International Tax Service

Written by Zahrial Fakhri on 16/07/2024
The author’s views are entirely their own and may not always reflect the views of Putranto Alliance.

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Introduction

International taxation refers to tax provisions regulating taxpayers’ taxation rights for international business activities. International taxation provides solutions to the taxation risks of double taxation and tax avoidance that taxpayers can exploit due to different tax provisions in multiple countries. This article aims to provide insights into how international taxation operates in Indonesia.

Definition

International taxation is a tax regulation that principally governs the taxation of domestic tax subjects receiving income from sources outside the country and foreign tax subjects receiving income from sources within a country’s territory. International tax regulation allows claims of taxation rights by a country based on certain connecting factors, generally divided into two types:

Personal Connecting Factor:
Links a country’s tax rights based on the status of its tax subject connected to that country.
Objective Connecting Factor:
Links the state’s taxation rights based on economic activity or tax object connected to the territorial area of a country.

The Importance

International taxation is crucial for countries with open economic systems, such as Indonesia, which engage in international trade by exporting and importing goods and services. The primary objectives of international taxation include:

Improving Economic Levels:
Enhancing the country’s economic status through effective tax regulation.
Maintaining International Relations:
Ensuring good diplomatic and economic relations between countries.
Minimizing Investment Barriers:
Reducing obstacles to foreign investment in Indonesia.

International Taxation In Indonesia

International taxation in Indonesia discusses agreements between countries with Double Tax Avoidance Agreements (Perjanjian Penghindaran Pajak Berganda/P3B) or Tax Treaties regulated in Article 32A of the Income Tax Law and Law Number 7 of 2021 concerning the Harmonization of Tax Regulations . There are two P3B models in the world: the Organization for Economic Cooperation and Development Model (OECD Model) and the United Nations Model (UN Model).

Implementation of P3B in Indonesia and each country differs according to the agreements between Indonesia and those countries. Then, to use the P3B scheme, taxpayers must have a Surat Keterangan Domisili (SKD) or Certificate of Residence (COR). SKD/COR is a certificate issued by an authorized official whose contents explain that the said Taxpayer is a tax subject to his country. SKD is divided into two types: Domestic Taxpayer SKD (SKD Wajib Pajak Dalam Negeri/SKD WPDN) and Foreign Taxpayer SKD (SKD Wajib Pajak Luar Negeri/SKD SKD WPLN). If the Taxpayer does not have a COR, he/she will be subject to domestic provisions.

When It Applied

The optimal time to engage in international tax services is when individuals or entities are involved in cross-border transactions, investments, or business activities. This is particularly important for multinational corporations and businesses that need to navigate complex international tax regulations to avoid double taxation and ensure compliance with tax laws in multiple jurisdictions.

Key scenarios include:

Initiating Cross-Border Transactions:
When starting to engage in international trade or investment.
Expanding Business Operations:
When expanding business operations to new countries or regions.
Entering Joint Ventures:
When entering into joint ventures or partnerships with foreign entities.
Receiving Foreign Income:
When receiving income from foreign sources, whether through investments, services, or sales.
Planning for Tax Efficiency:
When planning for tax efficiency and seeking to minimize the tax burden through legal means.

Benefits

Engaging in international tax services offers several benefits:

Tax Savings:
Effective tax planning can significantly minimize the tax burden by utilizing tax treaties and other legal provisions.
Compliance:
Ensuring adherence to international tax regulations helps avoid penalties and legal issues.
Dispute Resolution:
Efficient handling of international tax disputes can prevent prolonged legal battles and financial uncertainties.
Investment Facilitation:
Reducing barriers to foreign investment promotes smoother international business operations and attracts foreign capital.
Cash Flow Management:
Proper tax planning and compliance can improve cash flow management by optimizing tax payments and credits.
Risk Mitigation:
Identifying and mitigating risks associated with international taxation, such as double taxation and tax avoidance issues.
Strategic Decision Making:
Providing valuable insights for strategic decision-making in international business operations.

How We Can Help

When engaging in international business, taxation can be complex due to the involvement of multiple countries with different tax provisions. A lack of understanding of international tax regulations can lead to double taxation and international tax disputes. If a dispute arises, processing objections and appeals can be time-consuming. Therefore, it is essential to fully understand international tax provisions when transacting with another country.

Putranto Alliance offers comprehensive assistance in navigating international tax obligations, including:

Identifying tax regulation:
Identifying which country’s laws should be implemented based on cross-regional transactions.
Tax Planning:
Developing strategies to minimize taxes while complying with applicable regulations and treaties.
Tax Reporting:
Preparing and submitting accurate tax reports to ensure compliance with tax laws.
Tax Calculations:
Accurately calculating taxes payable to avoid underpayment or overpayment.
Tax Payments:
Facilitating timely and correct tax payments to avoid penalties.
Dispute Resolution:
Assisting in the resolution of tax disputes, including objections and appeals related to transfer pricing or other violations of tax treaties.

Our services ensure that clients can focus on their core business activities while we handle the complexities of international taxation.

FAQs

What is an international taxation service?

International taxation service assists taxpayers in fulfilling international tax obligations arising from their business activities.

How is the imposition of foreign taxpayers who get income from Indonesia?

Foreign taxpayers will be subject to tax objects under applicable regulations. Those with a Certificate of Residence (COR) will be subject to the appropriate tax treaty rate, while those without a COR will be subject to Income Tax Article 26.

How is the imposition on domestic taxpayers who get income from outside Indonesia?

Domestic taxpayers earning income from abroad will have their income tax deducted based on the Income Tax Law. Foreign tax deductions can be credited under applicable tax treaty provisions.

What are the differences between domestic and foreign taxpayers in the international tax provisions that apply in Indonesia?

Domestic taxpayers are taxed on income from both Indonesia and abroad, while foreign taxpayers are taxed only on income from sources within Indonesia. Domestic taxpayers are taxed based on net income at general rates, whereas foreign taxpayers are taxed based on gross income at comparable rates. Domestic taxpayers must submit annual tax returns, while foreign taxpayers fulfill their tax obligations through final withholding taxes.

How does transfer pricing practice affect international taxation?

International business transactions between companies in different countries involve prices that reflect the profits or losses of the companies involved. These prices impact the income tax paid by the companies. If companies in different countries have a special relationship, they can adjust transfer prices to reduce the global tax burden. This is typically done by allocating higher income to countries with low tax rates and higher costs to countries with high tax rates. To prevent such practices, the arm’s length principle is applied, as stipulated in Article 9, paragraph 1 of the P3B model. This principle requires that the price used in transactions between related parties should be the same as the price used by unrelated parties transacting independently under similar conditions.

What mechanisms are available for resolving international tax disputes?

Taxpayers burdened by double taxation, transfer pricing disputes, or P3B agreement violations can use Objections, Appeals, Mutual Agreement Procedure (MAP), or Advance Pricing Agreement (APA). Filing objections against unfair tax assessments by tax auditor. Pursuing appeals if objections are not satisfactorily resolved. MAP resolves disputes by allowing taxpayers to request their country’s authorities to negotiate with partner countries, addressing issues like double taxation, P3B provision violations, and discriminatory tax treatment. APA involves agreements between tax authorities and taxpayers to set fair prices for transactions between related parties, providing certainty, reducing compliance costs, and preventing disputes. Domestic taxpayers can apply for APA through their local tax office if they meet the requirements.

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