RI to end tax treaty with Mauritius

RI to end tax treaty with Mauritius

Rendi A. Witular, Jakarta

The Indonesian government has decided to end the country's tax
treaty with the Republic of Mauritius next year amid suspicions
that the facility had been abused by non-Mauritian investors,
including Indonesian companies, to avoid tax obligations.

"We appreciate the urgency to scrap the tax treaty (with
Mauritius). That is what is most important," said Director
General of Taxation Hadi Purnomo on the sidelines of a hearing
with the Constitutional Court on Monday.

According to a directorate internal circular dated June 24,
which has been confirmed by Hadi, the eight-year bilateral treaty
will cease to apply from Jan. 1, 2005. However, neither Hadi nor
the circular specified the reason for the abolition.

The tax treaty with Mauritius was signed in 1997; the
provision was designed to avoid double taxation of Mauritius
residents or companies in Indonesia, or Indonesian citizens or
companies in the tiny African island state.

The treaty was also aimed at attracting foreign investors to
engage in the country's financial sector, such as banking and the
capital market.

A senior official at the Directorate General of Taxation said
a diplomatic announcement to end the treaty was sent to the
Mauritian Ministry of Foreign Affairs and International Commerce
via the Indonesian Ambassador to Tanzania in January.

He said the termination was based on the fact that non-
Mauritian investors or residents could invest in Indonesian
companies via special-purpose vehicles (SPVs) and take advantage
of the tax treaty to pay less tax (tax evasion).

"There's a potential loss of Rp 5 trillion (US$555 million) to
Rp 10 trillion per year as a result of tax evasion by non-
Mauritian investors who set up companies on the island," said the
official.

The official explained that the losses occurred as the
government could not fully recoup income tax from Mauritian
companies investing in Indonesia in order to avoid double
taxation, as agreed in the treaty.

Under the treaty, the Indonesian government may impose a
maximum income tax of 10 percent on Mauritius-based companies on
gains from dividends, interest and royalties. In comparison,
Indonesian companies here must pay income tax of up to 30
percent.

As for Mauritius, the country has freed its companies and
residents from paying taxes.

A number of Indonesian companies appear to have misused the
facility by forming an SPV in the tax-haven island, returning to
Indonesia as foreign investors.

In the first semester of last year, Mauritius accounted for 73
percent of a total US$3.03 billion in foreign direct investment
approved in Indonesia.

Local and foreign investors have often used SPVs to buy assets
and state companies offered by the Indonesian government so that
they pay less in tax.

At present, the Indonesian government has signed tax treaty
with 54 countries, including small countries such as Luxembourg,
Tunisia, Algiers, the Ukraine, Slovakia, the Seychelles, Sudan,
Syria, Uzbekistan and Mongolia.

Discovered by the Portuguese in 1505, Mauritius was
subsequently held by the Dutch, French, and British before
independence was attained in 1968. Due to the free-tax policy,
the country has attracted considerable foreign investment and
enjoys one of Africa's highest per capita incomes.