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.