RI to renegotiate tax treaty with Japan

Rendi A. Witular, The Jakarta Post, Jakarta

The Indonesian government is seeking to renegotiate the country's tax treaty with Japan after discovering that several articles in the agreement have caused a potential loss of state revenue from taxes, senior tax officials said.

Djoko Slamet Surjoputro, director of the taxation system at the Directorate General of Taxation, told The Jakarta Post the directorate had completed its review of the treaty and concluded that several "unfavorable" articles in it needed to be immediately revised.

"The treaty is actually unfair for us, and has caused potential losses to the state. That is why we have decided to review it and request a renegotiation with Japan," said Djoko after a recent hearing with the House of Representatives.

"I have estimated a potential loss of trillions of rupiah, given the fact that Japanese business activity here is much larger than Indonesian (business activity) in Japan," said Djoko, refusing to elaborate on the unfavorable articles.

Djoko said the government had yet to officially submit the renegotiation proposal to the Japanese government.

A senior tax official, who asked for anonymity, said most of the unfavorable articles were related to non-taxable facilities given to profits earned by Japanese firms with "non-permanent establishment" in Indonesia.

The treaty defines a permanent establishment as a fixed place of business through which the business of an enterprise is wholly or partly carried out, such as a place of management, a branch, an office, a factory, a workshop, a farm or plantation, a mine, an oil or gas well, and a quarry, or any other place of extraction of natural resources.

Under the treaty, a Japanese company with permanent establishment status in Indonesia is subject to pay part of its taxes in Indonesia and another part in Japan, while those with non-permanent establishment status are not subject to taxes in Indonesia, instead paying all of their taxes in Japan.

The treaty includes an article that states a Japanese enterprise is categorized as a non-permanent establishment if it carries out its business through a broker, general commission agent or any other agent of independent status.

Such facilities have been used by many Japanese companies to reap profits in Indonesia.

The official said that Indonesia wanted to apply permanent establishment status to Japanese firms engaged in the supervision, operation and installation of rigs or ships used for the exploration and exploitation of natural resources, so that Indonesia could collect taxes from them.

The tax treaty, which was signed in March 1982, aims among others to attract Japanese investors to the country.

The official said the Indonesian government had several times asked to meet with the Japanese government to renegotiate the treaty since 1990, but Japan had always refused.

"The refusal from Japan is among the obstacles to initiating a free trade agreement (FTA) between the two countries. We only want to launch a FTA with Japan if it agrees to revise the treaty," said the official.