RI to renegotiate tax treaty with Japan

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.