The convention adopts a new anti-tax evasion article (Article 28), which means that companies that are unable to comply with the TPP may not be entitled to contractual benefits under this updated DTA. The new agreement removes a withholding tax exemption currently provided for in the existing agreement for interest on government bonds or debentures. As a result, the source country could levy a withholding tax of up to 10% on this income (as on all other interest). The updated Singapore-Indonesia DTA, signed by the respective representatives of Singapore and Indonesia on 4 February 2020, was ratified by Indonesia on 11 May 2021 and entered into force in Singapore on 23 July 2021. 1. The ratified Singapore-Indonesia DTA replaces the existing treaty and enters into force on 1 January 2022. Representatives of the governments of Singapore and Indonesia signed a new tax treaty in February 2020, introducing an article on capital gains (which is not included in the existing contract). The country emerged largely unscathed from the global economic crisis, which left a gap in several regional economies. Indonesia`s rich natural resources remain the main pulling force of international conglomerates; However, the situation is gradually changing, with a focus on Indonesian consumers. Foreign direct investment is estimated to have increased by 27% in the first quarter of 2013 to a record high of Rs 65.5 trillion, or nearly S$7 billion. Large population, young workers and a growing middle class are attracting investment to Indonesia.
The Boston Consulting Group recently predicted that Indonesia`s middle class and affluent consumers would double to 141 million by 2020. More importantly, the country`s unit labor costs are much lower than conventional destinations such as China, India, or Vietnam, which, along with the recent easing of the licensing process and the government`s efforts to reduce bureaucracy, will improve the country`s competitiveness in the manufacturing sector. Indonesia is becoming an important investment destination in the region. The changes to the updated Singapore-Indonesia DTA would further enhance Singapore`s attractiveness as an investment hub in Indonesia and the flow of investment between Singapore and Indonesia. In addition to reduced withholding tax rates on royalties and after-tax income taxes, capital gains from eligible investments of Singapore tax resident investors should effectively no longer be taxed under Indonesian law on gross proceeds from the sale of unlisted shares, and the removal of the restriction on contract benefits relief would provide foreign investors with a broader view of the range of structuring options and offer the possibility to reinvest income and/or gains from investments without the need to transfer such income and/or profits to the investor`s country of residence in order to benefit from contractual benefits. The new contract adopts the “principal purpose test” provision to limit the abuse of contracts. The new treaty also removes a restriction on relief from transferred income, but includes an expanded provision on exchange of information. Indonesia and Singapore have extensive cooperation in various sectors, and total trade in goods between the two reached S$48.8 billion ($36.1 billion) in 2020. Singapore has been Indonesia`s largest foreign investor since 2014, with a total investment reaching S$13.2 billion ($9.7 billion) in 2020. In addition, there are about $300 billion in Indonesian assets in Singapore. The restriction on relief had now been removed from the Indonesia-Singapore DTA. Under article 22 of the previous DTA, residents of Singapore could benefit from the provisions of the Treaty only if the income was transferred to Singapore.
Singapore`s domestic tax system is in itself a very attractive feature for international investors. With its tax-friendly policies such as exemption of foreign dividends, exemption of certain foreign income, no withholding tax on dividends paid to non-residents and no capital gains tax, Singapore is undoubtedly the most attractive global business hub and the most sought-after jurisdiction for holding companies. These aspects, combined with the DTA with Indonesia, constitute an interesting offer for the structuring of companies, which is the most effective from the point of view of tax planning. More details on the specific provisions of the Singapore-Indonesia tax treaty can be found on the IRAS website. General information on DTAs in Singapore is available in the Singapore Guide to Double Taxation Treaties (DTAs). (ii) Lifting of the limitation of the exemption to contractual benefits The new Singapore-Indonesia Income Tax Agreement will enter into force once each country`s ratification processes have been completed, and the provisions of the Convention will enter into force on 1 January 2021 at the earliest, when Singapore and Indonesia have completed their respective ratification processes in 2020. (1) Income tax (Singapore – Indonesia) (double taxation treaty for the avoidance of double taxation treaties) Order 2021 (2) Under the TPP, tax authorities may refuse to apply contractual benefits if obtaining such contractual benefits was one of the main objectives of a settlement or transaction, unless it is demonstrated that the granting of that benefit in the circumstances is consistent with the purpose and purpose of the relevant provisions of the DTA Would be. .