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Until now, Indonesia has had 58 tax treaty with other countries. There are also several tax treaties are still in the process and therefore has not become effective.
Legal basis of double taxation avoidance agreement or tax treaty is Article 32A of Income Tax Law. Based on this article Government is authorized to make agreements with other governments in the context of avoidance of double taxation and prevention of tax evasion.
Article 32A of the contents of the Income Tax Law is clear that doing negotiations with other countries to make tax treaty has two main objectives: first to avoid double taxation and the second is to prevent fiscal evasion.
In addition to the two main objectives above, there are other objectives that in fact the result when the two main objectives in the above is achieved. In the explanation of Article 32A Income Tax Law also affirmed that the government's taxation agreements are in order of increasing economic and trade relations with other countries. A tax treaty is also intended to encourage capital flows, technology, and expertise to a country. Tax treaty also would give legal certainty to taxpayers, improving the economic transactions between countries and enhance cooperation among countries.
Avoidance of Double Taxation (Double Taxation)
In applying the regulations of taxation, tax authority of a country will interact with other state tax jurisdiction. This interaction of two-state tax jurisdiction will usually lead to double taxation. This double taxation arises because two tax jusdiction levy income tax to the same income owned by the same person.
Suppose someone named Mr. X who is a citizen of country A earn income derived from state B. state A tax provisions would impose taxes on income earned by nationals of any source of income. On the other hand, country B tax provisions also impose taxes on income derived from the country, although the recipient is not a citizen or non-resident of state B. Well, in this case Mr. X will be taxed twice by country A and country B.
Double taxation also could arise if a person or entity meets the definition as a residence in the two countries. With this condition, the person or entity will be taxed twice as well on all his income. This problem is commonly known as the problem of dual residence.
To solve the problems described above due to the application of two state tax provisions, the two countries need to conduct negotiations to create a double taxation avoidance agreement (tax treaty). In this P3B will be arranged on the right of each country's taxation for certain types of income.
In the case of dual residence, a tax treaty will make provisions such that a person or entity will only be a residence from a single country. This provision is commonly called the Tie Breaker Rule which is usually contained in Article 2 of a tax treaty.
In tax treaty also usually be arranged on the corresponding adjustment in the case of transfer pricing and shall contain provisions concerning the methods of removing double taxation. Corresponding adjustment implies that if one country make corrections in the price of a transaction, , then other countries must also do the opposite correction for not to be double taxation matter.
Preventing Tax Evasion
Avoiding taxes can be done in the form of tax avoidance and tax evasion. Tax avoidance is usually done still in the corridor of tax provisions. If avoidance is done in accordance with the purpose of making provision, the avoidance is not a problem. However, if avoidance is done by cheating the rules not in accordance with the intention of the legislators then this type of avoidance must be our concern.
Examples of tax avoidance with cheating the provision is that making capital loans in the hope that the dividend could be called a interest expense that can be expensed. The practice of using transfer prices in international transactions by shifting profits to countries with low tax rate is also one of this type of tax evasion.
In other cases, the form of tax evasion could be to make the false transactions despite its legal form correctly. Fictitious transaction is intended to benefit from a tax treaty, whereby if the transaction should be done in a way that he will not benefit from a tax treaty. Establishment of the conduit company, paper box company or a special purpose company is usually used to obtain a tax treaty benefits.
Tax avoidance in the form of significant tax evasion in violation of tax provisions such as not reporting income or fictitious expenses. Thus, tax evasion has criminal and illegal dimension.
Information Exchange
To prevent tax evasion and avoidance in an international transaction, some tax treaties usually contain provisions concerning the exchange of information. Information from other countries can be used to resolve cases such as tax evasion or avoidance treaty shopping case, transfer pricing cases or criminal tax cases.
In OECD Model, the provisions concerning the exchange of information contained in Article 26. Meanwhile, Indonesia's internal rules to make the process of exchanging information is provided in SE-61/PJ/2009.
Legal basis of double taxation avoidance agreement or tax treaty is Article 32A of Income Tax Law. Based on this article Government is authorized to make agreements with other governments in the context of avoidance of double taxation and prevention of tax evasion.
Article 32A of the contents of the Income Tax Law is clear that doing negotiations with other countries to make tax treaty has two main objectives: first to avoid double taxation and the second is to prevent fiscal evasion.
In addition to the two main objectives above, there are other objectives that in fact the result when the two main objectives in the above is achieved. In the explanation of Article 32A Income Tax Law also affirmed that the government's taxation agreements are in order of increasing economic and trade relations with other countries. A tax treaty is also intended to encourage capital flows, technology, and expertise to a country. Tax treaty also would give legal certainty to taxpayers, improving the economic transactions between countries and enhance cooperation among countries.
Avoidance of Double Taxation (Double Taxation)
In applying the regulations of taxation, tax authority of a country will interact with other state tax jurisdiction. This interaction of two-state tax jurisdiction will usually lead to double taxation. This double taxation arises because two tax jusdiction levy income tax to the same income owned by the same person.
Suppose someone named Mr. X who is a citizen of country A earn income derived from state B. state A tax provisions would impose taxes on income earned by nationals of any source of income. On the other hand, country B tax provisions also impose taxes on income derived from the country, although the recipient is not a citizen or non-resident of state B. Well, in this case Mr. X will be taxed twice by country A and country B.
Double taxation also could arise if a person or entity meets the definition as a residence in the two countries. With this condition, the person or entity will be taxed twice as well on all his income. This problem is commonly known as the problem of dual residence.
To solve the problems described above due to the application of two state tax provisions, the two countries need to conduct negotiations to create a double taxation avoidance agreement (tax treaty). In this P3B will be arranged on the right of each country's taxation for certain types of income.
In the case of dual residence, a tax treaty will make provisions such that a person or entity will only be a residence from a single country. This provision is commonly called the Tie Breaker Rule which is usually contained in Article 2 of a tax treaty.
In tax treaty also usually be arranged on the corresponding adjustment in the case of transfer pricing and shall contain provisions concerning the methods of removing double taxation. Corresponding adjustment implies that if one country make corrections in the price of a transaction, , then other countries must also do the opposite correction for not to be double taxation matter.
Preventing Tax Evasion
Avoiding taxes can be done in the form of tax avoidance and tax evasion. Tax avoidance is usually done still in the corridor of tax provisions. If avoidance is done in accordance with the purpose of making provision, the avoidance is not a problem. However, if avoidance is done by cheating the rules not in accordance with the intention of the legislators then this type of avoidance must be our concern.
Examples of tax avoidance with cheating the provision is that making capital loans in the hope that the dividend could be called a interest expense that can be expensed. The practice of using transfer prices in international transactions by shifting profits to countries with low tax rate is also one of this type of tax evasion.
In other cases, the form of tax evasion could be to make the false transactions despite its legal form correctly. Fictitious transaction is intended to benefit from a tax treaty, whereby if the transaction should be done in a way that he will not benefit from a tax treaty. Establishment of the conduit company, paper box company or a special purpose company is usually used to obtain a tax treaty benefits.
Tax avoidance in the form of significant tax evasion in violation of tax provisions such as not reporting income or fictitious expenses. Thus, tax evasion has criminal and illegal dimension.
Information Exchange
To prevent tax evasion and avoidance in an international transaction, some tax treaties usually contain provisions concerning the exchange of information. Information from other countries can be used to resolve cases such as tax evasion or avoidance treaty shopping case, transfer pricing cases or criminal tax cases.
In OECD Model, the provisions concerning the exchange of information contained in Article 26. Meanwhile, Indonesia's internal rules to make the process of exchanging information is provided in SE-61/PJ/2009.
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