01 Mar 2018
CFC Rules in Indonesia
This article is for the persons or companies that having companies in other countries.
OECD and G20 countries, have already set up the strategy to cover the tax loophole with CFC Rule.
If the company plan to shift the profit to the lower tax rate country, it has to review the plan.
OECD has already set up 15 actions for BEPS issue. Action no. 3 of 15, clearly mentioned about ‘Designing Effective CFC Rules’
Controlled Foreign Corporation (CFC) Rules are features of an income tax system designed to limit artificial deferral of tax by using offshore low taxed entities. The rules are needed only with respect to income of an entity that is not currently taxed to the owners of the entity. Generally, certain classes of taxpayers must include in their income currently certain amounts earned by foreign entities they or related persons control.
CFC Rules in Indonesia
Based on MOF 107/PMK-03/2017,
An Indonesian tax payer or together with other Indonesian tax payers own shares of the non listed foreign entity at 50% or more directly and indirectly will be deemed Dividend on Corporate Income after Tax after fiscal year ended.
Indonesia uses entity approach rather than transactional approach. In some developed countries like Australia, Japan, UK, South Korea, they use transactional approach. Only tainted income such as rental or royalty, illegal bribes that will be subject to CFC rule. Indonesia that follow entity approach, will deem dividend on Corporate Commercial Income after tax in foreign countries.
Deemed dividend should be reported within 4 months since the date of filing of CITR (Corporate Income Tax Return) is filed in the foreign countries or 7 months since the related fiscal year ended if no CITR is filed in the foreign countries
Tax paid in foreign countries can be credited, but should be recalculated for allowable creditable FTC (Foreign Tax Credit).
Actually there are still some issues that have to be clarified:
- a. Does MOF 107 override the tax treaty?
- b. MOF 107 needs to clarify that the right of tax on deemed dividend is applied to treaty countries, if it does not override the treaty and the explanation the reason.
Managing the tax risks and do compliances and transparency are strongly recommended if the offshore investment companies under the CFC Rule.
Agung Tjahjady SH, CLA, CPA, MM, BKP (Managing Partner)
Registered Tax Consultant, Advocate
+62 816 825 348
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