Transfer Pricing and CFCs in Indonesia
Base erosion and profit shifting
Timing of documentation
Failure to document
Limitation period for authority review
Rules and standards
Indonesia has concluded tax treaties with more than 60 countries and jurisdictions covering its major trading partners in the Association of Southeast Asian Nations (ASEAN), America, Europe and much of the Asia-Pacific region. All of those tax treaties have MAP provisions.
When relief is available
Limits on relief
Advantages and disadvantages
Non-deductible intercompany payments
Branches and permanent establishments
Temporary exemptions and reductions
Tax authority focus and BEPS
Deemed Dividends for CFCs
Indonesia's Ministry of Finance (MOF) issued a regulation (PMK-93) on 26 June 2019 that updates the controlled foreign corporation (CFC) rules as from fiscal year 2019. PMK-93 amends certain provisions of a regulation dating from 2017 (PMK-107) relating to the determination of deemed dividends from CFCs.
Under Indonesian tax law, a CFC is a foreign company in which an Indonesian resident company or individual (either alone or together with other shareholders) holds at least 50% of the company’s total share capital. An Indonesian shareholder in a CFC must pay Indonesian tax on its share of deemed dividends from the CFC each year, to the extent the related profits are not distributed to the shareholder in the form of actual dividends. Where an actual dividend distribution exceeds prior year deemed dividends, the excess is taxable in the year the actual dividend is paid. The CFC rules do not apply to shareholdings in listed foreign companies.
Determination of deemed dividend income
PMK-93 updates the rules for determining deemed dividends from CFCs. As opposed to the rules prescribed under PMK-107, which stipulated that deemed dividends include all income from both direct and indirect CFCs irrespective of the nature of the income (i.e. whether active or passive), PMK-93 limits deemed dividends to the following types of passive income:
- Dividends (excluding dividends from other CFCs);
- Interest (excluding interest received by a CFC that is owned by an Indonesian tax resident bank; however, this exception does not apply to interest income received by a CFC from Indonesian tax resident related parties);
- Rent from land, buildings and other assets (if received from a related party);
- Royalties; and
- Gains from the sale or transfer of assets.
Deemed dividend calculation
Under PMK 93, deemed dividends are calculated as the gross income of the CFC from the types of passive income described above, reduced by the following deductions and taxes:
- Expenses incurred by the CFC to obtain, maintain and collect the income; and
- Income taxes due or paid by the CFC with respect to the income, including taxes withheld from the income when it was paid to the CFC.
The new CFC rules are expected to accommodate the needs of Indonesian businesses to expand overseas. The exclusion of active business income from deemed dividends means that offshore subsidiaries of Indonesian holding companies will be able to reinvest their net active business income without incurring additional Indonesian tax.