On 18 February 2021, the Director General of Taxes issued Circular Letters Number SE-05/PJ/2021 and SE-18/PJ/2021 concerning the Notification of Entry Into Force of the Multilateral Convention to Implement Measures related to Tax Treaty Related to Prevent the Base Erosion and Profit Shifting between Indonesia and Australia and between Indonesia and the United Arab Emirates, respectively.

These Circular Letters are intended to inform all units within the Directorate General of Taxes regarding the applicable time and the effective applicable time and the points of arrangement in the Convention that apply to the Tax Treaty (“DTA”) between Indonesia-Australia and Indonesia-United Arab Emirates.

Based on Article 35 of the Convention, the provisions shall have effect in each Contracting Jurisdiction with respect to the Covered Tax Agreement:

• in respect to taxes withheld at source on amounts paid or credited to non-residents, where the event raising taxes occurs on or after 1 January 2021; and
• in respect to all other taxes levied with respect to taxable periods beginning on or after 1 January 2022 in Indonesia and 26 June 2021 in Australia and the United Arab Emirates.

The main points of the provisions in the Convention that apply to the DTA (Tax Treaty) include:

• Article 4 paragraph 1 and paragraph 3 letter e) of the Convention replaces Article 4 paragraph 4 regarding dual residence as a corporate tax subject;
• Article 6 paragraph 1 of the Convention replaces the preamble to the DTA to emphasize that the purpose of establishing Tax Treaty is to eliminate double taxation without creating any opportunity for not being taxed or tax reduction through tax avoidance or evasion;
• Article 7 paragraph 1 of the Convention applies to the DTA; therefore, the benefits of the DTA are not given when it can be concluded, considering all the facts and circumstances, that one of the main objectives of the transaction carried out is to obtain the benefits of the DTA;
• Article 9 paragraph 1 of the Convention applies to Article 13 paragraph 4 of the DTA:
  1. only applies when the limit on the value of immovable assets is met at any time within the period of 365 days before the transfer as referred to in Article 13 paragraph 4 of the DTA occurs; and
  2. also applies to the transfer of shares or rights that are comparable, such as rights in partnership or custody with management (trust);
• Article 11 paragraph 1 of the Convention applies to the DTA; therefore, the DTA does not limit the taxation rights of each country to its own residents, except for the benefits of the Tax Treaty in connection with Article 9 paragraph 3, Article 18, Article 19, Article 20, Article 21, Article 24, Article 25, and Article 27 of the DTA;
• Article 13:
  1. paragraph 2 of the Convention (Option A) applies to Article 5 paragraph 3 of the DTA; therefore, the definition of a permanent establishment in the DTA does not include:
     1. activities specifically listed in Article 5 paragraph 3 of the DTA;
     2. maintenance of a fixed place of business which is solely for the purpose of running, for the company, every activity not described in letter a);
     3. maintenance of a fixed place of business which is solely for the combination of activities mentioned in letter a) and letter b),throughout the said activity or, in the case of letter c), the entire activity of the place of business which is permanent in nature, has the characteristic of preparation or support;
  2. paragraph 4 of the Convention applies to Article 5 paragraph 3 of the DTA (as modified by Article 13 paragraph 2 of the Convention); therefore, Article 5 paragraph 3 of the DTA (as modified by Article 13 paragraph 2 of the Convention) does not apply to a fixed place of business which is used or maintained by an enterprise if the same closely-related company or companies carry out business activities at the same place or elsewhere in the same Contracting State and:
     1. the place or other place is a permanent establishment for the company or companies that are closely related; or
     2. all activities resulting from a combination of activities run by both companies in the same place, or by the same company or companies which are closely related in two places, neither for preparation nor supporting,

        provided that the business activity carried out by both companies in the same place, or by the same company or companies that are closely related in two places, is a complementary function which is an integral part of business activities;

• Article 14 paragraph 1 of the Convention applies to Article 5 paragraph 2 letter (i) of the DTA; therefore, for the purpose of determining the time test for the permanent establishment of construction according to Article 5 paragraph 2 letter (i) of the DTA:
  1. if the company of a Contracting State to the DTA carries out activities in the other Contracting State in a place which is a building, construction project, installation project, or other specified project and these activities are carried out exceeding 30 days but have not exceeded the period of time of the permanent establishment of construction in Article 5 paragraph 2 letter (i) of the DTA; and
  2. when the related activities are carried out in the other Contracting State in a building, construction, or installation project, or the same other places over different time periods, each exceeding 30 days, by one or more companies which are closely related to the first-mentioned company,
     these different time tests are added to the overall time tests during which the first-mentioned company carries out activities in that building, construction or installation project, or other places;

• Article 15 paragraph 1 of the Convention applies to Article 13 paragraph 4 and Article 14 paragraph 1 of the Convention; therefore, the meaning of an individual or entity closely related to an enterprise is an individual or entity where:
  1. based on all related facts and circumstances, one of them has control over the other or both are under the control of the same individual or entity; or
  2. one of them owns directly or indirectly more than 50% of the rights over the other (or, in the case of a company, more than 50% of the voting rights and the value of the company’s shares or rights to the company’s equity) or if an individual or other entity owns directly or indirectly, more than 50% of the rights (or, in the case of a company, more than 50% of the voting rights and the value of the company’s shares or rights to the company’s equity) over the individual or entity;
• Article 16:
  1. paragraph 3 of the first sentence of the Convention applies to Article 25 paragraph 3 of the DTA; therefore, the competent authorities must try to resolve through mutual agreement any difficulties or doubts that arise in the interpretation or application of the DTA; and
  2. paragraph 3 of the second sentence of the Convention applies to Article 25 paragraph 4 of the DTA; therefore, the competent authorities can be consulted to eliminate double taxation in the event that it is not regulated in the DTA.

The main points of the provisions in the Convention that apply to the DTA (“Tax Treaty”) include:

• Article 6 paragraph 1 of the Convention replaces the preamble of the DTA to emphasize that the purpose of establishing the Tax Treaty is to eliminate double taxation without creating any opportunity for not being taxed at all or tax reduction through tax avoidance or evasion;
• Article 7 paragraph 1 of the Convention applies to the DTA; therefore, the benefits of the DTA are not given when it can be concluded, considering all the facts and circumstances, that one of the main objectives of the transaction carried out is to obtain the benefits of the DTA;
• Article 16:
  1. paragraph 1 of the second sentence of the Convention replaces Article (25) paragraph 1 of the second sentence of the DTA; therefore, applications for mutual consent must be submitted within three years of the imposition of taxes that are not in accordance with the DTA;\
  2. paragraph 2 of the second sentence of the Convention applies to Article (25) paragraph 2 of the DTA; therefore, the collective agreement that is reached is carried out regardless of the time limit according to the domestic legislation; and
• Article 17 paragraph 1 of the Convention replaces Article (9) paragraph 2 of the DTA; therefore, in the event of an adjustment in company profits in a State Party to the DTA, the other State Party must make adjustments continued on the profits of the parties with a special relationship with the company.