Controlled foreign corporation (CFC) rules Indonesia
FALCON SC TAX UPDATE
New Controlled Foreign Company (CFC) Rules
Summary of MoF Regulation No. 107/PMK.03/2017
The Minister of Finance of the Republic of Indonesia (“MoF”) has issued its regulation No. 107/PMK.03/2017 (“PMK 107/2017”) dated 27 July 2017 concerning the determination earning of deemed dividend and calculation base for an Indonesian resident Taxpayer with capital participation in foreign entities (“BULN”) other than listed companies. PMK 107/2017 stipulates the Controlled Foreign Companies tax regulation (“CFC”) to handle tax avoidance between countries and this regulation is effective on its promulgation date.
This Regulation revokes MoF Regulation No. 256/PMK.03/2008 (“PMK256/2008”) concerning the determination earning of deemed dividend for an Indonesian
resident Taxpayer with capital participation in foreign entities (“BULN”) other than listed companies. The differences between PMK 107/2017 and PMK 256/2008 are set out below:
Who will be the subject of Deemed Dividend?
As stipulated in Article 2 of PMK 107/2017, Deemed Dividend apply to Individual and Corporate Taxpayer with the following criteria:
- Direct CFC
a. Having a direct capital participation of at least 50% (fifty percent) of the total paid up capital;
Example:
PT ABC which is a resident Taxpayer owns a direct capital participation of 60% (sixty percent) of the total paid up capital of XYZ Ltd. which is a resident of country D. XYZ Ltd is not listed in the stock exchange.
Thus, PT ABC has direct CFC over XYZ Ltd. because it has a direct capital participation of at least 50% (fifty percent) of the paid up capital of XYZ Ltd.,
b. Together with other resident Taxpayers having direct capital participation of at least 50% (fifty percent) from the total paid up capital.
Example:
PT ABC and Mr. Andi Baso are resident Taxpayers, each direct capital participation is 40% (forty percent) and 20% (twenty percent) respectively of the total paid up capital of XYZ Ltd. which is a resident of country D. XYZ Ltd is not listed in the stock exchange.
In such case, PT ABC and Mr. Andi Baso together own 60% (40% + 20%
= 60%) direct capital participation in XYZ Ltd. They together have direct control of XYZ Ltd. because they have direct capital participation of at least 50% (fifty percent).
- Indirect CFC
a. Having a minimum ownership of 50% by another direct or indirect CFC, or collectively by a number of direct or indirect CFCs.
Example:
PT GHI which is a resident Taxpayer owns a direct capital participation of 60% (sixty percent) of the total paid up capital PQR Ltd. which is a resident of country D. Furthermore, PQR Ltd. has direct capital participation of 90% (ninety percent) of the total paid up capital of STU Co. which is a resident of country
E. Furthermore, STU Co. has a direct capital of 40% (forty percent) of the total paid up capital of VWX Co. which is a resident of country F. PQR Ltd., STU Co., and VWX Co. are not listed in the stock exchange.
In such case, PT GHI:
a. has direct control of PQR Ltd. because it has a direct capital participation of at least 50% (fifty percent) of the total paid up capital of PQR Ltd.
b. has indirect control of STU Co. (through PQR Ltd.) because there is capital participation of 50% (fifty percent) or more of the total paid up capital at each level of capital participation; and
c. has no control of VWX Co. because there is no capital participation of 50% (fifty percent) or more of the total paid up capital at each level of capital participation.
Then PQR Ltd. is a direct controlled by PT GHI, and STU Co. is an indirect controlled by PT GHI while VWX Co. is not controlled by PT GHI.
b. having direct capital participation together with other resident Taxpayers on directly controlled BULN and indirect capital participation in directly controlled BULN.
Example:
Furthermore Forco Ltd. owns a 60% (sixty percent) direct capital in Forsubco1 Ltd. and 45% (forty five percent) at Forsubco2 Ltd. Forsubco1 Ltd. and Forsubco2 Ltd. are a resident of country X. Forco Ltd, Forsubco1 Ltd. And Forsubco2 Ltd. are not listed in the stock exchange.
In such case the determination of the direct resident Taxpayer’s participation in Forco Ltd. is as follows:
Based on the above calculation, there are 6 (six) resident Taxpayers (PT ABC, PT DEF, PT GHI, PT JKL, PT MNO and PT PQR) which together have direct capital participation of at least 50% Fifty percent of the total paid up capital of Forco Ltd. Accordingly, the 6 (six) resident Taxpayers are together have direct control to Forco Ltd. So Forco Ltd. is directly controlled by 6 (six) resident Taxpayers.
Furthermore, the determination of indirect resident taxpayer participation in Forsubco1 Ltd. and Forsubco2 Ltd. is as follows:
A. PT ABC, PT DEF, PT GHI, PT JKL, PT MNO and PT PQR are together own an indirect control of Forsubco1 Ltd. (Through Forco Ltd.) because there is a capital participation of 50% (fifty percent) or more of the total paid-up capital at each level of capital, so Forsubco1 Ltd. is indirectly controlled by 6 (six) resident taxpayers.
B. PT ABC, PT DEF, PT GHI, PT JKL, PT MNO and PT PQR have no control of Forsubco2 Ltd. because there is no capital participation of 50% (fifty percent) or more of the total paid-up capital at each level of capital, so Forsubco2 Ltd. is not a controlled non-listed BULN by 6 (six) resident Taxpayers.
When is a Deemed Dividend applied?
Ministry of Finance has determined the timing of Deemed Dividend:
- at the end of the fourth month after the submission deadline of the annual income tax return for the nonlisted BULN.
- in the event that non-listed BULN is under direct control, it has no obligation to submit Annual Income Tax Return or there is no provision for the deadline for submission of Annual Income Tax Return upon receipt of Deemed Dividend at the end of the seventh month after the end of fiscal year.
Basic Calculation of Deemed Dividend?
The Deemed Dividend is based on Profit After Tax of non-listed BULN.
The amount of Deemed Dividend is calculated by multiplying the percentage of resident Taxpayer participation in non-listed BULN under direct control with Deemed Dividend imposition.
A. Basic Raw Formulas Determination of Deemed Dividend:
B. Layers of capital participation that result in resident Taxpayer become direct control as well as indirect control of non-listed BULN:
Example of calculating Deemed Dividend:
PT ABC which is a resident Taxpayer owns a direct capital participation of 65% (sixty percent) of the total paid up capital of XYZ Ltd. which is a resident of country D. XYZ Ltd is not listed in the stock exchange.
In fiscal year 2016, XYZ Ltd. earns profit after tax of USD 50,000.00. Fiscal year of XYZ Ltd is 1 January until 31 December 2016 and the deadline for the submission of Annual Corporate Income Tax Return is no later than 31 May 2017. The exchange rate of USD to Rupiah as of September 30, 2017 is IDR 11,500.00 / USD.
When is a Deemed Dividend applied?
The Deemed Dividend payment for PT JKL for its participation in XYZ Ltd. is September 30, 2017.
How much is Deemed Dividend?
Thus, the amount of Deemed Dividend of 2017 obtained by PT JKL is: Deemed Dividend = (Capital participation) X (Profit After Tax)
USD 32,500.00. = 65% X USD 50.000,00
Deemed Dividend that must be reported in the Annual Income Tax Return for fiscal Year 2017 is:
USD 32.500,00 X Rp11.500,00 / USD = Rp 373.750.000,00
Tax Credit
For the tax on Deemed Dividend, Taxpayer can credit the Income Tax witheld by foreign country on actual dividend. Then, it shall be submitted by the Taxpayer along with the submission of the Annual Income Tax Return. For Example:
Continuing with the example above, PT JKL receives Dividend from XYZ Ltd for the Fiscal Year 2018 and Fiscal Year 2019 of Rp. 350.000.000, – and Rp. 150,000,000, – subject to withholding of income tax in country D of 20% (twenty percent). There is no tax treaty between the Government of Indonesia and the government of country D. The withholding tax for Year 2018 is Rp. 70.000.000, – (Rp 350,000,000 X 20%) and Year 2019 is Rp.
30.000.000, – (Rp 150,000,000 X 20%).
Explanation:
a. For the fiscal year 2018 due to the tax payable is greater than the tax withheld abroad, thus the amount of income tax from abroad that can be credited in the tax year 2018 is Rp. 70.000.000, –
b. For the fiscal year 2019 because the domestic income suffered a fiscal loss of 75 million so that the tax payable is less than the tax withheld abroad, thus the amount of income tax from abroad that can be credited in the tax year 2018 is Rp. 18.750.000, – or at the maximum of the payable tax.
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