By Anthony Diosdi
Introduction
If a U.S. business or individual is claiming a benefit through a bilateral international income tax treaty, they must consider both the domestic and foreign compliance requirements of taking a treaty position. On the domestic side, the taxpayer must correctly disclose the treaty position on a U.S. tax return. On the foreign side, the taxpayer may need to satisfy requirements promulgated by the applicable foreign government. Other than filing a foreign tax return, most of the time a domestic taxpayer taking a treaty position does not have any foreign filing obligations. There are some exceptions to this general rule. One such exception is when a domestic taxpayer is using the United States Indonesia tax treaty to obtain relief from foreign taxes. When a domestic taxpayer is utilizing the United States Indonesia tax treaty to reduce a foreign tax obligation, at a minimum, the taxpayer must comply with Regulation No. PER-10/PJ/2017 (“PER-10”) and complete Form DGT.
Indonesia Regulation PER-10 and Form DGT
In order to claim a beneficial treaty position for Indonesia tax purposes, a U.S. taxpayer must satisfy the following elements discussed in PER-10 must demonstrate the principal purpose of the “arrangements or transactions” with Indonesia was not contrary to the object and purpose of the tax treaty. A Form DGT must be filed with the Indonesia tax authorities to indicate whether or not one of the principal purposes of the “arrangements or transactions” with Indonesia was to obtain a benefit under the U.S. Indonesia tax treaty that is contrary to the object and purpose of the tax treaty.
If a domestic taxpayer established a branch or other entity to take advantage of the U.S. Indonesia tax treaty, the taxpayer must satisfy the following tests to take a treaty position:
1. There must be a relevant economic motive for establishing the entity;
2. The entity must have its own management and the management must have the authority to carry out transactions.
3. The entity must have adequate assets to carry on business activities and the entity must employee individuals with adequate expertise to carry out its business transactions;
4. The entity must have an active business purpose other than receiving income in the form of dividends, interest, and/or royalties originating in Indonesia;
5. In addition, if a taxpayer takes a beneficial treaty position, the following must be satisfied: a) For an individual taxpayer, he or she is not acting as an agent or nominee; b) For a corporate taxpayer, the entity is not acting as an agent, nominee, or conduit for another entity.
The taxpayer completes the appropriate schedule on Form DGT to establish to certify compliance with the above tests.
Form DGT may also be used by U.S. taxpayers to obtain local Indonesia tax benefits, even if they do qualify to claim a beneficial treaty position.
Conclusion
Claiming a treaty position often requires careful analysis of both domestic and foreign law. We provide international tax treaty advice to numerous U.S.-based and foreign-based clients, including publicly traded and loosely held entities. When necessary, we refer our clients to a network of global tax professionals specializing in foreign tax law.
Anthony Diosdi is a partner and attorney at Diosdi Ching & Liu, LLP, located in San Francisco, California. Diosdi Ching & Liu, LLP also has offices in Pleasanton, California and Fort Lauderdale, Florida. Anthony Diosdi advises clients in tax matters domestically and internationally throughout the United States, Asia, Europe, Australia, Canada, and South America. Anthony Diosdi may be reached at (415) 318-3990 or by email: adiosdi@sftaxcounsel.com.
This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.