INDONESIA LAW AND PRACTICE Contributed by: Agus Ahadi Deradjat (Agung), Gustaaf Reerink, Adri Dharma, Karina Widyaputri and Ilma Sulistyani, ABNR Counsellors at Law
The implementation of the OECD’s Pillar Two significantly reduces the effectiveness of Indo - nesia’s tax holiday regime for large multination - als, as any corporate income tax exemption or reduction that brings the effective tax rate below 15% may trigger a top-up tax. This undermines the intended benefit of tax holidays and could make Indonesia less attractive to large-scale foreign investors. 5.4 Tax Consolidation In Indonesia, tax consolidation is not generally available. Each legal entity is treated as a sepa - rate taxpayer, even within the same group. 5.5 Thin Capitalisation Rules and Other Limitations Indonesia applies thin capitalisation rules by lim - iting the debt-to-equity ratio (DER) to a maximum of 4:1 for the purpose of interest deductibility. Any interest expense on debt exceeding this ratio is non-deductible for income tax purposes, aiming to prevent excessive debt used for tax avoidance through related-party financing. This rule applies to most corporate taxpayers, with exceptions granted to banks, insurance companies, mining companies under specific contracts (eg, Production Sharing Contracts or Contract of Works). In addition, Indonesia has proposed introduc - ing a thin capitalisation rule based on EBITDA, aligning with international best practices, to limit excessive interest deductions. However, as of now, this EBITDA-based limitation has not yet been implemented. 5.6 Transfer Pricing Transfer pricing rules are fully applicable in Indo - nesia and are actively enforced by the Indone - sian tax authority. They apply to transactions
between related parties, including parent–sub - sidiary companies, sister companies (under common control), transactions with related non- residents and domestic related-party transac - tions if tax benefits arise (eg, different tax rates
or a tax holiday/allowance). 5.7 Anti-Evasion Rules
Indonesia enforces both general (GAAR) and specific (SAAR) anti-avoidance rules to combat tax evasion and abusive arrangements. Under GAAR, the tax authority may re-determine tax - able income or deny deductions if a transaction lacks a bona fide business purpose or is struc - tured solely for tax benefits. They may apply the substance-over-form principle to disregard artificial arrangements without commercial sub - stance. SAAR covers targeted rules such as transfer pric - ing, thin capitalisation, beneficial ownership, and Controlled Foreign Company (CFC) provisions. A CFC in Indonesia refers to a foreign entity that is at least 50% owned (directly or indirectly) by an Indonesian taxpayer or jointly controlled (≥50%) by Indonesian residents. Under Indonesia’s CFC rules, certain undistributed profits of such for - eign subsidiaries may be deemed as dividends and taxed in Indonesia, even if not actually dis - tributed and the CFC is located in a low-tax juris - diction. These rules aim to prevent profit shifting and tax deferral through offshore entities. 5.8 Tariffs Indonesia’s tariff regime is based on the ASEAN Harmonized Tariff Nomenclature (AHTN), with import duties generally ranging from 0% to 40%. Preferential rates apply under various free trade agreements (eg, ASEAN, Japan and Aus - tralia). Tariffs are highest on goods intended to protect local industries, including agriculture (up to 40%), automotive (up to 50% + luxury tax),
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