Indonesia Closes Bond Tax Loophole

by Mary Swire, Tax-News.com, Hong Kong

24 November 2009

Indonesia’s Directorate General of Taxation has issued two tax regulations that are intended to provide certainty on the withholding tax treatment of the typical special purpose vehicle (SPV) structure used for Indonesian conventional and Islamic bond issues.

Indonesian companies have generally used an offshore SPV to take advantage of double taxation agreements (DTA) that would reduce the applicable withholding tax on interest paid to foreign investors from 20% to the rate under the agreement. The favorable rate applied has usually been 10%, but some issuers have also tried to use the zero rate that should be available under the Netherlands-Indonesia DTA.

While the Indonesian government had appeared, until now, to be prepared to live with the 10% withholding tax rate for foreign investors, it has become concerned at the use of investment in those bonds by domestic bond investors to avoid taxes.

Under the new regulation, the tax office will require additional information in future from bondholders who are receiving interest from bonds structured through an SPV to determine whether they should be entitled to a withholding tax rate below the full rate of 20%.

The information could prove to be administratively difficult to provide as investors in bonds are unlikely to be registered and issuers are unaware of their identity. In that case, the benefit of a reduced withholding tax would probably be unachievable.

The government has, however, emphasized that there is no intention to change the tax treatment of interest receivable by foreign investors on Indonesian government debt.

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