Indonesian Participation for BEPS on Action 5: Harmful Tax Practices Specific Actions – Preferential Tax Regime

BEPS Aksi 5 adalah salah satu dari empat standar minimum BEPS yang berlaku untuk semua anggota Kerangka Inklusif BEPS dan yurisdiksi mana pun yang relevan. Aksi 5 terdiri dari 4 konten spesifik tindakan dan Rezim Pajak Preferensial sebagai bagian dari praktik perpajakan yang merugikan merupakan salah satu konten spesifik tindakan yang menunjukkan rezim pajak spesifik yang diamati, yang disebabkan oleh kebijakan dan peraturan perpajakan di masing-masing negara anggota, memberikan ketidakadilan bagi yurisdiksi lain. Konten Rezim Pajak Preferensi memiliki beberapa referensi dari laporan tahun 1998, laporan tahun 2015 dan juga laporan kemajuan tahun 2017, 2018 dan yang terbaru adalah kesimpulan terkini tahun 2022 tentang tinjauan rezim pajak preferensial. Dua laporan utama, yaitu laporan tahun 1998 dan laporan tahun 2015, merupakan dasar dari rezim perpajakan preferensial baik dari segi definisi, dasar penentuan, kategorisasi status dan praktik terbaik. Sementara itu, laporan kemajuan terutama meninjau rezim pajak preferensi masing-masing negara di setiap negara anggota dan langkah selanjutnya untuk meminimalkan dampak buruk terhadap yurisdiksi lain.

Definisi yang termasuk dalam cakupan Laporan tahun 1998, pertama-tama, rezim ini harus diterapkan pada pendapatan dari aktivitas yang berpindah secara geografis, seperti aktivitas keuangan dan jasa lainnya, termasuk penyediaan barang tak berwujud. Rezim preferensial yang dirancang untuk menarik investasi pada pabrik, bangunan dan peralatan berada di luar cakupan Laporan tahun 1998. Kedua, rezim tersebut harus memperhatikan perpajakan atas pendapatan yang relevan dari aktivitas yang berpindah-pindah secara geografis. Oleh karena itu, pekerjaan ini terutama berkaitan dengan perpajakan bisnis, sedangkan pajak konsumsi secara eksplisit dikecualikan. Pajak bisnis dapat dipungut di tingkat pemerintah nasional, federal, atau pusat (“pajak nasional”) dan/atau di tingkat sub-nasional, sub-federal, atau desentralisasi (“pajak sub-nasional”). Pajak daerah mencakup pajak yang dipungut di tingkat negara bagian, regional, provinsi, atau lokal.[1]

 

In order for a regime to be considered preferential, it must offer some form of tax preference in comparison with the general principles of taxation in the relevant country. A preference offered by a regime either in small or large amounts of preference also may take a wide range of forms, including a reduction in the tax rate or tax base or preferential terms for the payment or repayment of taxes. The key point is that the regime must be preferential in comparison with the general principles of taxation in the relevant country, and not in comparison with principles applied in other countries. For example, where the rate of corporate tax applied to all income in a particular country is 10%, the taxation of income from mobile activities at 10% is not preferential, even though it may be lower than the rate applied in other countries. Thus, the framework under the 1998 Report determines whether a regime is a harmful preferential regime involves three stages[2]:

1. Consideration of whether a regime is within the scope of work of the FHTP and whether it is preferential;
2. Consideration of the five key factors and five secondary factors set out in the 1998 Report and amended by 2018 Progress Report to determine whether a preferential regime is potentially harmful;
3. Consideration of the economic effects of a regime to determine whether a potentially harmful regime is actually harmful.

As mentioned by the second consideration, there are five key factors for assessing regimes according to 2018 Progress Report[3]:

• The regime imposes no or low effective tax rates on income from geographically mobile financial and other service activities.
• The regime is ring-fenced from the domestic economy.
• The regime lacks transparency.
• There is no effective exchange of information with respect to the regime.
• The regime fails to require substantial activities.

The first key factor must be met in order for the FHTP’s analysis of a regime’s harmfulness to continue. If any one of the following four key factors is also met, then the regime will be found to be potentially harmful.

Meanwhile, the secondary factors can inform about the determinations of the key factors as listed below[4]:

1. An artificial definition of the tax base. This secondary factor can inform determinations of whether the key factors are met, including whether a regime imposes no or low effective tax rates.
2. Failure to adhere to international transfer pricing principles. This secondary factor can inform determinations of whether a regime imposes no or low effective tax rates, whether a regime is ring-fenced, and whether a regime fails to meet the transparency factor.

• Foreign source income exempts from residence country taxation. This secondary factor can inform determinations of whether the key factors are met, including whether a regime is ring-fenced.

1. Negotiable tax rate or tax base. This secondary factor can inform determinations of whether the key factors are met, including whether a regime imposes no or low effective tax rates and lacks transparency.
2. Existence of secrecy provisions. This secondary factor can inform determinations of whether the key factors are met, including whether a regime lacks exchange of information

In the specific action of Preferential Tax Regimes, each country was requested to provide a description of its regimes, along with a self-review using a standard template. The self-reviews were followed by extensive analysis and peer reviews. The reviews were based on the principles and factors set out in the 1998 Report and relevant economic considerations. The reviews would inform list of current preferential regimes of each member states, the status of each preferential regimes and will be divided into two main categories as below[5]:

1. IP Regimes: Regimes which provide a preferential tax treatment for certain income arising from qualifying intellectual property (IP)
2. Non-IP Regimes: Regime that provides geographically mobile activities such as financial and other service activities that are not related with intellectual property. Later will be diversified into Headquarters Regimes, Financing and Leasing Regimes, Banking and Insurance Regimes, Distribution Center and Service Centre Regimes, Shipping Regimes, Holding Company Regimes, Fund Management Regimes and Miscellaneous Regimes

After being reviewed into status as listed in the attachment of the article, some of the preferential regime has to be abolished or substantially amended, especially on harmful features of the regime that are risky for BEPS to happen. Then when a regime is going to be abolished or substantially amended, there is a need to close off that existing regime. Closing off an existing regime means that no new entrants are permitted to enter the regime, and that the scope of benefits in the existing regime cannot be substantially expanded for existing beneficiaries. Therefore, the Action 5 of Preferential Tax Regime acted by FHTP will continue it task by Monitoring and reviewing the implementation of commitments to eliminate or amend a regime to ensure consistency with the Action 5 standard, the progress of other regimes if any reconsideration matters, “disadvantaged area” areas and any newly introduced regimes.[6]

Indonesia as part of the OECD/G20 Inclusive Framework on BEPS also participates in Action 5’s Specific Action of Preferential Tax Regimes. Indonesia has submitted four of its preferential regimes, as listed at the attachment part, since the 2015 final report and has been reviewed until the 2022 updated conclusions on the review of preferential tax regimes. The four Indonesia’s Preferential Tax Regimes include Public/listed company regime, Investment allowance regime, Special economic zone regime and Tax holiday regime. After being reviewed by FHTP, the four regimes classified as out of scope or the regime does not grant tax benefits to geographically mobile activities. This means Indonesia, as a member of OECD/G20 inclusive framework on BEPS, did not practice any harmful preferential tax regime that threatened the International Taxation or in line with the objective of Action 5 of international regime of BEPS by OECD/G20.

In conclusion the Preferential Tax Regimes as part of harmful tax practices Action 5 is one of the action specific contents that shows the observed specific tax regimes in, caused by taxation policies and regulations in each member states, giving an unfairness for other jurisdictions. To be included, the regime must apply to income from geographically mobile activities and must relate to the taxation. Later. In order for a regime to be considered preferential, it must offer some form of tax preference in comparison with the general principles of taxation in the relevant country. After being considered as a preferential tax regime, it has to be reviewed whether it is a harmful preferential regime or not. There are 3 steps, 5 key factors and 5 secondary factors that determine whether a regime is a harmful preferential regime. After being reviewed, some of the preferential regime has to be abolished or substantially amended especially on harmful features of the regime. Indonesia did not practice any harmful preferential tax regime, instead having only 4 preferential tax regimes with the status out of scope and did not grant tax benefits to geographically mobile activities

 

TBrights is a tax consultant in Indonesia which currently is an integrated business service in Indonesia providing comprehensive tax and business services

By Olina Rizki Arizal
Partner

 

ATTACHMENTS

Meaning of results for preferential tax regimes[7]

Result	Meaning
Harmful	The regime has harmful features and economic effects. The jurisdiction is expected to take measures in order to remove the harmful features of the regime.
Potentially harmful but not actually harmful	The regime is in scope, meets the low or no effective tax rate criterion and implicates one or more of the criteria, but an assessment of the economic effects shows that the regime is not having a harmful impact in practice. The regime is subject to a yearly monitoring process by the FHTP and where changes are identified, the FHTP can reconsider the conclusion.
Potentially harmful	The regime is in scope, meets the low or no effective tax rate criterion and features of the regime implicate one or more of the criteria. However, an assessment of the economic effects has not yet taken place to make a determination as to whether the regime is (actually) “harmful”.
Not harmful	The regime is in scope but does not have any features which implicate any of the criteria
Not harmful (amended)	The regime is not harmful, taking into account amendments to ensure harmful features are removed.
Out of scope	The regime does not grant tax benefits to geographically mobile activities
Out of scope (amended)	The regime is out of scope, taking in account amendments which means it no longer grants tax benefits to geographically mobile activities.
In the process of being amended / in the process of being eliminated	The jurisdiction has communicated to the FHTP the commitment of its government to abolish or amend the regime in light of the discussions by the FHTP about the features of the regime that are of concern, For regimes reviewed in 2017 and thereafter, this commitment involves a commitment to making the amendments within the timeline indicated above
Abolished	A definite date for complete abolition of the regime has been announced, and the regime is transparent and has effective exchange of information. No new entrants are permitted into the regime. Any grandfathering for existing beneficiaries is consistent with the applicable framework and timelines.
Disadvantaged areas regime	The regime provides incidental benefits to IP income, which is acceptable under paragraph 150 of the 2015 Report BEPS Action 5
Not operational	The jurisdiction did not operationalize the regime and no taxpayer is able to benefit from it. If the regime becomes operational in the future, the jurisdiction has committed to inform the FHTP and the regime will be reviewed.
Under review	The FHTP is continuing to consider the features of the regime and whether the criteria are implicated.

List of Indonesia Preferential Tax Regimes Reviewed by FHTP according to 2015 Final Report[8]

No	Country	Regime	Type	Conclusion
1	Indonesia	Public/listed company regime	Non-IP Regime	Under Review
2	Indonesia	Investment allowance regime	Non-IP Regime	Under Review
3	Indonesia	Special economic zone regime	Non-IP Regime	Under Review
4	Indonesia	Tax holiday regime	Non-IP Regime	Under Review

 

List of Indonesia Preferential Tax Regimes Reviewed by FHTP according to 2017 Progress Report[9]

No	Country	Regime	Type	Conclusion
1	Indonesia	Public/listed company regime	Non-IP Regime	Out of Scope
2	Indonesia	Investment allowance regime	Non-IP Regime	Out of Scope
3	Indonesia	Special economic zone regime	Non-IP Regime	Out of Scope
4	Indonesia	Tax holiday regime	Non-IP Regime	Out of Scope

 

List of Indonesia Preferential Tax Regimes Reviewed by FHTP according to 2018 Progress Report[10]

No	Country	Regime	Type	Conclusion	Comments
1	Indonesia	Public/listed company regime	Non-IP Regime	Out of Scope	No income from geographically mobile activities
2	Indonesia	Investment allowance regime	Non-IP Regime	Out of Scope	No income from geographically mobile activities
3	Indonesia	Special economic zone regime	Non-IP Regime	Out of Scope	No income from geographically mobile activities
4	Indonesia	Tax holiday regime	Non-IP Regime	Out of Scope	No income from geographically mobile activities

 

List Of Indonesia Preferential Tax Regimes Reviewed by FHTP According To 2022 Updated Conclusions On The Review Of Preferential Tax Regimes[11]

No	Country	Regime	Type	Conclusion	Comments
1	Indonesia	Public/listed company regime	Non-IP Regime	Out of Scope	No benefits for income from geographically mobile activities.
2	Indonesia	Investment allowance regime	Non-IP Regime	Out of Scope	No benefits for income from geographically mobile activities.
3	Indonesia	Special economic zone regime	Non-IP Regime	Out of Scope	No benefits for income from geographically mobile activities.
4	Indonesia	Tax holiday regime	Non-IP Regime	Out of Scope	No benefits for income from geographically mobile activities.

 

[1] OECD (2015), Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance, Action 5 – 2015 Final Report, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris, https://doi.org/10.1787/9789264241190-en.

[2] Ibid

[3] OECD (2019), Harmful Tax Practices – 2018 Progress Report on Preferential Regimes: Inclusive Framework on BEPS: Action 5, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris, https://doi.org/10.1787/9789264311480-en

[4] Ibid

[5] OECD (2015), Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance, Action 5 – 2015 Final Report, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris, https://doi.org/10.1787/9789264241190-en.

[6] OECD (2019), Harmful Tax Practices – 2018 Progress Report on Preferential Regimes: Inclusive Framework on BEPS: Action 5, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris, https://doi.org/10.1787/9789264311480-en.

[7] OECD (2019), Harmful Tax Practices – 2018 Progress Report on Preferential Regimes: Inclusive Framework on BEPS: Action 5, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris, https://doi.org/10.1787/9789264311480-en.

[8] OECD (2015), Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance, Action 5 – 2015 Final Report, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris, https://doi.org/10.1787/9789264241190-en.

[9] OECD (2017),  Praktik Pajak yang Berbahaya – Laporan Kemajuan 2017 tentang Rezim Preferensial: Kerangka Inklusif tentang BEPS: Aksi 5 , Proyek Erosi Basis dan Peralihan Keuntungan OECD/G20, OECD Publishing, Paris,  https://doi.org/ 10.1787/9789264283954-en .

[10] OECD (2019),  Praktik Pajak yang Berbahaya – Laporan Kemajuan 2018 tentang Rezim Preferensial: Kerangka Inklusif tentang BEPS: Aksi 5 , Proyek Erosi Basis dan Peralihan Keuntungan OECD/G20, OECD Publishing, Paris,  https://doi.org/ 10.1787/9789264311480-en .

[11] OECD (2023),  Praktik Pajak yang Berbahaya – Hasil Tinjauan Sejawat , Proyek Erosi Basis dan Pengalihan Keuntungan OECD/G20, Penerbitan OECD,