Understanding Tax Treatment of Representative Offices in Indonesia
Recent years have seen numerous high-profile cases by the Indonesia tax authority against prominent foreign tech firms. Most notable of these cases is that of Google, which allegedly used an Indonesian RO to carry out its in-country business activities, but shifted all taxable profit to an offshore entity in Singapore. However, Google’s case is not uncommon. In fact, many investors also do the same thing and invoice clients from offshore entities, presenting themselves and their businesses to legal issues.
Although previously this tax avoidance strategy may have been low-risk, the recent crackdown by the tax authorities demonstrates how essential it is that investors, even those using ROs in the country, take measures to ensure full tax compliance. Thus, to avoid the fate of Google and others, it is essential for companies operating ROs in Indonesia to have a strong grasp of tax regulations. Further, given the complexity of such regulations, investors are encouraged to seek the assistance of professional services experts of tax officials to avoid costly oversights.
Tax Treatment of Representative Offices
As ROs may not engage directly in profit generation, many investors assume the only tax they must be concerned with are withholdings on employee salaries. However, Indonesia’s Tax Authority has in fact put into place specific regulations for the tax treatment of ROs, stipulating that if ROs carry out activities to generate profit in Indonesia, even if the revenues are paid directly to an offshore parent, then such activities will be found to be liable for corporate taxation.
ROs are categorized as a special class of taxpayers that have to use specified tax calculations to inform its CIT liability, even if the ROs are not directly booking revenue. The current tax rate under this special category is 0.44 percent of Gross Export Values (GEVs). GEVs are overall replacement values for revenues of a foreign company that operates an RO in Indonesia. These revenues come from goods or services delivered to persons or corporate entities located in Indonesia by the RO. Additionally, if the RO of foreign entities are de-facto found to be engaging in profit making activity on behalf of the parent company, then the parent company will be liable for the Branch Profits Tax specified in a tax treaty between Indonesia and the parent’s home country.
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