Minimizing Tax Treaty Abuse, Certificate of Domicile Review Procedure is Issued

To minimize the misuse of the double taxation avoidance agreement (P3B) facility or what is commonly called a tax treaty, the tax authority issues a review guideline on Certificate of Domicile (COD) documents.

The review is conducted when the tax officials are doing a review or during the objection process and when processing the reduction or cancellation of the Tax Assessment Notice (SKP). For information, so far the tax authorities do not have standard guidelines for a review on COD.

COD is a document that must be owned by a foreign company if they want to enjoy the benefits of a Tax Treaty between the Indonesian government and the government of the country or jurisdiction of origin of the taxpayer.

Tax Treaty Benefits

By utilizing the tax treaty, taxpayers who are not the subject of Indonesian tax have the opportunity to enjoy the tax rate specified in the agreement, not based on the general prevailing tax provisions in Indonesia. 

To ensure that the company is entitled to enjoy the P3B facility, the Directorate General of Taxes (DGT) will conduct a check and review the COD attached. 

The Formal Review

The review procedure is regulated in the Circular Letter of the Director General of Taxes number SE-35/PJ/2021, which is issued and takes effect on 31 May 2021.

The review is conducted on the formal and material aspects of COD.

Research related to formal aspects is carried out to ensure that the domicile certificate are:

1. Made according to the applicable format

The format of the COD has been regulated in the Director General of Taxes Regulation Number PER-25/PJ/2018.

2. Filled in correctly, completely, and clearly.

3. Signed by Non-Resident Taxpayer

4. Authorized by the competent authority in the partner country or jurisdiction

Authentication can be done in the form of an electronic signature, as long as it is common in the country or jurisdiction of the partner country

5. It has not passed the expiration date or is still valid.

If there is none, information on the validity period can be submitted in an additional explanation issued by an official in the partner country or jurisdiction.

6. No misuse of tax treaty facilities

The review conducted on the statement letter that the taxpayer did not abuse the Tax Treaty.

7. Non-resident taxpayers act as beneficial owners (if it is required in the P3B)

Material Review

After conducting the formal review, the tax officials will examine the material aspects of the COD, to ensure that there is no misuse of the Tax Treaty and fulfill the requirements as a beneficial owner.

1.Tax Treaty abuse

Non-resident taxpayers are considered not to have abused the P3B facility if they have economic substance in establishing an entity or transacting, the legal form is the same as the economic substance in establishing an entity and transacting, business activities are managed by the management itself which has sufficient authority in transacting.

In addition, the company must also have adequate fixed and non-fixed assets, have a sufficient and adequate number of employees with expertise and skills according to the company's line of business, have active business activities.

Another indication of the absence of tax treaty abuse is that the company does not have transactions aimed at avoiding taxes in any country or jurisdiction.

2.Terms of Beneficial Owner

Meanwhile, non-resident taxpayers are considered to meet the terms of the beneficial owner, if they meet the following conditions. First, for a non-resident individual taxpayer who does not act as an agent, nominee, or conduit.

Further, non-resident corporate taxpayers must also have control over the company, have the amount of income that may be used to finance obligations to other parties is a maximum of 50%, is responsible for the company's risk, and may not transfer all income to other parties.