Simplifying Cross-Border Taxes and Unlock Global Market with Tax Treaty in 2025

A Double Taxation Avoidance Agreement (DTAA), commonly known as a Tax Treaty, is a bilateral agreement between two countries aimed at avoiding or reducing double taxation on income earned by taxpayers in both countries. This treaty regulates the allocation of taxing rights on income arising from cross-border transactions, preventing double taxation and promoting international trade and investment.

Treatment

In the context of a Tax Treaty, there are two main principles that determine taxation rights:

1. Residence Principle: The country where the taxpayer resides has the right to tax the taxpayer’s global income, regardless of where the income is sourced.

2. Source Principle: The country where the income is generated has the right to tax the income, regardless of the taxpayer’s residence.

A Tax Treaty serves to allocate taxing rights between the country of residence and the country of source, thereby preventing double taxation.

Objectives

The main objectives of a Tax Treaty include:

• Preventing Double Taxation: Ensuring that income is not taxed twice by different jurisdictions.

• Preventing Tax Evasion: Establishing cooperation between countries to prevent unlawful tax avoidance.

• Encouraging Foreign Investment: Providing legal certainty and tax incentives to attract foreign investors.

• Promoting International Trade: Reducing tax barriers to facilitate cross-border trade and services.

Overall, a Tax Treaty aims to create a fair and efficient international taxation system while fostering global economic growth.

Implementation Procedure

The implementation of a Tax Treaty follows these steps:

1. Eligibility Verification: Ensuring that the taxpayer, taxable income, country, and relevant tax treaty provisions fall within the scope of tax avoidance under the treaty. Not all taxpayers are eligible for treaty benefits.

2. Analysis of Income Type: Determining whether the income type falls under the provisions of the treaty and the applicable substantive article.

3. Determination of Taxing Rights: Identifying which country has taxing rights based on the relevant treaty article.

4. Elimination of Double Taxation: If both countries have taxing rights, the treaty provisions will determine the method to eliminate double taxation.

5. Dispute Resolution: If disagreements arise, the final step is to resolve double taxation issues through mutual agreement procedures (MAP) between the countries involved.

   
   

Latest Developments (2025)

• Global Minimum Tax Implementation: As of January 1, 2025, Indonesia has adopted a 15% global minimum tax in line with the OECD-led international agreement. This policy aims to prevent tax avoidance and establish a fairer global tax system.

• Increase in VAT Rate: Indonesia has increased its Value-Added Tax (VAT) rate to 12% effective from January 1, 2025. This is part of Indonesia’s fiscal reform to boost state revenue and support ongoing development projects.

• Double Taxation Agreements (Tax Treaty): Indonesia has signed 71 Double Taxation Avoidance Agreements (DTAAs) with various countries, including Singapore, Malaysia, China, the United States, and the United Kingdom. These agreements ensure the elimination of double taxation on income earned in Indonesia and the taxpayer’s country of residence. The treaties often include reduced tax rates on dividends, interest, and royalties, as well as tax exemptions for certain service payments.