Tax Brackets

SECTION 18 SENTENCE ( 2) INCOME TAX [CODE/LAW] AND ITS(THE COMPARISON WITH SOME STATES)

Common

Rule as arranged in Section 18 sentence ( 2) Income tax [Code/Law] in inveterate international taxation literature is called " controlled foreign corporation rule" or shortened [by] CFC rule. Order concerning CFC basically to prevent taxpayer in a state does tax deferral to its(the production, by the way of doing transaction or investment in nations recognized with the title " tax havens", because tax rate in the very low nations or even there is no tax at all. In general, intention of order CFC is that taxpayer doesn't remove its(the production country exit by found company in certain nations because its(the taxation rule is very clearance.

Rule arranging CFC to contain three principal element that is definition from CFC, production type bowing to order CFC, and treatment of tax to the production.

Conditions applied to specify is a company considered as company entering category CFC, as arranged in Section 18 sentence ( 2) be:

a) level of investment of taxpayer in country in company is intended [by] [at] least 50% from legal capital remited; or

b) together equal compulsorily other tax has investment of lowest legal capital of 50% from stock amounts remited.

If the covenant is fulfilled [by] hence dividend from its(the investment will be hit PPh in Indonesia, although company place of the investment doesn't allot dividend.

This rule arranged in Decree of The Minister for Finance No. 650/KMK04/1994, that is that dividend paid by company build in nations sebagaiaman mentioned in catalog, assumed divided. So the standard ministrial decree contains two the fundamental, that is treatment of tax to dividend from investment by taxpayer in country as arranged in Section 18 sentence ( 2), and nations catalog place of doing of investment.

Ketetentuan arranging about CFC to include;cover two main problems that is, cognition from " tax haven country" and determination of production type which to the applicable production of rule rule of CFC.

definition of State tax haven

Determination bottom of nations place of doing the investment not based on criterion that is clear, besides that nations is state tax haven. State tax haven has konotasi that its(the low tax rate. The concerned low tax rate is lower tax rate from tax rate applied in domicile state. So from Indonesia eyeglasses, the nations has lower tax rate from rate PPh. Comparison of the tax rate only considers his(its nominal rate is only.

In other nations of measuring rod used not only his(its nominal rate, but also comparison between rates effektif applied in nations CFC with rate effektif inside the country. In practice of this thing very difficult because having to monitors rate effektif every year his(its. Which is easier its(the applying is by doing approach by considering level of tax that is actually is paid in the nations. As comparison, what embraced by Argentina, Australia and Selandia Baru looks like Indonesia because in the law and regulation of its(the tax doesn't give definition is so-called with " state with low tax rate". While some states, for example Denmark, Perancis, Norwegian and English applies comparison between level of taxes paid by CFC with level of tax inside the country.

Approach through " tax that is actually is paid" in state where CFC stays, to determine does the state admission in categorizing low tax gone through by Japan by applying plafond 25% as directive.

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Production types becoming order coverage CFC

If corrected reading rule Section 18 sentence ( 2) and Decree of The Minister for Finance No. 650/KMK04/1994 only limits to dividend. Mean rule concerning order CFC applies to " liability income" only. Generally, production type included in order CFC consisted of three kinds , that is:

" liability income, or productions from investment;

" active income, that is production from business activity; and

" base company income: production besides " liability income" is entering in category " tainted income"

In explicit invited Income tax to limit treatment of order CFC only to " liability income", because Decree of The Minister for Finance No. 650/KMK04/1994 emphatically arranges treatment of tax to dividend.

In nations having order CFC usually exempts production of business ( business income) from coverage CFC rules, except Selandia Baru and Swedia.

For example, shareholder which is taxpayer in country ( a state) found company in Cayman Island, and the company is assumed [by] admission in categorizing CFC ( based on entity approach). CFC Company active in hotel having four p’s in Cayman Island. Operating margin obtained from activity to labour hotel, doesn't enter in categorizing production bowing to rule CFC.

definition of State tax haven

Determination bottom of nations place of doing the investment not based on criterion that is clear, besides that nations is state tax haven. State tax haven has konotasi that its(the low tax rate. The concerned low tax rate is lower tax rate from tax rate applied in domicile state. So from Indonesia eyeglasses, the nations has lower tax rate from rate PPh. Comparison of the tax rate only considers his(its nominal rate is only.

In other nations of measuring rod used not only his(its nominal rate, but also comparison between rates effektif applied in nations CFC with rate effektif inside the country. In practice of this thing very difficult because having to monitors rate effektif every year his(its. Which is easier its(the applying is by doing approach by considering level of tax that is actually is paid in the nations. As comparison, what embraced by Argentina, Australia and Selandia Baru looks like Indonesia because in the law and regulation of its(the tax doesn't give definition is so-called with " state with low tax rate". While some states, for example Denmark, Perancis, Norwegian and English applies comparison between level of taxes paid by CFC with level of tax inside the country.

Approach through " tax that is actually is paid" in state where CFC stays, to determine does the state admission in categorizing low tax gone through by Japan by applying plafond 25% as directive.

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Production types becoming order coverage CFC

If corrected reading rule Section 18 sentence ( 2) and Decree of The Minister for Finance No. 650/KMK04/1994 only limits to dividend. Mean rule concerning order CFC applies to " liability income" only. Generally, production type included in order CFC consisted of three kinds , that is:

" liability income, or productions from investment;

" active income, that is production from business activity; and

" base company income: production besides " liability income" is entering in category " tainted income"

In explicit invited Income tax to limit treatment of order CFC only to " liability income", because Decree of The Minister for Finance No. 650/KMK04/1994 emphatically arranges treatment of tax to dividend.

In nations having order CFC usually exempts production of business ( business income) from coverage CFC rules, except Selandia Baru and Swedia.

For example, shareholder which is taxpayer in country ( a state) found company in Cayman Island, and the company is assumed [by] admission in categorizing CFC ( based on entity approach). CFC Company active in hotel having four p’s in Cayman Island. Operating margin obtained from activity to labour hotel, doesn't enter in categorizing production bowing to rule CFC.

Approach to determine production type entering in order coverage CFC is approach based on transaski ( transactional approach) or approach based on entity ( entity approach). Section 18 sentence ( 2), Income tax [Code/Law] indicates that invitors PPh to go through entity approach, because a limit to production which will be applied order CFC, based on investment of taxpayer in country in certain nations.

Approach of problem based on transaction ( transactional approach) differs from approach based on entity. In the case of transactional approach, determined some production types enterred by kedalam cluster " tainted income".

The concerned " tainted income" be production obtained by CFC which to his(its is applicable rule about CFC. Production entering in categorizing this for example sale of possession or vesting of service done outside domicile state from shareholder CFC. creation of A kind of this production given strong impression would purpose of avoid imposition of tax inside the country. Some states applies that if level of tainted income obtained by CFC to exceed a certain percentage hence all the production or operating margin is assumed [by] admission in coverage CFC. So marginally can be told that production entering in category " tainted income" be business income.

In practice of often difficult to differentiate between business income with liability income. For example, production in the form of interest obtained by finance companies usually is considered to be business income.

Denmark treats interest as liability income although if the interest obtained by finance companies, because main target of order CFC only be addressed to CFC which production in the form of its(the interest or possession exceeding one-third from all its(the production or possession. In some states like for example Japan, Korea, Portugal and English, rent or royalty always is considered to be tainted income, along the length of the production is not production from effort for in essence.

Capital gains to transfer of possession usually doesn't enter in category " tainted income", especially possession utilized to implement business. On the contrary capital gains from sale of public company stock considered as liability income.

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Base company income

The concerned jargon " base company income" be all production types besides liability income, what considered as " tainted income" for applying of order CFC. Usually production of this type is sale of possession or vesting of service outside state where CFC is build, or given to party(sides having related parties. Exploits CFC to obtain the production gives impression the happening of tax avoidance inside the country. From administration side of taxation of the production enterred as category " tainted income" be complement from applying of order transfer of pricing. By entering it as " tainted income" hence procedure and order transfer of pricing is not necessarily be applied.

Its(the exercise is various state is not uniform in meaning of cognition from " base company income" differs in between one states otherly. For Example Denmark and Argentina doesn't enter " base company income" as tainted

income. On The Contrary Hungary, Selandia Baru and Swedia treats all bases company income as tainted income.

There are some transaction which can be made directive to determine is production from the transaction admission in categorizing tainted income.

(i) Production from transaction compulsorily tax in country: if taxpayer in country does transaski with CFC, and the taxpayer burdens it as expense of hence the production is considered " tainted income", as applied in Spanyol. So in this case there are two approachs at the same time that is entity approach, and transaction approach. Australian applies other approach that is by contending that " tainted income" covers production obtained by CFC from vesting of service to taxpayer in country or to " form of permanent business" is residing in Australian.

( ii) Production from transaction between party(sides having related parties: Transaction between party(sides having related parties usually is packed into faction " tainted income" . On the contrary in the case of transaction between CFC with third party that is is not has related parties hence production coming from the transaction doesn't enter in faction " tainted income" so that order arranging CFC void.

Income Tax [Code/Law] and suggestion of its(the alteration

Income tax [Code/Law] also has had order about CFC as elaborated in the face, but treatment of CFC applied terhada just income liability that is dividend. In proposing alteration of Income tax invitors some rules extending order coverage CFC have been enterred, formulated in sentence ( 3b) and ( 3c) from Section 18, each of its(the formula is as follows:

( 3b) Director-General of Authoritative tax specifies Taxpayer that is actually does sale or purchasing of stock or company asset through other party or body formed for the purpose of that way ( Special Purpose Company) in the case of The taxpayer has related parties with the other party or body or there is in-(un- wajaran fixation.

( 3c) Director-General of Authoritative tax specifies sale or transfer of company stock between or bodies formed by untiuk intention that way ( conduit company or Special Purpose Company) what build or domiciles in state giving protection ( Tax Haven Country) what has related parties with body build or domiciles in Indonesia or permanent business body in Indonesia, as sale or transfer of body stock dimiciling in Indonesia.

Rule arranged in sentence ( 3b) for arranging about transaction classified as " tainted income". However, this order doesn't itemize transaction what is entering kedalam this category. In explanation design to the sentence it is mentioned that this rule applies to transaction

stock sale. Explanation from the sentence emphatically limits its(the applying to stock sale, so that thereby transaction outside sale of stock cannot be applied this order. Based on this rule, DIRJEN specifies entity doing transfer of possession.

While sentence rule ( 3c) emphatically refers to sales transaction of stock from SPC having related parties with company in Indonesia. In the case of that way hence transferring or sells stock is considered to be [by] sale by Indonesia taxpayer.

Both the orders not expressly arranges applying of order CFC to transactions which can be classified as " tainted income" like for example vesting of service done by SPC.

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Conclusion

From the description to some conclusions can pulled like submitted hereunder.

i) Proposeed addition in Rancangan Perubahan Undang-undang Pajak Penghasilan only include;cover sales transaction of other stock and asset, but doesn't include;cover other transaction like for example vesting of service by SPC.

ii) suggestion of The new order doesn't show promise clear how applying to order CFC, because based on suggestion of the alteration, only stock included. Appraisal to sham intended to difficult to be done to determine fair price.

iii) Needs soon is published order becoming handling bottom of problems transfer of pricing that applying to enforceable CFC order finely. This thing becomes very relevant because suggestion contained in sentence ( 3b) clearly concerning problem transfer of pricing. Like known, order transfer of the pricing now time has come to be renewed remembers OECD has published Transfer Pricing Guidelines which new.

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Income tax [Code/Law]

Case elaborated to along with approach of its(the problem only to be small part of overall of approach to the problem. The thing meant to make comparison with the orders in inviting Income tax. Becoming question is is Undnag-undang Income tax have been enough arranging treatment of its(the tax following way of its(the imposition.

Which very insists on is that concerning order " transfer of pricing" because its(the exercise order up for be renewed as according to OECD Guidelines which most recent. Like known guidance concerning transfer of pricing published in the year 1985 nor fully refers to OECD Guidelines. If exercise indicator to handling of transfer of pricing have been as according to OECD Guidelines hence government officer would be easier in facing this problem. To be more sharpness

case elaborated face given [by] addition of information, for example PARENTCo is company livinging in Japan, SUBSIDICO-1 is corporate subsidiaries livinging in Singapore and SUBSIDICO-2 is corporate subsidiaries dimiciling in Indonesia. At the time of John Doe assigned as employee in SUBSIDICO-2, so-called lately is ladened with cost ( charges) because PARENTCo gives SOP to John Doe. Side that, John Doe for specified period in every year his(its is also is assigned in SUBSIDICO-1 ( Singapore). In a period of the assignation John Doe doesn't get a run for from SUBSIDICO-1 but at the time of the assignation s(he is permanent as employee SUBSIDICO-2.

If problem transfer of pricing in this case for a while is disregarded hence load paid to the order of by its(the holding companies seen from invitors eyeglasses PPh, can be tapered down as expense of because fulfilling common criterion as arranged in Section 6 sentence ( 1) letter a, that is cost to get, bills for and looks after production. From the aspect of approach SUBSIDICO-2, how treatment of payment to PARENTCo attributed to its(the obligation as cutter PPh. Remembers between Indonesias and Japan there are P3B hence to determine is the cost must cut PPh must be corrected reading the P3B. Question that is first of all must be thrown is admission in category is the payment for PARENTCo. From the aspect of production type approach as according to category P3B fee paid by SUBSIDICO-2 is not " business profits". Nearest is that fee tersbeut admission kedalam " production of others" because cannot be classified kedalam productions which determination of its(the pemajakan freehold asset is arranged in P3B. Nearest is cluster " production of others", which in P3B Indonesia-Jepang will only be taxed in Japan, where PARENTCo livings. Thereby hence SUBSIDICO-2 may not cut PPh at all.

Second transaction is that John Doe works in two companies out of one groups, which in the transaction SUDSIDICO-2 doesn't receive fee in the relation with discharging John Doe for the sake of SUBSIDICO-1. What treatment of its(the PPh to the transaction? Earns DITJEN PAJAK to apply " imputed income" to the transaction? If the answer " positive" arises problem how much/many production from the transaction? SUBSIDICO-2 might possibly be snared in problem " form of permanent business ( BUT)" because John Doe its(the status is employee from SUBSIDICO-2 is residing in Singapore. This situation can be assumed represents SUBSIDICO-2 so that this company will be assumed had BUT in Singapore if fulfilling time test as arranged in Section 5(2)i from P3B Indonesia-Singapura. Problem faced by Singapore in this case equal to Indonesia in the case of determining how much/many production from " BUT SUBSIDICO-2" from activity gives the service.

From situation that is told upper seen that SOP launched by PARENTCo to John Doe, what obtains the benefit not only John Doe but also SUBSIDICO-1 livinging in Singapore.

Difficulty told upper caused by the transaction only seen rashers so that its(the trouble-shooting nor zero in. This thing is not to mention if evaluated from treatment of income tax to fee received by John Doe in the transaction.

This solvable problem passed approach optimally chain P3B. Case presented upper entangling three different tax jurisdictions. If third of the state admission in chain P3B hence its(the handling would easier. Exploiting of P3B maximumly need to be gone through through exchanges of off the cuff in character information. The concerned " exchanges of information spontaneously" be information sent by a state concerning other state taxpayer as result of tax audit done by state so-called first.

Transaction taken as case study is upper will only can be detected if one of state to do inspection of tax so that its(the transaction will be able to be known. Till now exchanges of information only be convergent to exchanges of in character information automatic ( automatic exchange of information), which only include;cover liability income. this type Information Interchange also will assist imposition of tax to the employee from the aspect of approach remunerasi received by it.

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Considerations before choosing method transfer of pricing

Who obtains benefit
First of all need to be determined as according to case is upper, whosoever obtaining benefit from the transaction. Explains the obtaining benefit from SOP is SUBSIDICO-2 employing John Doe. However, possible SUBSIDICO-1 also obtains its(the benefit if(when John Doe is side structurally held responsible to SUBSIDICO-2 but permanent is in control of performance in SUBSIDICO-1.

This thing earns is just happened if(when SUBSIDICO-2 to give service to SUBSIDICO-1 or in the case of doing of posting with between SUBSIDICO-1 and SUBSIDICO-2 to John Doe.

So for example SUBSIDICO-2 gives service to SUBSIDICO-1 by employing John Doe as main character ( as according to its(the expertise). While in SOP mentioned, John Doe is employee who is obtaining benefit from the plan. In the case of that way for applying of transfer of pricing must be corrected reading the relation of transaction between PARENTCo with and SUBSIDICO-2 place of John Doe works and transaction between SUBSIDICO-2 with SUBSIDICO-1 and other affiliate. Encumbering billed for by PARENTCo to SUBSIDICO-2 in the relation with exercise of SOP to John Doe becomes cost for the agenda of vesting of service to affiliated company in the group. In the case of that way hence who enjoys transaction SOP ( beside Jihn Doe) becoming not relevant again.

Vesting of intercompany service affiliated in the relation with SOP is not done but an or more employee is entering in program SOP, works for company multiple in group. PARENTCO then cost allocation to involving affiliated company, for the agenda of SOP. In this case, cost allocation must be related to fee which ought to be received by the employee to obtain number of fair fees.

Comparison with transaction that is is not is influenced [by] related parties

One of important key for the agenda of applying of method transfer of pricing is do comparison of transaction that is conspecific with transaction done between party(sides that is is not has related parties. Looks for comparison with independent transaction in the relation with example is upper to difficult to because if only the transaction there is hence stock taken as option object is stock from company employing the employee. If company is public company hence the price of stock at the time of option is executed to easy to be known, but if non the company public company hence its(the value will not be knowable swiftly.

Thereby not possibly does comparison with transaction that is is not is influenced [by] related parties for transaction in the form of SOP.

Based on breakdown of above mentioned hence to be able to do analysis transfer of better pricing pointed to characteristic from financial and commercial relationship between PARENTCo with SUBSIDICO-1 and SUBSIDICO-2 in consequence of SOP. As According To OECD TRANSFER PRICING GUIDELINES some things that need to be corrected reading to apply method transfer of pricing applied by attention that is:

a) Marking from SOP given;

b) Function analysis;

c) Conditions in contract;

d) Economic factor;

e) Business strategy.

Fifth of factor as mentioned upper, be factor to determine " comparability" with transaction that is is not influenced by related parties. After done adjustment that " comparable" then is selected method transfer of pricing used. The process is non thing which is easy because having to pass some steps which might not give pawn that case faced " comparable".

Basically situation of its(the problem is at encumbering by PARENTCo to SUBSIDICo for the agenda of vesting of option freehold asset to employee does express transaction which arm's length or in any case comes near it. Coms into question it is determine is make-good in the transaction has expressed arm's length. For the purpose possible more feasible by applying some approachs.

One of way of determine is transaction intended consists in conditions and condition that is intentionally is created or not be by comparing it with independent transaction. What intended here is is encumbering of expense of for the agenda of SOP between PARENTCo with SUBSIDICo same approximately if it is done by independent party(sides. This thing is gone through by the way of determining value from financial instrument used, in this case is stock taken as object SOP. In above case is look for market price from stock PARENTCo becoming object SOP, in this case not difficult because the stock is commercialized in stock exchange. This approach cannot be done if stock PARENTCo is not commercialized in bourse so that difficult to do comparison.

Other approach is by comparing cost which will be shouldered by PARENTCo as party(side providing its(the stock for the agenda of SOP, with cost which must be released olh SUBSIDICo to get stock from PARENTCo if only PARENTCo was company that is is not has related parties with SUBSIDICo. If cost to obtain the stock has got hence the next phase is apply method cost-plus to determine cost which arm's length.

determination of Cost ( or stock of value PARENTCo) to obtain the stock not as simple as thought by there are some thing influencing it. The thing can be gone through by seeing the price of stock at the time of giving of option freehold asset. The price then is added with costs related to vesting of service having relationship with vesting of the option freehold asset.