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Amendment to withholding tax rules for discounts of state debentures — Orbitax Tax News & Alerts

The government has issued Government Regulation 27 of 2008, which amends the rules for withholding tax on discounts (or interest) of state debentures, as previously provided for under Government Regulation 11 of 2006 (revoked).

The withholding tax rate on bond discounts remains at 20% (subject to tax treaty relief) under both the new and old regulations. However, the following changes are introduced under the new regulation:

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The definition of "state debentures" is expanded to mean state treasury notes and state bonds in IDR and foreign currencies whereby the interest and principal amounts are guaranteed by the Republic of Indonesia.

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The meaning of "discounts" of state treasury notes has been changed from the excess of the nominal value of the bonds upon maturity over their initial issuance cost, to the excess of (i) the nominal value of the bonds upon maturity over the price paid on the primary or secondary market, or (ii) the selling price of the bonds on the secondary market over the price paid on the primary or secondary market.

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The party responsible for withholding the tax on the discount of the state treasury notes has been changed from the Bank of Indonesia to (i) the issuer of the bonds or custodians that act as payers, where the discount is received by the bondholders upon maturity of the bonds, or (ii) securities companies (brokers) or banks acting as intermediary traders or purchasers, where the discount is received by bondholders from secondary market trading.

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The following parties are exempt from the withholding tax: (i) banks incorporated in Indonesia and branches of foreign banks in Indonesia, (ii) pension funds that have been approved by the Minister of Finance, and (iii) for the first 5 years from their incorporation, mutual funds that are listed on the capital market and registered with the Financial Institution Supervisory Board.

Withholding tax on income from construction services

The government has issued Government Regulation (GR) Number 51 of 2008, which provides the final income tax rates for construction services. The issuance of this regulation revokes GR 140 of 2000, which will continue to apply to construction contracts that have been fully or partly paid up to 31 December 2008. Under GR 140 of 2000, income from construction operational services are taxed at 2% whereas income from construction planning and supervisory services are taxed at 4%.

Contracts paid after 31 December 2008 will be subject to the provisions of GR 51 of 2008, as follows:

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engineering construction services are taxed at 2% where they are provided by small-scale businesses, 4% where the service provider is not classified as a business, and 3% in all other cases;

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construction planning and supervision services are taxed at 4% where the service provider is classified as a business and 6% if otherwise;

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the tax is to be withheld by recipients of the construction services, or remitted by service providers if it is not withheld;

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permanent establishments carrying on construction services are subject to tax at the above-mentioned rates, which is separate from the 20% branch profits tax imposed pursuant to Art. 26 of the Income Tax Law 17/2000 (subject to treaty relief);

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business losses arising from the provision of construction services can only be used up to the 2008 tax period and cannot be carried forward to subsequent periods; and

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construction service providers are required to maintain separate records in relation to income arising from construction services and other business activities

GR 51 of 2008 also provides definitions for construction-related activities such as planning, engineering and supervision.