Indonesia, Hong Kong Sign Treaty on Taxes

Jakarta Globe, Dion Bisara, March 23, 2010

Indonesia and Hong Kong sealed a taxation treaty on Tuesday that officials said would eliminate double taxation while reducing tax evasion through cross-border transactions. Finance Minister Sri Mulyani Indrawati and Hong Kong Finance Secretary John Tsang signed the pact in Jakarta.

Under the agreement, Indonesia will reduce taxes on Hong Kong investors’ income from dividends, royalties and interest from financial products, as well as profits generated by branches of Hong Kong companies operating in Indonesia.

Indonesia currently taxes these categories of income at 20 percent.

Syarifuddin Alsah, director of tax regulation at the Finance Ministry’s Directorate General of Taxation, said Hong Kong investors’ income tax on dividends and interest will be cut to 10 percent, while the tax on interest from financial products will be lowered to 5 percent.

Meanwhile, Indonesian companies operating in Hong Kong will no longer be subject to double taxation. Any Hong Kong tax paid by Indonesian companies will be deductible from any tax owed in Indonesia.

“This agreement hopefully is going to strengthen the integrity of Indonesia’s tax system, especially by allowing the exchange of taxpayers’ information, including bank information,” Sri Mulyani said. She added that the treaty will provide more certainty to cross-border investors. “It will enhance the economies of both countries,” she said.

Tsang said bilateral trade between Indonesia and Hong Kong grew by an average of 9 percent annually between 2005 and 2009.

“Last year trade between Hong Kong and Indonesia was worth $4.5 billion,” he said. “It’s hard to say the exact effect of the treaty but hopefully the trade of both countries will improve by double digits in the next five years or even sooner.”

Pontas Pane, interim director of intelligence and investigation at the Directorate General of Taxation, said the treaty would make it harder for people to evade taxes by hiding their assets abroad.

Chris Kanter, deputy chairman for investment at the Indonesian Chamber of Commerce and Industry (Kadin), said the treaty would help Indonesian companies that have branches in Hong Kong.

“Certainly this treaty with Hong Kong will boost our trade with them,” he said.

The tax agreement was the 59th signed by Indonesia. It has similar treaties with countries including the United States, the United Kingdom and Singapore.

It is the third such treaty signed by Hong Kong, which recently signed similar tax treaties with Brunei and the Netherlands.

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