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Indonesia Tightens Rules On CFCs To Foil Profit-Shifting - Briefing Note
Tom Burroughes
21 March 2017
Indonesia’s government is soon to step up its fight against the misuse of what are called Controlled Foreign Companies to prevent tax evasion by moving profits around to low-tax countries. Separately, Indonesia has been operating a tax amnesty programme to repatriate tens of billions of dollars the government believes has been stashed away in jurisdictions such as Singapore. The programme runs until the end of March. (To see an article on how the programme and other developments have affected bankers in Singapore, click here.)
The Asian country has rules in place over CFCs to prevent profit-shifting from Indonesia to less heavily taxed jurisdictions. At present, the foreign subsidiary’s profit will be taxable immediately it is in the hands of an Indonesian shareholder. The rules apply 50 per cent ownership thresholds and impose the CFC (income tax) on the “accounting profit” produced by foreign subsidiaries, a note from law firm Rawlinson & Hunter says. The definition of “accounting profit” has led to different interpretations of the rules and confusion, according to Herdin Syafari, tax director at the firm.
Government reports have set out two proposals regarding the definition of a CFC. First, it could adopt a broad definition so that CFC rules apply to corporate entities as well as structures such as partnerships and trusts. Another suggestion is that a “hybrid mismatch rule” could be adopted to stop entities bypassing CFC rules through different treatments in different jurisdictions. Legal and economic control tests could be used to pin down who actually controls such entities, the note by Syafari added.