Explanatory note

The Agreement with Indonesia is set out in the Schedule to this Order.

The Agreement provides for business profits not arising through a permanent establishment to be taxed only in the country of the taxpayer’s residence.

Profits attributable to a permanent establishment may be taxed in the country in which the permanent establishment is situated (Articles 5 and 7).

Income from immovable property may be taxed in the country in which the property is situated (Article 6).

Air transport and shipping profits are generally to be taxed only in the residence state of the operator (Article 8).

The Agreement includes rules for determining taxable profits when a company in one country is related to a company in the other (Article 9).

The Agreement provides that where a United Kingdom company pays a dividend to a resident of Indonesia, the recipient will, subject to certain conditions, receive the tax credit to which an individual resident in the United Kingdom and in receipt of such a dividend would be entitled, less tax at at rate not exceeding 15 per cent on the aggregate of the dividend and the tax credit. In the case of a dividend paid by an Indonesian company to a resident of the United Kingdom the tax charged in Indonesia is not to exceed 10 per cent where the dividend is paid to a United Kingdom company which owns at least 15 per cent of the voting power in the paying company. In all other cases the rate of Indonesian tax will not exceed 15 per cent (Article 10).

The rate of tax imposed in the country of source on interest derived by a resident of the other country is, in general, not to exceed 10 per cent of the gross amount flowing to the other country. Certain categories of interest (eg interest payable to the Government of the other country) will be exempt from tax in the source state (Article 11).

The rate of tax in the country of source on industrial royalties flowing to the other country is 10 per cent. For certain other classes of royalties the rate of tax in the country of source is 15 per cent (Article 12).

Each country may tax capital gains in accordance with its domestic law although gains from the alienation of ships or aircraft operated in international traffic shall be taxable only in the country of residence of the operator (Article 13).

The earnings of temporary business visitors and some other individuals are, subject to certain conditions, to be taxed only in the country of the taxpayer’s residence (Articles 14 and 15). Fees received by a resident of one country in his capacity as a director (in Indonesia a “pengurus” or a “komisaris”) of a company resident in the other country may be taxed in the latter country (Article 16). Income derived from the activities of artistes and athletes may be taxed in the country in which those activities are performed (Article 17). Occupational pensions (other than those paid in respect of government service) and annuities are to be taxed only in the recipient’s country of residence (Article 18). Government service remuneration and pensions are normally to be taxed only by the paying Government (Article 19). Certain payments made to visiting students, apprentices and business trainees are exempt from tax in the country visited (Article 20).

Where income continues to be taxable in both countries credit will be given in the taxpayer’s country of residence for tax imposed by the other country. The credit to be given in the United Kingdom for tax imposed in Indonesia includes credit for tax spared under certain provisions of Indonesian law. In the case of dividends, the United Kingdom will give credit for the underlying tax paid in Indonesia where the shareholder is a United Kingdom company which controls at least 10 per cent of the voting power in the company paying the dividends (Article 21).

There are provisions safeguarding nationals and enterprises of one country against discriminatory taxation in the other country (Article 23), and for consultation (Article 24) and exchanges of information (Article 25) between the taxation authorities of the two countries.

The Agreement will enter into force on the date of the later of the notifications by each country of the completion of its legislative procedures. The Agreement is to take effect in the United Kingdom on or after 1st April in respect of corporation tax and on or after 6th April for income tax and capital gains tax in the calendar year next following that in which it enters into force. The date of entry into force will in due course be published in the London, Edinburgh and Belfast Gazettes.