The Indonesian Government has introduced new measures under Government Regulation No. 55 of 2022 on Rules Adjustments in Income Tax ("Regulation") to combat tax avoidance practices. The measures include formalising the "substance-over-form" principle into a written provision that allows the tax authority to impose adjustments based on the principle as an anti-avoidance measure if other anti-avoidance measures are ineffective. Furthermore, the Regulation allows the tax authority to recalculate tax payable based on a comparison of a taxpayer's financial performance against comparable companies in related-party transactions and deny deductibility of payments made to non-residents if they create double non-taxation benefits or double deductions.
These new measures demonstrate Indonesia's commitment to fully implement the Base Erosion and Profit Shifting (BEPS) Action Plan No. 2, and taxpayers must comply with the tax legislation. Corporate taxpayers planning to restructure must ensure that their proposed restructuring scheme follows the current tax framework, including the Regulation. The formalisation of the substance-over-form principle gives significant power to the tax authority, and the detailed procedural rules governing its implementation will be crucial to ensure that the tax authority does not abuse its authority and that the taxpayer is treated fairly.
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