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Tax Alert: PMK-35: Determination of a permanent establishment | 1
PMK-35: Determination ofa permanent establishment
Tax AlertApril 2019
Summary
The Minister of Finance (MoF) has issued regulation No. 35/PMK.03/2019 (“PMK-35”) regarding determination of a permanent establishment (“PE”) on 1 April 2019 and took effect on the same day.
With the increase of cross border business model involving foreign taxpayers, the regulation states that the MoF needed to provide legal certainty for foreign taxpayers that conduct business activities through a PE in order for them to carry out taxation rights and obligations in Indonesia.
PMK-35 appears to closely reflect OECD guidance in most respects. However, we note that some of the provisions on service and construction project PEs could be read quite broadly, particularly concerning subcontracting arrangements.
PMK-35 is now the leading source of guidance on PE matters from the Indonesian tax authorities, and should be considered in any Indonesian PE analysis.
This regulation does not specifically address cross-border digital transactions or any expanded digital PE concept. Also, it does not address potential changes to PE rules which may arise from the OECD Multilateral Instrument (“MLI”), which has been signed but not yet ratified by Indonesia.
While the regulation does not address questions of PE attribution, it is interesting to note the expansive view taken on when service and construction project PEs exist and we note the potential for similar views to be taken on attribution.
This alert aims to provide further explanation on PMK-35.
2 | Tax Alert: PMK-35: Determination of a permanent establishment
A. ImportantdefinitionsunderPMK-35
1. Foreign Individual is defined as an individual who does not reside in Indonesia or an individual who is in Indonesia for not more than 183 days within any 12-month period.
2. Foreign Company is defined as a corporate that is not established and is not domiciled in Indonesia.
3. Double tax treaty (“tax treaty”) is defined as an agreement between the Indonesian Government and the government of its treaty partner country or jurisdiction to avoid double taxation and tax evasion.
B. ObligationsofaforeigntaxpayerwhichconductsbusinessthroughaPE
1. A Foreign Individual or a Foreign Company which conducts business or activities through a PE must register itself to obtain a Tax Identification Number (“NPWP”).
2. The obligation to register for NPWP starts when the Foreign Individual or Foreign Company starts conducting business or activities through a PE in Indonesia. The Foreign Individual or Foreign Company must register for a NPWP within one month after its business or activities start to be conducted through a PE in Indonesia.
3. In case the Foreign Individual or Foreign Company conducting business or activities through a PE in Indonesia does not register for NPWP, the Directorate General of Taxation (DGT) may issue the NPWP ex-officio.
4. A Foreign Individual or a Foreign Company conducting business or activities through a PE as Entrepreneur conducting delivery of taxable goods and/ or services must report its business to be confirmed as a VAT-able Entrepreneur, unless it is classified as a small-scale entrepreneur.
5. The obligation to report its business to be confirmed as a VAT-able Entrepreneur must be conducted at the latest by the end of the following month after the month where the total gross turnover and/ or gross revenue exceeds the small-scale entrepreneur threshold.
C. PEforms
A PE is a business form used by a Foreign Individual or a Foreign Company to conduct its business or activities in Indonesia. The following sections provides further explanation on types of PE under PMK-35:
1. An establishment to run a business in Indonesia
General criteria
A PE is an establishment to run a business in Indonesia that meets the following criteria:
a. There is a place of business in Indonesia. The place of business covers any kind of place, space, facility or installation, including machinery or equipment used by a Foreign Individual or a Foreign Company to conduct its business or activities, which can be in a form of:
a) place of management;
b) branch;
c) representative office;
d) office building;
e) factory;
f) workshop;
g) warehouse;
h) sales and promotional space;
i) mining or extracting of natural resources;
Tax Alert: PMK-35: Determination of a permanent establishment | 3
j) oil and gas concession area;
k) fishery, farm, agriculture, plantation, or forestry; and
l) computer, electronic agent, or automatic equipment owned, rented, or used by a Foreign Individual or a Foreign Company to conduct business through internet.
The determination on the place of business will not depend on whether the Foreign Individual or Foreign Company owns or rents; or whether or not it legally has a right to use that place of business.
b. The place of business is permanent in nature.
The place of business is permanent in nature if the place is:
a) Continued to be used; and
b) Located in a certain geographical location.
c. The place of business is used by a Foreign Individual or a Foreign Company to conduct its business or activities.
The place of business is used to conduct business provided:
a) Such place of business is available for use so that the Foreign Individual or Foreign Company can have unlimited access in conducting its business or Foreign Individual or Foreign Company conducts its business or activities through that place of business.
The place of business should not meet the criteria of available for use if:
a) Such place of business is only used for electronic data storage and/or electronic data management by the Foreign Individual or Foreign Company; and
b) The Foreign Individual or Foreign Company has limited access to operate such place of business.
For tax treaty application
a. a business meeting the criteria stated above, but limited only to activities which are of a preparatory or auxiliary character is excluded from the definition of a PE. b. preparatory activities are preliminary activities so that the essential and significant activities are ready to be conducted. c. auxiliary activities are additional activities, which can accelerate the essential and significant activities. d. Essential and significant activities cover activities that: a) Are the core business or activities of the Foreign Individual or Foreign Company; b) Cannot be separated from the core business or activities of the Foreign Individual or Foreign Company; c) Directly generate income for the Foreign Individual or Foreign Company; d) Using significant amount of assets or human resources. e. In case the Foreign Individual or Foreign Company conducting activities, which are preparatory or auxiliary character for another party, the exception in (a) above is not applicable.
2. Construction, installation, or assembly project
General criteria
Construction, installation or assembly project, which is the business or activities of the Foreign Individual or Foreign Company, covers: a. Construction consulting service; b. Construction works; and c. Integrated construction works.
4 | Tax Alert: PMK-35: Determination of a permanent establishment
Installation or assembly project covers: a. Installation or assembly project related with the construction work project; and b. Installation or assembly project of machinery or equipment.
Included under the construction, installation or assembly project considered as a PE is construction, installation or assembly project in Indonesia where: a. The works are conducted outside of Indonesia; and/or b. The works are forwarded to either a local or a foreign subcontractor. As such, taxpayers will need to note the application of this regulation where parts of the construction and procurement are performed outside Indonesia, as these may also be attributed to the Indonesian PE.
For tax treaty application
a. the construction, installation or assembly project is considered as a PE if it is conducted beyond the time period stated in the tax treaty.
b. The time period is calculated when the Foreign Individual or Foreign Company starts the project until it finishes the work and delivers the result to the construction, installation or assembly service recipient; or it stops working before the project is finished. Included in this time period is the subcontractor’s working time if the Foreign Individual or Foreign Company forwards the work to a subcontractor.
c. Part of a day is calculated as one day, in case the period is calculated based on days; and part of a calendar month is calculated as one month, in case the period is calculated based on months.
3. Service PE - Furnishing of service, in whatever form, by employees or other personnel, provided the service is conducted for a period of more than 60 days within 12-month period
General criteria
The furnishing of service by employees or other personnel, provided the service is conducted for a period of more than 60 days within 12-month period, is considered as a PE if meet the following criteria: a. The employee or other personnel is hired by the Foreign Individual or Foreign Company or their subcontractors; b. The service is conducted in Indonesia; and c. The service is delivered to a party in Indonesia or outside of Indonesia.
For tax treaty application
a. the furnishing of service by employees or other personnel employed by a Foreign Individual or Foreign Company is considered as a PE if it is conducted beyond the time period stated in the tax treaty. b. The time period is calculated when the furnishing of service started until the service is completed. Included in this time period is the subcontractor’s working time if the Foreign Individual or Foreign Company uses a subcontractor. c. Part of a day is calculated as one day, in case the period is calculated based on days; and part of a calendar month is calculated as one month, in case the period is calculated based on months.
Foreign parties undertaking services in Indonesia should take care to understand the implications of these aspects of the regulation. The provisions on subcontractors are somewhat unclear and may be difficult to apply.
4. A person or a corporate other than an agent of an independent status
General criteria
A person or a corporate other than an agent of an independent status (i.e. dependent agent) is considered as a PE if that person or corporate is acting for and on behalf of the Foreign Individual or Foreign Company.
Tax Alert: PMK-35: Determination of a permanent establishment | 5
The person or corporate is acting for and on behalf of the Foreign Individual or Foreign Company if: a. It receives instructions for the benefit of the Foreign Individual or Foreign Company in conducting its business or activities; or b. It does not bear the risk from its business or activities.
A Foreign Individual or a Foreign Company cannot be considered to have a PE in Indonesia if in conducting its business or activities in Indonesia, it uses an independent agent, broker or middleman, provided such agent, broker or middleman is acting in the ordinary course of its business.
For tax treaty application
in case the dependent agent only conducting its activities, which are preparatory or auxiliary character, the dependent agent is not considered as a PE in Indonesia.
We note the usual treaty wording concerning “authority to conclude contracts” and “maintenance of stock of goods” are not addressed. It is not clear whether PMK- 35 is therefore broadening the scope of dependent agent PEs.
5. An agent or an employee of an insurance company that is not established and is not domiciled in Indonesia, who receives insurance premium or who bear risks in Indonesia
An agent or an employee of an insurance company that is not established and is not domiciled in Indonesia is considered as a PE in Indonesia if: a. It receives insurance premium in Indonesia; or b. It bears risks in Indonesia where the insured party resides, is domiciled or located in Indonesia
For tax treaty application
The criteria stated in this point are not applicable for re-insurance.
D. RevocationofNPWPandVAT-ableEntrepreneurstatus
1. The revocation of NPWP for a PE is conducted in case the PE ceases its business activities in Indonesia. The DGT can revoke the PE’s NPWP based on the application of a taxpayer, or ex-officio.
2. The revocation of VAT-able Entrepreneur status is conducted in case the Foreign Individual or Foreign Company conducting its business through a PE no longer meets the criteria as a VAT-able Entrepreneur. DGT can revoke the VAT-able Entrepreneur status of a PE based on the application of the VAT-able Entrepreneur or ex-officio.
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