The primary legal basis for determining tax residency in Indonesia is Article 1(4) of Law No. 36 of 2008 on Income Tax.
In Indonesia, an individual or entity is considered a tax resident based on the duration of their stay in the country. According to Article 1(4) of Law No. 36 of 2008 on Income Tax ("Undang-Undang Nomor 36 Tahun 2008 tentang Pajak Penghasilan"), an individual is deemed a tax resident if they are present in Indonesia for more than 183 days within 12 months. For entities, tax residency is determined by their establishment or primary place of management and control in Indonesia.
The criteria for tax residency aim to ensure that individuals and entities contributing to the Indonesian economy are subject to taxation. By establishing a clear threshold based on the duration of stay, the legislation seeks to provide certainty and predictability in tax obligations while preventing tax evasion.
Role of Tax Treaties: Tax treaties play a crucial role in mitigating double taxation and facilitating cross-border trade and investment by harmonizing tax rules between countries. They often include provisions that modify or supplement the tax residency criteria established in domestic laws.
Modifications and Exceptions: Regarding tax residency, Indonesia has signed tax treaties with various countries, including Portugal, which may introduce modifications or exceptions to the standard criteria. The Indonesia-Portugal Tax Treaty, for instance, provides specific rules for determining tax residency, taking precedence over domestic laws in certain circumstances.
Key Treaty Provisions and Explanation: In the case of the Indonesia-Portugal Tax Treaty, Article 4 outlines the criteria for tax residency for individuals. It typically incorporates the concept of "permanent home" and "center of vital interests" to determine residency status, which may differ from the 183-day rule under Indonesian domestic law.
Such modifications aim to prevent double taxation, provide clarity for taxpayers operating in both countries and promote economic cooperation. By aligning tax residency criteria with international standards, these treaty provisions enhance certainty and fairness in tax treatment, fostering a conducive environment for cross-border trade and investment.
