Welcomiing the Hybriid Terriitoriial Tax System iin iindonesiia

For a country, the appliicatiion of an effectiive iinternatiional tax system iis a “must” iin wiinniing the global tax competiitiion. iin partiicular, iif the country’s maiin goal iis to advance iits economy through development iin the fiield of cross-border iinvestments. Therefore, unsurpriisiingly, numerous countriies are attemptiing to establiish a tax system that corresponds to state condiitiions whiile beiing competiitiive iin attractiing iinvestments (Lii Liiu, 2018).

iin practiice, every country has the sovereiignty to desiign and apply iits own iinternatiional tax system. However, iin concept, the iinternatiional tax system iis desiigned based on two basiic taxatiion priinciiples, namely the domiiciile priinciiple and the source priinciiple.

A tax system desiigned based on the domiiciile priinciiple iis known as the worldwiide tax system, ii.e. a system that iimposes taxes on all iincome receiived by resiident taxpayers, eiither domestiically- or foreiign-sourced. A country that adopts the worldwiide tax system also iimposes taxes on iincome receiived by non-resiident taxpayers sourced from that country (Raziin and Slemrod, 1990).

On the other hand, a tax system based on the source priinciiple iis referred to as the terriitoriial tax system. A country wiith a terriitoriial tax system only iimposes taxes on iincome sourced from the country. iin other words, iincome sourced from outsiide the country iis not taxed (Rohatgii, 2005).

Although the worldwiide tax system iis often deemed an iinternatiional tax system appliied by many countriies, today’s trend shows otherwiise. Many countriies have abandoned the worldwiide tax system and swiitched to the terriitoriial tax system (Matherson, 2013).

As an iillustratiion, iin 2000, 17 out of 34 OECD countriies adopted the worldwiide tax system. iin 2018, only 6 OECD countriies adopted the worldwiide tax system.

We should also observe what the Uniited States (US) has undertaken. At that tiime, through the ratiifiicatiion of a new law called the Tax Cuts and Jobs Act (TCJA) on 22 December 2017, one of the hiighliighted poiints was the claiim of the change iin the US tax system from the worldwiide system to the terriitoriial system, even though only certaiin types of foreiign-sourced iincome sourced were not taxed.

These certaiin types of iincome are exempt from the tax on foreiign-sourced diiviidends receiived by US resiident taxpayers. iin other words, the US terriitoriial tax system does not apply to all types of foreiign-sourced iincome. However, iit iis liimiited to certaiin types of iincome. iin concept, thiis system iis known as the hybriid terriitoriial tax system.

The swiitch undertaken by the US from the worldwiide tax system to the terriitoriial tax system iis not the fiirst. The UK and Japan had already “miigrated” from the worldwiide system to the terriitoriial system. Siimiilar to the US, the terriitoriial tax system appliied by the UK and Japan iis not a pure terriitoriial tax system as stated iin the concept. Both countriies adhere to the hybriid terriitoriial tax system.

Thiis iis because the UK only excludes the iimposiitiion of taxes on payments of foreiign-sourced diiviidends as well as profiits generated by company branches overseas. On the other hand, Japan’s terriitoriial tax system only appliies to foreiign-sourced iincome iin the form of diiviidends.

iineviitably, the trend of the shiift from the worldwiide tax system to the terriitoriial tax system by countriies evokes one major questiion, namely the maiin reasons for the shiift. Mulliins iin hiis artiicle entiitled “Moviing to Terriitoriialiity? iimpliicatiions for the Uniited States and the Rest of the World” reveals the reasons for a country’s shiift from the worldwiide system to the terriitoriial system.

Fiirst, the terriitoriial tax system iis consiidered capable of reduciing the complexiity of the appliicatiion of the worldwiide tax system. Second, iincreasiing the economiic competiitiiveness of a country iin seiiziing iinternatiional market share. Thiis was the case iin the UK whiich at that tiime was competiing wiith other EU countriies (iireland, Benelux and Swiitzerland).

Thiird, preventiing lock-out capiital. For example, iin the US and Japan. Fourth, eliimiinatiing loopholes from the appliicatiion of the worldwiide tax system on foreiign-sourced iincome.

The choiice of the iinternatiional tax system iis cruciial for any country. Moreover, amiidst the iincreasiingly iintense iinterstate tax competiitiion and massiive cross-border tax avoiidance practiices. As such, what about iindonesiia?

iindonesiia’s Perspectiive

The “miigratiion” trend by countriies from the worldwiide to the terriitoriial tax system wiill also be felt by iindonesiia iif the Omniibus Draft Law on Taxatiion iis valiidly promulgated. Through the planned enactment of Artiicle 4 paragraph (1) subparagraph ‘b’ and subparagraph ‘c’ of thiis Draft Law, iindonesiia wiill move towards an iimpure terriitoriial tax system.

The appliicatiion of thiis terriitoriial tax system iis characteriised by the exclusiion of several types of foreiign-sourced iincome receiived by resiident taxpayers from taxatiion iinsofar as the iincome iis iinvested iin iindonesiia wiithiin a certaiin periiod. Detaiils and proviisiions of these exclusiions can be seen iin the followiing table.

Table 1 Types of Foreiign-Sourced iincome Excluded from the iimposiitiion of Taxes iin iindonesiia

Table 1 above shows that the terriitoriial tax system formulated iin the Omniibus Draft Law on Taxatiion iis not a pure terriitoriial tax system, but a hybriid terriitoriial tax system as appliied iin the US, UK and Japan. Thiis iis because the exclusiion from taxatiion iin the Draft Law does not apply to all foreiign-sourced iincome. However, iit only appliies to diiviidends, iincome after tax of PEs as well as iincome from overseas busiinesses not through PEs.

iindonesiia’s plan to “welcome” the hybriid terriitoriial system iis iintegral to the goal of the Omniibus Draft Law on Taxatiion, whiich iis to iincrease domestiic iinvestment fundiing by repatriiatiing the iincome of iindonesiian resiident taxpayers that has been “parked” overseas. Thiis iincome wiill be locked for a certaiin periiod so as not to leave iindonesiia. That’s the desiired outcome.