In this age of globalization, international trade and transactions continue to increase, and the role of tax treaties appears more significant today than ever before. In this context, the question whether domestic anti-abuse rules can be applied to counter abuse of tax treaties is highly relevant. This essay is attempting to examine this problem from an Indonesian perspective.
Other terms are ‘improper use of the convention’ and ‘treaty shopping’. The term of ‘improper use of the convention’ tends to be more polite, not sarcastic and not judging, so Directorate General of Taxes/DGT (Indonesian competent authority) prefers this term. The meaning is a condition where a person (legal body or individual) who has no right to get benefit of treaty, but uses other person for getting benefit unavailable directly (IBFD International Tax Glossary, 2005).
Indonesia is still regarded as capital importing countries or source country. Source country will always attempt to impose tax on income derived from that country. According to Indonesian income law (UU PPh), business profit derived by non-resident will be levied tax with progressive tariff as permanent establishment (PE) or levied tax 20% as non-PE according to article 26. Passive income derived by non-resident will be levied tax 20% as prescribed in article 26 of UU PPh. So, they shall be taxed. Continue reading