Indonesia is one of the world’s growing markets and is frequently referred to as the largest archipelago, with 17,500 islands. Singapore, a tiny city-state, is considered the fourth-richest nation in the world by GDP per person (International Monetary Fund World Economic Outlook 2016).
| Singapore | Indonesia | |
| Corporate Tax | 0% (on Foreign Profits) | 22% |
| Withholding Tax | 0% (on Dividends) | 20% |
| Time to Incorporate a Business | 3 days | 3 – 6 months |
This article examines the viability of conducting business in Singapore as compared to Indonesia in terms of factors including business environment, workforce, and taxation.
Financial Overview
Southeast Asia’s largest economy and the 16th largest economy in the world are both located in Indonesia. Since ending decades of autocratic control, Indonesia, a fledgling democracy, has preserved political stability.
While petroleum and minerals continue to make up the majority of exports, economic expansion and urbanization in Indonesia are driving rising demand for infrastructure. The government has implemented initiatives to reduce red tape, open up industries for investment, and enhance public services in order to continue changing the business climate.
Singapore is a highly developed, trade-oriented economy, in contrast to Indonesia, which has been categorized as a freshly industrialized country. Singapore had to rely on innovation and human capital for its development due to its tiny land area and lack of natural resources.
As a result, high-end manufacturing, engineering, biotechnology, and financial services now have a leading global economy. Investors continue to be drawn in large numbers by Singapore’s strong institutions, effective policymaking, commitment to free trade, and diversified economy.
Environment for Business
According to the 2017 World Bank Ease of Doing Business Index, Indonesia is now among the top 10 nations that have improved due to continuous reform initiatives. It also rose 15 spots from its prior position of #106 to #91. Singapore is the second-easiest business location in the world, in comparison. Here are some important comparisons in a nutshell:
Singapore’s legal system is based on English common law, whereas Indonesia’s is based on civil law. Common law courts typically consider prior rulings when analysing a case, but civil law systems include regulations and statutes that are intended to apply to all situations. Singapore and Indonesia are ranked #9 and #61 for rule of law, respectively, by the World Justice Project, which evaluates the efficiency of the rule of law in each nation.
Workforce
Indonesia is the fourth most populous country in the world, with a population of over 250 million. With more than 50% of its population under the age of 30, Indonesia has a young labour force. Only 23% of students in Indonesia today complete their postsecondary education, while 97% of the country’s citizens acquire only a primary education.
More over 70% of Singapore’s 5.5 million citizens between the ages of 25 and 34 have a higher education, despite the country’s median age of 40. In total, 40% of Singapore’s population aged 25 and older were tertiary educated.
Business Language
The official language of Indonesia is Bahasa Indonesia, which is utilized in both business and education. Although English is widely spoken in Indonesia, it is less common outside of the country’s major cities. Therefore, business owners and foreign employees might want to think about attending Bahasa classes. More than 700 indigenous languages, including Javanese, Sundanese, and Madurese, are also spoken throughout the archipelago.
Singapore, in contrast, uses English as its primary commercial and educational language. In addition to English, citizens study their native language in school, whether it is Mandarin, Malay, or Tamil. Therefore, the majority of Singaporeans are functionally bilingual.
Business Formation & Incorporation
For foreigners, starting a business in Indonesia can be difficult and time-consuming because they must first obtain approval from the Indonesia Investment Coordinating Board (BKPM). Perseroan Terbatas Penanaman Modal Asing (PT PMA), which needs two shareholders and a minimum paid-up capital of IDR 10 billion (about S$1 million), are companies that are entirely controlled by foreigners.
The most popular kind of company entity utilized by locals to conduct business in Indonesia is the Indonesian LLC (Perseroan Terbatas). Other types of business entities include limited partnerships, firma partnerships, representative offices, permanent establishments, and civil partnerships (Maatschap or Persekutuan Perdata) (Comanditer Venootschap). However, partnerships between foreign parties are not permitted to be formed in Indonesia.
Private Limited Companies, Subsidiary Companies, Representative Offices, and Sole Proprietorships are all types of corporate entities recognized in Singapore. A corporation can be incorporated in Singapore in about 24 hours with just two procedures, whereas it can take up to 9 procedures and 3 to 6 months to do so in Indonesia.
Requirements for Filing
After the end of each fiscal year, companies in Indonesia are required to give annual reports to their General Meeting of Shareholders (GMS). Some businesses, such as publicly traded corporations and those with annual revenues above IDR 50 billion, are required to have a public accountant audit their financial accounts. In addition, the Indonesian financial services body, Otoritas Jasa Keuangan, requires publicly traded corporations to provide financial reports (OJK).
Companies in Singapore are required to hold an AGM once a year, according to the calendar. Annual tax returns must be submitted, and annual financial reports must be audited.
Regulations for Immigration
The fastest and simplest sort of visa for conducting business in Indonesia is a business visa. The 60-day visa, however, should not allow travellers to work or get payment while they are in Indonesia. Employed foreign nationals in Indonesia are eligible to apply for the KITAS, a limited stay permit. However, employers must explain why a foreign specialist is needed for the position. A person can apply for KITAP, a permanent stay permit, after holding KITAS for three years.
Foreign professionals, managers, and executives who earn a minimum monthly salary of S$3,600 in Singapore may be granted an Employment Pass. Additionally, foreign business owners who intend to launch and run a new enterprise in Singapore can apply for the EntrePass.
Income Tax
A progressive income tax rate of up to 30% is applied to people who live in Indonesia or are present there for more than 183 days in a calendar year.
Singapore’s progressive tax rate, in contrast, rises to 22%.
Corporate Tax
Singapore offers businesses a top corporate tax rate of 17% on their chargeable income.
In Indonesia, there is a standard corporate income tax rate of 25%.
Tax Incentives & Exemptions
Additionally, small and medium-sized businesses will get a 50% tax deduction on gross revenues up to IDR 4.8 billion if their annual turnover is below IDR 50 billion.
Newly registered businesses in Singapore are entitled to a complete three-year tax exemption on their first S$100,000 in chargeable income.
Withholding Tax
On income from Indonesia, a 20% withholding tax is applied to non-residents. However, the withholding tax in Singapore ranges from 10% to 17%.
Foreign-Sourced Income
Profits from both Singapore-based and foreign businesses that are sent to Singapore are considered chargeable income for resident corporations there. Outside of the country, profits are not subject to taxation.
However, businesses in Indonesia must pay taxes on income from both domestic and foreign sources.
A Quick Look at Country Rankings
| YEAR | CATEGORY | SINGAPORE’S RANK | INDONESIA’S RANK | SOURCE |
| 2017 | Ease of Doing Business | 2 | 91 | World Bank, 2017 Ease of Doing Business Report |
| 2016 | Ease of Doing Business | 1 | 109 | World Bank, 2016 Ease of Doing Business Report |
| 2016 | Freest Economy in the World | 2 | 99 | Heritage Foundation’s Index of Economic Freedom |
| 2015-2016 | Most Competitive Economy in the World | 2 | 37 | World Economic Forum, Global Competitiveness Report |
| 2015 | Country with the lowest perception of Corruption | 8 | 88 | Transparency International’s Corruption Perceptions Index |
| 2015 | Best Business Country in the World | 8 | 93 | Forbes’ Best Countries for Business Index |
| 2015 | Most Competitive Economy in the World | 2 | 42 | IMD, World Competitiveness Yearbook |
| 2010 | Country with the Most Open Trade | 1 | 68 | World Economic Forum, Global Enabling Trade Report |
| 2009 | Lowest Tax Misery Country | 11 | 19 | Forbes Tax Misery and Reform Index |
| 2010 | Ease of Paying Taxes | 4 | 130 | PWC, IFC, World Bank’s 2011 Paying Taxes Survey |
| 2010 | Best Country in the World to Live In | 12 | – | HSBC’s 2010 Expat Experience Report |
| 2010 | Best Labour Force in the World | 1 | – | BERI’s Labour Force Evaluation Measure |
| 2010 | Asia’s Most Efficient Bureaucracy | 1 | 9 | Political and Economic Risk Consultancy Survey 2010 |
| 2010 | Asians’ Favourite Place to Live | 1 | 23 | ECA International’s 2010 Location Ratings System |
| 2010 | City with the Lowest Employer Risk in the World | 3 | 67 | Aon Consulting’s People Risk Index |
As a Final Thought
The ease of doing business in Singapore is one of the main reasons why more investors and traders prefer Singapore to Indonesia, despite Indonesia’s expanding consumer sector and ongoing reforms.
The Republic’s appeal as a business gateway to South-east Asia is additionally emphasized by connectivity, regulations that are supportive of business, and a stable regulatory environment.
The Singapore – Indonesia Double Tax Treaty
As South East Asia’s most densely populated country and largest economy, Indonesia is drawing hordes of foreign investors looking for the next major growth opportunity. With a population of over 251 million and an average annual growth rate of 6% over the past three years, foreign investment into the economy is rapidly increasing.
The global economic crisis, which hurt various regional economies, left the nation virtually untouched. International companies have continued to be drawn to Indonesia because of its abundant natural resources, but this is increasingly changing as attention is turning to Indonesian consumers.
According to reports, foreign direct investment increased 27% in the first quarter of 2013 to a record 65.5 trillion rupiah, or around S$7 billion. The country’s big population, young labour force, and expanding middle class are luring investors. According to a recent prediction by the Boston Consulting Group, Indonesia’s middle-class and wealthy population will quadruple to 141 million by 2020.
Most notably, the country has much lower unit labour costs than traditional locations like China, India, or Vietnam. This, together with recent changes to the licensing process and government initiatives to cut red tape, are expected to increase the country’s manufacturing competitiveness. Indonesia is becoming into a significant location for investments in the area.
Bilateral Relations Between Singapore and Indonesia
Singapore, a top-tier city-state with an unrivalled position as a regional hub and global financial center, is ideally situated to capitalize on Indonesia’s economic potential. The strong bilateral ties between Singapore and Indonesia are supported by mutual economic activity.
Singapore is a significant foreign investor in Indonesia, and as the country’s investment climate has improved, Singapore’s closeness to the resource-rich nation has made it a crucial route for foreign investors looking for possibilities in Indonesia. With investments totalling US$5.1 billion in 2011, Singapore has been the biggest foreign investor into Indonesia for three years in a row.
Singapore and Indonesia collaborate closely to help ASEAN realize its aim of creating an ASEAN Community by 2015, which will allow the ASEAN economies to grow more quickly. By creating a vast network of treaty agreements, Singapore is continually honed its advantage among the regional commercial hubs to ensure its distinction as the destination for regional holding corporations.
One of these treaty agreements that guarantees investors working beyond the boundaries of both nations an appealing tax proposition is the Singapore-Indonesia Double Tax Agreement (DTA). The main DTA clauses are summarized in the paragraphs that follow.
Singapore-Indonesia DTA
The Agreement for Avoidance of Double Taxation was reached between the governments of the Republic of Singapore and the Republic of Indonesia on May 8, 1990, and it became effective on January 25, 1991.
Scope of DTA
Persons who reside in either one of the Contracting States or in both are subject to the DTA’s requirements. “Person” refers to any individual, business, or group of people that is regarded as an entity for tax reasons. All taxes levied on income on behalf of a Contracting State shall be subject to the DTA’s rules. In the case of Indonesia, the provisions shall apply to the income tax (pajak penghasilan), the business tax (pajak perseroan), and the tax on interest, dividends, and royalties, to the extent allowed in such income tax (pajak atas bunga, dividen dan royalty). The agreement in Singapore pertains to income tax.
Residency
Any person who is a resident of a Contracting State for the purpose of that Contracting State’s taxation is referred to as a resident of a Contracting State. This phrase does not cover a foreign company’s permanent office that is considered a resident for tax reasons. If a person is a resident of both countries, his tax residency will be established by where his permanent home is; but, if his permanent home is located in neither of the two countries, or in neither of them, the center of vital interest will be taken into consideration.
If the individual does not have a habitual abode in both countries, then nationality will be taken into consideration. If the individual is a national of neither of the two countries, or of neither the permanent home nor the vital interest factors, then the contracting states shall determine the residency by mutual agreement.
The state where the person’s place of effective management is located will be used to determine residency if the person, other than an individual, is a resident of both contracting states. In circumstances of uncertainty, the competent authorities of the contracting States should mutually agree upon the residency by taking into account all pertinent factors.
Permanent Establishment
A “Permanent Establishment” (PE) is a fixed place of business where an enterprise conducts all or a portion of its operations. PE encompasses sites like an office, a factory, a workshop, a drilling rig, and locations where natural resources are extracted, like a mine, a quarry, an oil well, etc. Only if a building site, assembly, or installation project lasts longer than 183 days can it qualify as a permanent establishment.
A PE also includes the provision of services or consultancy through employees or other individuals engaged by the organization for a total of more over 90 days within a 12-month period. Storage facilities used for specific functions, such as displaying, delivering, processing, etc., would not constitute a PE. Maintenance of a fixed location only for the purpose of engaging in preparatory or supplementary operations will also not qualify as a PE.
An enterprise of a contracting state that has been doing oversight functions for a construction, installation, or assembly project that is being carried out in another state for more than six months is regarded to have a PE in that state.
PE will not apply if a broker, general commission agent, or other agent with independent standing is hired to do business in one of the contracting states. If such an agent regularly exercises the authority to conclude contracts on behalf of the enterprise in a contractual state and devotes all or almost all of their activity to acting on behalf of an enterprise, then they are considered to be PEs.
However, supplemental actions performed by the agent will not constitute a PE if they are undertaken. It is not enough for either company to be considered a PE of the other for it to be a resident company of one contractual state that is managed or under the control of a resident company of another contracting state.
Important Requirements
Dividends Tax
A resident of one Contracting State may be taxed on dividends paid by a resident corporation to a resident of another Contracting State.
However, it can be subject to taxation in the Contracting State where the company is based that is disbursing the dividends. However, in cases where the beneficiary of the dividend is the beneficial owner and a resident of the other contracting state, the tax so levied may not be greater than
If the beneficiary has a PE in the contracting state where the company providing the dividends is a resident and the dividend received is inextricably linked to that PE, this clause does not apply. Such dividend income associated with a PE will be regarded as a business profit and subject to the appropriate tax treatment.
Tax on Interest
Interest that is generated in one Contracting State and given to a citizen of another Contracting State may be subject to taxation in that other State. However, if the beneficiary is the beneficial owner of the interest, the tax so levied shall not exceed 10% of the gross amount.
Such interest may also be taxed in the Contracting State from which it originates. Regarding interest received from another Contracting State, the government of a Contracting State is exempt from tax in that State. In the following situations, interest that arises in one contracting state shall only be subject to taxation in the other contracting state:
If the beneficial owner of the interest has a PE or fixed base in the contracting state where the payer resides and the interest paid is inextricably linked to such PE or fixed base, the aforementioned restrictions must not apply.
If the interest paid exceeds the amount that would have otherwise been paid due to the special relationship between the payer and the recipient, the treaty’s provisions will only apply to that amount, and any additional interest paid will be subject to taxation under the laws of each Contracting State.
Royalties Tax
The other Contracting State may tax royalties that are generated in one Contracting State and given to a resident of another Contracting State. When the payer resides in a Contracting State, royalties are considered to have arisen in that State. The recipient must be the beneficial owner of the royalties in order for the tax to be levied to not exceed 15% of the gross amount of the royalties.
However, such royalties may also be taxed in the Contracting State in which they arise and in accordance with the legislation of that State. Royalties include any payments made in exchange for the use of or the right to utilize a copyright patent, trademark, design or model, plan, or other intellectual property.
If the amount of royalties paid exceeds what would have otherwise been paid due to the special relationship between the payer and the recipient, the treaty’s provisions will only apply to that amount, and any additional royalties will be subject to taxation under the laws of each Contracting State.
Capital Gains Tax
Capital gains are not covered under the agreement. The tax treatment of capital gains would thus be determined by each state’s domestic tax rules, in accordance with Article 21. (i.e., income not expressly mentioned). Indonesia will have the ability to tax capital gains that were generated there. Capital gains are not taxed in Singapore.
Accounting for Business Profits
Unless the company conducts business in the other Contracting State through a PE located there, the profits of a Contracting State enterprise are exclusively taxable in that State. However, the other Contracting State may only tax the fraction of the profit that can be directly attributed to the PE.
All expenses and deductions that could reasonably be attributable to the PE and deductible if the PE were an independent enterprise are allowed when calculating the PE’s profits, and the PE’s profits are calculated as though the PE were a distinct and separate enterprise carrying out the same or similar activities under the same or similar conditions and transacting completely independently with the enterprise of which it is a PE.
Profits are not due to a PE just because they purchase products for the enterprise. Unless there is a good reason to believe otherwise, profit attribution to the PE must be done using the same methodology every year. The requirements of the agreement shall not interfere with the contracting state’s legislation or the competent authority’s discretion where the information available to them is insufficient.
Treatment of Property Income
A resident of one Contracting State who receives income from real estate located in another Contracting State may be subject to taxation in that other State. This clause shall also apply to the income from an enterprise’s movable property and the income from movable property used for the performance of independent personal services.
The agreement must include provisions for income from the direct use, letting, or use of immovable property in any other way. Properties as defined by the law of the contracting state in which the property is located shall be included as “immovable property.” As consideration for the working of, or the right to work, mineral deposits, sources, and other natural resources, it shall include accessories, equipment, livestock, rights and usufruct of mobile property, and rights to variable or fixed payments.
Ships and airplanes, however, are not to be considered as immovable property.
Treatment of Shipping and Air Transportation Income
An enterprise from a Contracting State may only be taxed in that Contracting State on income received from operating aircraft in international traffic. In that circumstances, the tax levied in the other Contracting State, if such income is subject to tax there, shall be reduced by a percentage equal to 50%. The rules apply to the portion of ship or aircraft operating profits obtained by a contracting state entity through membership in a pool, a joint venture, or an international operating agency.
The Way Associated Businesses are Treated
Associated enterprises are those that are directly or indirectly involved in the management, control, or capital of an enterprise of another Contracting State. This participation can be done either directly or indirectly.
As a result, the profitability and revenue of the associated firms will be impacted. The terms and conditions of operations and transactions between associated enterprises will differ from those made between independent enterprises.
According to the DTA, contracting nations may consider taxable income that would have otherwise accrued if the parties were independent in the case of associate enterprises and tax the enterprises appropriately.
Income Treatment for Individuals
Independent Personal Service
Unless the person is present in the other Contracting State for a time or periods exceeding in total 90 days in any calendar year, income obtained by a resident of a Contracting State in respect of professional services or other activities of an independent nature shall be taxable only in that State. Only the portion of his income that can be linked to his stay and activity in the other state is subject to taxation.
In particular, independent scientific, literary, artistic, educational, or teaching activities are included under the umbrella term “professional services,” as are the independent practices of doctors, lawyers, engineers, architects, dentists, and accountants.
Dependent Personal Service
Unless the employment is performed in the other Contracting State, salaries, wages, and other comparable remuneration received by residents of a State for employment are solely taxable in that State. If the employment is carried out in this manner, the pay may be subject to taxation in the other State. Even though the employment is performed in a different Contracting State, the beneficiary is solely liable for taxes in the first state stated in the following situations:
Director’s Fees
A resident of a Contracting State who receives directors’ fees and other comparable payments while serving on the board of directors of a business that is based in another Contracting State may be subject to taxation in that other State.
Artists, Athletes, and Entertainers
A resident of one State who works as an entertainer, such as a performer in theatre, film, radio, or television, a musician, or an athlete, who engages in such activities in another State may be subject to taxation in that other State.
However, if these earnings were derived from activities carried out in one of the contracting states as part of some mutually agreed-upon exchange programs or were in large part supported by public funds from the Government, a political subdivision, a local authority, or a statutory body of the other Contracting State, they shall be exempt from tax.
Pensions
Pensions and other comparable payments made to a resident of one Contracting State in account of prior employment may be subject to taxation in the first-mentioned State.
Those Serving in Government
Salary, wages, and other similar remuneration paid to an individual by a Contracting State, a political subdivision, a local authority, or a statutory body in exchange for services rendered to that State, subdivision, authority, or body, other than pensions, would be subject to taxation by that State.
However, if the services are performed in the other contracting state and the resident receiver is a national of that state and his residency is not solely for the purpose of giving the service, then such compensation will only be taxable in that state.
Students and Trainees
When receiving training or education in another contracting state while temporarily present there purely for that purpose, students and trainees who were residents of one contracting state immediately prior to their visit are excused from paying taxes in that state.
All remittances, grants received from abroad, and any payment for services rendered in the other state that does not exceed US$2,200 per year are free from taxation in that other state if they are performed in connection with the recipient’s education, training, or upkeep.
Elimination of Double Taxation
When income is taxed in both Contracting States, the DTA offers relief from double taxation. When it comes to Indonesia, the Singapore tax owed on income produced from Singapore may be applied as a credit for the Indonesia tax due on that income.
The Singapore tax that must be paid in relation to income derived from Indonesia may be offset by the Indonesia tax that must be paid in relation to same income. The credit thus granted must not be greater than the tax levied by the relevant nation as determined prior to the credit being granted.
Conclusion
For foreign investors, Singapore’s domestic tax structure is a particularly alluring aspect. Singapore is unquestionably the most desirable jurisdiction for holding businesses because to its tax-friendly regulations, which include the exemption of foreign dividends, the exemption of certain foreign income, no withholding tax on dividends given to non-residents, and no capital gains tax. These elements combined with its DTA with Indonesia result in an intriguing proposal for business structuring that is most effective from the perspective of international tax planning.
Please visit the IRAS website for further information on the specific provisions covered under the tax treaty between Singapore and Indonesia.
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