Analysis of BEPS Action Plan 2 Recommendations in Indonesia
Errine Nessy
1
and Ning Rahayu
2
1
Magister of Accounting, Faculty of Economics and Business, University of Indonesia, Jakarta, Indonesia
2
Departement of Fiscal Administration, Faculty of Administration Science, University of Indonesia, Depok, Indonesia
1 2
Keywords: Base Erosion and Profit Shifting (BEPS), Hybrid Entity, Hybrid Financial Instrument, Hybrid Mismatch
Arrangement, Hybrid Transfer.
Abstract: The purpose of this study is to find out the relevance of BEPS Action Plan 2 Recommendations with
Indonesian domestic laws and obstacles if Indonesia adopts BEPS Action Plan 2 recommendations to its
domestic laws. This study was conducted with a qualitative approach, with data collection through library
and field study. The field study conducted through in-depth interviews with some key informants that
represent practitioners, academics, and tax authorities in Indonesia. The result of this study shows that
BEPS Action Plan recommendations that are relevant to be applied in Indonesia are Recommendation 1,
Recommendation 4, Recommendation 8, Recommendation 2.2, and Recommendation 5.1. Meanwhile, the
main obstacle in adopting BEPS Action Plan 2 recommendations in Indonesia is the level of complexity and
difficulty in administering those rules. In applying the proposed linking rules, both the taxpayer and the tax
authority should have detailed information about the tax treatment of instruments or entities in other
jurisdictions.
1 INTRODUCTION
Globalization has given companies access to loans
or investments in different countries of the world.
Unfortunately, these cross-border transactions
sometimes have no economic substance but are
designed solely to eliminate or reduce the tax
burden. One of the ways that is used is creating a
hybrid mismatch arrangement i.e. arrangements that
exploit differences in the tax treatment of an entity
or instrument under the laws of two or more tax
jurisdictions to achieve double non-taxation,
including long-term deferral (OECD, 2015).
Underlying elements used in hybrid mismatch
arrangement schemes are hybrid financial
instrument, hybrid transfer, hybrid entity, and dual
resident entity (OECD, 2012).
The following example will illustrate the use of a
hybrid financial instrument. In Figure 1, A Co
(resident in Country A) owns 95% shares in B Co
(resident in Country B). B Co issues a hybrid
financial instrument (such as perpetual debt
instrument) to A Co. The instrument is treated as
debt under the laws of Country B so that B Co
entitled to deduct the ‘interest’ payment under the
instrument. Meanwhile, the instrument is treated as
equity under the laws of Country A, so that the
‘dividend’ payment in Country A is exempt from tax
according to participation exemption regime. Thus,
this hybrid financial instrument (arrangement) gives
rise to a mismatch called D/NI (Deduction/ No
Inclusion) outcome.
Figure 1: Debt / Equity Hybrid.
The use of hybrid mismatch arrangements will
undoubtedly undermine the tax base in the countries
where they operate. To overcome this problem,
OECD (Organization of Economic Co-operation and
Development) and G20 made Base Erosion and
Profit Shifting (BEPS) Project that consist of 15
(fifteen) Action Plans. One of them was BEPS
Nessy, E. and Rahayu, N.
Analysis of BEPS Action Plan 2 Recommendations in Indonesia.
In Proceedings of the Journal of Contemporary Accounting and Economics Symposium 2018 on Special Session for Indonesian Study (JCAE 2018) - Contemporary Accounting Studies in
Indonesia, pages 109-119
ISBN: 978-989-758-339-1
Copyright © 2018 by SCITEPRESS – Science and Technology Publications, Lda. All rights reserved
109

Action Plan 2: Neutralizing the effects of hybrid
mismatch arrangements.
Based on further study and examination
conducted by the United Nations through Financing
for Development Office (FfDO), "Neutralizing the
effects of hybrid mismatch arrangements" is one of
nine topics that are important to protect tax bases for
developing countries (Ault & Arnold, 2015). It is in
line with a research conducted by Eberhartinger &
Petutschnig (2017) that find out perceptions and
opinions of experts in the field of international
taxation originating from OECD, BRICS (Brazil,
Russia, India, China, South Africa), and developing
countries. As a result of the research, BEPS Action
Plan 2 is ranked 2
nd
out of 10 Action Plan (1
st
rank is
Action 8-10 which is considered as one, while
Action 1, 11, and 15 are not taken into account) as
the most important in the opinion of international tax
experts originating from developing countries.
Indonesia as a developing country is likely to be
exposed to the risks of base erosion due to hybrid
mismatch arrangements. Unfortunately, Indonesia
has not specific anti-avoidance rule yet to address
hybrid mismatch arrangements. Moreover, there is
only one research that discussed BEPS Action Plan
2 in Indonesia. The research is conducted by Yuliati
(2015) and only discuss whether Indonesia will
apply BEPS Action Plan 2 recommendations.
Whereas, in-depth analysis of whether such
recommendations are needed to counteract tax
avoidance in Indonesia and the consequences of the
implementation of these recommendations are
necessary. Therefore, this study aims to find out the
relevance of BEPS Action Plan 2 recommendations
with Indonesian domestic laws and obstacles if
Indonesia adopts BEPS Action Plan 2
recommendations to its domestic laws.
This study will help the tax authority and
taxpayer to obtain comprehensive understanding
about BEPS Action Plan 2 recommendations. This
study also can be a consideration for the tax
authority to decide whether to adopt the
recommendations and if Indonesia will adopt the
recommendations, this study can be used to prepare
the steps to overcome the obstacles. Therefore,
regulations that will be drafted by the tax authorities
will be able to counteract the practice of tax
avoidance using hybrid mismatch arrangements in
Indonesia effectively.
2 LITERATURE REVIEW
2.1 Linking Rules
The role of hybrid mismatch arrangements in
aggressive tax planning has been discussed in a
number of OECD reports. OECD evaluates a
number of policy options such as harmonizing
domestic regulations, General Anti-Avoidance Rules
(GAAR), Specific Anti-Avoidance Rules (SAAR),
and rules specifically addressing hybrid mismatch
arrangements. The report also discusses some
countries that have introduced specific regulations to
address hybrid mismatch arrangements. Then, it is
concluded that domestic law which links the tax
treatment of an entity, instrument or transfer in the
country concerned to the tax treatment in another
country appears to hold significant potential as a tool
to address hybrid mismatch arrangements that are
viewed as inappropriate (OECD, 2012). Therefore,
the BEPS Action Plan 2 recommendations use the
concept of 'linking rules'.
The concept of linking rules to overcome hybrid
mismatch arrangements is also supported by
practitioners/ academics in the field of international
taxation. According to Thuronyi (2010) and
Bundgaard (2013), an approach used in countering
cross-border tax arbitrage is the application of
'coordination rules' which rests on the 'principle of
correspondence'. Under this principle, tax benefits
(deductions or exclusions) are dependent on the tax
treatment in another country. For example, to be an
interest deduction, the payment must be taxed in the
other country. This approach is considered to
minimize disruption to domestic laws and more
flexible than harmonization of domestic laws.
Coordination rules can also be implemented in
various mechanisms such as multilateral agreements,
directives (for the EU), or unilateral agreements.
Unilateral is the most flexible and easiest
mechanism to adopt, but it would be more effective
if the provision is adopted by substantial number of
countries (Thuronyi, 2010).
2.2 Overview of the Recommendations
BEPS Action Plan 2 recommendations consist of
two parts. The first part contains recommendations
for domestic laws, while the second part contains
recommendations for treaty issues (OECD, 2015).
With regard to the scope of this study, this section
only discusses recommendations for domestic laws.
General overview of the Recommendations can
be found in the Appendix section. There are two
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types of recommendations for domestic laws i.e.
specific recommendation and recommended hybrid
mismatch rule. Specific recommendations are
specific improvements to the domestic law, designed
to achieve a better alignment between those laws
and their intended tax policy outcomes. These
specific recommendations aim to minimize the
occurrence of a mismatch, so it is a preventive effort
against the existence of double non-taxation or long-
term deferral. Whereas recommended hybrid
mismatch rules are linking rules that will neutralize
the effects of hybrid mismatch arrangements when
the arrangement gives rise to a mismatch.
Although adopted unilaterally, the hybrid
mismatch rules are intended to be coordinated with
laws applied in other countries (Arnold, 2016). The
rules consist of the primary rule/ response and the
secondary/ defensive rule that has a hierarchy in its
implementation. A country is considered as primary
country in acting according to the primary rule
whenever there is a mismatch in tax outcome, and
another country is considered as secondary country
that will act according to the secondary rule only if
the primary country is not applying the primary rule
(Arnold, 2016).
To neutralize the mismatch in Figure 1 for
example, Country B is entitled to apply the primary
rule by denying the interest deducted by B Co.
However, if Country B does not apply the primary
rule (e.g. because it has not adopted this
recommendation) then Country A must apply
secondary rule by including the dividend received by
A Co as an ordinary income and impose the tax.
3 RESEARCH METHODOLOGY
This study is structured with a qualitative approach
which is used to explore and develop an in-depth
understanding of a problem (Cresswell, 2014). This
study is a descriptive research that will provide a
detailed picture of a specific situation or
phenomenon (Neuman, 2014). In this study, the
phenomenon to be described is the relevance of
BEPS Action Plan 2 Recommendations with
Indonesian domestic laws and obstacles if Indonesia
adopts the recommendations of BEPS Action Plan 2.
This study used several techniques and data
collection tools as follows:
(a) Library Study
To find out the relevance of BEPS
recommendations in Indonesia, library study
was conducted by analyzing the various hybrid
arrangements that could lead to mismatch based
on various books literature, journals, articles
and other research. After that, the arrangement
is analyzed to determine whether it is possible
to be used in Indonesia. Then, researchers
conclude whether the recommendations are
relevant to be incorporated into Indonesia
domestic laws. In addition, this study also
analyzes countries that have implemented the
linking rules to identify obstacles if Indonesia
adopts BEPS Action Plan 2 recommendations.
(b) Field Study
To set up good regulations, engagement
from all stakeholders is required. Therefore, this
study used field study conducted through in-
depth interviews with competent key informants
in the field of taxation that represent
practitioners, academics, and Directorate
General of Taxes (DGT) as the tax authority in
Indonesia.
i. Practitioners
Four practitioners interviewed work in
tax consultants who often deal with
multinational companies so that they
understand the schemes of tax avoidance
that can be used in Indonesia. They are also
familiar with BEPS Project including BEPS
Action Plan 2 recommendations so that
they can predict what will be the obstacles
if Indonesia adopts the recommendations.
ii. Academics
Two academics interviewed are
lecturers of international taxation at the
University of Indonesia. They understand
various alternatives to tackle tax avoidance
including BEPS Action Plan 2 proposed by
OECD and G20.
iii. Tax Authority
Two personnel represent tax authority
interviewed are a staff from Directorate of
International Taxation DGT who is
responsible for international tax regulation,
and a staff from Directorate of Tax Audit
and Collection DGT who is responsible for
examining related parties and other certain
transactions.
Interviews were conducted using semi-structured
interviews. After researchers determine a list of
questions relevant to the phenomenon to be studied,
key informants will be asked to answer these
questions. In this way, this study is expected to
provide a comprehensive and deep description in
understanding the problems of hybrid mismatch
arrangement in Indonesia and obstacles if Indonesia
adopts BEPS Action Plan 2 recommendations.
Analysis of BEPS Action Plan 2 Recommendations in Indonesia
111

From the information obtained based on a
literature study, the abstraction of data obtained
from the field study, and the patterns which are
contained from the data obtained, then researcher
drew conclusions which are the answer to the
research problems.
In order to make this study focused, the scope of
this study will be limited to the following matter:
(a) This study will only discuss the
mismatch generated due to differences in
classification and tax treatment of an entity or
financial instrument (hybrid mismatch
arrangement).
(b) This study will only discuss Indonesia
domestic law and BEPS Action Plan 2
recommendations: Neutralizing the Effects of
Hybrid Mismatch Arrangement for domestic
law. This study does not include Indonesia's
Double Taxation Convention (tax treaties), and
the recommendations of BEPS Action Plan 2 in
respect of these treaty issues.
4 RESULTS
4.1 The relevance of BEPS Action Plan
2 Recommendations with
Indonesian domestic laws
Based on analysis of various hybrid mismatch
arrangement schemes from literature, this study
concludes that some schemes are not effective for
use in Indonesia so that Indonesia does not need all
the set of the recommendations in BEPS Action Plan
2. Therefore, this section will identify arrangements
that can involve Indonesia taxpayer so that the
recommendation will be relevance to be applied in
Indonesia domestic law. While arrangements that
cannot be used in Indonesia will make the
recommendation be classified as irrelevant.
According to previous researches in Indonesia
that were conducted by Istiadi (2013) and Yuliati
(2015), the practice of tax avoidance using hybrid
financial instruments in Indonesia was conducted by
utilizing the difference in the classification of a
financial instrument in the payer jurisdiction to get
deduction of interest expense and in payee
jurisdiction to get exemption. Indonesia does not
give participation exemption or other benefits for
dividend received from abroad so that Indonesia
taxpayer as a payee will not receive benefit of hybrid
financial instruments. But, as payer, Indonesia
taxpayer can be involved to have deduction from
hybrid financial instruments. Therefore, Indonesia is
exposed to base erosion due to hybrid financial
instrument arrangement so that Recommendation 1
(Hybrid Financial Instrument Rule) is relevant to be
applied in Indonesia.
Considering disregarded payment made by a
hybrid, a deductible payment can give rise to D/NI
outcome when the payment is made by a hybrid
entity that is disregarded under the laws of the payee
jurisdiction (OECD, 2015). It means the payment is
treated just like a payment from a branch to its head
office so that it will not be recognized as an income
by the payee, but in the jurisdiction where the entity
is located, the payment is treated as a deduction.
Based on various schemes or arrangements in the
literature, the arrangements cannot be used in
Indonesia for the following reasons:
(a) As the country where the parent
company is located, Indonesia does not have a
concept of disregarded entity that will treat a
foreign subsidiary same as a foreign branch.
(b) As the country where the subsidiary is
located, Indonesia has not hybrid entity that can
be treated as disregarded entity, because in
Investment Law Number 25 Year 2007, foreign
investments are only allowed for corporations.
In addition, Indonesia does not use tax
consolidation tax regime in calculating tax, so that it
cannot involve the arrangement involving a branch.
Therefore, Recommendation 3 is not relevant to be
applied in Indonesia.
In the payment made to a reverse hybrid
arrangement, the payment received by a reverse
hybrid is not tax at all so that it gives rise to D/NI
outcome. A reverse hybrid is any person that is
treated as transparent under the laws of the
jurisdiction where it is established but as a non-
transparent (separate entity) by its investor (owner).
Treated as transparent means the entity is not taxed
in the entity level but in the owner level. Otherwise,
treated as non-transparent means the entity will be
taxed in the entity level, just like a corporation. With
respect to a payment made to reverse hybrid,
Indonesia cannot be involved as an intermediary
country because there is no transparent entity in
Indonesia. Meanwhile, Indonesia taxpayers are able
to involve in this arrangement as payer or investor so
that Recommendation 4 (Reverse Hybrid Rule) is
relevant to be applied in Indonesia.
Besides D/NI outcome, hybrid mismatch
arrangements can also give rise to Double Deduction
(DD) outcome or also known as double dipping. The
underlying elements that can be used are hybrid
entity and dual residence entity.
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Based on various schemes or arrangements in the
literature, the deductible payment made by a hybrid
entity cannot be used in Indonesia so that
Recommendation 6 (Deductible hybrid payments
rule) is not relevant to be applied in Indonesia, for
the following reasons:
(a) As the country where the parent
company or head office is located:
i. Indonesia does not have a concept of
disregarded entity that will treat a foreign
subsidiary same as a foreign branch.
ii. according to Minister of Finance
Decree Number 164/KMK.03/2002,
Indonesia does not allow losses suffered by
foreign branches to be a deduction of
domestic income. Only profits derived from
foreign branches will be included in the
income tax calculation in Indonesia.
(b) As the country where the subsidiary or
branch is located:
i. Indonesia does not have consolidation
tax regime because the tax calculation is
done by each business entity even though it
is within the same control group (related
parties). Accordingly, if any business entity
incurs a loss, the loss cannot be offset
against the income derived by the other
entities.
ii. Indonesia has not a hybrid entity that
can be treated as disregarded entity. A
hybrid entity or also called ‘classic hybrid’ is
an entity treated as corporate (non-
transparent) where it is established but as
transparent entity in the owner jurisdiction
(Gupta, 2015).
Likewise, the arrangement involving a dual
resident entity. The entity utilizes consolidation tax
regime or a disregarded entity to offset a loss of the
entity into profits of its affiliates in two different
countries (Vann, 1998). Therefore, the dual resident
entity cannot be used in Indonesia. So,
Recommendation 7 (Dual-resident payer rule) is not
relevant to be applied in Indonesia.
Mismatch (D/NI outcome) produced overseas,
for example by using debt/ equity hybrid in other
countries, can be brought into the third country
(payer jurisdiction) through the use of a non-hybrid
instrument such as an ordinary loan. Since it is
imported from other countries, the structure is called
an imported mismatch, and the resulting mismatch is
called indirect D/NI. In this case, Indonesia is
exposed to base erosion due to imported mismatch
mainly because Indonesia is a capital importing
country. Therefore, Recommendation 8 (Imported
Mismatch Rule) is also relevant to be applied in
Indonesia.
In a hybrid transfer, a share or a bond is treated
as held by two taxpayers in two different
jurisdictions. Therefore, the tax withholds from
dividend or interest is credited by both taxpayers.
OECD recommends that jurisdictions providing
relief for taxes withheld in source countries should
limit credits according to the proportion of
recognized net income. Currently, Indonesia only
has a ‘per country limitation’ for its foreign tax
credit method. Therefore, with the existing ordinary
credit method used in Indonesia, Recommendation
2.2 is relevant to be applied.
Indonesia already has a CFC rule. Unfortunately,
in defining the subject of CFC, Indonesia limits the
definition of CFC based on shares participation. In
fact, there are some transparent entities such as
Limited Liability Company (LLC) in America that
do not issue shares in their capital structure. Thus,
Recommendation 5.1 on the improvement of CFC
rule which also includes reverse hybrid revenues is
still relevant to be applied in Indonesia.
Meanwhile, Recommendation 2.1 (Participation
exemption), Recommendation 5.2 (Restriction of
transparent treatment to an entity), and
Recommendation 5.3 (Reporting for transparent
entities) is irrelevant because the tax system in
Indonesia does not provide participation exemption
regime for foreign dividends and does not recognize
the existence of transparent entities.
Table 1: The Relevance of BEPS Action Plan 2
Recommendations with Taxation System in Indonesia.
Relevant Irrelevant
Hybrid Mismatch Rules
Recommendation 1 9
Recommendation 3 9
Recommendation 4 9
Recommendation 6 9
Recommendation 7 9
Recommendation 8 9
Specific
Recommendations
Recommendation 2.1 9
Analysis of BEPS Action Plan 2 Recommendations in Indonesia
113

Recommendation 2.2 9
Recommendation 5.1 9
Recommendation 5.2 9
Recommendation 5.3 9
Overview of the relevance of BEPS Action Plan
2 Recommendations are presented above. It can be
concluded that Indonesia does not have to adopt all
the recommendations in BEPS Action Plan 2,
because according to arrangements that can be used
in Indonesia, Indonesia only need Recommendation
1, Recommendation 4, Recommendation 8,
Recommendation 2.1 and Recommendation 5.1.
4.2 Obstacles if Indonesia adopts BEPS
Action Plan 2 recommendations to
its domestic law
According to Boer & Marres (2015), the
recommendation of BEPS Action Plan 2 as a
specific step to overcome hybrid, at least in concept,
will be able to counter double non-taxation.
However, to adopt a provision, it is also necessary to
consider the obstacles that will be faced if Indonesia
adopts the recommendation of BEPS Action Plan 2.
These obstacles include:
4.2.1 Complexity in Formulating and
Implementing Recommended Rules
Hybrid mismatch arrangements are used to exploit
different tax treatments on an instrument and entity
(OECD, 2015). Thus the recommendations of BEPS
Action Plan 2 were made by considering various
interactions in various taxation systems used in the
world. Therefore, the resulting recommendations are
very complex.
As an illustration of the complexity of the BEPS
Action Plan 2 recommendations, final reports
containing recommendations and examples of hybrid
mismatch arrangements reach 458 pages, much more
compared to the combined of 14 other Action Plan
final reports which only 1500 pages. Thus, it can be
said that from all (15) BEPS Action Plan, the final
report of BEPS Action Plan 2 is the longest, most
comprehensive and complex, as well as difficult to
implement (Kuźniacki, et al., 2017).
The complexity of the BEPS Action Plan 2
recommendations is confirmed by all groups of
respondents (tax authority, academic, and
practitioner).
IW (tax authority):
“Kalau kita mau diakui bahwa kita menerapkan
rekomendasi BEPS 2 semuanya itu harus diadopsi.
Nah, itu kompleksitasnya luar biasa. Jadi, contoh-
contoh yang ada di 2015: Final Report yang 400-an
halaman itu harus kita adopsi semua. Nah, itu
kompleks, jadi untuk menerapkan itu terlalu rumit,
tidak sebanding dengan hasilnya.”
"If we want to be acknowledged that we
implement the BEPS 2 recommendations, all of
them should be adopted. Well, that's an incredible
complexity. So, the examples that exist in whole
2015: Final Report consists more than 400 pages
should be adopted. Well, it's complex, implement
them are too complicated, not worth the results."
(Interview with a staff of Directorate of International
Taxation DGT, October 23, 2017)
YWN (academics):
“Kalau kita bikin peraturan hybrid kan
kompleks, enforcement-nya belum tentu bisa.
Kapasitasnya belum bisa memahami peraturan
sekompleks ini, menurut saya belum mampu lah.
Takutnya malah nanti semakin kompleks dengan
adanya interpretasi sehingga nantinya bisa
digunakan untuk transaksi lain yang sebenarnya
legal tapi akhirnya kena ini.”
“If we make hybrid regulations, it will be
complex, the enforcement may not be possible. Our
capacity has not been able to understand these
complex regulation, in my opinion, we have not
been able. I’m afraid it will be more complex with
the interpretation so that later it can be used for other
transactions that are actually legal but eventually hit
this.” (Interview with a lecturer of University of
Indonesia, November 10, 2017)
GCT (practitioner):
“Menurut saya tidak mudah nantinya untuk
menerapkan primary rule dan secondary rule.
Merumuskannya saja bagaimana? Yang di kotak-
kotak dalam rekomendasi itu? Apakah bunyinya
hanya seperti itu? Kalau saya kok tidak yakin ya
yang tertulis di dalam kotak itu sudah cukup.”
“In my opinion, it is not easy later to apply the
primary rule and secondary rule. How to formulate
them? Are they in the boxes of the recommendation?
Do they just sound like that? I'm not sure that's
written in the box is enough.” (Interview with a
senior manager of Danny Darussalam Tax Center,
November 22, 2017)
The same thing is also expressed by the experts
of international taxation. Arnold (2016, p. 196)
states that the rules are very complex and will be
difficult for the tax authorities of many countries,
especially developing countries to apply. In addition,
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Harris (2015, p. 47) also states that the level of
complexity and difficulty in administering these
rules should not be underestimated.
First, the tax authority (or legislative body) will
experience the complexity in formulating the
recommendations of BEPS Action Plan 2 into
domestic laws in Indonesia. Then, in implementing
these rules, both tax authority and taxpayer must
know detailed information about the tax treatment of
an instrument or entity in other jurisdictions in the
world. In order to apply the primary rule of hybrid
financial instrument rule, the tax authority in payer
jurisdiction must know the tax treatment in payee
jurisdiction. Otherwise, to apply the secondary rule,
payee jurisdiction must know the tax treatment in
payer jurisdiction.
4.2.2 Implementation of the Rules Depends
on the Exchange of Information (EOI)
Since the core of the linking rule is considering tax
treatment in other countries, coordination among
involved countries is essential. Regarding this
issues, OECD (2015) states that in applying the
rules, the tax authority should only look to the
expected tax treatment of the payment under the
laws of the counterparty jurisdiction, rather than its
actual tax treatment in the hands of the counterparty.
But, to determine the expected tax treatment of the
payment under the laws of the counterparty
jurisdiction, tax authority must know and understand
clearly the laws of the counterparty jurisdiction. This
is not something that the tax authorities of most
countries have much experience (Arnold, 2016).
Therefore, it is likely that the tax authorities need to
consult and share information with tax authorities in
other countries. The argument is strengthened by
WN (practitioner):
“Nah, kalau bicara masalah hambatan, hambatan
dalam melaksanakannya tentu ada. Karena
bagaimanapun kita harus mengetahui di negara
lawan transaksinya treatment-nya seperti apa. Nah,
kalau bisa dibilang ini hambatan, ini hambatan.
Sebenarnya bisa diatasi dengan P3B, kita bisa minta
informasi terkait dengan transaksi ini perlakuan
pajaknya bagaimana di negara lawan transaksi.”
“Well, if we talk about obstacles, of course, there
is an obstacle in the implementation. Because after
all, we must know the treatment of transactions in
counterparty country. Well, if you could say this
obstacle, it's the obstacle. Actually, it can be
overcome with tax treaty, we can request
information related to this transaction and the tax
treatment in the counterparty country.” (Interview
with a tax partner of MUC Consulting Group,
November 20, 2017)
In addition, to detect and identify a mismatch,
information and reporting conducted in other
countries are also required. For example, in case of
an imported mismatch, the scheme is involving more
than two countries, so that the adoption of this
recommendation relies on an Exchange of
Information (EOI) that is fast, easy and includes all
information required. If the EOI cannot be done, it
will be impossible to reveal any imported mismatch.
However, in the current procedure EOI can be
done if taxpayers are already at the tax audit level as
said by KBK (tax authority):
“Karena PMK yang baru kan belum ada PER-
nya, jadi masih ikut peraturan EOI yang lama di
mana EOI bisa kalau pemeriksaan saja.”
“Because the new Minister of Finance
Regulation does not have the new Director General
Regulation yet, so we still follow the old EOI
regulation where EOI can only be done in tax audit.”
(Interview with a staff of Directorate of Tax Audit
and Collection DGT, November 20, 2017)
Therefore, if Indonesia wants to adopt the
recommendations, the tax authority must also ensure
that the regulations enable the EOI process is
possible when needed without sacrificing the
confidentiality of taxpayer's data.
4.2.3 Administrative and Compliance Costs
Become Higher
To formulate and implement such complex rules, it
requires intensive socialization and training for tax
officials in order to properly implement the rules. In
addition, the need to conduct EOI will increase the
burden of administration in the form of reliable
infrastructure and human resources. Thus, the
implementation of this provision raises high
administrative costs. This problem is confirmed by
IW (tax authority):
“Karena itu tadi, kita kan tidak melihat manfaat
punya aturan seperti itu, masalah apa yang mau
diselesaikan sehingga kita memerlukan
prasarana/infrastruktur untuk berkomunikasi dan
sebagainya. Artinya kan tidak sebanding antara
effort dengan hasilnya.”
“Because of that, we did not see the benefits of
having such rules, what problems that will be solved
so we have to provide infrastructure to communicate
and so forth. This means it is not worth the effort
with the result.” (Interview with a staff of
Directorate of International Taxation DGT, October
23, 2017)
Analysis of BEPS Action Plan 2 Recommendations in Indonesia
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From the taxpayer side, this rules may also
increase the compliance cost as to avoid the risk of
being corrected, the taxpayer must also ensure the
tax treatment in the other country's transactions.
Therefore, taxpayers will need to spend consultation
fees for experts/consultants in other countries. Issues
regarding high administrative and compliance costs
are also discussed in similar research conducted by
Aleksandra (2014) and Frank (2015).
Therefore, if Indonesia wants to adopt BEPS
Action Plan 2 recommendations, the tax authority
should make a study about potential tax loss due to
hybrid mismatch arrangements. Then the study can
be used to consider cost (i.e expense and effort
needed) and benefit (i.e. potential tax loss that can
be restored) in implementing the BEPS Action Plan
2 recommendations.
4.2.4 The Scope of Structured Arrangements
that have not Existed Before
Besides applicable to related parties and taxpayers
within the same control group, recommended hybrid
mismatch rules are also applied in the case of the
hybrid mismatch is priced into the terms of the
arrangement or the facts and circumstances of the
arrangement indicating that it has been designed to
produce a hybrid mismatch, which is called
structured arrangements (OECD, 2015). Thus, the
scope of hybrid mismatch rules is vast because they
are also applied to taxpayers who have no ownership
or control relationship at all.
The advantage of this structured arrangement
clause is that tax authorities are entitled to take
action in case of there are indications about
intentional tax avoidance that absolutely has no
business purpose by involving parties with no
ownership or control relationship. This is different
from the arm's length principle currently owned by
Indonesia, where the tax authority entitled to
reclassify debt into equity in the case of a loan in
related party transactions does not meet the fairness
and business norms.
However, in practice, it could make the tax
authorities become overwhelmed. If previously the
tax authority may focus on transactions between
related parties, then if this BEPS Action Plan 2
recommendations apply the tax authorities must also
consider other transactions conducted not by related
parties. In addition, there is a possibility of different
interpretations between taxpayers and tax authorities
in defining structured arrangements (Aleksandra,
2014). Thus, this clause potentially increases the
number of tax disputes.
4.2.5 There is a Potential Loss of Investment
Attractiveness
Denmark was a country that has previously applied
the concept of linking rules (or also called
coordination rules) in its domestic law. According to
Bundgaard (2008), coordination rules are effective
in addressing hybrid mismatch arrangements (in the
literature referred to as tax arbitrage). However,
Bundgaard (2008) revealed that perhaps Denmark
has lost foreign direct investment as a consequence
of its role as 'the policeman of the world's tax
systems'.
Therefore, the tax authorities should reconsider
when formulating rules in areas such as financial
instruments. Instead, financial innovation could be
generated benefits other than taxes. However, the
use of hybrid financial instruments is also motivated
by business reasons such as obtaining low borrowing
costs, more flexible funding, raising credit ratings,
and so on. Therefore, less favorable rules for
innovation in financial instruments can make a
country less attractive than other countries, and that
is harmful to the economy (Bundgaard, 2008).
Opinion about the investment attractiveness is
also submitted by NPS (practitioner):
“Menyelesaikan masalah ini juga nggak
gampang. Pertama, peraturan domestik harus
dikencangkan, tapi kalau terlalu kencang juga
jadinya tidak ada yang datang ke negara itu. Buat
apa tax holiday itu, kan supaya menarik. Batasnya
mana, kita mau memberikan insentif, tapi kita juga
nggak mau kehilangan.”
“Resolving this issue is also not easy. First, the
domestic regulations should be tightened, but if it is
too tight then there will be no one to come to the
country. Why we make tax holiday, it is to attract.
Where is the limit, we want to provide incentives,
but we also do not want to lose.” (Interview with a
senior tax advisor of Assegaf Hamzah & Partners,
November 15, 2017)
Regarding the issue of investment attractiveness,
there is also another opinion. Marchgraber, as
quoted by Tambunan (2016) argues that the
enactment of BEPS Action Plan 2 recommendation
will not dampen the attractiveness of a country to
attract foreign investment. In relation to the Parent-
Subsidiary Directive (PSD) for example, if
Switzerland continues to allow deduction on
payment under hybrid financial instruments,
investors in the EU will tax the payment as ordinary
income. Thus, if Switzerland has a lower tax rate, it
would be more profitable for investors if
Switzerland denies the deduction. Otherwise, the
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payment will be taxed at a higher rate in the
investor's country.
Based on those opinions then it can be concluded
that Indonesia should adopt BEPS Action Plan 2
recommendations when the recommendations are
adopted by substantial number of countries. So,
Indonesia would not lose its investment
attractiveness. Addressing hybrid mismatch
arrangements will help everyone move in the
direction of greater worldwide cooperation (Shaviro,
2002). Moreover, a comprehensive solution where
all countries implement the same set of hybrid
mismatch rules will also result in compliance and
administration efficiencies and also a certainty for
taxpayers (Ruchelman, 2014).
5 CONCLUSIONS
Based on the result of this study, the following
conclusions can be drawn:
(1) BEPS Action Plan recommendations that are
relevant to be applied in Indonesia are
Recommendation 1, Recommendation 4,
Recommendation 8, Recommendation 2.2, and
Recommendation 5.1. While other
recommendations are not relevant to be applied
because the underlying elements of
arrangements are not effective for use in current
Indonesia taxation system.
(2) The following obstacles need to overcome if
Indonesia adopts the recommendations of BEPS
Action Plan 2:
(a) complexity in formulating and
implementing the recommended rules;
(b) implementation of the rules depends on the
Exchange of Information (EOI);
(c) administrative and compliance costs
become higher;
(d) the scope of structured arrangements that
have not existed before; and
(e) there is a potential loss of investment
attractiveness;
ACKNOWLEDGEMENTS
The first author would like to acknowledge the
Indonesia Endowment Fund for Education (LPDP)
Ministry of Finance Republic of Indonesia who
supported her study and sponsored her for the JCAE
2018 conference.
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APPENDIX
General Overview of the Recommendations
Mismatch Arrangement Specific recommendations Recommended hybrid mismatch rule
Response Defensive rule Scope
D/NI Hybrid financial
instrument
Rec. 2.1 - No dividend
exemption for deductible
payments
Rec. 2.2 - Proportionate
limitation of withholding
tax credits
Recommendation 1 Related parties
and structured
arrangements
Deny payer
deduction
Include as
ordinary income
Disregarded
payment made by
a hybrid
Recommendation 3 Control group
and structured
arrangements
Deny payer
deduction
Include as
ordinary income
Payment made to a
reverse hybrid
Rec. 5.1 - Improvements
to offshore investment
regime
Rec. 5.2 - Restricting tax
transparency of
intermediate entities
Recommendation 4 Control group
and structured
arrangements
Deny payer
deduction
-
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where non-resident
investors treat the entity as
opaque
Rec. 5.3 - Reporting for
intermediaries
DD Deductible payment
made by a hybrid
Recommendation 6 No limitation
on response,
defensive rule
applies to
control group
and structured
arrangements
Deny parent
deduction
Deny payer
deduction
Deductible payment
made by
dual resident
Recommendation 7 No limitation
on response
Deny resident
deduction
-
Indirect
D/NI
Imported mismatch
arrangements
Recommendation 8 Members of
control group
and structured
arrangements
Deny payer
deduction
-
Source: OECD (2015, p.20)
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