Following his visit to the United States in early February 2026, Indonesia’s President returned with a reciprocal agreement, the Agreement on Reciprocal Trade (ART).
Under the agreement, the US reduced import tariffs on Indonesian goods from 32% to 19% (Ministry of Foreign Affairs, 2026). In addition, major Indonesian commodities, such as palm oil, cocoa, coffee, and rubber, were exempted from import tariffs.
On the other hand, Indonesia also granted broader market access to US products. Indonesia agreed to remove various non-tariff barriers, including those related to import licensing, local content levels (tingkat komponen dalam negeri/TKDN), standards recognition, and halal certification. As a result, US goods entering Indonesia are no longer subject to import duties and are no longer bound by several of these non-tariff requirements.
Although the ART primarily focuses on import tariffs, it is also important to revisit the Indonesia–US tax treaty to understand better the broader economic cooperation framework between the two countries.
The Indonesia-US Tax Treaty
The tax treaty currently in force between Indonesia and the US was signed on July 11, 1987, and entered into effect on February 1, 1997.
The treaty consists of 31 articles governing aspects of international taxation, including general definitions, permanent establishment, taxation of immovable property, business profits, dividends, and royalties.
This double taxation avoidance agreement (DTAA) is an international legal instrument designed to prevent the same income from being taxed twice while encouraging cross-border investment and trade.
Through the Indonesia-US tax treaty, both countries also determine the allocation of taxing rights over different types of income, including dividends, interest, royalties, and business profits.
Permanent Establishment Concept
One of the most pivotal concepts in the Indonesia-US tax treaty is the concept of permanent establishment (PE), known in Indonesia as bentuk usaha tetap (BUT). In principle, a country may only tax certain income if there is a sufficiently strong economic connection, or nexus, within its jurisdiction.
For example, if a US company conducts business in Indonesia without establishing a PE, its business profits are taxable only in the US, its country of residence.
The following ten types of PEs are recognized under the treaty:
- Place of management
- Branch
- Office
- Factory
- Workshop
- Farm or plantation
- Warehouse
- Mineral resources extraction site
- Building site or construction project
- The provision of services, including consulting services, by foreign personnel
The existence of a PE is a crucial factor in determining which country has the right to tax business profits.
Taxation of Dividends
The Indonesia-US tax treaty also sets limits on withholding tax rates for dividends in the source country.
Indonesia, as the source country, may still tax dividends paid to US taxpayers, but at reduced rates compared to domestic tax rates.
The dividend withholding tax rates under the treaty are:
- 15% for non-resident taxpayers
- 10% for shareholders with over 25% ownership (substantial holding)
These reduced rates are intended to encourage cross-border direct investment.
Taxation of Interest
For interest income, the source country may also impose tax, but only up to a limited rate specified in the treaty. Under the Indonesia-US tax treaty, the withholding tax rate on interest is 10% of the gross amount of interest paid.
However, this provision does not apply when the interest recipient is a government institution, a central bank, a government financial institution, or a political subdivision.
This rule is particularly relevant for cross-border financing arrangements, including intercompany loans and project financing.
Taxation of Royalties
Royalty income is also specifically regulated under the treaty. Royalties arising in Indonesia and paid to US residents may be taxed in Indonesia, but only up to the maximum rate specified in the treaty.
The withholding tax rate on royalties is 10% of the gross royalty amount. This rate commonly applies to transactions involving intellectual property rights, such as technology licensing, copyrights, trademarks, etc.
Taxation of Employment Income
For employment income, the treaty generally provides that salaries or wages are taxed in the country where the work is performed, also known as the source country.
If specific conditions are met, however, some exceptions apply. For example, when the individual’s stay does not exceed a specified period and the remuneration is not borne by a PE in that country. These provisions are particularly important for expatriate employees working across borders.
Eliminating Double Taxation
To prevent double taxation, both countries apply the tax credit method. Under this mechanism, taxes paid in the source country may be credited against the tax payable in the taxpayer’s country of residence.
As a result, taxpayers do not have to pay tax twice on the same income.
Exchange of Information and the Non-Discrimination Principle
The treaty also incorporates two principles of international tax cooperation:
Non-Discrimination
This clause prohibits a country from imposing more burdensome tax treatment on nationals or enterprises of the treaty partner than it does on its own taxpayers in similar circumstances.
Exchange of Information
The treaty allows tax authorities in both countries to exchange information to prevent tax avoidance and evasion. This cooperation helps improve transparency and voluntary compliance in the international tax system.
Overall, the Indonesia-US tax treaty plays a significant role in providing tax certainty for cross-border transactions. For taxpayers engaged in international business activities, understanding the treaty provisions is essential to properly benefit from treaty relief while remaining compliant with tax regulations in both jurisdictions.
Also Read:
https://ideatax.id/articles/updates-to-the-05-msme-final-income-tax-and-its-business-impact
https://ideatax.id/articles/article-26-withholding-tax-on-foreign-taxpayers
