The Ministry of Trade reported that in the first half of 2025, trade between Indonesia and Japan ranked fourth among Indonesia’s largest trading partners after China, the United States, and India. During this period, Indonesia’s exports to Japan reached USD 7.12 billion, while imports from Japan amounted to USD 7.47 billion, resulting in a trade deficit of USD 0.35 billion.
One common form of cooperation in the economic relations between the two countries involves payment transactions for technical assistance. Technology transfers from Japan to Indonesia often require such services, either directly or indirectly. However, this frequently raises questions about how these payments should be taxed.
Tax Treatment of Technical Assistance Payments
According to the OECD Model Tax Convention Commentary on Article 12 Paragraph 11.6, when technical assistance and know-how can be separated within a contract, each should be taxed independently. Conversely, if they cannot be separated, the entire transaction is treated as a single unit and taxed under the same provisions that apply to royalties.
Based on this, there are two possible tax treatments for technical assistance transactions:
- When technical assistance cannot be separated from know-how.
- When technical assistance can be separated from know-how.
Technical Assistance That Cannot Be Separated from Know-How
If the provision of technical assistance cannot be separated from payments for know-how or royalties, then, under Article 12 of the Double Taxation Avoidance Agreement (DTAA) between Indonesia and Japan, Indonesia—as the source country—may impose tax at a rate not exceeding 10% on the income. This rate applies as long as the income recipient provides a valid Directorate General of Taxes (DGT) Form and Certificate of Residence (CoR).
In this case, payments for technical assistance are treated as part of the royalty and subject to Article 26 withholding tax at a rate of 10%.
Technical Assistance That Can Be Separated from Know-How
Technical assistance and know-how will receive the following different tax treatment if they are clearly defined as separate components in the contract:
- Technical assistance is taxed under Article 7 of the Indonesia-Japan Tax Treaty, which means it is taxable in the recipient’s country of domicile (Japan), provided the recipient does not have a permanent establishment (PE) in Indonesia.
- Know-how is taxed under Article 12 of the treaty, with a maximum withholding tax rate of 10% in the source country, provided a valid DGT Form and CoR are submitted.
Conclusion
For transactions involving payments for both technical assistance and know-how between Indonesian and Japanese entities, companies can adopt a tax management strategy by combining both elements into a single contract. When properly documented with a valid DGT Form and CoR, the combined transaction is subject to only a 10% withholding tax under Article 26.
On the other hand, if the payments are separated, technical assistance income will be taxed in Japan at the corporate tax rate of 30–34%. In other words, combining the two components can reduce the overall tax burden by approximately 20–24%.
FAQ on Technical Assistance Tax Management in Indonesia-Japan Transactions
What does “technical assistance” mean in the context of international taxation?
Technical assistance refers to professional services that apply specialized technical knowledge, skills, or experience from a foreign party to support business operations in Indonesia, such as technical training, machinery installation, consulting, or technology transfer.
Why must payments for technical assistance between Indonesia and Japan be reviewed for tax implications?
Because such payments represent cross-border transactions that can trigger income tax obligations (Article 26 withholding tax). Additionally, the applicable tax treatment depends on whether the services can be separated from know-how, as outlined in the Indonesia-Japan tax treaty.
What documents are required to qualify for a reduced tax rate?
The Indonesian company must obtain a DGT Form and CoR from the Japanese income recipient. These documents confirm the recipient’s eligibility for tax treaty benefits.
Why can combining payments for technical assistance and know-how reduce taxes?
When combined in a single contract, the payment is taxed under the royalty rate (10%). If separated, technical assistance income is taxed in Japan at a rate of 30–34%. Therefore, combining the two can result in tax savings of up to 24%.
Is every payment for technical assistance abroad automatically subject to Article 26 withholding tax?
Not necessarily. It depends on the service type, the recipient’s domicile, and the relevant tax treaty. A reduced tax rate may apply if the recipient is domiciled in a country with a tax treaty in place with Indonesia and provides the required documents.
