Resolving Conflicts Between Production Sharing Contracts and Tax Treaties in Indonesia

This article discusses the uncertain dispute settlement for a conflict resulting from applying a reduced rate stipulated in a tax treaty or a domestic withholding tax rate agreed to in a production sharing contract (PSC) on branch profit tax (BPT) in Indonesia. The contractor, the permanent establishment of a non-resident entity in Indonesia, interpreted that a reduced rate shall apply whereas the Indonesian tax authority adhered to applying the prevailing domestic withholding tax rate at the time that the PSC was signed. The ambiguousness between the tax treaty and the PSC led the disputed entity to choose litigation as the primary alternative of dispute settlement even though the tax treaty facilitates resolving the problem through a mutual agreement procedure (MAP) or another possible dispute resolution. Further, Indonesian civil law does not implement the jurisprudence. The dispute will continue if renegotiation is not reached. To reduce the chance of a potential dispute in the future, a stabilization clause to accommodate the change of the regulation during the period of the contract has been included, however, it only applies to the latest version of the PSC.