Analysis Of Controlled Foreign Company (Cfc) Rules In Indonesia
To Prevent Tax Avoidance Practises
Nova Ratu Pietraya Sari, Ning Rahayu
Faculty of Economy and Business, University of Indonesia, Salemba Raya Street, Jakarta, Indonesia
Keywords: CFC Rules, Controlled Foreign Company, Deemed Dividend, Tax Avoidance.
Abstract: To counter deferral tax payment as one of tax avoidance scheme, some countries have a set of rules called
CFC (Controlled Foreign Company) rules. On July 26 2017, Indonesia issued the latest regulation on CFC
rules which is Minister of Finance Regulation (MFR) number 107. This research aims to analyze how the
newest CFC rules in Indonesia, MFR No. 107/MFR.03/2017, can be used to counteract tax avoidance
practices and what are the constraints in implementing these newest CFC rules in Indonesia. This research
conducted with qualitative approach. Data collection using literature research and interview. This research
concluded that the latest CFC rules in Indonesia, MFR No. 107/MFR.03/2017, can be used to counteract tax
avoidance practices by already improve the deemed dividend mechanism, has covered provision on indirect
ownership, has covered provisions on trusts, and has covered provisions on foreign tax credit. The
constraints in implementing CFC rules in Indonesia, MFR No. 107/MFR.03/2017, are the scope about CFC
is too extensive so it become ineffective to implemented, complication in detecting indirect ownership and
joint ownership, complication in obtaining data and information on supervisory process by Directorate
General of Taxes (DGT), and the lack of awareness about CFC issue by DGT officials.
1 INTRODUCTION
Base erosion and profit shifting have become the
latest tax issues for countries around the world. The
shifting of income to countries that provide tax
advantages causes many other countries to
experience a stripping of tax base. This will affect
the economic conditions of a country, especially
countries whose most of their funding comes from
taxes.
Indonesia is one of the countries whose source of
the State Budget (APBN) mostly comes from taxes.
Table 1: State Budget of Indonesia
2017 2016 2015 2014
A. Government Revenue 1750,3 1822,5 1793,6 1667,2
I. Domestic Income 1748,9 1820,5 1790,3 1665,8
1. Tax Revenue 1498,9 1546,7 1380 1280,4
2. Non-Tax State Revenue 250 273,8 410,3 385,4
II. Grant Revenue 1,4 2 3,3 1,4
% tax revenue to total
g
overnment revenue
86% 85% 77% 77%
Based on the above table, more than 75% of the state
budget of Indonesia comes from taxes. It continues
to increase from year to year.
Tax avoidance practices that cause erosion of the
tax base in Indonesia should be prevented so as not
to disrupt the financing of the development process.
One of the ways of tax avoidance is done by defer
the payment of taxes using Controlled Foreign
Company (CFC). Some countries already have a set
of rules to counteract tax avoidance practices in the
form of deferral tax payments using CFC. This set of
rules is called CFC rules.
On July 26, 2017, the Directorate General of
Taxes (DGT) has issued the latest regulation as part
of CFC rules in Indonesia which is Minister of
Finance Regulation (MFR) number 107 (PMK
No.107/PMK.03/2017). This latest MFR about CFC
rules are expected can improve the weaknesses of
previous regulations (MFR No. 256/MFR.03/2017).
Some previous studies have concluded that
previous CFC rules in Indonesia have weaknesses
that used by taxpayers to conduct tax avoidance
practices. MFR No. 107/MFR.03/2017 is
implementation of BEPS Action Plan 3
recommended by OECD. Recommendation in BEPS
Action Plan 3 aims to assist tax authorities in a
country in order to be able to set up CFC rules that
strong enough to counteract tax avoidance practices
400
Sari, N. and Rahayu, N.
Analysis of Controlled Foreign Company (CFC) Rules In Indonesia To Prevent Tax Avoidance Practises.
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 400-408
ISBN: 978-989-758-339-1
Copyright © 2018 by SCITEPRESS – Science and Technology Publications, Lda. All rights reserved

in the form of deferral tax payments using CFC.
How does this new regulation work to be said strong
enough to counter tax avoidance practices? Is there
any constraint in implementing it?
This research aims to analyze how the latest
CFC rules in Indonesia can be used to counteract tax
avoidance practices and to find out what kind of
constraints encountered in its implementation. This
research is expected to provide input to the DGT in
preparing the next CFC rules policy tool. This
research also expected become additional literature
for the subsequent research.
2 LITERATURE REVIEW
2.1 Tax Avoidance and Tax Evasion
Frans Vanistendael (1997), Michael J. McIntyre and
Brian J Arnold (2000), Kessler (2004) in Hutagaol
and Tobing (2007) stated that tax evasion is a tax
savings made by taxpayers in a way that violate the
regulations. According to Sophar Lumbantoruan
(1996), Carlos A Silvani (1992), Erli Suandi (2003),
Kwaai Faat (2003), and James Kessler (2004) as
stated in Hutagaol and Tobing (2007) tax avoidance
is an effort of tax savings made by the taxpayer in
accordance with regulations. The difference between
tax avoidance and tax evasion lies in whether the tax
savings made by the taxpayer are violate the
regulation or not. If it is against the regulation then it
is included as tax evasion, whereas if the tax savings
made by the taxpayer is not violate to the prevailing
regulations then it is tax avoidance. Slamet (2007)
distinguishes tax avoidance into two categories,
acceptable and unacceptable.
2.2 Deferral Tax Payment Using CFC as
Tax Avoidance Scheme
According to Arnold in Rahayu (2008), Rohatgi
(2007), and OECD (2015), one of tax avoidance
mechanism commonly used by taxpayers is deferral
tax payments using CFC. This is done by, first,
establishing a controlled subsidiary abroad called
Controlled Foreign Company (CFC). CFC usually
establised in tax haven country. The next step is
shifting income from tax payer to CFC, then
postponed dividends distribution from the CFC for a
long term period. The advantages obtain from this
tax avoidance scheme is time value of money from
postponed paying taxes in residence country. The
impact of this tax avoidance scheme is shifting of
income to tax haven countries and the erosion of tax
bases in many other countries.
2.3 BEPS Action Plan 3: Designing
Effective Controlled Foreign
Company (CFC) Rules
Recommendation in BEPS Action Plan 3 aims to
assist tax authorities in a country in order to be able
to set up CFC rules that strong enough to counteract
tax avoidance practices in the form of deferral tax
payments using CFC. The recommendations
compiled by the OECD are organized into six parts:
1. The definition of CFC, including the definition
of control
It is recommended to includes transparent
entities and Permanent Establishment (PE). Not
only regulate controls legally but also
economically control. And most importantly the
CFC rules must include both direct and indirect
control.
2. Exemption and threshold
The OECD recommends that exemption and
threshold can be done in three ways establish a
minimum amount of ownership so that the
taxpayer jointly deemed to have ownership of a
CFC is limited to a certain amount of
participation, only applicable when known CFC
is established with the motive of tax avoidance,
and determine that CFC rules apply only to CFCs
in countries that have lower tax rates than the tax
rates on which the parent company is located
3. Definition of CFC income
The OECD recommends that CFC income be
clearly defined in CFC rules so as not to generate
multiple interpretations and consistent with
domestic policy.
4. Computing CFC income
The OECD recommends that CFC income be
calculated on the basis of the applicable
provisions of the country where the parent
company is located. It is also recommended that
the loss of a CFC can only be offset with income
from the same CFC or from another CFC
residing in the same country.
5. Attribution of earnings
The OECD recommends the atribution should be
tied to minimum control threshold, the amount of
income atributed to each shareholder calculated
referring to their proportion of ownership and
actual period of ownership, jurisdiction can
determine when income should included in tax
payer returns, and CFC rules should apply tax
rate of the parent jurisdiction.
Analysis of Controlled Foreign Company (CFC) Rules In Indonesia To Prevent Tax Avoidance Practises
401

6. Elimination of double taxation
A main consideration in setting up CFC rules is
to avoid double taxation among the jurisdictions
involved. The OECD recommends the
elimination of double taxation may be made by
including provisions concerning foreign tax
exemptions or credits tax.
2.4 Specific Anti-Tax Avoidance Rules
(SAAR) in Indonesia
There are several ways of tax avoidance that are
often used by taxpayers among others. Thin
Capitalization, deferral tax payment using CFC,
Transfer Pricing, Treaty Shopping, Special Purpose
Company, etc.
Against these specific tax avoidance forms, some
countries have rules to counter them. According to
Alhusnieka (2011), Indonesia also has a set of rules
to counter such specific tax avoidance practices. It is
regulated in Article 18 of the Income Tax Law.
Article 18 paragraph 1 is a provision to counter the
practice of tax evasion in the form of Thin
Capitalization, Article 18 paragraph 2 is a provision
to counter the practice of tax avoidance in the form
of deferral tax payment using CFC, Article 18
paragraph 3, 3 (a), and 4 is a provision to counteract
the practice tax avoidance in the form of Transfer
Pricing, Article 26 paragraph 1a is a provision to
counter the practice of tax avoidance in the form of
Treaty Shopping, and Article 18 paragraph 3b and
3c is a provision to counter the practice of tax
avoidance using special purpose company, and
Article 18 paragraph 3d is a provision to counteract
the practice of tax avoidance in the form of private
persons who have a special relationship with
employers abroad. Tax laws that are specifically
designed to counteract certain tax avoidance
schemes are called Specific Anti-Tax Avoidance
Rules (SAAR). Each of the provisions in the Income
Tax Law will then be made implementing
regulations as technical guidance and
implementation guidance in form i.e. Minister
Finance Regulation or Director General Regulation.
As mentioned above, CFC rules in Indonesia is
part of SAAR which stated in Article 18 paragraph 2
Income Tax Law. The latest implementation
guidance is MFR number 107/MFR.03/2017.
2.5 Deemed Dividend Mechanism
There are several mechanisms that can be used to
attain taxes from CFC schemes and schemes using
offshore holding companies as described by Gunadi
(2007) ie market to market approach, deemed rate of
return approach, deemed distributrion approach, and
deferral charge approach. The market to market
approach is done by incorporating the increase /
decrease in value of taxpayer investments in CFCs
into taxable income (capital gain accumulation per
accrual basis). The imputed income or deemed rate
of return approach is made by requesting tax payer
having a CFC to report CFC earnings on a certain
percentage regardless of the actual income of the
CFC. The deemed distributrion approach is made by
imposing a tax according to the percentage of capital
participation in CFC income whether the dividend
has been actually distributed or yet. The deferral
charge approach is conducted by delay the taxes of
domicile until dividend is actually distributed. Upon
receipt of actual dividend from CFCs will be added
with a certain amount of interest that will reduce the
profit from the delay of taxation.
CFC rules in Indonesia use the deemed
distribution mechanism to impose a tax on CFC
income. It is called deemed dividend.
3 RESEARCH METHODOLOGY
The research methodology is conducted to gathered
information and data, analyze it, and then draw
conclusions about how CFC regulations in Indonesia
are used to counteract tax avoidance practices and
constraint in the implementation.
3.1 Research Method
Qualitative methods views social reality as
something comprehensive, holistic, dynamic, full of
meaning, and the relationship of symptoms is
interactive (Sugiyono, 2017). In this study,
researchers used qualitative methods because the
researcher believes the application of a taxation law
and its relationship with the community is something
that comprehensive, holistic, interactive, and
dynamic relationship.
3.2 Data Collection
Data collection techniques used in this research are
literature studies and field studies. Literature studies
conduct by gathered information and data using
literature, books, articles, and journals on topics
related to international taxation, tax planning, tax
JCAE Symposium 2018 – Journal of Contemporary Accounting and Economics Symposium 2018 on Special Session for Indonesian Study
402

evasion, CFCs, BEPS Action Plan 3: Designing
Effective Controlled Foreign Company Rules, and
other topics related to CFCs. Field studies conduct
through in-depth interviews with key informants
which is competent in this topic study. According to
the researchers, competent key informant in this
topic are the parties from academics who knows
about international taxation, practitioners from tax
consultant especially international tax, and DGT.
3.3 Data Analysis
According Sarwono (2006), in research using
qualitative methods, conducting data analysis is to
process and analyze the data that has been collected
into data that is systematic, organized, structured,
and meaningful. It can be done by organizing the
data, by reading repeatedly the data collected so that
researchers find useful data for research and
eliminate useless data, then test the theory that
comes with the existing data, then give explanation
for the data collected, then write the report.
4 RESEARCH FINDING AND
DISCUSSION
4.1 Analysis of CFC Rules in Indonesia
in Countering Tax Avoidance
Practices
According to Arnold in Rahayu (2008), Rohatgi
(2007), and OECD (2015), one of tax avoidance
mechanism commonly used by taxpayers is deferral
tax payments using CFC. This is done by, first,
establishing a controlled subsidiary abroad called
Controlled Foreign Company (CFC). CFC usually
establised in tax haven country. The next step is
shifting income from tax payer to CFC, then
postponed dividends distribution from the CFC for a
long term period. The advantages obtain from this
tax avoidance scheme is time value of money from
postponed paying taxes in residence country. The
impact of this tax avoidance scheme is shifting of
income to tax haven countries and the erosion of tax
bases in many other countries.
In Indonesia, based on data from Investment
Coordinating Board/Badan Koordinasi Penanaman
Modal (BKPM) regarding Indonesian companies
that are established abroad or companies that doing
outward investment, there are as many as 631
companies. After comparison with the list of tax
haven countries, the result obtained is that most
companies abroad are established in tax-haven
countries or countries with lower tax rates than
Indonesia.
Table 2: List of Indonesian Companies Abroad
No. Country
Amount of
Companies
Tax Haven
Country
Tax
Rates
(2016)
Yes No
1 Australia 9 - V
2 Barbados 1 - V
3 Brazil 1 - V
4
British
Virgin Island
43 V - -
5
Cayman
Island
16 V - -
6 China 13 - V
7 Denmark 1 V - 22
8 France 1 - V
9 Germany 1 - V
10 Hong Kong 15 V - 16,5
11 Hongaria 1 V - 19
12 India 5 - V
13 Italia 2 - V
14 Japan 3 - V
15 Korea 1 V - 24,2
16 Liberia 3 - V
17 Luxembourg 1 - V
18 Malaysia 100 V - 24
19 Malta 1 - V
20
Marshall
Islands
5 - V
21 Mauritania 2 - V
22 Mauritius 10 V - 15
23 Myanmar 5 - V
24 Netherlands 41 - V
25 New Zealand 1 - V
26 Panama 15 - V
27 Phillippines 23 - V
28 Saudi Arabia 2 V - 20
29 Serbia 2 V - 15
30 Seychelles 9 - V
31 Singapore 100 V - 17
32 Taiwan 31 V - 17
33 Thailand 100 V - 20
Analysis of Controlled Foreign Company (CFC) Rules In Indonesia To Prevent Tax Avoidance Practises
403

No. Country
Amount of
Companies
Tax Haven
Country
Tax
Rates
(2016)
Yes No
34 Timor Leste 1 - V
35 Tortola 1 - V
36 Tunisia 1 - V
37 UAE 11 - V
38
United
Kingdo
m
4 V - 20
39 USA 10 - V
40 Uzbekistan 1 - V
41 Vanuatu 2 V - -
42 Vietnam 31 V - 20
43 Yemen 5 V - 20
Jumlah
Perusahaan
631 464 167
A total of 464 companies from 631 Indonesian
companies abroad or 74% were established in
countries with lower tax rates than Indonesia. While
the remaining 167 companies or 26% established in
countries whose tax rates are not lower than
Indonesia. This indicates that tax planning using
CFC scheme is commonly used by Indonesian tax
payer.
CFC rules are terms used for a specific tax
avoidance rule regarding a transaction. The specific
transaction targeted by this rule is a transaction for
the tax deferral payments using CFC. Indonesia also
has a set of rules regarding efforts to prevent tax
avoidance practices using CFC schemes. According
to Alhusnieka (2011) and Rahayu (2008) the
provisions to prevent the practice of tax avoidance
using the CFC scheme are regulated in Article 18
paragraph (2) of Law No. 36 of 2008 on Income
Tax. Anti tax avoidance stipulated in Article 18 of
Law Number 36 Year 2008 regarding Income Tax is
Specific Anti Tax Avoidance Rules (SAAR). SAAR
regulates the prevention of tax avoidance limited to
the forms mentioned in the provisions. How the
latest CFC rules in Indonesia are used to counteract
tax evasion practices will be described below.
4.1.1 Improved Deemed Dividend
Mechanism
The main characteristic of the CFC rules is to
immediately tax when tax payer already has income.
CFC rules in Indonesia used deemed distributrion
approach called deemed dividend (Gunadi, 2007). It
is made by imposing tax every year in set of time
regardless whether dividend has been actually
distributed or not. The amount of tax imposed
depends on the percentage of ownership in CFC and
the income after tax of the CFC.
In this latest CFC rules, PMK-
107/PMK.03/2017, the deemed dividend
arrangement is more consistent. Deemed dividends
that must be reported every year by Indonesian
taxpayer reflect real income of CFC which is income
after tax of the CFC and percentage of ownership of
the Indonesian taxpayer. This makes taxpayers
unable to avoid provision by distribute the dividend
in a insignificant amount before the set time as
happened before as a result of the weakness of the
previous CFC rules. The fact that there is actual
distribution of dividend before the set time does not
invalidate the obligation to report the deemed
dividend in that year.
At the same time, there is a provisions
concerning deemed dividend which can be
calculated for the period of 5 years back in a row
since the year of receipt of dividend. Indonesian tax
payer can also take the tax credit from the income
tax section of the deemed dividend. Given this
arrangement, the existing deemed dividend
mechanisms become more consistent. Taxpayers
also get certainty and clarity in the implementation
of this provision.
4.1.2 Includes indirect ownership
Fajriyan (2017) states that one of the
recommendations of the OECD to be adopted in
strengthening the CFC rules is the extension of the
definition of control which is not only limited to
direct controls but also indirect control. According
to the OECD (2015) when setting limits on control,
there are two things to be noted, the control type
and the control level. There are several types of
controls: legal control, economic control, de facto
control, and consolidated control. In preparing a
CFC rule in a country, the tax authorities are
expected to cover the whole type of control. PMK-
107 / PMK.03 / 2017 as latest CFC rules already
covered provision about indirect ownership. This
provision closes the gap for taxpayers who want to
exploit weaknesses on 'indirect control'
4.1.3 Includes Trust and Other Similar
Entities
According to interviewee, a trust is a type of entity
commonly used in countries with common law
JCAE Symposium 2018 – Journal of Contemporary Accounting and Economics Symposium 2018 on Special Session for Indonesian Study
404

systems that can be used as a means of controlling
the assets of a CFC. According to OEDC (2015)
recommendation should include permanent
establishment (PE) and transparent entity. Weakness
in the previous regulation used by taxpayers to avoid
tax obligation is by using intermediary of trust. In
the latest CFC rules in Indonesia, this weakness has
been fixed. Article 4 paragraph (8) of PMK No.
107/PMK.03/2017 stipulates that in the case of
equity participation in CFC do through trusts or
other similar entities abroad, such capital
participation shall be deemed performed by the party
participating in capital. This means that the use of
trust to avoid previous CFC rules is no longer
effective. The scheme using trust as CFC can be
seen in the figure below.
Figure 1: CFC in Trust Form.
Based on the picture above, PT ABC has ownership in
XYZ Ltd. through trust. Under the terms of previous CFC
rules, PT ABC does not have to comply to reporting
deemed dividends on XYZ Ltd. because its direct
ownership is in trust entities. Under the latest CFC rules,
PT ABC shall report deemed dividends on its ownership
in XYZ Ltd. because its ownership in trust entity is
considered not existent and considered as if PT ABC has
direct ownership to XYZ Ltd.
4.1.4 Regulates provisions on Foreign Tax
Credits
A cross-border transaction involving two or more
countries has the potential to generate international
double taxation (Gunadi, 2007). For taxpayers, the
emerge of double taxation will become burden for
their business and investment activities. Therefore
international double taxation must be eliminated or
granted. In line with that, the OECD (2015) states
that the primary consideration in drafting the CFC
rules is not to create double taxation among
jurisdictions involved. The emergence of double
taxation can affect the competition, growth, and
economic development of countries in the world.
The potential for the inclusion of double taxation
may be made by including provisions concerning
foreign tax exemptions or credits. Double taxation
may arise from a number of conditions: one CFC
income is also subject to income taxes abroad, one
CFC income being the tax subject of several
countries that have CFC rules, and when the CFC
actually distributes dividends from earnings
previously imposed by deemed dividend. In
Indonesia the provision to avoid double taxation is
done by foreign tax credit mechanism. The
provisions concerning the crediting of income tax in
CFC rules in Indonesia are arranged in article 7
PMK No. 107/PMK.03/2017. With this provision
the taxpayer avoids from getting burden of double
taxation.
4.2 Constraints In Implementing CFC
Rules In Indonesia
4.2.1 The Scope is Too Extensive So It
Become Ineffective
CFC rules become too wide-ranging. CFCs as
SAAR should be more specifically targeted to
certain tax avoidance scheme only, in this case is in
scheme of deferral tax payments using CFC.
According Gunadi (2007) deferral payment of tax
using CFC is giving benefit if the tax rate in CFC
jurisdiction is lower than the tax rate in Indonesia.
One indication of tax avoidance intentions using
CFCs is to choose a country that provides tax
benefits or tax-haven state.
The OECD (2015) recommends setting limits on
who these CFC rules apply to:
a. Establish a minimum amount of ownership (de
minimis threshold)
b. Only applicable when known CFC is established
with the motive of tax avoidance
c. Determine that CFC rules apply only to countries
which has a lower tax rate than the country
where the parent is located.
This limitation aims to reduce administrative
burdens and make CFC rules more targeted and
more effective.
According to Gunadi (2007) there are two
approaches that can be used to limit the criteria of
anyone subject to the terms of the CFC by means of
designated jurisdiction approach and a transactional
approach. The designated jurisdiction approach is
conducted by determining which countries are
considered tax havens then made a list of these
countries in the rules. Determination of the criteria
of tax haven country can be done by comparing
Indonesian tax rate with state tax rate indicated as
tax haven. The comparable tax rate may be the
PT ABC
trust
INDONESIA
XYZ Ltd.
COUNTRY A
Analysis of Controlled Foreign Company (CFC) Rules In Indonesia To Prevent Tax Avoidance Practises
405

nominal tax or the effective tax rate. While the
transaction approach is done by differentiating the
category of income regardless whether the CFC is in
a country with lower tax rates or not.
In differentiating the category of income of the
CFC, can be used two approaches: entity approach
or certain earnings approach / tainted income. The
entity approach typically uses some exceptions such
as exceptions for earnings from actual businesses,
exceptions to certain percentages, exclusions for
listed companies, exceptions for companies that are
not intended to avoid taxes (have valid business
purposes). While certain income approaches specify
only the types of tainted income are considered CFC
income which is usually a passive income (dividend,
interest, royalty).
The terms of the latest CFC rules in PMK
No.107/PMK.03/2017 in Indonesia are not
differentiated by jurisdiction or by type of income.
CFC rules in Indonesia uses a global approach so
that all countries and all CFC income both active
income and passive income are included in the
CFC's terms. The use of global approach makes the
scope of this provision to be extensive.
The effect of the extent of the scope of this
provision is that if there is a CFC company that
actually undertakes business activities and assumes
business risks and resides in a country where the tax
rate is not lower than Indonesia, the company will
still be subject to the terms of this CFC. For such
CFCs and for existing capital owners in Indonesia
this may result in excessive tax burdens.
In the opinion of some key informans, the terms
of the CFC rules must be maintained to be targeted,
ie targeting CFCs located in countries with lower tax
rates than Indonesia or can also be more targeted on
the type of income that passive income only because
this type of income is widely used in tax avoidance
efforts.
Provisions on low tax jurisdiction can be set
forth in the form of implementing regulations under
the provisions of PMK-107 / PMK.03 / 2017, for
example in the Director General Regulation.
4.2.2 Difficulty in Detecting Indirect
Ownership and Joint Ownership
According to interviewee, one of the important
changes in PMK No. 107/PMK.03/2017 is the
regulation of indirect ownership. In the previous
provision, PMK No. 256/PMK.03/2017, indirect
ownership is not regulated. It is used by taxpayers to
avoid provision in CFC rules by creating ownership
schemes where income is put on a company that is
formally owned indirectly by Indonesian tax payer
but is actually a company controlled by Indonesian
tax payer. This is done solely to avoid the provisions
of CFC rules. By doing so Indonesian tax payer may
be spared from the obligation to report the deemed
dividend of its existing overseas company in
accordance with the provisions stipulated in PMK
No. 256/PMK.03/2017.
In the latest terms PMK No.
107/PMK.03/2017 taxpayers can not do such a thing
anymore. Indirect ownership schemes are already
regulated in PMK No. 107/PMK.03/2017,
exemplified by the scheme and how it is defined as a
direct and indirect controlled CFC. However, this
will lead to obstacles in the implementation process
later. The DGT will find it difficult to obtain data on
indirect ownership schemes as exemplified in the
PMK No. 107/PMK.03/2017. The more stratified the
scheme of ownership trees undertaken by Indonesian
taxpayer, the more difficult it is for the DGT to
detect the existence of the chain of ownership.
Moreover, the tree of ownership is information
about entities abroad. To obtain information about
foreign entities have certain obstacles because it
involves two jurisdictions. This requires a long and
complicated process through Exchange of
Information (EOI) activities. By improving EOI
processes and mechanisms, it is expected to assist in
detecting indirect ownership schemes.
Furthermore, in its recommendations, the
OECD (2015) provides restrictions on which CFC
rules apply, one of which is to set a minimum
threshold. In the terms of the minimum threshold,
the taxpayer jointly deemed to have ownership of a
CFC is limited to a certain amount of participation.
In Indonesia, the provisions on de minimis threshold
can not be implemented because it will limit the
powers granted to the Minister of Finance by Article
18 paragraph (2) of the Income Tax Act regarding
CFC rules.
Absence of minimum threshold in PMK No.
107/PMK.03/2017 in addition to not wanting to limit
the authority granted by Article 18 paragraph (2),
also used to avoid taxpayers who want to avoid the
regulation by doing fragmentation. Fragmentation is
done by deliberately splitting its ownership to be
below 50% so it is not considered to have CFCs
abroad. By performing fragmentation, tax payer
expect to avoid the provisions of the CFC rules
because of its ownership under 50% threshold
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406

despite the fact that the taxpayer along with the other
party still has control over the CFC.
The absence of a minimum threshold will
increased administrative costs by the DGT, incurring
compliance costs for taxpayers, and also creates
difficulties in its oversight process. DGT as a party
exercising supervision over the implementation of
this provision shall have sufficient data and
information on anyone who has a share of the joint
investment of a CFC overseas. Whereas for the
exchange of data and information between Tax
Office (KPP), DJP is still having difficulties. If the
Indonesian taxpayer owning an overseas CFC and it
registered in different KPP, the DGT will find it
difficult to detect it.
4.2.3 Difficulty in Obtaining Data and
Information for The DGT Supervisory
Process
Oversee the implementation of this provision
requires accurate information and data on CFCs
owned by the taxpayer. As for the current, DGT
does not have a special tool to capture information
related to these matters. For now the provisions on
CFC are still highly dependent on self-assessment of
taxpayers.
Constraint to supervision by the DGT in
particular such data and information can be
addressed in several ways, namely the provision of
CbCR (Country by Country Report) in the Transfer
Pricing Rules. Information gathering conducted by
the DGT can also be done with the EOI (Exchange
of Information) mechanism. As well as the
consolidated financial statements reported by the
taxpayer may serve as a trigger for collecting CFC
related data and information in Indonesia.
4.2.4 Lack of Awareness of CFC Topic by
DGT Officials
Not all tax officers are aware and understand about
CFC topic. Moreover, because the CFC case is
usually found only in the Middle Tax Office and
Large Tax Office whose taxpayers are likely to do
outward investment. Limitations of knowledge and
understanding by tax officials on these CFC topics
can be overcome by providing regular socialization
and learning to tax officials on these CFC topics.
Socialization on CFC issues is also given to the
taxpayer so as to achieve the same understanding
between the taxpayer with the DGT.
5 CONCLUSIONS
5.1 Conclusions
From the analysis of CFC rules in Indonesia, it can
be concluded as follows:
1. CFC rules in Indonesia may be used to
counteract tax evasion practices by
improvements to deemed dividend mechanism,
including indirect ownership, include provisions
on trusts, and has regulated provisions on foreign
tax credits.
2. The constraints in implementing CFC rules in
Indonesia are:
a. the scope of this provision becomes too
extensive so it become ineffective to
implemented
b. difficulty in detecting indirect ownership and
joint ownership
c. difficulties in obtaining data and information
for monitoring process by DGT
d. lack of awareness of tax officials on CFC
topics
5.2 Recommendations
This research recommendation are:
1. In order for the provisions in the CFC rules to
give results as expected, it is recommended that
the DGT as a tax authority to create a special unit
of supervision to ensure that this provision is
strictly adhered by the taxpayer.
2. The constraints in implementing latest CFC rules
can be addressed by:
a. To overcome the ineffectiveness of CFC
rules due to their overly extensive coverage,
it is recommended that the provisions in the
CFC rules be targeted using a designated
jurisdiction approach. Provisions on low tax
jurisdiction can be set forth in the form of
implementing regulations under the
provisions of PMK No.107/PMK.03/2017,
for example in the Director General
Regulation,
b. To overcome the difficulties of detecting
indirect ownership and joint ownership it is
advisable to improve the Exchange of
Information mechanism to be more efficient
and effective and improve the exchange of
information between KPPs.
c. To overcome difficulties in obtaining data
and information for monitoring process by
DGT it is suggested to collect data from
Analysis of Controlled Foreign Company (CFC) Rules In Indonesia To Prevent Tax Avoidance Practises
407

CbCR, EOI, and taxpayer consolidated
financial statements.
d. To overcome the lack of understanding of tax
officers on CFC topics it is suggested to
provide continuous socialization to the
internal DGT and eksternal DGT in order to
achieve the same understanding within the
internal DGT and the same understanding
between the DGT and the taxpayer.
ACKNOWLEDGEMENTS
Indonesia Endowment Fund for Education (LPDP).
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