Qatar wants Indonesia tax treaty legalized

Urip Hudiono, The Jakarta Post, Jakarta

Qatar has asked Indonesia to ratify a tax treaty so it can continue a US$1 billion infrastructure development fund it committed to Indonesia last year.

The treaty against double taxation in both countries may be needed because Qatar and Indonesia could manage the infrastructure fund through a joint company, the Finance Ministry's Director General for the Treasury Herry Purnomo said last week.

Both countries have given their preliminary consent to the treaty.

"Qatar has actually offered the setting up of a company (for the fund) with a wide business scope, although we want it to focus on financing infrastructure development," Herry said.

"There have been options to cooperate with local firms, invest directly, or to go through the government's investment agency ... but there are still some taxation issues regarding this," he said.

But Herry said these issues were currently being addressed and the President had been notified.

The Qatar Investment Authority committed on the infrastructure development fund during President Susilo Bambang Yudhoyono's visit to the Middle East in May last year.

Qatar would provide 85 percent of the fund and Indonesia would provide the rest.

A memorandum of understanding on the fund was signed in May this year, Herry said.

And one on the tax treaty was signed during Yudhoyono's visit to the Gulf country.

Tax treaties commonly provide more lenient taxation between participating countries.

Lower income taxes can be provided, along with a provision to avoid taxation for a second time in the corresponding country -- commonly known as double taxation.

But these treaties are not without controversy.

There have been cases where the anti-double taxation agreement was misused to avoid taxes all together by registering a company in the country with lower tax rates.

Indonesia in 2004 terminated a 1999 tax treaty with Mauritius to avoid losing significant tax revenues.

Investors from the Middle East are among those Indonesia has been courting for its investment needs.

Indonesia wants to encourage these investors to develop the country's poor infrastructure, which in turn is expected to attract more investments.

But Indonesia needs Rp 1,000 trillion (US$111 billion) in investments this year to achieve its 6.3 percent growth target, and another $150 billion in infrastructure development funds over the next five years to sustain more investments ahead.

Besides Qatar, Indonesia has received a $1.5 billion commitment from the Jeddah-based Islamic Development Bank (IDB) for sharia-based infrastructure development projects, with the government providing at least $100 million of the total fund.

It is also discussing a similar trust fund with the Asian Development Bank (ADB) and the World Bank.

The government has allocated Rp 4 trillion ($444 million) from the 2006 and 2007 state budgets as a revolving seed fund for its investment agency.

However the funds are yet to be used, Herry said.

The funds may be used by the government to provide guarantee incentives and partnership schemes for 91 infrastructure projects worth $22.5 billion.

These projects were offered in an investor summit in 2005 along with 10 model projects worth 4.5 billion in 2006.
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