We have had overwhelming response to our alert on the new Indonesian tax regulations last week available here. SPV issuers will be required to certify that they meet all the criteria in the Certificate of Domicile to be submitted to the Indonesian tax authorities. After a close look at the proposed form of Certificate of Domicile, we now think it is very likely that all existing Indonesian bond issuances with an SPV Issuer structure will be affected by the new regulations, regardless of where the SPV is established. The regulations apply on a forward basis from 1 January 2010 - current disputes as to the applicability of treaty benefits (and therefore tax assessments) prior to this date will probably continue.

Tax Call Provisions

We have received a number of enquiries regarding tax call provisions in the bond issuances currently in the market. Since the Indofood case in 2004, there has been significant negotiation on tax call clauses, and the language can vary considerably between issuances. The majority of current Indonesian bond issuances contain call provisions that only apply if the tax rate exceeds 20%, but a number contain call provisions if there is any change in the applicable withholding rate or (in issuer-friendly versions) change in policy of the tax authorities. Based on the Indofood case, we believe it will be challenging to apply the tax call language on bonds using a Netherlands issuer, as the Indonesian tax authorities have not fundamentally changed their position in the Indofood case that Netherlands SPVs are not entitled to treaty benefits - a position that was accepted by the English courts. While Indofood is an English case, we think it would have persuasive force with respect to New York law governed bonds as well.

Accordingly, we believe exercise of the tax call provisions would be challenging under most of the bond issuances currently in the market. A possible exception to this rule would be Singapore issued bonds where the Indonesian tax authorities have not previously challenged the application of the 10% treaty rate - in which case an increase to 20% may trigger issuer-friendly tax call provisions. Another exception would be where an issuer has written comfort from a governmental authority that a particular rate may apply. Please note these are generalisations and the availability of the tax call language on any particular issuance would require detailed analysis of the actual tax call wording as well as the specific facts and circumstances of the case.

Equity Investments

We have also received a number of queries whether the new regulations apply to other types of investment. While clearly targeted at debt investment structures, the regulations undoubtedly apply to equity investments as well. Many observers have noted the similarities between the new Indonesian regulations and the new Anti-Treaty Shopping regulations in China (more details from our China practice can be found here), where similar regulations have been applied to equity investment structures.

Most obviously, this would affect private equity investments where a treaty jurisdiction SPV is 'interposed' between the fund vehicle (often in a non-treaty jurisdiction such as Cayman Islands) and the Indonesian investee company. Unless carefully structured, it is likely that the SPV would not be treated as the beneficial owner of dividend or royalty streams from Indonesia, and would not be entitled to treaty benefits on these cashflows. In addition, Indonesian tax authorities are likely to view any gain on the sale of the assets as taxable in Indonesia, even if this is conducted as a sale of the offshore SPV. This could potentially be burdensome as the Indonesian tax authorities will deem an offshore seller to have realised a taxable gain, resulting in a net taxation of 5% of the sale price, whether or not any actual gain is realised. We also think that strategic investors will need to carefully consider the investment structures for their Indonesian joint ventures and acquisitions in light of the new regulations, to ensure that there are no unintended consequences.

O'Melveny & Myers LLP routinely provides advice to clients on complex transactions in which these issues may arise, including finance, mergers and acquisitions, and licensing arrangements. If you have any questions about the operation of the applicable statutory provisions or the case law interpreting these provisions, please contact any of the attorneys listed on this alert.


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