Singapore Indonesia tax treaty and IP royalties

IP royalties paid from Indonesia to Singapore are common for many reasons. One is that Singapore is a base for regional investment so holding companies tend to be located in Singapore, covering SE Asia. Another is that foreign businesses operating in SE Asian countries face other restrictions (ownership limitations, higher corporate tax etc) that might make IP royalties a useful structural tool. A third is that investment vehicles that own IP assets in a robust jurisdiction are easier to attract VC and other financing options, even an outright sale.

Royalties however attract withholding tax when they are paid offshore. There are different rates for different types of IP. The rules are set out under the Singapore-Indonesia Double Tax Treaty; Indonesia and Singapore signed a new tax treaty on 4 February 2020 to replace the 1990 tax treaty between the two countries. Ratification is under way and it should be in effect by the end of 2020; which means its time for businesses to start planning now.  

Under the new treaty withholding tax for royalties will be lowered from 15% to the new rates of either 10% or 8%, depending on the type of royalty:

• 10%, for the copyrights, patent, trade mark, design or models, trade secrets; and
• 8%, for the use of or the right to use, industrial, commercial or scientific equipment, or know how.

So ‘classic’ IP royalties (e.g. licenses of copyright or trade marks) attract 10%. Physical equipment is 8%. Of great interest will be the trade secrets and know how rules, which could create a whole new category of licensable rights, which are currently quite overlooked in transactions.

Both countries apply the credit method for the elimination of double taxation. This means that Singapore should credit the withholding tax paid against the Singapore IP owner’s income tax in Singapore (an already fair 17% corporate tax rate is reduced to an effective 7% then for that IP royalty income).

Is Trump’s trade war coming to Indonesia over IP? (Part 2)

The last post explained the US government's complaints about Indonesia's IP system and the US government's review of GSPs, that is the tariff preferences the US grants to Indonesia. 

Indonesia was asked to provide its written response to the US government's complaints about ineffective IP protection. In its submitted briefs Indonesia set out:

1. About the complaint that the Patent law had strict working requirements, Indonesia stated that deferment of the requirement to manufacture a product to the patent would be made available through a simple online application. 
2. About lack of enforcement Indonesia clarified that from 2016-2018, there were 93 IP cases of Intellectual Property handled by DGIP Investigators.  They mentioned an improved complaint system and site blocking process for IP complaints against streaming and app systems delivering pirated content. A Customs IP border protection system is now in force and companies which are based in Indonesia can use it.
3. As to the complaint about lack of coordination, Indonesia mentioned that the Coordinating Ministry for Politics, Law and Security would revitalize the National IP Task Force. The Creative Department BEKRAF would be brought brought in to assist enforcement and an MOU between ministries would follow. 
4. There is planned implementation of the Indonesia-US Work Plan on IPR to focus on public IP education, strengthening of the legal enforcement framework, IPR enforcement and better cooperation. The National IP Task Force will be utilized.
5. Other matters mentioned included the revisions to the Designs law. 

Whether this will satisfy the US is not clear. There isn't anything particularity new set out. The Customs system excludes most companies (unless they have a local subsidiary). The volumes of enforcement cases handled by the DGIP PPNS is very low compared to neighboring countries (and police cases don't add many numbers). The National IP Task force has been around for many years without any discernible impact so far. it is not clear how designs law amendments will help either. 

The final decision on the US investigation and Indonesia’s status as a GSP beneficiary is pending. Around 124 different products exported to the US are at risk, if Indonesia cannot demonstrate improved IP protection.  

Is Trump’s trade war coming to Indonesia over IP? (Part 1)

US imports from Indonesia have been growing as product sourcing diverts away from China due to recent tariffs. In recent months, GSP imports from Indonesia of product categories hit by Trump’s China tariffs grew by 22%, while imports of other products grew by 15%. So, Indonesia has been benefiting from tariffs slapped on Chinese goods. 

But Trump’s trade war is expanding. The Generalized System of Preferences (GSP) is a US trade program which allows tariff reduced imports from preferred US trade partners. Several countries' GSP status is under review, as GSP benefits are not automatic and beneficiary countries must meet eligibility criteria including effective IP protection.  

The 2018 National Trade Estimate Report on ‘Foreign Trade Barriers’ covering Indonesia stated that a wide array of trade barriers create serious negative effects on U.S. commerce. Indonesia remains on the USTR's Priority Watch List. Some key US IP concerns include :
a. Lack of effective IP protection and enforcement including insufficient enforcement coordination among agencies. 
b. Widespread copyright piracy and trademark counterfeiting
c. Concerns over Indonesia’s Patent Law - the working requirements
d. Lack of effective Data Exclusivity in marketing approvals

They also cite market access barriers, like requirements for domestic manufacturing and technology transfer for pharmaceuticals and other sectors.

A review of Indonesia's GSP eligibility of Indonesia was started by the USTR in 2018.  If Indonesia is found not to provide effective IP protection, it could lose its tariff reductions under the GSP. Indonesian exporters would then be penalized. 

The next post will set out the responses from Indonesia's government. 

e Regional Comprehensive Economic Partnership in SE Asia; can Indonesia lead the negotiations?

The Regional Comprehensive Economic Partnership (RCEP), is a proposed free trade agreement (FTA) between ASEAN countries and six Asia-Pacific countries. Indonesia is the ASEAN coordinator for RCEP and has led recent negotiations for RCEP. It is hoped to complete the deal this year. RECP is expected to contain a detailed IP chapter, incorporating a TRIPS+ model, that is IP provisions designed to go beyond TRIPS.

However concern has been expressed whether Indonesia is adequately prepared to do this. As it is there are current concerns about how robust Indonesia’s implementation of TRIPS is.  The USTR Special 301 report and Europe’ IP report on Third Countries both cite concerns about weak existing IP protection. Some of the areas where compatibility with RECP is not yet close include:

• Non traditional trademarks,
• E-filing
• Patentability of new forms and uses of known substances
• Copyright term

The upshot of the differences between Indonesia’s current IP laws and RCEP is that all of Indonesian’s IP laws will need to be amended again. The process for amending the laws started in 2012 and has not yet finished (the Industrial Designs law amendments are not yet passed). It is generally a very long process to pass laws in Indonesia. 

Hopefully RCEP will provide an impetus to improve the IP enforcement more and more quickly.
   
 
   

USTR's Special 301 report 2019 - Indonesia

The US government announced its US Special 301 review last week, and perhaps the most interesting question is whether President Donald Trump’s US protectionist policies and provocation of trade disputes suggests any change in the Special 301 approach. The purpose of the Special 301 review is to identify US trading partners that do not adequately or effectively protect and enforce IP rights or otherwise deny market access to U.S. innovators and creators that rely on protection of IP rights.

Of course China comes in for the most criticism, given the extent of copyright piracy and trademark counterfeiting and trade secret theft among other issues. However it is probably correct to say that the larger the trading relationship the more scrutiny a country faces, so the final Report doesn’t exactly compare like with like. So China (which is supposed to be the source of 75% of the world’s fake goods) and other large trading partners always feature. Over the last 20 years most SE Asian countries have fallen off the Priority Watch List and Watch list as IP protection improved.

This year Indonesia features on the Priority Watch List and Thailand and Vietnam on the Watch lists. This is the same as 2018. The last changes for SE Asia was the downgrading of Thailand in 2017.

Indonesia the report says suffers from many problems; these are broadly:

• widespread piracy and counterfeiting and, in particular, the lack of enforcement, as well as low deterrent penalties
• conflicts between GI rules and pre-existing trademark rights and common food names
• problematic patentability criteria for incremental innovations, local manufacturing and use requirements, ease of compulsory licenses, and burdensome patentable material disclosure requirements and excessive patent annuity fees. 
• Poor protection against unfair commercial use and unauthorized disclosure of undisclosed pharma and agrochem regulatory /test data for marketing approvals
• Market  access barriers for the pharm and movie industry especially

Much of these are longstanding complaints. Weak IP enforcement for example, is an old one, which the USTR suggests needs better enforcement coordination and a specialist IP police unit. However the patent barriers were only created in the last few years. With no improvements in the longstanding complaints, the direction of travel i.e. more IPR barriers is not likely to lead to Indonesia coming off the Priority Watch List any time soon.

Elections in Indonesia, IP and fake ballots?

  The world’s largest one day direct election, Indonesia's presidential election completed last week. The count continues but President Joko Widodo looks set to win with a 55% majority.  Most commentators seem to think that continued stability is good for the economy and country generally. And in terms of continuation of the bureaucrats in position, that should mean no major changes for IP.

One curious incident occurred in an otherwise calm and peaceful election. In Selangor, a city in the neighbouring country of Malaysia thousands of ballot papers were found pre marked in favour of Indonesian candidates. The Indonesian General Elections Commission (KPU) and the Election Supervisory Agency (Bawaslu) are investigating with the Royal Malaysian Police. It is not clear what these papers were. Were they genuine ballot papers intended for Indonesia's diaspora living in Malaysia but never distributed? Or fake ballot papers printed abroad intended to be added to the count?

US and EU IP judgements on SE Asian countries; part 3 Indonesia

Part 3 of this series on the combined views of the EU and US on IPO protection in major SEA economies focuses on Indonesia. 


The EU report says that Indonesia, having enacted new copyright and trade mark legislation, was also moved from Priority 2 to 3 in previous years. But market access barriers, weak governance and corruption continue to weigh down IPR infrastructure. There are high levels of pirated and counterfeit products, and no regulatory data protection. Legislation drafting is not transparent and IPR registration is very slow.  Enforcement by the IPO Investigation team has declined and the Police and Customs remain ineffective. Other concerns are absence of implementing regulations, lack of protection against unfair commercial use, bad faith trade mark registrations, overly lengthy and expensive Court proceedings, Court decisions are not published and contain very brief legal reasoning.  The patent law is cited as having problems.


The USTR shares similar concerns about the 2016 patent law which includes restrictive local manufacturing requirements as additional patentability criteria which “undermine innovation and research and prevent investment”. They mention the lack of regulatory data protection for pharma and plant products. It also questions whether the newly implemented Customs IP recordal system can really benefit foreign right holders, because only those with a local subsidiary can record their IP rights with Customs. The USTR also states that Indonesia GIs law raises questions about the effects of new registrations on pre-existing trade mark rights, and questions the lack of unfair competition laws.


Both the EU and the US look to Indonesia to improve IP enforcement cooperation among relevant agencies, to meaningfully address all concerns. Indonesia is in many senses, less well developed according to both EU and US in IP protection, and thus remains at a higher level of concern than other SEA countries. The EU is in the process of negotiating an FTA which includes a number of IP elements.  

Indonesia's IP deployment and development

An interesting analysis of Indonesia’s IP position was put forward by in September. WIPO puts forward a classic developing market situation then applied it to Indonesia.  Their analysis is broadly as follows:

General emerging market theme	Indonesia position
Low patent filings at home; patents by non-residents	Indonesia’s patent landscape is dominated by foreign applicants
When R&D or IP occures it is dominated by public sector	LIPI and a few universities dominate, few private sector applicants (pharma company Dexa and Wirya Innovasi - digital tech developer are top local PCT patentees in 2015); Indonesia has a low base of domestic inventions.
Some reliance on utility models, designs	More local applicants, especially in designs (packaging and apparel dominate) – but still highest in SEA region
More reliant on trademarks, but mostly only national reach	Many trademarks are filed by local traders – a majority in fact (previous OECD research agreed on this); few foreign TMs filed
At times important notable copyright sector	Indonesia has a strong music and film industry; with strong copyright industry associations.
Large portions of economy not using the IP system	Limited manufacturing base, historic commodity focus of the economy, limited technology development by private sector

Indonesia proposes to develop a National IP strategy - see here. A lot can be learnt from the above analysis on what to focus on.

Indonesia starts on a national IP strategy

Indonesia's IP Office has started formulating a Intellectual Property National Strategy. They ran a Focus Group Discussion attended by representatives of the IPO, other ministries and Indonesia's IP Attorneys Association (AKHKI) recently.  The Ministry of Law has established a team of National Expert. Their first activity is to conduct a study to review current national policies, as well as to identify the best way to align IP national strategy with other development priorities.

Many countries now use national IP strategies to help drive innovation. China started to do it a decade ago and several other SE Asian nations do the same thing including the Philippines and Vietnam.  A previous OCED study concluded that Indonesian trademark based industries are central to the economy. the International Trademarks Association has also published a study indicating the importance of trademark related industries to the local economies in the SEA region. Ecommerce is now proving a major new economic driver in Indonesia, with VC funded start ups turning into huge businesses. If the team of National Experts can draw all these elements together, many important Indonesian business sectors can benefit.