Allocation of Head Office Expenses and the Interpretation of Article 7(3) of the United Nations Model Tax Treaty

Abstract

In this article, the author discusses the interpretation of article 7(3) of the UN Model Tax Treaty and the allocation of head office expenses to a permanent establishment under Indonesia’s domestic law. The article reviews Indonesian case law, which has generally upheld the indirect method of allocation, despite double taxation outcomes, and supported the tax authority’s demands for detailed supplementary information and documentation beyond consolidated accounts and audited allocation methodologies. The author also addresses arm’s length pricing of intra-group services and suggests that it might be challenged by the Indonesian tax authority in the determination of taxable profit of a permanent establishment in Indonesia.