PART I. — GENERAL DESCRIPTION OF INCOME-TAX SYSTEM1
note1. The income-tax system in the Netherlands East Indies,2 hereinafter referred to as N.E.I., consists of an income tax (Inkomstenbelasting) on individuals and partnerships (including limited partnerships) and a tax on companies (Vennootschapsbelasting). These two taxes constitute the most important source of governmental revenue, yielding about one-third of the total receipts from taxes.3
note note2. Originally — during the period 1920–1924 — companies were subject to the same income tax as individuals and partnerships (Ordinance of May 19th, 1921, as amended). In 1925, however, companies were made subject to a special tax (Ordinance of July 7th, 1925, as amended), and the income tax remained applicable only to individuals and partnerships. The Income-Tax Ordinance was amended by Ordinance No. III, of March 23rd, 1932, hereinafter called Income-Tax Ordinance, 1932, which is effective from January 1st, 1933, and the Company-Tax Ordinance was amended by Ordinance No. 196 of April 28th, 1932, hereinafter called the Company-Tax Ordinance, 1932.
3. Since January 1st, 1932, individuals (not companies) also pay a property tax which is in the nature of a supertax on account of the possession of property which increases the fiscal capacity of the taxpayer. The tax is payable on the same property as that which yields income subject to the income tax. The rate is 2.50 per 1,000 on net property between 25,000 and 120,000 florins and 2 per 1,000 of the excess. The tax is levied in the same way as the income tax (Ordinance No. 405 of July 25th, 1932). There is also a special ground tax on real property situated in N.E.I., which is payable without regard to whether the owner is an individual or a legal entity, or whether he is a resident or a non-resident (Ordinance of August 12th, 1928, as amended). Although this tax is not on the income from real property, it is computed on the basis of its valuation; for example, the valuation of leased buildings is based on rent; that of buildings occupied by the owner is determined by a comparison with the value of rented buildings, or by a certain percentage of the purchase price. With the exception of jungle and other unproductive ground, which is exempted, the valuation of land is fixed at seven times the yearly income (calculated according to the results of the past five years). Because of its not being an income tax, no more detailed description of the ground tax will be given.
I. INCOME TAX
1. TAXPAYERS
4. Individuals. — Regardless of their nationality, individuals are subject to the income tax on their total income if they reside in N.E.I. If non-resident, they are taxable only on income from specified sources (see paragraph 9). Individuals who are normally resident in N.E.I., but go abroad temporarily, remain taxable as residents unless they stay abroad more than one year, in which case their liability is restricted to that of non-residents.
5. An individual is generally regarded as being resident in N.E.I., for the purposes of the income tax, if he lives in the country, or intends to live there for an indefinite period, whether in a rented house, a hotel, or any other dwelling-place, the liability extending from the beginning of this period. If an individual enters N.E.I. temporarily, and remains taxable as a resident in his own country, he will not be taxable in N.E.I. as a resident unless his stay lasts for more than one year, the liability to taxation as a resident beginning with the second year. The term “non-resident” refers to a person who does not fulfil this requirement. A non-resident does not incur any liability in respect of income from a trade, profession or employment which is exercised in N.E.I. for less than three months; but, if he is engaged in such activities for more than three months, he is taxable on the income derived from the beginning of that period. The circumstances of the numerous individuals who make short trips to N.E.I. on behalf of foreign enterprises are so varied, that the application of the principles just stated depends largely on the facts of each particular case.
6. Partnerships. — If resident in N.E.I., a partnership is not ordinarily taxed itself, but its members are assessed on their respective shares of its income. Thus, if a member is an individual or another partnership, the distributive share will be included in the assessment to the income tax or, if a company, in the assessment to the company tax. However, if one or more of the members of a resident partnership are unknown, or if their distributive share of its income is uncertain, the authorities may tax the partnership instead of its members. A non-resident partnership is subject, as a partnership, to the income tax in respect of income from specified sources (see paragraph 9). The tax may be assessed, however, on each partner of the non-resident partnership if he chooses to declare his share of its income from the indicated sources.
7. For the purposes of this report, a partnership is regarded as being resident in the country where it is organised, or where it has its real centre of management, if the latter is in a different country. In fact, except for partnerships organised by citizens of the Netherlands, most partnerships composed of nationals of other countries are organised and registered in N.E.I., and therefore come within the term “resident partnerships”.
2. TAXABLE INCOME
8. In general, income of resident individuals or partners includes the total net amount of what is derived in money, valuables or kind from the following sources, whether situated abroad or in N.E.I.:
9. The taxable income of non-resident individuals or partnerships includes income from one or more of the following categories derived from local sources — i.e., sources in the N.E.I.:
10. A non-resident is not taxable on foreign income. A non-resident partner is taxable only on his share of the income of the resident partnership which is derived in N.E.I., provided the partnership gives satisfactory information in regard to its partners, the sources of its income and the basis of its distribution.
11. The categories of income referred to in paragraphs 8 and 9 are defined more fully below:
3. ASSESSMENT OF TAX
(a) Computation of Taxable Income and Deductions
12. The tax is assessed on the basis of a return which includes income of all categories. All individual taxpayers whose gross income exceeds 1,200 florins must file, before April 1st of each year, either personally or, if they do not reside in N.E.I., through a representative, a return of their income. This return must be made whether or not a form has been received from the authorities. As a general rule, the tax-year, or year for which tax is paid, is the current calendar year, but the basis of assessment is the income derived during the preceding year from the sources existing on January 1st of the tax-year. By way of exception, salaries are assessed on an amount estimated on the basis of the salary received at the beginning of the tax-year; further, in the case of income from a profession or trade, the accounting year of the taxpayer, if it overlaps the calendar year by its first half or more, is taken instead of the calendar year.
13. Allowable Deductions. — The following are deductible: cost of repairs and of maintenance in their original state of property exclusively used in the taxpayer’s profession or trade, and also depreciation of those objects, so far as such depreciation is consistent with the efficient management of the business; expenses for wages, gratuities, etc., freights, insurance premiums, store rent, interest on mortgages, debts of whatever nature (including interest paid to bankers on money borrowed for the purchase of securities), and, in general, all disbursements required to obtain the income or to carry on the profession or trade. Foreign taxes paid abroad on foreign income, ground tax and other charges due by the taxpayer in accordance with legal ordinances and local custom are also deductible. A business loss for a fiscal year may be deducted from the profit made during the following two years, starting with the first of these years. Losses suffered in one category of income are deductible from income in all the other categories. Other deductions are: periodical payments, alimonies or other payments due under a legal obligation, premiums on life insurance not exceeding 5 per cent of income and subject to a maximum of 800 florins.
14. Non-allowable Deductions. — The following are not deductible: household expenses of the taxpayer and of his family, personal taxes of whatever kind, the part of the income invested as capital or laid up as reserves, disbursements for purchasing, founding or improving grounds, buildings, etc., disbursements for taking over, buying or extending a profession or trade (capital expenses), interest on the taxpayer’s capital invested in his trade or profession.
15. Abatements. — No allowances are given in respect of minimum of existence, marital status, or dependents, other than ascendants or descendants. An allowance is given for each of such dependents, the amount of which varies with the income of the taxpayer.
(b) Computation of Tax and Deductions
16. The tax is levied, on the whole of the net taxable income computed as described above, at progressive rates (see Annex).
17. Abatement of tax is granted to a resident if he dies or leaves N.E.I., and to a non-resident if he ceases to derive income from one of the sources mentioned in paragraph 9. Abatement is also granted to residents, but not to non-residents, in case of suspension of a trade or a profession, or discharge from an office, or other exceptional circumstances, if evidence is given that, through these circumstances, the taxed net income differs more than one-quarter from the amount the taxpayer really earned during the tax-year.
18. In order to prevent double taxation, a resident taxpayer who also pays tax in the Netherlands, Surinam or Curaçao, may deduct from his N.E.I. tax on total income the amount of tax which would be due on the part of his income derived from those countries. The Governor-General is authorised to issue ordinances in consonance with provisions in the legislation of other countries, effecting total or partial relief from double taxation, on condition of reciprocity (Netherlands Law of June 14th, 1930, Official Gazette, No. 244, published in N.E.I. Official Gazette 1930, No. 310). Non-resident individuals and partnerships are not taxable on profits derived from shipping between ports in N.E.I. and abroad (Income-Tax Ordinance, 1932, effective January 1st, 1933).
4. COLLECTION OF TAX
19. There is no withholding of tax at source, the only method of taxation being direct assessment against the taxpayer or his representative in N.E.I. A resident pays the tax, after receiving his notice of assessment in as many instalments as the number of months in the calendar year which have not yet elapsed; and in five instalments if the notice is received after July 31st. Non-residents pay tax before the 15th day of the third month after the month in which the notice has been received. The Treasury has, to a certain extent, a preferential claim on the property of a taxpayer.
5. PROCEDURE AND APPEALS
20. The local inspector of finance examines the return of the taxpayer, computes the assessment, enters it in a register, and notifies the taxpayer. The latter can ask the inspector for a revision of the assessment, and, if necessary, he may carry his objections to the Court of Tax Appeals.
21. Penalties. — Failure to make a return, the filing of a false return and the refusal to supply requested information are subject to heavy penalties. If information obtained subsequently to the original assessment shows that it was too low, an additional assessment may be made within three years after the beginning of the tax-year to which the assessment relates, and the additional tax will be increased by 200 per cent.
II. COMPANY TAX
1. TAXPAYERS
22. The liability of a company to the company tax depends upon its nature and upon whether it is resident or not in N.E.I. The company tax is payable by a resident share company (naamloose vennootschap), or limited partnership with share capital (commanditaire vennootschap op aandeelen), other associations whose capital is entirely or in part divided into shares, co-operative societies and mutual insurance companies on their total income, from all sources. Non-resident companies, limited partnerships with a share capital, and other associations whose capital is wholly or partially divided into shares are taxable only in respect of specified items of income (see paragraph 25). The company tax is also payable by associations, organised in N.E.I. with no share capital and not being partnerships, in respect of income from business activities other than activities conducted for the general welfare.
23. The term “resident” is used in the preceding paragraph to interpret the word “gevestigd”, which is used in the Company-Tax Ordinance. This word is not defined in the Ordinance; but, according to a decision rendered by the Chief Inspector of Taxes,1 it indicates the place where a company has its registered office. If the company’s real centre of management (hoofdleiding) is in another country, then the latter is the deciding factor in determining the extent of tax liability. Thus, if the registered office is in N.E.I., where the company was organised, but if the directors live and meet in another country, and if the annual meeting of shareholders takes place and the central book-keeping is maintained in the other country, the company will be treated as resident in that country.
note2. TAXABLE INCOME
24. According to the Company-Tax Ordinance, companies resident in N.E.I. are taxable on their total profits obtained in whatever form or name, whether through the carrying on of a business or the investment of capital outside of that business. It is immaterial whether the sources of the income are situated abroad or in N.E.I.
25. Non-resident companies are taxable only on income from the following sources in N.E.I.:
note note26. According to an official commentary of the Ordinance, tax liability arises in the case of non-resident companies when they have economic relations (economische betrekking) with N.E.I. — for instance, carry on a business or own real property in the country. Such economic relations determine the extent of the tax liability, as only the profit accruing from such relations is taxable. The Ordinance does not specify the circumstances in which a foreign company is considered as carrying on business within N.E.I. In practice, however, liability arises if the foreign company has a permanent establishment there.
27. A foreign enterprise carrying on business through a subsidiary company organised in N.E.I. has not been treated until now as a taxpayer, but the question as to whether or not the subsidiary company should be treated as a branch is still much debated. Except in some parts of Northern Sumatra, where native princes rule, only Dutch subjects or companies incorporated in the Netherlands or in N.E.I. may hold a title of leasehold or concession (Article 11 of the Agrarian Ordinance, 1872, No. 116). Thus a foreign company, wishing to carry on an agricultural or mining enterprise in N.E.I., is compelled to organise a subsidiary company (dummy) in the Netherlands or N.E.I. As the concessions or leasehold are registered in the name of the dummy, this company is taxed for the profits of the enterprise, though it exists only juridically and is totally dependent on the holding company for its financial resources. If, however, the transactions between the subsidiary and the parent company were conducted in such a manner that the true profits of the subsidiary did not appear in its books, certain officials would be inclined to assess the foreign holding company itself through the dummy as its organ.
3. ASSESSMENT OF TAX
(a) Computation of Taxable Income and Deductions
28. The tax is assessed on the basis of a return, which is made on a form supplied to the company by the local inspector. The tax-year is the company’s accounting year; otherwise, the calendar year. The basis of assessment is the net income of the preceding accounting or calendar year. The basis embraces all income derived from the carrying on of a business and from investing capital outside the business, including profits made through the disposal of assets not belonging to the company’s stock-in-trade, and, in general, every gain made through sale.
29. Allowable Deductions. — In calculating net profit, the gross amount may be reduced by expenses incurred in the making, collection and maintenance of such profit. Deductions from gross profit include interest on loans, depreciation of assets used in the business, bad debts contracted in conducting the business and written off according to business usage, and the amount necessarily written off on account of the expiration of rights (e.g., leaseholds) which are subject to a limited period. In practice, taxes paid abroad on foreign income are deductible. A loss suffered in one year may be deducted from the profit made during the two succeeding years. Cost of organising, reorganising or increasing the capital of a company is deductible as from January 1st, 1933.
30. Non-allowable Deductions. — No deduction is allowed for capital expenditure, for the creation or increase of a reserve fund, for interest on capital invested in the business, or for any tax (i.e., the N.E.I. company tax or a foreign tax) on profits derived in N.E.I. The Ordinance allows no deduction whatever for payments out of profits, or surplus, with the exception of payments to the Government otherwise than as shareholder, and of payments (bonuses) granted for services rendered to persons other than managing directors, directors, managers or managing partners. When a company borrows from its shareholders amounts far in excess of what could be obtained from disinterested sources, no deduction is allowed for any interest on the part of the loan which exceeds that which could be borrowed from such disinterested sources. As the borrowing company is assessed, no tax is levied on the creditor company in respect of the interest in question.
31. Double Taxation Relief. — If a resident company pays tax to the Government of the Netherlands, Surinam or Curaçao or a foreign country, on profits derived from business conducted or property (including rights therein) situated within those countries, N.E.I. exempts two-thirds of the profit acquired in the Netherlands, Surinam or Curaçao, and half of the profit acquired in foreign countries. The same exemption is granted to resident companies holding 90 per cent of the registered stock of non-resident companies which are taxed by the above-mentioned Governments. The Governor-General has special powers to effect relief by ordinance (see paragraph 18). Non-resident companies are not taxable on profits derived from shipping between ports in N.E.I. and abroad (Company-Tax Ordinance, 1932, effective January 1st, 1933).
32. To prevent double liability to the N.E.I. tax, no tax is levied on dividends received by an N.E.I. or foreign company from an N.E.I. company or a foreign company deriving at least 90 per cent of its income from sources in N.E.I., provided the shares held in the distributing company are registered in the name of the shareholder.
33. Assessment of Non-resident Insurance Companies. — Special rules are given for the computation of the taxable income of foreign insurance companies. This taxable income is fixed for life insurance companies at 5 per cent, and for all others at 10 per cent, of the amount received in premiums or capital from insurees living or incorporated within N.E.I., or for risks within this country. No deductions are allowed for brokerage or other commissions, rebates, reinsurance or other expenses. As an exception to the preceding regime, the taxpayer may request to be taxed on an amount representing the same proportion of the whole net profit of the insurance business as the above-mentioned amount received in premiums and capital in N.E.I. bears to the total amount received in the same year in premiums and capital from insurees.
(b) Computation of Tax and Abatements
34. The tax is computed on the total net taxable income of the company at a proportional rate plus a surcharge (also proportional) on the preceding rate (see Annex).
35. No abatements are allowed against the tax. For double taxation relief, see paragraph 31.
4. COLLECTION OF TAX
36. Tax is never withheld at source under N.E.I. law, but is always levied by direct assessment against the taxpayer or his representative in N.E.I. The inspector of finance or his substitute notes the assessment in a register and notifies it to the management of the company. The company tax must be paid as a rule within one month from the date of the assessment notice, but the inspector of finance can allow a postponement, in which case interest will be due on the amount for which postponement is granted at a rate of ½ per cent for every month. The Treasury has, to a certain extent, a preferential claim for the tax on all property of the company, etc.
5. PROCEDURE AND APPEALS
37. In general, the district inspector of finance sends the company a return form, which is filled in and returned to the inspector after the books are closed. The taxpayer must comply with all requests for verbal or written information necessary to verify the return. Usually, copies of the annual balance-sheets and profit-and-loss statements are requested. Upon request, the taxpayer must open his books and pertinent documents to the examination of the inspector of finance, of any persons named by the head inspector, or of experts appointed for that purpose.
38. After having secured the necessary information, the inspector computes the assessment, enters it in a register, and serves a notice of assessment on the taxpayer. The taxpayer may lodge an appeal in three months to the head inspector and thence to the Court of Tax Appeals, which is the final authority.
39. Penalties. — If, after receiving a return form and a written reminder, the taxpayer makes no declaration, or if he refuses to give access to the books and to related documents when requested, the assessment will be increased by 100 per cent. Provisional assessment may be imposed on the basis of the amount declared, or on the basis of an estimated amount if accounts have not yet been closed. If it appears through later information that the assessment was too low, an additional tax may be assessed, and increased 100 per cent, provided five years have not elapsed since the end of the year for which the tax is levied.