ARTICLE 12

Interest

This Article governs the taxation by a Contracting State of interest derived from sources within that State by a resident of the other Contracting State. The source rule is provided In Article 7 (Source of Income). The taxation of certain excess interest of a permanent establishment is covered by Article 11 (Dividends), paragraph 4, and by the Protocol.

Interest derived by a resident of one Contracting State from sources in the other Contracting State may be taxed by both States. However, the tax imposed at source may not exceed 15 percent of the gross interest when the beneficial owner of the interest is s resident of the other State; and no tax may be imposed at source when the interest is derived by the other Contracting State or any agency or instrumentality thereof which is exempt from income tax in that other State. In the absence of the Convention, there would generally be no U.S. tax on portfolio interest or on interest derived by the Government of Indonesia that is exempt under section 892 of the Internal Revenue Code, and a 30 percent tax would be withheld on other interest. The Indonesian statutory rate of tax on interest paid to nonresidents is generally 20 percent.

The limitation of tax at source does not apply with respect to the U.S. taxation of U.S. citizens resident in Indonesia. (See paragraph 3 of Article 18 (General Rules of Taxation).)

The limitation of tax at source also does not apply if the indebtedness giving rise to the interest is effectively connected with a permanent establishment or fixed base which the owner of the interest has in the State where the interest has its source. In such a case the interest is taxable to the permanent establishment or fixed base in accordance with the provisions of Article 8 (Business Profits) or 15 (Independent Personal Services), as appropriate.

Paragraph 5 provides that, where interest paid to a related person exceeds the amount which would be paid to an unrelated person, the excess amount is not affected by this Article, but may be taxed by each Contracting State in accordance with its law, including other provisions of the Convention which may be applicable. For example, if the excess payment is characterized as a dividend, the provisions of Article 11 (Dividends) would be applicable.

The definition of interest in paragraph 6 is substantially the same as in the U.S. Model.