ARTICLE 13

Royalties

This Article governs the taxation by a Contracting States of royalties derived from

sources within that State by a resident of the other Contracting State.

Such royalties may be taxed by both Contracting States, the country of source and the country of residence. However, paragraph 2 limits the tax at source when the beneficial owner of the royalties is a resident of the other State. The limits are 10 percent of the gross payment for the rental of equipment and 15 percent of the gross payment in other cases.

The 10 percent rate applies to payments for the use of, or right to use, industrial, commercial or scientific equipment, other than payments for the rental of ships, aircraft or containers which are exempt from tax under Article 9 (Shipping and Air Transport). Thus, for example, income from the bareboat leasing of a plane operated in international traffic is covered by Article 9 and not by this Article. Income from the leasing of containers by a leasing company and payments for the leasing of drilling rigs and similar equipment are covered by paragraph 3(b) of this Article. The treatment of payments for the leasing of equipment as royalties differs from the position of the U.S. Model that such income constitutes business profits. It represents a significant concession by the United States in order to conclude the Convention. Indonesia, as a developing country, seeks to preserve taxation at source of payments deducted from the Indonesian tax base and paid to nonresidents. It maintains this position even in income tax conventions with countries which provide tax incentives to investment in Indonesia. Since the United States does not provide such an investment incentive by treaty, Indonesia views the reduction in its tax on such rentals from 20 to 10 percent of the gross payment as a significant concession on its part.

The 15 percent rate applies to royalties with respect to copyrights, including film or tape rentals, patents, designs, models, plans, secret processes or formulas, trademarks and information concerning industrial, commercial or scientific experience. It also applies to gain on the disposition of any right or property giving rise to a royalty if the amount realized is contingent on the productivity, use or disposition of such property or rights. The 15 percent rate is a maximum. It does not prejudice any lower rate which may be agreed to between a Contracting State and residents of the other State. For example, if film rentals derived from Indonesia by U.S. residents are subject to an effective tax rate of less than 15 percent of the gross amount, that regime will continue to apply.

The limitations of tax at source do not apply to the U.S. taxation of U.S. citizens resident in Indonesia. (5ee paragraph 3 of Article 28 (General Rules of Taxation).)

The limitations of tax at source provided in paragraph 2 also do not apply if the property or rights giving rise to the royalty are effectively connected with a permanent establishment or a fixed base which the recipient has in the Contracting State where the royalty arises. In that case the provisions of Article 8 (Business Profits) or Article 15 (Independent Personal Services) apply.

Paragraph 5 provides that, where a royalty paid to a related person exceeds the amount that 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.