ARTICLE 24

Non-discrimination

Paragraph 1 prohibits either Contracting State from imposing more burdensome taxes or related requirements on its residents who are citizens of the other Contracting State than on its resident Citizens. The limitation of this provision to persons resident in a Contracting State does not imply on the part of either State an intent to discriminate among nonresidents on the basis of nationality.

Paragraph 2 ensures non-discriminatory taxation by each Contracting State of permanent

establishments of residents of the other Contracting State relative to the taxation of enterprises carried on by residents of that State. The branch profits tax authorized by paragraph 4 of Article 11 (Dividends) is explicitly excepted from this provision. Non-discriminatory treatment does not require granting the same relief for family circumstances to nonresident individuals as may be available to resident individuals. Nor does it prohibit the withholding of tax on payments by a U.S. partnership to partners who are residents of Indonesia; withholding in this case, as in the case of payments to nonresident aliens of certain other income such as dividends, interest, and royalties, is a reasonable mechanism for collecting the U.S. tax due from persons not continually present in the United States.

Paragraph 3 prohibits discriminatory taxation of resident corporations based on their ownership; i.e., corporations owned by residents of the other Contracting State may not be subject to more burdensome taxes or connected requirements than corporations owned or controlled by residents of the taxing State which are engaged in the same activities. It is understood that this provision does not prevent the United States from imposing tax on a U.S. corporation which makes a distribution in liquidation to an Indonesian corporation. It is also understood that the ineligibility of a corporation with nonresident alien shareholders to make an election to be an “S” corporation does not violate this provision. The ineligibility of such a corporation to make the election is not due to the nationality or residence of its shareholders, but to the fact that they are not subject to U.S. tax on a net basis as are U.S. shareholders.

Paragraph 4 provides that, except where the payments are considered excessive in accordance with the provisions of paragraph 1 of Article 10 (Related Persons), paragraph 5 of Article 12 (Interest), or paragraph 5 of Article 13 (Royalties), interest, royalties, end other disbursements made by a resident of a Contracting State to a resident of the other Contracting State shall be allowed as a deduction in computing taxable income in the first State to the same extent as if the payment were made to a resident of that State. (If a deduction of a payment by one resident to another would be disallowed because the payer's debt exceeded the allowable debt-to-equity ratio, the same ratio would apply in determining the deductibility of a payment to a nonresident.) This is implicit in the language of the U.S. Model, but it is made explicit in this case, at the request of Indonesia, by the addition of the parenthetical reference to debt-to-equity ratios. Similarly, for purposes of taxes on capital, any debt which would be deductible to a resident of a Contracting State if the creditor were also a resident of that State must be allowed as a deduction to the same extent when the creditor is a resident of the other State, taking into account any applicable debt/equity rules.

The provisions of this Article apply not only to the income taxes specified in Article 2 (Taxes Covered), but to all taxes imposed at the national level. The U.S. Model extends this Article to sub-national taxes as well. The limitation to national taxes in this case does not imply any intent to discriminate in application of sub-national taxes, nor is any such practice known to exist.