Revision of tax holiday rules stimulates investment and imports in Indonesia

Indonesia’s GDP growth for the first half of 2018 was estimated at 5.7%. However, in line with other emerging markets, Indonesia was faced with the challenge of a sliding rupiah against the US dollar over the course of the year. To help curb negative effects that may arise from this, Indonesia has redoubled efforts to reduce imports. It is also encouraging foreign direct investment and stimulating domestic investment.

Incentives

To achieve this goal, the country has revised the rules of its tax holiday. For investments above Rp500bn ($35.5m), the new tax holiday regulation provides a 100% exemption of corporate income tax (CIT), as well as two years of 50% CIT reduction following the initial concession period. Investments below Rp500bn ($35.5m) may benefit from a 50% CIT reduction for a period of five years, as well as two subsequent years of 25% reduction after the initial concession period. The number of eligible industries has been revised and expanded, and the tax holiday provides up-front certainty about which industries are eligible for the incentive. If an industry is not specifically included, it is still be possible to obtain a tax holiday, subject to a special approval procedure. Obtaining the incentive has been simplified by allowing for advanced approval and eliminating some requirements, including the required deposit of 10% of project funds.

As an incentive to support small enterprises, Indonesian tax law previously provided a final tax of 1% on revenue. The tax rate is applicable for taxpayers who have an annual gross revenue of Rp4.8bn ($340,000) or less. This final tax rate has been reduced to 0.5%.

Further incentives have been announced, but have yet to be officially introduced. They include revising the tax allowance incentive and an incentive for research and development spending, as well as vocational training and incentives to stimulate the digital economy.

The country is also considering expanding the list of exported services which, for value-added tax (VAT) purposes, would be subject to a 0% rate. Currently, most service providers must add 10% VAT to service charges for customers in other countries. Competitors in other jurisdictions typically do not need to apply this VAT. Accordingly, Indonesian companies are put in a less competitive position. Expansion of the services that benefit from zero-ratings would be a welcome measure to help to bolster Indonesia’s competitive position.

Regarding limiting imports, the government has opted to slightly disincentivise imports by increasing Article No. 22 withholding tax on imported consumer products. This tax is a prepayment of the CIT.

Tax Compliance

To further support its development goals, Indonesia has been working to increase tax compliance. This is an important goal, as roughly 85% of the government’s budget is funded through tax collections. The government is increasing data collection through various avenues. First, the tax office now has access to bank balance information of taxpayers with balances exceeding Rp1bn ($70,900). In the future, this information will be augmented by data received from other jurisdictions, and the tax office will receive information from as many as 69 government agencies or public associations that are tasked with administering and collecting the relevant data. Second, it has established a data analytics team to identify non-compliant taxpayers and detect tax fraud. Third, it is continuing its efforts to increase compliance by consolidating information collected during the tax amnesty – a programme that allowed taxpayers to report undisclosed assets by paying redemption money – as well as auditing taxpayers who did not participate in the programme.

Lastly, the government is revising three key tax laws: the General Tax Provisions and Procedures Law, the Income Tax Law, and the VAT and Luxury Sales Tax Law. Little has been announced with respect to the changes, but the aim is to provide the government an opportunity to improve the ease of doing business in Indonesia and provide sufficient certainty for taxpayers with regard to their various rights and obligations.