Tax Allowances, tighter or looser ?

In December 2011 the Indonesian government through the Investment Coordinating Board (BKPM) released Government Regulation (GR) 52/2011 as a revised version of GR 62/2008 regarding Tax Allowance for companies that invest in certain business sectors and/or certain regions. The revised regulation covers areas such as plantations, pharmaceuticals and electronics with strategic focus on promoting interest in downstream sector to reduce reliance on imports. The revised GR covers a range of some 129 different sectors compared to the 38 sectors covered under the previous decree.

To promote more investment, on 6 April 2015, The government issued GR 18/2015 which updates the income tax incentives package and revoked GR 1/2007 as lastly amended by GR 52/2011.

GR 18/2015 now covers 143 sectors which are 66 designated sectors and 77 designated sectors in designated regions) including green investment.

Criteria

GR-18 sets out global criteria to enjoy the tax allowance, i.e.

•          High investment value or for export purposes;
•          High absorption of manpower; or
•          High local content

To attract more investment, the government loosen the rules by eliminating the criteria of realizing at least 80% of investment plan and threshold of investment plan in the amount of  IDR 1 trillion (around USD 100 millions). The criteria for eligible company is also wider that now tax allowance can be enjoyed not only for new investment but also for expansion of investment. More criteria have been added to enable companies to enjoy longer loss carry forward.

However, the government tighten the rules by providing tax allowance incentives only for companies that have run commercial production. Previously the companies may get incentives although their investment has not been realized fully.

Highlight of GR 18/2015

• Total net taxable income is reduced to 30% of the total investment value (in the form of fixed assets, including land) over the course of six years at 5% percent tax payable each year, starting from commercial production provided that those assets are not being used for other purposes or  transferred out for certain periods.
•   Accelerated depreciation and amortization of assets.
• A reduced withholding tax rate of 10% for dividends paid to non-resident taxpayers or the applicable reduce rate by tax treaty.
• Loss carry forward more than 5 years but not more than 10 years depending on certain conditions:

a)      Further one year if the investment is located in an industry zone or bonded zone

b)       Further one year if the investment requires at least IDR 10 billion in spending on economic and social infrastructure for its business area

c)      Further one year if the investment contains local contents at least 70% starting from 4^thyear.

d)     Further one year if the investment employs at least 500 Indonesian national workers for five consecutive years or further two years if the investment employs at least 1.000 Indonesian national workers for five consecutive years. (Previously it’s only available for 500 workers).

e)      Further two years if at least 5% of the investment value is spent on research and development in Indonesia to develop products and promote efficiency in the production process over 5 years. (Previously it’s only one year)

f)       Further two years if the business expansion cost derived from earning after tax in a tax year prior to the issuance of expansion investment approval. This additional two years is granted for tax loss in the year of commercial production started. (Previously it’s not available)

g)      Further two years if the export proceed is at least 30% of the total sales for the investment outside the bonded zone. (Previously it’s not available)

Procedure

Ministry of Finance (MoF) and Investment Coordinating Board (ICB) have issued MoF Reg. No 89/PMK.010/2015 and ICB Reg. No 8 Year 2015 regarding the procedure to obtain tax allowance incentive as the implementing regulation of GR 18/2015.

Under previous rule, Minister of Finance had  the authority to decide to which company is eligible for enjoying tax allowance.  By new regulations (MoF-89 and ICB-8), the decision to grant tax allowance  is made by trilateral institutions namely Ministry of Finance, related Ministry (who regulates such certain sectors), and Investment Coordinating Board. The technical requirements such as the workforce, export proceed threshold, etc. will be on ICB discretion.

Recently, Minister of Industry (MoI) has issued  MoI Reg. No. 48/M-IND/PER/5/2015 dated 5 May 2015 regarding criteria or requirement in implementing tax allowance.  MoI-48 sets out detail criteria for each industry to be qualified as high investment, high absorption of manpower, or high local content. However, those criteria are only as indicators and decision for determining  the elegible companies that are granted for tax allowance is based on trilateral meeting. 

Recently Minister of Tourism has issued regulation No 9 Year 2014 dated 5 May 2015 regarding Criteria or Requirement to Utilize Tax Allowance in Tourism Industry.  In general, the requirements are among others: (1) using area minimum of 100 hectare, (2) investment amount  minimum of  IDR 50 billion,  (3) using manpower minimum of 100 people .

Summary

According to Head of Fiscal Policy Office, GR 18/2015 is intended to respond depreciation in Rupiah currency and  current year deficit.  In addition, pursuant to ICB, the old tax allowance rule is not attractive enough. Although tax allowance provision has been inserted in Income Tax Law in 2000, its implementing regulation (GR 1/2007) was issued in 2007 and based on ICB records, the number of companies granted for tax allowance is 88 starting from 2008-2014. The record shows that the existing tax allowance should be improved. 

Therefore the government eliminated some requirements which seems create some burdens for investors such as  realization of investment plan  at least 80%  and threshold of investment plan in the amount of  IDR 1 trillion (around USD 100 millions).  Then the government  set out general  criteria to enjoy tax allowance rather than detail requirements. Previously there are detail requirements under each designated business sectors/regions related to investment value, number of Indonesia workers, and size of business. By setting up general criteria, Investment Coordinating Board (in coordination to related ministries) has a room to justify which companies are entitled for tax allowance incentive .  

To make it more attractive, the rule has been loosened  by adding more opportunities to have longer loss carry forward, such as  for investment that employs at least 1.000 Indonesian national workers for five consecutive years, at least 5% of the investment value is spent on research and development in Indonesia, reinvestment of earning after tax, and export goods from the investment outside the bonded zone. The government only tighten the rules by providing tax allowance incentives only for companies that have run commercial production rather than  referring to investment plan.

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