In August 2011, Minister of Finance
(MoF) introduced Regulation No.
130/PMK.011/2011 (“PMK-130”) which comes
under Government Regulation No. 94/2010 regarding tax holidays for large scale
investments. Such exemptions are granted for FDI projects of at least IDR 1
trillion in areas such as petrochemical refineries and renewable energy
projects. The regulation will also apply to those businesses set up one year
prior to the announcement of the tax holiday.
In August
2015, four years after PMK-130, MoF issue regulation no. 159/PMK.010/2015
(“PMK-159) that revoke PMK-130. Under PMK-159, tax holiday is given in the form
of tax reduction rather than tax exemption.
New
things
The procedure of filing tax holiday is simpler in the PMK
159 (through One Stop Services/ OSS in Investment Coordinating Board office).The
company applying for the tax holiday will be determined by a verification
committee and MoF will issue a decree for eligible taxpayers based on
Verification Committee’s recommendation and no need to consult to the
President. It will speed up the process and it will provide certainty whether
the application is accepted or rejected.
PMK-159 extends the number of pioneer industry from 5 to 9 industries. Those 9 pioneer industries are upstream metal
industry; oil refinery industry; organic basic chemicals derived from petroleum
and natural gas industry; machinery industry that produces industrial
machinery; agriculture, forestry, and fishery products-based manufacture
industry; telecommunication, information and communication industry; marine
transportation industry; manufacture industry that is the main industry in
Special Economic Zones (KEK); and/or economic infrastructure other than the
ones applying Cooperation between Government and Business Entity (KPBU) scheme.
By adding more pioneer industries
and simplifying the procedure, PMK-159 is
expected to attract more investors. However, considering that tax holiday will
generate tax loss to the country, PMK-159 has been equipped with safeguards
provision to avoid abuse of the facility such as obligation to submit
regular report, prohibition to transfer assets or ownership, collection of
related party transaction data, obligation to apply Advance Pricing Agreement,
etc. In short, PMK-159 is well designed to
anticipate the negative impact of tax holiday.
Below is the comparison between the old and the new tax holiday regulation :
PMK-130 (Old)
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PMK-159 (New)
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Criteria
·
Corporate
taxpayers that are newly established after 15th August 2010
·
The capital
investment is minimum of 1 trillion IDR
·
Taxpayers with a
minimum of 10% of the investment held as a deposit on a bank account in
Indonesia
·
Be involved in
‘pioneer industries’ namely any industries
which possessing extensive interrelatedness, providing high value
added and externalities, introducing new technology, and possessing strategic
value for national economy.
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Criteria
·
Corporate
taxpayers that are newly established on or after 15 August 2011
·
The capital
investment is minimum of 1 trillion IDR, except
for telecommunication, information, and communication industry which
introduce high technology.
·
Taxpayers with a
minimum of 10% of the investment held as a deposit on a bank account in
Indonesia
·
Be involved in
‘pioneer industries’ namely any industries
which possessing extensive interrelatedness, providing high value
added and externalities, introducing new technology, and possessing strategic
value for national economy.
·
Comply with the Debt to Equity Ratio (DER) regulation
·
In case the newly established corporation is owned directly by domestic
corporation (except for public company or state /local government owned company) or a permanent
establishment (PE), the owner should obtain tax clearance from DGT
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Tax Facilities
·
An exemption from corporate income tax (100%) for a period from 5 and up to 10 years, beginning from the first
date of commercial production
·
After the
initial ‘tax holiday’ period expires, an additional incentive of a 50%
reduction in the amount of corporate income tax payable may be made available
for an additional two year period.
·
After 7 years,
other additional years may be
granted by Minister of Finance considering the strategic value of a
certain industry and competitiveness of national industry. (unclear time
limit)
|
Tax Facilities
·
A reduction from corporate income tax (from 10% to 100%) for a period from 5
and up to 15 years, beginning from
the first date of commercial production,
·
For telecommunication, information, and communication industry that invest more than IDR 500 billion but
less than IDR 1 trillion will be granted income tax reduction maximum of 50%.
·
After 15 years,
other additional years may be
granted by Minister of Finance considering the strategic value of a
certain industry and competitiveness of national industry but maximum to 20 years
·
The amount of
tax reduction is given in equal percentage every year
·
The facilities are given to the income derived from main
activity in pioneer industry.
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Facility utilization
Eligible
taxpayers may be utilize tax holiday
provided that :
Note : commencement of commercial production
will be assessed by DGT.
|
Facility utilization
Eligible
taxpayers may be utilize tax holiday
provided that :
Note : commencement of commercial production,
suitability of investment plan, and investment realization will be assessed
by DGT.
|
Eligible industries
This list
can be extended by Minister of Finance (open list)
|
Eligible industries
(closed list)
Note :
renewable resource is under tax allowance scheme, not tax holiday anymore
|
Procedure
|
Procedure
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Safeguard
Taxpayers
granted for tax holiday are prohibited to:
·
Import or buy second-hand capital goods
·
Conduct main business that is not in accordance with
investment plan
·
Transfer assets or company ownership, except for replacement
of asset to be more productive, or transfer the ownership to other taxpayers
that already obtained tax clearance, or transfer the ownership through IPO.
·
Relocate investment to other province or overseas starting
from the utilization of tax holiday facilities until 5 years after the end of
tax holiday period
·
Change bookkeeping method to shift profit or loss from tax
holiday period to non-tax holiday period, vice versa.
·
Abuse tax holiday facility in order to avoid or evade tax
such as inappropriate transfer pricing application.
In
addition, taxpayers granted for tax holiday are obliged to:
·
Submit regular report to DGT and Verification committee
regarding fund utilization report deposited in domestic bank, audited
investment realization report, production report during tax holiday period
·
Fulfill DGT request for related party transaction data
·
Apply for Advanced Pricing Agreement (APA)
In the
event that taxpayers are entitled for tax holiday and receive other income
such as interest, royalty, rent, capital gain etc., those income will be excluded from tax holiday facility and
will be taxed accordingly.
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Reference
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Reference
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Tax
Holiday in the beginning
Tax holidays in Indonesia has been introduced for the first time in
Investment Law No 1 Year 1967. At that time, the
government intended to attract foreign direct investment which had been closed
under Soekarno administration. In 1967, income tax is governed under Income Tax
Ordinance 1925 where the corporate income tax rate is 45%. Exempting high
income tax for certain period was believed will attract FDI.
However,
statistic for FDI (figure 1) shows that there was no significant impact of tax holiday from 1978 to 1984. Indonesia, in 1984, reformed taxation from Income Tax Ordinance
to Income Tax Law. One of milestone in the reformed is corporate income tax rate is reduced
from 45% to 35%. The other milestone is
tax holiday was revoked considering that corporate income tax rate of 35% will be competitive enough to attract FDI. As shown in the Figure 1, FDI increase
dramatically after Income Tax Law entry into force.  |
source : Using Tax Incentives to Compete for Foreign Investment: Are They
Worth the cost ?, Foreign Investment Advisory Service (FIAS) Occasional Paper
No 15, 2001
|
However, in 1996, second generation of tax holiday has been introduced
through the issuance of Government Regulation (GR) 45 Year 1996. Although Income Tax Low does not accommodate
tax holiday, GR 45 tried to cover the incentive through tax borned by Government mechanism for 10 years. In
substance, tax borned by the government is similar with tax holiday. Unfortunately, this incentive is given to the
companies that have close relationship with the authority, not by criteria stated in
GR 45 since it is subject to President approval.
It was not long to be applied
because in 2000, the Parliament approved amendment of Income Tax Law No 17 Year 200o and tax incentive for new
investment only available in the form of Investment Allowance (accelerated
depreciation, lower dividend tax, longer useful life for depreciation, and
additional deduction for investment cost).
As consequence, GR-45 was revoked by GR 148 Year 2000.
Pro and contra of tax holiday
Tax holiday is
still debatable whether it is an effective scheme to attract foreign
investment. According to IMF Paper “Revenue
Mobilization in Developing Countries”, Tax
holidays are time-limited exemptions from the CIT, which may or may not be
renewable. They are widely regarded as a particularly ill-designed form of
investment incentive, and one that poses considerable dangers to the wider tax
system among others :
•
Unless offered for periods so long that
investors are likely to doubt their credibility, they are most attractive to
the most footloose firms, which are those likely to bring the least benefit to
the wider economy (such as textiles and assembly of light manufacturing goods).
• They
are open to abuse, undermining tax revenue by providing entrepreneurs with a
strong incentive to use transfer pricing and financial arrangements to shift
taxable profits into holiday enterprises: by arranging, for example, for
taxpaying companies (able to deduct the interest payments) to borrow from
holiday companies (not taxable on interest received). Such devices can operate
across national borders, and also between domestic firms. However clever the
legal provisions crafted to address this risk, experience suggests that
companies will prove adept in finding ways to avoid them. Even the most
developed tax administrations have great difficulty dealing with such abuse.
In IMF working
paper no WP/08/129, they stated
that GR 45 which provided
tax holidays to newly incorporated firms “operating in certain industries” for
up to 10 years presented serious
administrative challenges to a tax agency as they introduce the possibility for
taxpayers to transfer profits from operations that do not qualify for the
holiday to those that do.
Table below shows that Tax Holidays in GR 45 did not relate directly with the
incremental of Foreign Direct Investment.
The
experience in other countries indicates that tax holidays have small effects on
long-term investment relative to their fiscal cost. Although there is considerable evidence that
differences in international taxation affect the volume, location, and
character of FDI in developed economies the evidence on tax holidays in
emerging markets is more negative. (IMF Working Paper
No WP/08/207) . In the paper
also stated that are most attractive for footloose industries that tend to exit the country at the
end of the holiday period. These industries are likely to bring the smallest
benefit to the overall economy. Instead, firms investing in long-lived assets whose
revenues may not fully recover costs during the period of the holiday, benefit least
from tax holidays.
New Investment Law
In 2007, there is
a new Investment Law No 25 Year 2007 that revoke Investment Law No 1/1967. The tax holiday provision still exist and
rewrite. Considering the push from the parties
who support for tax holiday, the government issued GR 94 Year 2010 as
the implementing regulation of 4th amendment of Income Tax Law. Although tax holiday is not accommodate in
the 4th amendment of Income Tax Law, GR 94 provides space for tax
holiday referred to Investment Law 25/2007 as the basis.
Safeguards
Realizing the
negative impact on tax holiday for tax revenue, tax authority actually resist
to adopt tax holiday again. However, because the government already issued GR 94,
tax authority has to find ways to mitigate the impact.
In 2011, when MoF
issued PMK-130, there is a safeguard for tax holiday implementation by
requiring a tax sparing in the home country. Tax sparing will guarantee that
income exempted in Indonesia will not be taxed in the home country otherwise
the home country will enjoy benefit from
tax on income derived from Indonesia which has been exempted.
Unfortunately, the
effectiveness of tax sparing is debatable similar with tax
holidays. In tax treaty signed by
Indonesia, not all tax treaty accommodate tax sparing provision. For
example, Tax treaty Indonesia-Japan
provides tax sparing provision while Tax treaty Indonesia-China is silent. The absence of tax sparing provision will restrict investor from China, one of the biggest investor in Indonesia, to obtain tax holiday as one of requirement in PMK-130.
In 2015, the new
tax holiday (PMK-159) adds more industries that eligible for tax holiday to
make it more attractive. In other hand, tax sparing as the safeguard is changed
to a set of safeguard such as obligation
to submit regular report, prohibition to transfer assets or ownership,
collection of related party transaction data, obligation to apply Advance
Pricing Agreement, etc.
Hopefully the new
tax holiday regulation will achieve its mission to attract more investors and to be successful in minimizing the negative
impact of tax holiday.
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