Taxation Regulations in Indonesia that Attract and Burden Investors

Taxation Facilities

Indonesia has projected an economic growth rate of around 6% -7% per annum. To achieve this, it is necessary to have an investment environment that can attract both domestic and foreign investors. Is the taxation legislation in Indonesia capable of improving the investment climate?

Taxation Regulations that Attract Investment

Reduction of income tax rates for corporate taxpayers

The fourth amendment to the Income Tax Law which took effect in 2009 has reduced the income tax rates for corporate taxpayers, which previously was subject to progressive rates with the highest rate of 30% to the current proportional rate of 28%. Based on Paragraph 2a of Article 17 of the Income Tax Law, starting fiscal year 2010 this will be further reduced to 25%.
 

Taxation Facilities

Since the third amendment to the Income Tax Law in 2000, the Income Tax Law has provided tax incentives for investors that are domestic corporate taxpayers and to cooperatives that invest in certain businesses, and/or in certain areas (high priority on the national scale).
 
Certain business investments include 15 industrial sectors such as the food industry, textile industry, pulp, chemicals and pharmaceuticals, electrical industry, metal machinery, transportation equipment, shipbuilding, use of renewable energy resources, and others.

In addition, the facility is being given to investments in certain business sectors which are conducted in certain areas outside of the Java island, namely in Sulawesi (East Indonesia) such as in agribusiness industry, food industry, sugar industry, and particularly in the cement industry in Aceh.

The facilities being provided include:

• Depreciation of tangible assets and accelerated depreciation
• Compensation of loss (loss carry over) for a longer period: 6 years and maximum of 10 years;
• Reduction of net income amounting to 5% of the total investment for a period of six years;
• Imposition of tax on dividends received by a foreign taxpayer at the rate of 10% or lower in accordance with the tax treaty.
• Direct exemption from article 22 income tax on the import of machinery and equipment (excluding spare parts) without the need for Certificate of Exemption from Article 22 Income Tax.
• Exemption from VAT on the import of strategic goods such as machinery and equipment that are used directly to produce the goods.

The compensation for losses of more than five years as stated above is given as follows:

• Additional one year if the capital investment is made in the bonded zone or in a  particular industrial area;
• Additional one year if employing Indonesian manpower of at least 500 people for five consecutive years;
• Additional one year if making new capital investment on the economic infrastructure and social development in the area amounting to at least        IDR 10,000,000,000.00
• Additional year if conducting research and product development and production efficiency in Indonesia for five consecutive years.
• Additional one year if using the components of domestic production of at least 70% from the fourth year.

Taxation Regulations that Detract Investment

Investment is badly needed by the Indonesian government in order to boost economic growth. Basically, aside from raising revenue for government expenditure, taxation also has the social economic function of improving the redistribution of income in the society. However, the function of taxation in Indonesia is more emphasized on increasing government revenue. Thus, the investors need to fully understand the taxation policies that are counterproductive with the current taxation facilities. Some conditions that detract investments are as follows:

Taxation System

The taxation in Indonesia is based on self-assessment system. In fact, the tax administration closely supervises the daily activities of the taxpayers. Through a desk audit, the taxpayer will be asked every time to explain the transactions performed. If the tax administration views the transaction not to be in accordance with the provisions of the tax laws, the tax administration will immediately make an arbitrary assessment accompanied by the imposition of tax administrative sanctions.
 
Tax Regulation

The taxation regulations in Indonesia are quite complicated. Aside from being stipulated in the laws, these are also regulated in Government Regulation, Minister of Finance Regulation and Director General of Taxes Regulation. Oftentimes, the regulations are retroactively effective starting from the previous year, which would naturally confuse taxpayers as they have to make changes to their financial statements.
      
Another problem with the taxation regulations is that if there is a difference in the interpretation of the tax regulations between the taxpayers and the tax administration, it is the opinion of the tax administration that will prevail. Administrative interpretations often expand the meaning of the taxation provisions (this is not common in other countries).

Objection to the assessment results

Arbitrary assessments lead to an increase in the number of appeals. Generally, an objection against the assessment result will be rejected by the taxation administration, which would make the taxpayer file an appeal to the tax court. The taxpayers feel that such a situation is very inefficient because it increases the cost and is too time consuming.

Promotion Costs

Typically, the tax payable is calculated by multiplying the tax rate with the taxable income. Taxable income is derived by subtracting the allowable deductible expenses such as sales promotion expenses from the gross income. In Indonesia, the promotion expenses that can be deducted from the gross income are set out in a Minister of Finance regulation. One of the conditions is that the taxpayer must prepare the record of expenditure and revenue in details, which can then be a burden for the taxpayer.

Tax Rate based on the Tax Treaty

One of the government’s effort to alleviate the tax burden for investors is to make the agreements for the avoidance of double taxation with the tax authorities in other countries. In practice, foreign taxpayers that receive or derive income from Indonesia (beneficial owner) must meet the administrative requirements which are quite cumbersome in order to be able to enjoy the tax rates set out in the tax treaty.  For example, the Certificate of Domicile must use the form prescribed by the Directorate General of Taxation, which also has a limited time validity. If these requirements are not met, the foreign taxpayer will be charged the maximum tax rate of 20%.

The Implementation of the Value Added Tax Law Amendment as of
April 1, 2010

Export Services

The Value Added Tax is a tax levied on the consumption of domestic goods and services (in the customs area). Its consequence on the overseas export of goods or services is to be subject to tax at the rate of 0%. The 0% tariff is intended to facilitate the mechanism of reduction of output tax from input tax in the VAT system.

Prior to April 1, 2010, only the export of goods is subject to 0% tax rate. Taxpayers who export services cannot obtain a refund of the input tax paid. The amendment to the VAT Law has expanded the imposition of tax object by specifying that the export of intangible goods or export of services overseas is subject to tax at the rate of 0% (Article 7 of the VAT Law). The expansion of tax object on the said exports is made so that the implementation of VAT is consistent with its principles and mechanisms.

Apparently, under Minister of Finance Regulation No. 70/PMK.03/2010, not all exports of services are subject to 0%. The 0% rate on the export of services is limited to three types of service exports, namely:
a. the delivery of services on the orders of goods of which all the specifications and materials are from the buyer, and the results of which are sent to foreign countries;
b. services that are attached to movable goods which are used outside the customs area;
c. services attached to immovable goods which are used outside of the country.

Thus, taxpayers (investors) whose activity is rendering of services aside of the abovementioned three types of services, such as providing consulting services to overseas clients, will be subject to tax amounting to 10%. This charging of tax is contrary to the principle of the imposition of VAT (destination principle). The consequence is that if the overseas consumers are not willing to pay the VAT, it will be the resident taxpayer who must pay.

Repayment of input tax that has already been refunded if the taxpayer fails to produce

During the initial period of business building (e.g. factories), the investors can still credit the input tax and can ask the tax office for a refund of all the input tax that had been paid. However, if within three years and the company is not yet productive, the tax that had been refunded must be repaid.

Taxand’s Take

Indonesia does require investors, both domestic and foreign.  However, based on experience, investment and taxation policies in the country often do not support investors. Investors planning to start a business in Indonesia need to understand first of all that the areas provided tax facilities are those areas where infrastructure are inadequate as the government wants the private companies to help build and develop the concerned region. The second complication of the taxation laws is that there are often changes in the tax collection policies. The third is that the local government authorities have the authority to collect local taxes which are often equal to the tax base of the central government. Fourth, the economic development policies of the local government are sometimes not in line with the central government.  Thus, it is necessary for investors to obtain detailed information about the investment policies from the National Investment Coordinating Board (BKPM), as well as to be cognizant of the implementation of the tax regulations in Indonesia.

 
Jakarta, 10 May 2010.
PB Taxand