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Be Prepared: Tax Regulations that Attract and Burden Investors
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 tax legislation in Indonesia capable of improving the investment climate? Taxand Indonesia reviews the regulations which both attract and burden investors and identify what businesses should be thinking about to maximise investments.
- Reduction of Income Tax Rates for Corporate Taxpayers
- Introduction of Tax Incentives
- Benefits of the Tax Incentives
- Compensation of Losses Over More Than Five Years
- The Tax System and Tax Regulation
- Promotion Costs
- Tax Rates based on the Tax Treaty
- Implementation of the VAT as of 1 April 2010
Indonesia does require investors, both domestic and foreign. However, investment and tax policies don't always support the investor. Investors therefore need to be prepared to take advantage of what is on offer, but also start to plan ahead to minimise potential impacts on invesments. Investors planning to start a business in Indonesia need to understand:
1. Indonesian tax facilities are designed to help develop inadequate infrastructure; the government wants private companies to help them build and develop the region
2. frequency of changes in the tax collection policies
3. local government authorities have the authority to collect local taxes which are often equal to the tax base of the central government
4. local government economic development policies are not always in line with central government
It is necessary for investors to obtain detailed information about investment policies from the National Investment Coordinating Board (BKPM) and to be cognisant of the implementation of tax regulations in Indonesia.
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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%. Starting fiscal year 2010 this will be further reduced to 25%.
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.
- 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
- 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
Investment is badly needed by the Indonesian government in order to boost economic growth. Aside from raising revenue for government expenditure, tax also has the social economic function of improving the redistribution of income in the society. However, the function of tax in Indonesia is more emphasised on increasing government revenue. Thus, investors need to fully understand the tax policies that are counterproductive with the current tax facilities. Some conditions that detract investments are as follows:
The Tax System and Tax Regulation
The tax 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.
The tax 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. Often 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 tax regulations is 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 tax provisions (this is not common in other countries).
Arbitrary assessments lead to an increase in the number of appeals. Generally, an objection against the assessment result will be rejected by the tax 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 costs and is too time consuming.
Typically, tax 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 the Minister of Finance regulation. One of the conditions is that the taxpayer must prepare the record of expenditure and revenue in detail, which can then be a burden for the taxpayer.
Tax Rates based on the Tax Treaty
One of the government's efforts to alleviate the tax burden for investors is to develop avoidance of double taxation agreements with 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, 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 Tax, which is only valid for a limited time. If these requirements are not met, the foreign taxpayer will be charged the maximum tax rate of 20%.
Value Added Tax is a tax levied on the consumption of domestic goods and services. Consequently the overseas export of goods or services is 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 1 April 2010, only exported goods were subject to 0% tax rate. Taxpayers who exported services cannot obtain a refund to the input tax paid. The VAT Law Amendment 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%. The expansion of the tax object on exports has been made to ensure consistency in the implementation of VAT according to its principles and mechanisms.
However it's thought, under Minister of Finance Regulation, 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
Taxpayers (investors) whose activity is rendering of services aside from 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 imposition of VAT principle (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 businesses constructing buildings (e.g. factories), the investors can still credit the input tax and can ask the tax office for a refund on all 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.