The government finally trimmed the corporate tax rate. The Corporate Income Tax (CIT) is gradually lowered from 25% to 22% in 2020-2021 and becoming 20% starting from 2022. Moreover, there is an additional discount of 3% cheaper than such rate for business entities that release at least 40% of their shares to the public.
Through Government Regulation in Lieu of Law (Peraturan Pemerintah Pengganti Undang-Undang/Perppu) Number 1 of 2020, the government accelerates one year earlier than the initial plan, either because they are impatient in facing the long process of controversy over the discussion of Omnibus Law in parliament or not strong enough to face the protest of "business ambassadors" at the Presidential Palace, who always worship capital. One thing is certain, copy-pasting one clause in the Law Draft (Rancangan Undang- Undang/RUU) on Taxation Provisions and Facilities is like an oasis in a desert for business people in the midst of business struggle due to corona outbreaks (Covid-19).
Race to the Bottom
The CIT rate reduction is interesting to be discussed amid the strengthening of the taxation competition in the world. Recently, many countries have been competing to reduce their tax rates (race to the bottom). It's all about the real competitiveness. It is the limited resources and production capacity in the country that—inevitably—forces each country to find a strategy in attracting as much foreign capital as possible. Besides development and economic funding factors, direct investment is needed by each country to gain other benefits, such as transfer of technology, job creation and skilled human resources, industrial raw materials, and of course capital. Indonesia is one of the countries competing in the global political-economic arena.
However, is the low tax rate the only reason for investors to invest in Indonesia? What about the consequences that possibly arise concerning the state revenue, both in the short, medium and long term?
As far as the author concerned, without being cut, Indonesian corporate tax rate is still rational at 25% and quite competitive in the ASEAN region. The Indonesia's CIT rate is equal to those imposed by Myanmar (25%) and even better than the Philippines (30%). However, the corporate tax rate in Indonesia is indeed higher compared to Malaysia (24%), Laos (24%), Thailand (20%), Cambodia (20%), Brunei Darussalam (18.5%), Vietnam (20%), and Singapore (17%).
Likewise when compared to the G20 countries, Indonesia's CIT rate is the same as those imposed by China (25%) and only higher than the UK (19%), Turkey and Russia (20%), and the average European Union (EU) rates (22, 5%) and South Korea (24.2%). Indonesia's CIT rate is nothing compared to those applied by the United States (38.9%), France (44.4%), and especially India (48%).
Even if low tax rates can attract investors, Indonesia has been very generous in providing fiscal incentives. Starting from the tax allowance to the tax holiday has been provided by the government to boost investment. To what extend Indonesia's CIT tax rate should be trimmed further?
Should we follow Vietnam who dares to give massive tax discounts? Normally, the CIT rate in Vietnam is only 20%, lower than in Indonesia. Even so, investors can get another rate cut through a special relaxation policy of 17% if it operates in lagging regions or even 10% if investors are willing to open businesses in a very-lagging regions.
We should check out Thailand too. In order to attract investors, the country cut corporate tax rate to 23% in 2012 from 30%. As a result, the tax ratio immediately dropped to 16.5% from 17.6% in 2011. It is a short-term risk that Indonesia must also consider. As Indonesia is currently focusing on increasing the national tax ratio.
Not Only Rates
Speaking of competition for capital, economic competitiveness is indeed becoming the main key for a country to be the winner. The cheap tax rate could possibly be one of the ammunitions. Nevertheless, it is not the only variable that investors consider in investing. Investing is not gambling. The stakes are not merely capital. Many things are taken into account by investors before determining suitable land to be able to invest continuously.
Based on the results of the World Bank survey to 754 international company respondents regarding investor factors in choosing investment locations — in their report titled Global Investment Competitiveness Report 2017/2018 — it shows that 19% of respondents stated that low tax rates were very important and 39% mentioned it was important.
Foreign investors will definitely consider the amount of the Effective Marginal Tax Rate (EMTR) as well as the tax incentives offered by a country.
However, cheap taxes are not the main issues. The major concern of investors is political and security stability, as well as legal and regulatory certainty. Again, the bureaucratic flow that is too long became a problem.
The author considers it would be better if the government improved Indonesia's taxation system first because from 11,436 tax dispute cases that ended in the Tax Court in 2018, as many as 7,813 cases were involving the Directorate General of Taxes (DGT). The number of tax dispute increased by 40.6% compared to those in 2017 of 5,553 cases. This indicates that the taxation system in Indonesia is not secure enough for investors because they are always haunted by disputes with the tax authorities. In addition, compliance in fulfilling tax obligations (compliance cost) will eventually become the element that must be considered by business people. Taxation system in Indonesia, especially in the tax law order is much more important than reducing the CIT rate. The improvement of taxation system in Indonesia, especially in the tax law system is much more important than reducing CIT rate.
Finally, the reduction in the CIT rate will not succeed in stimulating foreign investment when the administrative process of fulfilling tax obligations and settling tax disputes remains an issue. Apart from that, is it ethical to impose investment interests in the midst of a pandemic? From the author’s standpoint, investors will definitely think twice or even thrice before investing in this country, at least amid the threat of economic recession.
*) This article is the 2nd Winner of MUC Consulting Writing Contest 2019, which has been through the process of editing and updating data.