Office Business is Choked by the Covid-19 Pandemic. This title—according to the content of the news in Bisnis Indonesia—at least describes the current condition of the property rental businesses. Office buildings are deserted, left by tenants trying to keep their distance and employees having to work from home. Meanwhile, the ones surviving request for negotiation on lease rates.
The entire office performance matrix in Jakarta was reported negative, following stalled rental activities. The hotel business was even worse, pushing the management to figure out how to maintain occupancy during the pandemic. In fact, several state-owned hotels were forced to change their concept into inpatient installations for Covid-19 patients.
This phenomenon is not only happening in Indonesia but also in many countries. In the United States, property company D. Alexander offers "Destination Isolation" deals for families needing luxury housing for self-quarantine. This is not a social service, because the motive is purely the commercialization of idle assets. Quoting Forbes, the property company based in Florida (United States) is changing its target market to Covid-19 patients looking for convenient isolation places. Such a breakthrough amid the collapse of the residential business due to the recession and pandemic.
If you look at the calendar, at least it has been almost nine months since Covid-19 broke out in Indonesia. During that time, Large-Scale Social Restrictions (PSBB) were also implemented in some areas, especially in the capital.
Various economic stimulus policies have also been provided and continue to be pursued by the government. The main priority is tax incentives that cover almost all levels of society and business lines.
However, there will always be something that feels lacking when we talk about policy. For example, the tax support for property industry players, especially the space rental business. One thing is almost missed, namely that related to the plan of the Directorate General of Taxes (DGT) to evaluate the final Income Tax policy on land and building leases. In the 2019 DGT Performance Report, a review of the imposition of final Income Tax on land and building leases is deemed necessary. This is because its implementation is susceptible to multiple interpretations. Therefore, evaluation is needed in order to create a tax climate with legal certainty.
The issue, in its development, became one of the focuses of the 2020 taxation technical policy which was then discussed as a plan to reduce the final Income Tax rate on land and building leases.
Beforehand, we need to review the current final Income Tax rate policy on land and building leases. As stipulated in Government Regulation Number 34 of 2017, final Income Tax is imposed on income from renting land and/or buildings in the form of land, houses, flats, apartments, condominiums, office buildings, home-office, shops, house-shop, warehouses, and industry. As for the final Income Tax rate set is at 10% of gross income.
So, what is the ideal rate of final Income Tax on land and building leases? Using a simple calculation, when the final Income Tax rate of 10% was applied, the government had indirectly set the average net profit margin or ratio of net profit to income from the land and building lease business at 33% per year. The figure can be seen in the determination of the final Income Tax rate of 10% on land and building leases, while the Corporate Income Tax rate was still 30%.
Through Law No. 2 of 2020, the Corporate Income Tax rate has been cut to 22% for 2020 and 2021, then reduced again to 20% starting in 2022. When using the same assumption (net profit 33%), the final Income Tax rate on land and building leases drops to about 7% (=22% x 33%) starting in 2020 and down again to about 6% (=20% x 33%) starting in 2022.
Difficult in Every Way
The calculations above are the assumption under normal conditions. It will be different from the current abnormal condition. What else if it was not for the Covid-19 pandemic whose impact was truly devastating. If it is measured with numbers, the growth in the number of positive cases, and people who died because of Covid-19 is inversely proportional to the economic recession occurring.
In the context of evaluating the final Income Tax rate on land and building leases, perhaps the data on the level of office space occupancy should also be one of the suitable indicators to describe the rental property business condition.
Based on Cushman and Wakefield Indonesia research report, no space rental transaction in almost all office buildings in Jakarta took place since the beginning of the Covid-19 period, especially in April and May 2020. The global property consultant noted that, until the end of June 2020, the Jakarta Central Business District (CBD) office occupancy rate of all grades decreased to 74.2%.
An international property consultant Colliers International also revealed a downward trend in office space occupancy rates in the CBD in many major cities in Indonesia. Based on their research, the occupancy rate for office space in the CBD area during the first half of this year fell by 1.4% to 82.3%.
The decline is predicted to continue in the second half of 2020, with an estimated minus 2% by the end of the year. Even by 2021, the occupancy rate of office space in the CBD is expected to fall to 78.3%, which is the lowest level in 20 years or since the Asian financial crisis in 1999.
Seeing that the supply of office space is still very large and has not been absorbed by the market, perhaps delaying expansion until economic conditions are improved is a wise step for space leasing business actors. Therefore, more support is needed from the government to enable them to survive the pressures of economic crisis and pandemic, which no one knows when will end.
With the current difficult conditions, it may not be fair if the assumption of 33% net profit is still used as the basis for determining a new final Income Tax rate on land and building leases. Certainly, the potential profits that will be received by rental property entrepreneurs drop dramatically in line with the decline in demand. Therefore, ideally, the final Income Tax rate is trimmed from 10% to lower than 6%.
The question then, when should the final Income Tax rate cut be done?
Seeing the economic and social conditions that are far from normal, now may be a perfect time for the government to reduce the final Income Tax rate, especially on land and building leases. As promised by the DGT, a policy evaluation must indeed be carried out in 2020, which only about a month left.
In other words, the current momentum is not only right, but it indeed demands the government to implement extraordinary policies quickly, precisely, and accurately.
The last three words are not only for cutting the final Income Tax rate but also mandatory for all policies. Especially during a recession, pandemic, and boisterous public rejection of the discussion and ratification of the Job Creation Law that seemed to be hasty and less transparent.
**) A short version of this article was published in Bisnis Indonesia on 7 November 2020