Dilemma over Tax as Funding Source and Investment Stimulus

Wednesday, 07 March 2018

Dilemma over Tax as Funding Source and Investment Stimulus

Recently, President of Republic of Indonesia Joko Widodo was disappointed with the performance of Indonesia’s investment. Even though the gross fixed capital formation grew by 13% in 2017, surpassing the target of investment growth of 11% and the previous year’s realization of 12.4%, this accomplishment could not satisfy him.

It is because the performance of Indonesia’s investment was considerably much lower than that of peer countries in Asia, among others, India’s investment that increases by 30%, the Philippines’ by 38%, and even Malaysia’s by 51%.

Complicated licensing and regulation overlapping were considered by Jokowi still becoming obstacles to set up investment in Indonesia. 


Shortly afterwards, Minister of Finance Sri Mulyani Indrawati questioned the effectiveness of the implementation of tax allowance and tax holiday policies. Instead of attracting new investment, in reality, the level of participation is low, even during 2017, there was no new investor utilizing it.

The legal base of the tax facility provision by government is stipulated in Article 31A of Law Number 36 Year 2008 on Income Tax, which was elaborated through the implementing rules in the form of Government Regulation Number 9 Year 2016 on the Amendment to Government Regulation Number 18 Year 2015 on Income Tax Facility for Capital Investment in Specific Business Fields and or in Specific Regions.

Tax allowance is an incentive of tax relief technically stated in MoF Regulation Number 89/PMK.010/2015 on the Procedures of Provision of Income Tax Facility for Capital Investment in Specific Business Fields and/or in Specific Regions as well as Transfer of Asset and Sanction for Resident Corporate Taxpayer Given the Income Tax Facility.

The tax relief offered includes; (1) net income deduction of 30% from total capital investment for 6 (six) years or 5% per annum; (2) accelerated depreciation upon tangible and intangible assets; (3) Income Tax imposition on dividend paid to Non-resident Taxpayer other than Permanent Establishment (PE) in Indonesia of 10% or lower rate based on the prevailing Double Tax Avoidance Agreement; (4) loss compensation that is more than 5 (five) years but no more than 10 (ten) years. 

However, not all entrepreneurs can obtain the tax allowance facility. The facility provision is limited only to the investment with specific criteria in 145 business segments that are the focus of national industrial development. Meanwhile, the requirements of tax allowance recipient candidate are having: high investment value, high level of workforce absorption, as well as local content level of more than 20%.

In terms of tax holiday, it is regulated further in MoF Regulation Number 103/PMK.010/2016 on the Amendment to MoF Regulation Number 159/PMK.010/2015 on the Provision of Corporate Income Tax Deduction Facility. In the policy, the government is given the discretion to provide Income Tax deduction facility of 10% at minimum to 100% at maximum for new investment in specific business fields and for certain periods. The MoF Regulation affirms that the tax holiday facility may be granted for the period of 5 (five) to 15 (fifteen) years and can be extended to 20 years for the project deemed strategic for Indonesia’s economy or to 25 years at maximum particularly in Special Economic Zone (SEZ). 

The criteria and requirements that shall be met by the investor candidates for obtaining tax holiday are stricter than those for tax allowance. First, only investor candidates having status as new TaxGuide 9 Taxpayers and are the pioneer industry subjects in 9 (nine) priority business sectors may apply for tax holiday. They shall also have investment plan amounting to IDR1 trillion at minimum and fulfill Debt to Equity Ratio (DER) provision of 4:1. In addition, the investor candidates shall have legal entity status (ratification since/after 15 August 2011) and make statement of fund allocation in Indonesian banking of 10% at minimum from the investment plan. 

The 9 (nine) priority business fields being the targets of tax holiday comprise: base metal industry, oil refinery industry, industry of organic basic chemical from oil and gas, machinery industry, telecommunication equipment industry, agricultural product manufacturing industry, maritime industry, manufacturing industry in SEZ, and economic infrastructural project other than Public Private Partnershi

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