ANNOUNCEMENT 06 Apr 2015In April 2015, the government of Indonesia announced a targeted tax change.
NUMBER OF INTERVENTIONS
Regulation PP 18/2015 (in Bahasa Indonesia):
Initial 2007 regulation (in English):
Last 2011 amendment (in Bahasa Indonesia):
Media report on update:
On 6 April 2015, the Indonesian government announced regulation PP 18/2015 extending the accessibility of investment-related tax incentives. The regulation came into effect on 6 May 2015.
Motivation & form of the tax incentive
Article 3 of the government regulation 18/2015 describes the motivation underlying this incentive as "taxpayers conducting investment (...) will be awarded income tax facilities as long as they meet the following criteria:
The tax incentive allows participating companies to subtract a share of their total investment expenditure from their taxable income for a period of up to 10 years. The annual reduction is equal to 5 percent of the company's total investment in the given year. Participating companies may invoke this reduction annually for a period of six years. Under certain conditions, this period may be extended to up to 10 years.
Furthermore, participating companies receive accelerated amortization and depreciation as well as more generous loss compensation allowances to reduce their taxable income.
Finally, participating companies need only pay a reduced income tax on dividends paid to foreign stockholders.
Loosened participation criteria
The amendment of 6 April 2015 removes material participation conditions such as a minimum investment value of about 100 million USD and an investment completion rate of 80% for already established companies.
The only remaining eligibility criterion is that the investment is conducted in one of the listed "sectors of national importance" or a designated region. This represents a loosening of the criteria listed in the previous 2007 regulation as amended in 2011 (cf. Related Measures).
Additional possibilities for an extended duration of the tax incentive
The amendment of 6 April 2015 also provides additional tax incentives for the reinvestment of corporate profits in Indonesia. Companies exporting at least 30% of their produce will obtain an extension of the income tax reduction for two more years. This concept of offering tax reductions for export-oriented companies was not mentioned in previous provisions.
Furthermore, companies may now obtain another 2 years of income tax reduction if they hire at least 1000 Indonesian employees for five consecutive years. In the previous provisions, companies were only eligible for a single additional year if they hired more than 500 local workers over five straight years.
Finally, the one-year extension in the case where R&D costs represented at least 5% of the total investment costs was now stretched to 2 years.
Amended list of eligible sectors
The final novelty introduced on 6 April 2015 concerns the list of eligible sectors. In the new list of sectors eligible for the scheme, the following sectors were added: inorganic chlor and alkali, computer assembly, car industry, catfish, surimi, liquid milk, sago palm flour, steel rolling rattan and bamboo furniture.
Meanwhile, the construction of public roads was scrapped from the list.
On 14 August 2015, the Indonesian Finance Ministry published regulation 159/PMK.010/2015 extending the period of the investment-related income tax exemption from 10 to 15 years, with a potential extension for another 5 years (cf. Related Measures).
On 21 September 2015, according to media reports, two palm oil and one dairy company received tax allowances for up to 15 years for investments planned in the Riau province and Jakarta, respectively.
On 22 April 2016, the government published regulation 9/2016 expanding the list of sectors eligible for the programme (cf. Related Measures).
On 12 January 2018, the Ministry of Industry published regulation 1/2018 (cf. Related State Acts) largely updating the sector-specific eligibility for the income tax reduction. Hence, this intervention is no longer classified as in force.
The GTA includes state guarantees and other financial incentives that are likely to affect the restructuring and performance of firms facing international competition, whether from imports, in export markets, and from foreign subsidiaries.
The amendment of 6 April 2015 also introduces an exemption on the income tax payable on dividends to foreign stockholders. On the condition that foreign stockholders re-invest their dividend earnings in Indonesia, the relevant income tax is reduced from 10 percent to zero.