Indonesia’s Proposed Corporate Income Tax Reduction to Lure in Investors
The Indonesian government is taking steps to remedy the unfavourable economic downturn plaguing the nation since the post-election period in the final quarter of last year with plans to reduce the corporate tax rate. The proposition comes not long after the nation agreed to revise the luxury goods tax regulation in an effort to stimulate domestic consumption. The rate cut is a short term solution that businesses will welcome and will ultimately see the government sacrificing fulfilling its annual tax collection targets for the year. Efforts to counterbalance the potential losses in tax collection include the introduction of an online tax filing system which started in February to encourage companies to become more tax compliant.
Reeling in Investors
In an attempt to win over more investors, the Ministry of Finance announced plans to reduce the corporate income tax rate from 25% to 17.5%; a figure nearing that of Singapore. Indonesia’s corporate income tax is slightly higher than its regional neighbours which can deter investors and often leads to the establishment of holding companies based out of Singapore thereby subjecting dividends to a more preferable taxation rate. Indonesia’s corporate income tax rate has been a particularly decisive factor for investors in the manufacturing sector where Indonesia faces stiff competition from markets such as Thailand and Vietnam. Key advisor to the President, Mr Luhut Panjaitan, has pledged to investors that the proposed plan will go through this year though there is no confirmation on the set time period.
Current Corporate Tax Rates in the ASEAN, 2015
Source: Deloitte Corporate Tax Rates 2015
Finance Minister Mr Bambang Brodjonegoro has admitted that the policy will not guarantee increased state tax revenue, however, it may reduce transfer pricing which according to the Director General of Tax, Mr Sigit Pramudito, results in an estimated loss of 200 trillion IDR to the state coffers due to non-compliant companies.
Modernising Tax Reports
Tax revenue as of end April this year (2015) accounted for a disappointing 24% of the annual target at 310.1 trillion IDR (approximately $23.8 billion USD), and the proposition may potentially further hurt short-term tax collection. As a measure to counter the losses, the government introduced an online tax filing system operating as ‘OnlinePajak’, administered by the State Tax Office since 18th February 2015. Investors should find the recently launched online tax report system as a boon as it turns the commonly lengthy and tangled bureaucratic procedure into a three-step process.
Exception to the Rule
Indonesia’s 99.9% of small and medium enterprises (SMEs) will not be affected by the reduced corporate tax rate in due part to the former administration’s decision to exempt the country’s smaller business entities from the policy. In 2013, President Yudhoyono’s cabinet passed Government Regulation No. 46 Year 2013 (PP 46) alleviating SMEs of corporate taxation by applying a 1% monthly tax rate on gross revenue aimed to encourage more SMEs to formally register themselves and undertake their taxation responsibilities. Those SMEs must earn a gross annual income below 4.8 billion IDR to be excluded from the standard corporate taxation benchmark.
Staying Above Ground
Indonesia’s ambitious annual state tax revenue goal was announced during a more favourable economic environment, now the government has rightly changed track to ease strain on businesses and to lure new investment. Therefore, while President Joko Widodo’s plans to enhance fiscal discipline in the country are admirable, unfortunately they are ill-timed; for now at least. The government needs to maintain focus on boosting growth through enhancing Indonesia’s competitiveness for which a preferable corporate income tax rate is an important tool. Simplifying tax filing procedures through an online system as well as the tax amnesty to enable those with funds outside of Indonesia to repatriate them without being penalised should ideally contribute to a more fiscal friendly environment for current and future investors alike.