Thin Capitalization Rules Indonesia
The ratio of Debt and Equity Provisions for Income Tax Calculation, PMK 169 2015
The Indonesian Government on September 9, 2015 has issued special provisions that regulate the ratio of debt and capital for the calculation of income tax for corporate taxpayers through the Ministry of Finance Regulation No. 169 / PMK.010 / 2015 (“MOF Regulation 169/2015” or “PMK 169”). The PMK is derived from the Income Tax Law (amendment 2008) Article 18, paragraph 1, which states that the finance minister is authorized to issue a decision regarding the the ratio of debt and equity of the company for tax purposes. The provision of capital to debt ratio and the calculation of the tax will be come into force in 2016.
Subject of Thin Capitalization Rules Indonesia / PMK 169 2015
Subject of PMK 169 2015 is the taxpayer whose capital consists of shares that are incorporated in Indonesia or domiciled in Indonesia. With these criteria, then Permanent Establishment (“PE”), CV, Partnership, Firm, and other forms of business entities is not regulated in terms of its ratio of debt and capital. There are several types of business entities are excluded, which is banking and financial service institutions, also corporate taxpayers in oil and gas sector which has had special agreement such as profit-sharing, Kontrak Karya, therein have been specifying the provision concerning the ratio of debt and capital, businesses in the area infrastructure; and the taxpayer which has the all income subject to final tax
Ratio of debt and equity
PMK 169 2015 determining the ratio of debt and capital (equity) which are allowed for income tax calculation is equal to 4: 1 (debt: equity). In the case, tax payer exceed this ratio, the amount of borrowing costs (interest costs and other expenses, unless arising from changes in principal amount) is required to be adjusted in accordance with the provisions of PMK 169 2015. In the situation where the equity is zero or negative, PMK 169 2015 not allow all borrowing costs in income tax calculations.
For loans from abroad, the taxpayer is required to report the amount of the loan to the Director General of Taxation. In the event that the taxpayer does not report the borrowing costs can not be calculated.
Corporate taxpayers need to examine its financing structure, review with the provisions of 4: 1 ratio. Tax payer may need to increase the amount of share capital, or retain existing, and look at alternative financing composition and the structure of the group entities for anticipated losses in taxes (in terms of borrowing costs is not recognized as operating expenses). For taxpayers who have loans from overseas should ensure it is reported to the tax office to be able to use interest cost as deductible expense.
- The provision that borrowing costs are not recognized on condition of equity is zero or less than zero (negative), it’s show lack of support to the business on the situation of genuine business loss. It is necessary to formulate more precise tax regulations regarding the condition of negative equity to determine if the loss is genuine or not. If the loss is genuine, the cost of borrowing must be taken into account. It is common when business suffering loss, the opportunity to obtain an injection of share capital is more difficult than loan with interest financing.
- Regarding the acceptable cost of debt from affiliated transaction that has not been specifically defined in this provision, it is necessary to establish the rules to measure the arm’s lenght cost of borrowing, thus providing legal certainty and businesses in the future related to the loan transaction. A soecific safe harbour rules, may be relevant and in short term may reduce the risk and cost to comply.
- The existence of an example of calculating the cost of borrowing attached to the PMK 169 2015 give a better ilusration for the application of the regulation and its relationship with other tax provisions that regulate the amount of borrowing costs that is allowed for corporate income tax.
- For the reporting obligations of foreign loans, tax authority in further, should publish the guidance regarding the form of a report to the taxpayer and also the existence of this reporting to the services section of the DGT and all account representatives, to establish a legal certainty for the taxpayer.