Government of Republic of Indonesia (“GoI”) has released Minister of Finance Regulation No.35 2018 (“MoF-R35/2018”) regarding facility of Corporate Income Tax (“CIT”) reduction (“Facility”). The amendment of tax holiday facility provision is intended to increase the direct investment to push Indonesian economic growth.
Under this regulation, a company incorporated in Indonesia in a Pioneer Industry may obtain a tax reduction facility of 100% from CIT payable (or exempted from CIT payable) and 50% from CIT payable with the following details:
This MoF contains the provisions from the initial stages of the terms and processes of providing CIT payable reduction Facility, quotation and mechanism for determining the grant of Facility date, reporting, controlling, and obligation for Taxpayer until stipulated conditions that may cause revocation of Facility.
Requirements for Taxpayer to apply for Facility
An Indonesia legal entity, in a Pioneer Industry, has a new investment plan value IDR 500.000.000.000,00 (five hundred billion Rupiah), comply with the provision regarding debt to equity ratio, and not yet received a decision on granting or rejecting the reduction of income tax by the Minister of Finance. There is no provision of any restriction on this facility specifically to a newly established entity or for a entity which incorporated in certain year.
The Tax Facility application will be assessed by
The determination of the final decision and requirements for the reduction of CIT payable is conducted by Investment Coordinating Board (“ICB”/BKPM).
The Pioneer Industry covered by this regulation are as follows:
- Base metal industry (steel and not steel) with or without integrated derivatives;
- Purification and/or refining oil and gas industry with or without integrated derivatives;
- Petrochemical industry based on petroleum, natural gas, or coal with or without integrated derivatives;
- An inorganic base chemical with or without integrated derivatives;
- Chemical and organic industry which source from agricultural, plantation, or forestry with or without integrated derivatives;
- Pharmaceutical raw materials industry with or without integrated derivatives;
- Semiconductor and other computer main component manufacturing industry such as wafer semiconductor, backlight for Liquid Crystal Display (LCD), electrical driver, or LCD which is integrated with computer manufacturing industry;
- Manufacturing of key components of communication equipment such as wafer semiconductor, backlight for LCD, electrical driver, or LCD which is integrated with mobile phone manufacturing industry;
- Manufacturing of key components of health equipment which is integrated with the manufacture of irradiation, electromedical, or electrotherapy equipment;
- Manufacturing of key components of industrial machinery such as electric motors or internal combustion engines which is integrated with machine manufacturing industry;
- Manufacturing of key components of engines such as piston, cylinder head, or cylinder block which is integrated with the manufacturing of four wheeled or more vehicles;
- Manufacturing of robotic components which is integrated with manufacturing fabrication industry;
- Manufacturing of key components of ship which is integrated with the ship manufacturing industry;
- Manufacturing of key components of airplane such as engine, propeller, rotor, or structure components which is integrated with airplane manufacturing industry;
- Manufacturing of key components of train such as engine or transmission which is integrated with train manufacturing industry;
- Manufacturing of power generator machinery, including garbage power plant machinery industry; or
- Economic infrastructure.
The details of business sector and production types for each Pioneer Industry will be regulated by Head of ICB.
Industries which are not listed in the Regulation
This MoF regulation also provides opportunities to apply Facility for Taxpayer whose business sector that have not been included as pioneer industries in this MoF regulation. Under these conditions, proposed mechanisms will be conducted between ministries that will involve ICB, Ministry of Finance and other sector ministries.
With the decrease of investment value from the previous tax holiday regulation, that is IDR 500billion from minimum IDR 1trillion for any Pioneer Industry has create this new Facility provision to become more attractive to investors and easier to apply. Formerly (MoF Regulation 159/2015), Facility can only be granted for taxpayer with investment value of IDR 500billion which introducing high technology make the the former regulation were more difficult to implement.
The 100% corporate income tax reduction stipulated in this MoF is more attractive to Taxpayer because in the previous provision the percentage of tax reduction was uncertain but was determined in the range from 10% to 100% from the corporate income tax upon analysis by authorities.
The process of determining whether the Taxpayer meet the requirements for the grant of Facility has become simpler because it is done by ICB only. Formerly, the process was conduct in two phases, first taxpayer proposal shall be reviewed by ICB, and second phase MoF will conduct verification of result of review by ICB.
This MoF Regulation is a policy suitable with government mission to promote funds to be invested in Indonesia. By giving this Facility, the Taxpayer who take business expansion in Pioneer Industry or a company which included in Pioneer Industry that adds capacity with new investment. As a result, this keeps the investments in Indonesia.
Regarding Taxpayer who can propose its business sector as Pioneer Industry, the MoF regulation hasn’t set time frame of the process and decision to determine that the Taxpayer industry sector meets the criteria as a Pioneer Industry.
The flexibility of the definition of Pioneer Industry in this MoF regulation is expected to accommodate the current needs and economic challenges. Amid the rapid growth start-ups, digital economy and huge amount of investment value in business sectors, the MoF regulation has not included these industries as a Pioneer Industry. Thanks to the provision in this MoF regulation which has allowed those who are not listed have been given the right to propose to ICB to determine if Pioneer Industry.
Taxpayer only need 5 days to receive Ministry of Finance decision after ICB sent the proposal to the MoF. This timeframe is better than before.
One of things that make the former tax reduction facility less attractive is the revocation of facilities. In example, revocation can be done if there is finding of transfer pricing issue from resulting audit in the period of tax reduction facility. These provisions may cause investors to worry if at any point in time during the period of the tax reduction facility, the tax audit finds (i.e transfer pricing issue), then the facility shall be revoked and Taxpayer shall pay the tax payable that has been reduced by other sanctions in accordance with taxation law, so there is doubt about the certainty of the facility. At present, the risk of Facility revoke is become more measurable.
In summary, this MoF regulation has improved the policy of tax reduction facility to become more effective to attract new investors.
Mikail Jaman, Ak, M.Ak, CPA, CA, CPI
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