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Business Updates | Indonesia Introduces New Tax Incentives for Pioneer Industries

Faced with growing unease over the country’s short-term growth prospects, the Indonesian government has shifted gears in its attempt to reverse the downtrodden narrative surrounding its economy. In what is one of the first signs that President Joko Widodo’s administration has begun to accept the pressing need to introduce investment-friendly measures to counter-act waning confidence, Indonesia on 16th August 2015 enacted a revision to regulations regarding tax incentives for pioneer industries.

The significance of this course of action goes beyond its inclusion of new areas of business now eligible for lengthy tax holidays. Having most recently made waves for decisions such as the implementation of new trade barriers (See Indonesia Raises Import Tariffs on Consumer Goods); the government had yet to show signs that it was willing to operate within the parameters of the current slowdown and shore up investor sentiment. As the hopeful first of several policy fixes being carried out through greater consultation with the business community, there is reason to believe the new tax incentives for pioneer industries mark a different approach by the government in which tangible solutions are being sought for current challenges.

Broadened scope and longer tax breaks

The latest revisions to Minister of Finance Regulation (PMK) No. 130/PMK.011/2011 Concerning the Provision of Corporate Income Tax Relief or Reduction Facility bring about several positive developments that should pique the interest of prospective investors. Foremost among these changes is the addition of four new areas of business now considered to be ‘pioneer industries’ and thus eligible to benefit from substantial tax incentives. This extension of a list first issued in 2011 to attract investment in high-risk, capital intensive projects is particularly focused on agriculture, marine industries, and manufacturing – sectors that align closely with President Widodo’s vision for Indonesia as a self-sufficient, maritime nation (See Indonesia's Maritime Ambitions Require Massive Upgrade of Seaports):

Under the revised regulation laid out in Minister of Finance Regulation No. 159/PMK.010/2015, pioneer industries in Indonesia now include:

  • Marine transportation
  • Manufacturing as part of the main industry in Special Economic Zones
  • Economic infrastructure outside of a government and business entity scheme
  • Manufacturing based on Agriculture, Forestry, and Fisheries

In addition to the original pioneer industries:

  • Upstream Metals
  • Oil Refineries
  • Basic Organic Chemical Industry origination from Oil and Natural Gas
  • Machineries that produce Industrial Machines
  • Telecommunications, Information, and Communication

Minor re-categorisations aimed at widening the scope of the original pioneer industries now see renewable energy projects (formerly a standalone pioneer industry) included within ‘Manufacturing based on Agriculture, Forestry and Fisheries’ – a decision indicative of the government’s desire to focus on biofuels derived from agricultural commodities (See Opportunities in Indonesia’s Downstream Sugar Industry). Moreover, the recent amendment is no doubt a clear government effort to steer Indonesia’s economy away from an overreliance on raw commodities through incentives to pursue downstream processing and manufacturing.

In appealing to firms with the advanced capacity and technical knowhow to carry out large-scale pioneer industry projects, the revised regulation also lowers the minimum initial investment requirement for industries meeting the ‘high technology’ criteria (such as telecommunications) to 500 billion IDR ($37 million USD). The remaining pioneer industries are still subject to a 1 trillion IDR ($100 million USD) initial investment requirement.

Other positive developments include a corporate tax reduction of up to 100% – an increase from the previous 50% threshold – for a maximum duration of 15 years with the possibility of a further 5 year extension subject to the Finance Minister’s discretion. Under the previous regulation, tax holidays for pioneer industry firms were capped at 10 years and improvements in this regard places Indonesia at a competitive advantage relative to regional partners such as Malaysia and Singapore which offer a maximum of 10 and 15 years respectively for pioneer industries (Ernst & Young).

An improvement but not a perfect remedy

In addressing points of weakness in PMK No. 130/PMK.011/2011 pertaining to the size of the corporate tax reduction and the length of the tax holiday, the revised regulation should overcome hurdles that previously saw only three companies receive the tax breaks associated with pioneer industry status between 2011 and 2015. With several high-profile companies including Samsung and Foxconn backing out of pioneer industry projects during the negotiation process, critics have pointed to the old regulation’s convoluted approval process requiring the consent of several government bodies such as the Ministry of Finance, Office of the Coordinating Economic Minister, the Indonesian President, Ministry of Industry, and the Indonesia Investment Coordinating Board (BKPM) as an impediment to successful applications. Moreover, room for negotiation in setting the precise terms of the tax reduction between this series of government agencies and corporations seeking pioneer industry status backfired with the companies’ demands deemed unrealistic.

The latter of these two problems remains largely unchecked, with the revised tax incentive regulation failing to spell out precise requirements and criteria corresponding to tax reductions of different magnitudes. The onus is still on the government to exercise its discretion in awarding corporate tax breaks ranging from 10% to 100% for durations ranging from 5 to 15 years. This leaves the system vulnerable to large corporations with the leverage of being able to enter other regional markets should the tax incentive terms not meet their expectations. However, to cut down on inflexible government decisions which largely painted the background of Samsung’s denied bid, greater authority has now been given to the Finance Minister in approving pioneer industry projects resulting in a more streamlined approval process.

Mr M.M. Azhar Lubis as BKPM’s Deputy Chairman for Investment Monitoring and Implementation in his statement to Global Business Guide reiterated the government’s hope that investors will see the amended tax incentive as a further opening for business. Hence, he encourages interested companies in the nine covered sectors to apply for a principle license and realise their investments upon obtaining one. Regarding red-tape; “BKPM will facilitate and assist investors if they encounter obstacles, including for obtaining licenses in the regional level,” he assured.

Other investment-friendly policies on the horizon?

Through the inclusion of a sector categorised as ‘Manufacturing as Part of the Main Industry in Special Economic Zones’, the new tax incentive scheme stands as a part of a cohesive strategy in which President Joko Widodo’s plans to launch 17 new Special Economic Zones (SEZs). Each future SEZ is further designated to a particular sector dependent upon the proximate availability of raw materials to create a focused industrial development tailored to each region’s specific strength (See A Look into Indonesia's Special Economic Zones). Through this course of action, the government hopes to draw in investors previously dissuaded from entering due to concerns about the challenges of supply chain logistics in Indonesia.

In appealing to foreign investors, specifically, the current administration has also recently addressed some difficulties for international firms by easing KITAS requirements for expatriates, as well as by reducing corporate income taxes and streamlining the process for business licenses. Infrastructure development, however, remains slow in coming illustrated by government agencies under-spending due to red tape and subsequently exacerbated by recent events on the global stage (See The Present Plight of the Indonesian Rupiah). That said, foreign direct investment in Indonesia has continued to trend upwards, underlining the country’s prospects in the eye of investors (See FDI Growth in Indonesia: A Timely Reminder of Long-term Upside).

Global Business Guide Indonesia - 28th August 2015

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Indonesia Snapshot

Capital: Jakarta
Population: 259 million (2016)
Currency: Indonesian Rupiah
Nominal GDP: $936 billion USD (IMF, 2016)
GDP Per Capita: $3,620 USD at Current Prices (IMF, 2016)
GDP Growth: 5.0% (2016)
External Debt: 36.80% of GDP (BI, Q2 2016)
Ease of Doing Business: 91/190 (WB, 2017)
Corruption Index: 90/176 (TI, 2016)