|Freddy Karyadi||Oene Marseille|
On August 15 2011, Indonesia's Minister of Finance (MoF) issued Regulation 130/PMK.011/2011 concerning the long-awaited tax holiday.
The tax holiday will be available for selected pioneer industries, which are defined to be industries having extensive interconnection, giving high value added and externality, introducing new technology, and having strategic value for the nation-wide economy. At this stage, the pioneer industries covered under the Regulation are:
- the base metal industry;
- the oil refinery and/or organic base chemical industry, where sources are from natural oil and gas;
- the machinery industry;
- the renewable energy industry; and/or
- the communication equipment industry
In an effort to encourage further investment in Indonesia, a tax holiday may be granted for up to 10 years as of the fiscal year where the commercial operation starts. After the tax holiday expires, the taxpayer is allowed a 50% reduction in income tax for the following two fiscal years. An additional period of concession may be granted by the MoF in the interest of maintaining the competitiveness of national industry and the strategic value of certain industries.
In order to take advantage of the tax holiday:
- the investment must be in a pioneer industry;
- the approved new investment plan must be at least Rp1 trillion ($113 million);
- at least 10% of the investment capital must be placed in the Indonesian Bank and cannot be withdrawn before the commencement of the realization of the investment; and
- the taxpayer must be in the form of Indonesian legal entity, and it must be established within 12 months before the issuance of the regulation or afterthe enactment of the regulation.
The taxpayer may use the tax holiday if it has realised its investment plan and conducted commercial production. The tax holiday only applies to the income received from the activity that is given the tax holiday but would not cover tax withholding and collection obligations; thus the taxpayers are still required to deduct and collect tax from other third parties, as stipulated under the prevailing tax laws.
A request for the tax holiday is made to the Minister of Industry (MoI) or the Head of Investment Coordinating Board (BKPM) who will coordinate with the relevant ministries. As part of the proposal to be submitted to the MoF, the MoI or the head of BKPM is required to provide documents evidencing eligibility of the requesting taxpayer, as well as to conduct certain analyses.
The prerequisite analyses include an analysis on the existence of tax sparing rules in the country of domicile of the foreign investor. These tax sparing rules are described to be an acknowledgement of the tax incentive granted by Indonesia in the income tax calculation of the country of domicile. The other analyses to be performed are on:
- availability of infrastructure at the location of the investment;
- absorption of local manpower;
- review of fulfillment of the Pioneer industry criteria by the requesting taxpayer; and
- a clear and concrete step-plan for transfer of technology.
A proposal equipped with complete supporting documents is then submitted to the MoF (by the MoI or the head of BKPM) who will appoint a verification committee to review the strategic impact of the project to the national economy and to ensure that the above criteria are met, the minimum required investment has been made, and commercial production has begun.
The committee will consult with the Coordinating Minister for the Economy before submitting its recommendation to the MoF. The MoF will then consult with the President before the final approval is granted. Application for the tax holiday must be submitted by the MoI or the head of BKPM within three years of the date of the regulation. An application cannot be submitted if the taxpayer has obtained a tax facility under article 31(a) of the Income Tax Law (tax allowance for certain industries or regions).
A taxpayer who has received the tax holiday must submit the periodical report to the Directorate General of Tax and the verification committee regarding the report of the usage of fund placed in the Indonesian Banking and the audited report of the realisation of investment. Failure to comply with the above mentioned criteria and reporting obligation will cause revocation of the tax holiday.
There are a number of important issues which need to be clarified, such as what industries in particular are covered. Given that the application will go through a verification committee, three Ministers, BKPM and, finally, the President, the process is likely to be time-consuming and potentially difficult. Although the regulation is a positive step, it remains to be seen how the bureaucratic procedures will be applied in practice.
Oene Marseille and Freddy Karyadi