Indonesia Extends Tax Holiday in Bid to Attract More Foreign Investment

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Indonesia has announced plans to extend the validity of the country’s tax holiday from the current 10 years to a maximum of 15 years. The tax holiday applies to investments over IDR 1 trillion (US$76 million), labor-intensive investments, and investments into eastern Indonesia (an economically poorer region). Additionally, the tax holiday will be applied to investments into “pioneer” sectors, which includes the following:

  • Base metals
  • Oil refinery
  • Machinery
  • Renewable energy
  • Communications equipment industry

According to the country’s finance minister, all other conditions relating to the tax holidays will remain the same. The government is expected to issue regulations on the new tax break later this year.

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Investment projects that are approved in Indonesia are eligible to receive a range of other tax allowances, including the following:

  • Import duty exemptions
  • A taxable income reduction worth up to 30 percent of the realized investment spread over six years
  • A maximum loss carry-forward facility for a 10-year period
  • A 10 percent income tax on dividends
  • Accelerated depreciation and amortization

The extension of the tax holiday comes as Indonesia struggles to find a way to encourage greater investment into the country and grow its exports. For the second quarter in a row, Indonesia’s economy contracted as exports and government spending continued to decline – GDP was down 0.18 percent. The country’s currency, the rupiah, also fell. The rupiah is now the worst performing currency in Asia for this year.

In a bid to generate additional revenue for the government’s development plans, Indonesia’s Directorate General of Taxation is implementing a tax amnesty program, effective from April 29. It is hoped that the program will vastly broaden the country’s tax base.

In another bid to increase domestic investment, the Indonesian government has brought in tax breaks for enterprises exporting a minimum of 30 percent of their production, in line with tax breaks for multinationals re-investing their profits in the nation rather than sending profits and dividends to overseas shareholders. Such firms are not required to meet minimum invested capital or number of employee requirements to qualify for the tax breaks.

The Indonesian government has also begun a new scheme on tax allowance by abolishing the minimum limit on investment, and making the procedural processes surrounding incentives simpler.

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