Tax Incentives for Special Economic Zones in Indonesia
Indonesia operates some 19 special economic zones (SEZ), 14 of which are operational – which if combined would account for one of the world’s largest exclusive economic zones (spread over 6 million km2). The Indonesian government has pledged to make the SEZs a policy priority to attract foreign investment, boost industrial activity, and promote job creation – further facilitated through its tax incentive programs under the Ministry of Finance regulation No. 237/PMK.010/2020 (PMK 237).
These tax incentives include exemptions from income tax, value-added tax (VAT), import duties, sales tax on luxury goods, and excise duties.
The government has worked hard to diversify economic activity away from the island of Java, which contributes some 58 percent of the total Indonesian GDP and accounts for 60 percent of the country’s total population of 270 million. As such, only six SEZs are located on Java and the vast majority are in outlying regions like Sumatra and Sulawesi. The introduction of the latest tax incentives in late 2020 is seen as a timely one when the COVID-19 pandemic caused entities to reconsider the location of their production bases.
In trying to capitalize on the recent global supply-chain readjustments, Indonesia also introduced the Job Creation Act, also known as the Omnibus Law, which aims to simplify business licensing, streamline corporate tax regulations, relax labor laws, and ease foreign investment restrictions. The government has noted that Indonesia’s strict labor laws are frequently cited as a disincentive to investors.
What tax incentives are available?
Exemption on corporate income tax
Business stakeholders in an SEZ are differentiated into two types of taxpayers: badan usaha (business entities) and pelaku usaha (businesspersons).Both business entities and business players are eligible for a 100 percent reduction in corporate income tax (CIT) provided that their investments are conducted in SEZs and with a minimum investment value of 100 billion rupiah (US$7 million), for a period of 10 years.
Businesspersons can receive more concession period – the greater their investment – as can be seen from the following table.
After the expiration of the aforementioned CIT incentives, taxpayers are eligible for a 50 percent CIT reduction payable for the subsequent two years. Further, during the concession period, no withholding tax (WHT) is applied to eligible income, such as income from land and building rental.
Corporate income tax allowance
Taxpayers that invest 100 billion rupiah (US$7 million) are also eligible to receive several CIT allowances. These are:
- A 30 percent reduction in net income on the total investment on fixed assets reduced over six years over six years, at five percent per year;
- Accelerated depreciation allowances of up to 100 percent of tangible and intangible assets;
- A WHT rate of 10 percent, or the treaty rate (whichever is lower) on dividend payments made to non-resident recipients; and
- Tax-loss carried forward for up to 10 years.
Import and excise duties
Import duties, tax on the importation, and excise duties are all exempted on the following dutiable/taxable goods:
- Capital goods used for the construction or development of SEZs for a period of five years; and
- For the entry of consumable raw materials for service industries (for tourism SEZs); and
- Entry of goods to be sold in shops and shopping centers (for tourism SEZs).
VAT and sales tax on luxury goods
VAT will not be collected in relation to the following activities:
- The import of taxable tangible goods into an SEZ by a business entity;
- The delivery of taxable tangible goods from another Indonesian free trade zone, customs area, or bonded storage facilities to a business entity;
- The delivery of taxable services or goods, including land or buildings by a business entity in an SEZ to another business entity in the same or another SEZ; and
- The import of consumer goods into a tourism SEZ.
The non-collection of VAT also applies to raw materials needed to produce taxable services or goods related to ship and aircraft maintenance, repair, and overhaul (MRO) activities.
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