Under the Ministry of Finance (MOF) Regulation 159/PMK.010/2015 Tahun2015 (PMK 159/2015), effective August 16 2015, Indonesia is revising the 2011 tax holiday regulation which provides an opportunity for certain taxpayers to have corporate income tax reductions for investments in selected ‘pioneer industries’ (the ‘Tax Facility’). The reduction ranges from 10% to 100%, and may be granted for five to 15 years starting from the year commercial production happens. The Tax Facility is effective only when the taxpayer has realised its investment plan, and only applies to income received from main activity(s) across pioneer industries.
Pioneer industries are: upstream metal; oil refinery; basic organic chemicals from oil and natural gas; industrial machinery; processing agricultural, forestry and fishery product; telecommunication, information and communication; marine transportation; processing industry that constitutes the main industry in within special economic zones (SEZs); and/or economic infrastructure other than those using the Public Private Partnership scheme.
To apply for the Tax Facility, the applicant must:
· be a newly registered taxpayer;
· make an investment in a pioneer industry;
· have an approved investment plan of at least IDR 1 trillion (which can be reduced to IDR 500 billion in certain circumstances);
· comply with the debt-to-equity ratio requirement under the prevailing regulation (refer to the MOF Regulation No. 169 of 2015 below);
· submit a letter of undertaking to deposit a minimum of 10% of the total investment plan value in an Indonesian bank, which is non-withdrawable before realisation of investment; and
· be incorporated as an Indonesian legal entity as of August 15 2011.
Thin capitalisation
Pursuant to MOF Regulation No. 169 of 2015 dated September 9 2015, the maximum debt-to-equity ratio permissible in Indonesia is 4:1, effective for taxation year 2016 onwards. Exemptions apply for: banks; financing institutions; insurance and reinsurance; taxpayers in the business of oil and gas, general mining, and other mining sector areas which are bound in production sharing contract, contract of work, or coal contract of work cooperation agreement, where such contract stipulates provision on debt-to-equity ratio limitation; taxpayers, all of whose income is imposed by final income tax; and taxpayers in the infrastructure business field.
In the event that the taxpayer’s debt-to-equity ratio exceeds 4:1, the cost of loan used in calculating taxable income is the amount of loan in accordance with the debt-to-equity ratio. The cost of loan includes: (a) loan interest; (b) discount and premium related to the loan; (c) additional cost incurred related to borrowings arrangement; (d) financial cost in lease finance; (e) fee for security of payment; and (f) exchange rate difference from foreign loan, provided the difference is as for the adjustment to the interest cost and cost as stated in (b), (c), (d), and (e).
Freddy Karyadi (fkaryadi@abnrlaw.com) and Chaterine Tanuwijaya (+62 21 250 5125/5136), of Ali Budiardjo Nugroho Reksodiputro (ABNR), a principal International Tax Review correspondent firm. www.abnrlaw.com
