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How pioneer industries will benefit from Indonesian tax holiday

The Indonesian Ministry of Finance has released long awaited regulations regarding the provision of tax facilities in the form of exemption from, or reductions in, the rate of corporate income tax.

Under Government Regulation No. 94/2010 and Regulation No. 130/PMK011/2011, a tax holiday or rate reduction will be available to companies in pioneer industries.

To qualify for the exemption taxpayers must engage in pioneer or upstream industries covering sectors such as base metals, natural oil and gas chemical refinery, machinery, renewable energy and telecommunication equipment.

The taxpayer must also have a new capital investment plan under the approval of the authorised institution at a minimum value of Rp1 trillion ($120 million) and deposit a fund equal to at least 10% of their planned total capital investment in an Indonesian bank. Further, this should not be withdrawn before the realisation of the capital investment.

Finally, the corporate entity must own the status of an Indonesian legal entity, approval for which is issued at least 12 months before the validation of the regulation.

“The corporate income tax exemption is granted for a minimum of five years to a maximum of 10 years, calculated since the tax year in which the commercial production commences,” said Imam Subekti of MUC Global Consulting. “Further, after the exemption facility period ends, the taxpayer shall be granted the corporate income tax reduction facility at 50% from the corporate income tax due for a two tax year period.”

“To obtain the facility, taxpayers file the application to the Trade Minister or the Head of Indonesian Investment Coordinating Board,” added Subekti.

Advisers say the motivations behind the tax holiday are political ones, with the facility having effect until the next general election in three years time.

“This tax holiday facility is a politically driven facility,” said Prijohandojo Kristanto, chairman at PB Taxand in Indonesia. “The facility is given to selected pioneer projects and applicable only to those who apply for new investment 12 months before the effective date and three years afterwards, which coincides with the end of the current government’s tenure.”

Kristanto believes the tax holiday should draw in investment.

“There is a lot of criticism addressed to the present government for not realising its promises,” he said. “Therefore in the last three years of its tenure, the government provides this extraordinary facility to attract new and big pioneer industries, instead of improving the long-awaited improvements by business sectors such as improvement on infrastructure, legal certainty and less bureaucracy, because those will take a longer time.”

The time delay between application and realisation of the facility could vary depending on the level of authority interest in the taxpayer project.

“I don't know how long it would take to get this facility,” said Kristanto. “However, if the project is interesting enough for the Minister of Industry, the Head of Investment Coordination Board and the Minister of Finance, it will be relatively quick.”

“My advice to investors would be to apply now,” he added.

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