"The Indonesian tax office has a reputation for being collection-driven and applying inconsistent treatment from time to time."
Tax Service Line leader, Indonesia.
The risks of emerging markets are well known and even a savvy global company can stumble with:
- Complex regulations
- Local political and cultural nuances
- Bureaucratic obstacles
- Unclear business processes
In this spotlight, we focus on Indonesia's tax system, which can be quite favorable to foreign investors but has some hidden obstacles. We caught up with Ben Koesmoeljana, our Tax Service Line Leader in Indonesia, to discuss the main tax factors that new investors should consider.
Does Indonesia offer any interesting tax advantages to the new investor?
Ben Koesmoeljana: In August, Indonesia began offering a tax holiday to major direct investors who make new capital investments in certain "pioneering" industries. Intended to boost long-term growth by attracting more inbound investment, the incentive exempts the investor from corporate income tax for the first 5 to 10 years after the start of the operation, with a 50% corporate tax reduction for up to two years after that initial term.
Nor do the carrots necessarily end there: based on the national competitiveness of the industry and the strategic value of the activity pursued, the tax reduction may be extended. However, there are two important caveats. First, the tax facility kicks in only after the company has realized its entire investment and begun commercial production in the country. Second, the new rules apply only to investments in "pioneering" sectors the government would like to encourage, including base metals, oil refining, petrochemicals and renewable energy, and the company must invest at least IDR1t (around US$117m) in Indonesia.
How would you describe Indonesia's tax burden and compliance requirements?
Ben Koesmoeljana: The Indonesian tax burden is often seen as onerous, and the compliance regime often considered quite rigid on the whole. There is some uncertainty, too, in the rules, as some rulings may be open to interpretation due to the non-binding nature of their wording.
What are the biggest tax risks?
Ben Koesmoeljana: The Indonesian tax office has a reputation for being collection-driven and applying inconsistent treatment from time to time. The system's quality has improved considerably in recent years, but some taxpayers find that tax audit and objection results are not always consistent and the time frame to obtain tax rulings is not clear. Litigation keeps taking longer as the tax courts are overstretched, and more cases are being appealed to Indonesia's Supreme Court.
How would you describe the local tax landscape compared to that of other Asian countries?
Ben Koesmoeljana: Indonesia is comparable to its major regional peers, such as China, Thailand and Vietnam. Compared to China, Indonesia is arguably more agreeable from a tax perspective, but Thailand and Vietnam tend to pose similar risks.
What are the transfer pricing requirements?
Ben Koesmoeljana: The central requirement is that related-party transactions must be carried out at arm's length. The taxpayer must prove that they have applied arm's length principles, documented the process of the application of arm's length principles, and disclosed the existence of related-party transactions and the application of arm's-length principles in the tax return.
Are there any situations that set off tax audits?
Ben Koesmoeljana: Companies should be aware that a number of criteria can trigger a tax audit: losses and no tax payments for three years in a row; significant transactions between related parties; profit performance as compared to industry profit performance; and more "No" than "Yes" answers in Attachment 3-A of the transfer pricing document from the Directorate-General of Tax. The nationalities of the related parties may also be considered a factor.
Do you have any tax pointers to share with anyone considering an Indonesian investment?
Ben Koesmoeljana: Get your tax structure right from the very start, whether you choose to enter the country by acquisition or by setting up a new local entity. It will save a lot of maneuvering in the long run and simplify any future needs that arise. If you're entering via an acquisition, pay attention to the particular tax implications. There are particular rules, for example, governing the accounting of family businesses and planning IPOs for family businesses.
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