Tax incentives in Asia-Pacific
The income tax incentives are granted by the Indonesian Government to meet various economic and social objectives. The Government Regulation Number 9 Year 2016 regarding income tax facility for investment in certain business fields and certain regions stipulates that taxpayers making a new investment or expanding the current business activity on certain business fields can be granted income tax incentives. With the regulation, the Indonesian Government is expecting more foreign investments into the country to support and grow the economy as a whole and accelerate the development of certain regions and provinces in Indonesia.
Indonesia incentive regime overview
Incentives in Indonesia can be broadly categorised into discretionary and statutory incentives. Discretionary incentives include the Tax Allowance incentive and Tax Holiday incentive, which require approvals from the Ministry of Finance. Statutory tax incentives include incentives for listed companies and small or medium scale companies and conditions and requirements are specifically defined under the Income Tax Law.
General information on discretionary incentives:
Incentive administering body
Various government boards based on administrative requirements:
- Investment coordinating board (Badan Koordinasi Penanaman Modal (BKPM))
- Directorate General of Taxation (DGT)
- The Ministry of Finance
General application process
- Submission of application to the BKPM
- Evaluation of the application by the committee
- BKPM will submit its recommendation to the Minister of Finance through the DGT
- DGT will conduct discussions with the BKPM for examination and verification
- The Minister of Finance will issue the Income Tax Incentive approval
Incentive application timeline
By law, the BKPM recommendation will take 18 working days from the date the company receives an official receipt stating that the documents and information provided are complete.
The evaluation process with the DGT will take much longer than the regulated time line if the information provided is insufficient.
The Income Tax Incentive approval by the Minister of Finance will be completed within 10 working days after DGT’s review is complete.
Other things to note
Taxpayers who are granted the Income Tax Incentive cannot:
- Use fixed assets receiving facilities for any purpose other than for the said investment project that the incentive is granted for
- Transfer parts or the entire fixed assets unless the transferred fixed assets shall be replaced with new fixed assets
The useful life of each fixed asset is determined by the DGT on the basis of the regulations.
The key tax incentives in Indonesia focus on export-oriented industries, manufacturing industries and sophisticated technology industries. We provide an overview of key available tax incentives for the manufacturing industries available, through application with the relevant government agencies and the Indonesia BKPM.
Tax allowance for manufacturing activities
Corporate tax benefits
- Investment allowance in the form of a reduction of net income by 30% of total investment; i.e., fixed capital (tangible assets) including land that is utilized for the company’s primary activity. This allowance may be claimed at a rate of five percent each year over a six-year period from the date that the company starts to operate commercially.
- Following the 2015 amendment, tax losses may be carried forward for more than five years but not more than 10 years. Additionally, a two-year tax loss carry forward may be granted to companies, subject to conditions.
- Accelerated depreciation of tangible assets and accelerated amortization of intangible assets on the new investment and business expansion, with various benefit periods and depreciation rates.
Other tax benefits
Reduced tax rate of 10% for dividends paid to non-residents
Key assessment parameters
- High total investment or the investment is for export purposes
- Local manpower utilization
- High level of local content
BKPM will review the application based on the:
- Total investment quantum
- Business fields
- Locations for the investment
- Local content
- Export orientation
- Amount of local labour utilized
Tax holiday for manufacturing activities
This will be applicable to nine business sectors, covering the following industries:
- Base metal
- Oil refinery
- Organic basic chemicals derived from natural oil and gas resources
- Industrial machinery
- Agricultural, forestry and fishery products processing
- Telecommunication, information and communication equipment industry
- Marine transportation
- Industrial processing, which is a major industry in the KEK (Special Economic Zone)
- Economic infrastructure other than KPBU (Government and Business EntitiesCorporation Scheme)
Corporate tax benefits
Corporate income tax exemption on income (at least 10% to a maximum of 100% of income) derived from qualifying business activities for a period of five to fifteen years, starting from the commencement of commercial operations. In special cases, the corporate tax exemption could be granted for up to 20 years.
Key assessment parameters
- A new taxpayer
- Engaged in “pioneer industries1”
- New approved investment plans of at least IDR1t (approximately USD$70m)
- Debt-to-equity ratio as regulated by the Minister of Finance
- Ability to deposit at least 10% of total investment plan in the Indonesian banking system without any withdrawal until commercial production begins
- Applicable to Indonesian legal entities established after 15 August 2010 (i.e., 12 months before the issuance of the Regulation)
1Pioneer industries include those with strategic value for the nation’s economy.