The long-awaited tax holiday regulation was finally issued on 15 August 2011 by the Minister of Finance (“MoF”) as Regulation 130/PMK.011/2011 concerning Granting of Corporate Income Tax Exemption or Reduction.
The tax holiday is available for selected “pioneer industries”, which is defined as “industries having extensive interconnection, giving high value added and externality, introducing new technology, and having strategic value for the nation-wide economy. At this stage, the pioneer industries covered under the Regulation are:
- Base metal industry;
- Oil refinery and/or organic base chemical industry, which the sources are from natural oil and gas;
- Machinery industry;
- Renewable energy industry; and/or
- Communication equipment industry
In an effort to encourage further investment in Indonesia, a tax holiday may be granted for 5 up to 10 years as of the fiscal year where the commercial operation starts. After the tax holiday expires, the taxpayer is allowed a 50% reduction in income tax for the following 2 fiscal years. An additional period of concession may be granted by MOF in the interest of maintaining the competitiveness of national industry and the strategic value of certain industries.
In order to take advantage of the tax holiday, the following conditions must be met:
- The investment is in a “pioneer” industry;
- The approved new investment plan must be at least IDR 1 trillion (approx USD 118 million);
- At least 10% of the investment capital must be placed in an Indonesian bank, and it cannot be withdrawn prior to the commencement of the realization of the investment;
- The taxpayer must be in the form of Indonesian legal entity, and it must be established within 12 months prior to the issuance of the regulation or after the enactment of the regulation.
The taxpayer may utilize the tax holiday if it has realized its investment plan and conduct the commercial production. The tax holiday only applies to the incomes received from activities that are qualified for the tax holiday – it does not apply to tax withholding and collection obligations; thus the taxpayer is still required to deduct and collect taxes from other third parties, as stipulated under the prevailing tax laws.
The request for the tax holiday is to be made to the Minister of Industry (“MoI”) or the Head of the Investment Coordinating Board (“BKPM”), who will coordinate with the relevant ministries. As part of the proposal to be submitted to MOF, the Minister of Industry or the Head of Capital Investment Board is required to provide documents evidencing the eligibility of the requesting taxpayer, as well as to conduct certain analyses. The prerequisite analyses include an analysis of the existence of "tax sparing rules" in the country of domicile of the foreign investor. The tax sparing rules is described to be an acknowledgement of the tax incentive granted by Indonesia in the income tax calculation of the country of domicile. The other analyses are analysis of:
- Availability of infrastructure at the location of the investment;
- Absorption of local manpower;
- Review of fulfillment of the Pioneer industry criteria by the requesting taxpayer; and
- Clear and concrete step-plan for transfer of technology.
A proposal equipped with complete supporting documents is then submitted to the MoF (by the MoI or the Head of BKPM), who will appoint a “Verification Committee” that is tasked to review the strategic impact of the project on the national economy and to ensure that the above criteria are met, the minimum required investment has been made, and that commercial production has begun. The Verification Committee will consult with the Coordinating Minister for the Economy before submitting its recommendation to the MoF. The MoF will then consult with the President before the final approval is granted. Application for the tax holiday must be submitted by the MoI or the Head of BKPM within 3 years of the date of the regulation. An application cannot be submitted if the taxpayer has obtained a tax facility under article 31(a) of the Income Tax Law (tax allowance for certain industries or regions). A taxpayer who has received the tax holiday must submit periodical reports to the Directorate General of Tax and Verification Committee comprising a report regarding the use of the fund placed in the Indonesian Banking and an audited report of the realization of the investment. Failure to comply with the above mentioned criteria and reporting obligation will result in the revocation of the tax holiday.
There are a number of important issues which need to be clarified, such as what industries in particular are covered. Given that the application will go through a Verification Committee, 3 Ministers, BKPM and, finally, the President, the process is likely to be time-consuming and potentially difficult. Although the regulation is a positive step, it remains to be seen how the bureaucratic procedures will be applied in practice. (by: Freddy Karyadi)