Indonesian Insights

Written by Andini H. Dewi

In August, the Government of Indonesia enacted the most anticipated tax regulation for the year of 2011. Having discussed this regulation on and off for almost two years, Minister of Finance Regulation No. 130/PMK.011/2011 (the “Tax Holiday Regulation”) was finally enacted on August 15, 2011 to provide tax allowances and an income tax holiday of between 5 to 10 years to companies in “pioneer industries.” The aim of this regulation is to ramp-up investment in infrastructure and resource-based manufacturing industries.

In early December of the same year the Minister of Industry signed a draft regulation which sets forth guidelines for the submission of a tax holiday application. The guidelines are issued to implement the provision in Article 4 of the Tax Holiday Regulation which requires companies to submit an application to the Minister of Industry or the Chairman of Indonesia Investment Coordinating Board (“BKPM”). The eligibility  and evaluation criteria, as well as the application procedure, are set forth below.

Tax Facilities

The Tax Holiday Regulation provides for  two types of tax facility, namely: (1) the exemption of corporate income tax and (2) the deduction of corporate income tax. The exemption of corporate income tax is granted for a maximum of 10 years and for a minimum period of 5 years as of the year tax of the corporate taxpayer’s commercial production. At the end of the exemption period, the corporate tax payer is granted a deduction from its corporate income tax in the amount of 50% of its 2 years indebted tax. A longer period of exemption and deduction of corporate income tax may possibly be granted with consideration to maintain a competitive national industry and/or the strategic value of a particular business.

Eligibility Criteria

The exemption and reduction of corporate income tax is only given to corporate taxpayers who fulfill certain criteria, which are:

a.         the corporate taxpayer is in a pioneer industry such as:

i.          manufacturing basic metals;

ii.          petroleum refining and/or organic basic chemicals derived from petroleum;

iii.         industrial machinery;

iv.        renewable resources; and/or

v.         communication equipment industry.

b.         the corporate taxpayer has a new investment plan which has already obtained governmental approval and its total investment is at least IDR 1.000.000.000.000,- (one trillion Rupiah);

c.         the corporate taxpayer places the funds in an Indonesian bank, which must be at least 10% of the total investment plan and such funds shall not be withdrawn prior to the commencement of the proposed investment;

d.         the corporate taxpayer is an Indonesian legal entity, of which the establishment approval was obtained at the latest 12 months before the Tax Holiday Regulation is in effect or its establishment approval is obtained at or after the the Tax Holiday Regulation has been effective;

e.         the corporate taxpayer has realized the entire capital investment; and

f.          the corporate taxpayer produces/manufactures commercially.

How Applications are Evaluated

After completing the above criteria, the corporate taxpayer then submits an application to obtain the exemption or reduction of the corporate income tax to the Minister of Industry or the Chairman of the BKPM. The Minister of Industry or the Chairman of the BKPM will study the following aspects before approving a tax exemption:

a.         Infrastructure availability in the proposed investment location;

b.        The absorption of the domestic workforce;

c.         Pioneer industry status;

d.         A clear and concrete plan of the technology transfer; and

e.        Acknowledgement of Indonesian tax exemption and reduction from the business entity’s origin country (tax sparing regulation).

Procedure for Submitting a Tax Holiday Application

As briefly mentioned above, a company must apply to the Minister of Industry or the Chairman of the BKPM to obtain the tax exemption with the procedures as set forth in the Submission Guidelines (which have only been released in draft form and have not yet been promulgated). Pursuant to the Submission Guidelines, there are five stages required for the issuance of the approval of this corporate income tax exemption or reduction, anticipated to be completed within 14 days. Those stages are:

a.         Submission of Application

The taxpayer submits an application to the Minister of Industry attaching several documents including: (i) a copy of their Taxpayer Registration Number (NPWP), (ii) the Investment Approval Letter issued by the BKPM and (iii) proof of funds placed in an Indonesian bank. The application then will be forwarded to the Director General of Industrial Management (1 day).

b.         Presentation of Investment Plan

The taxpayer will then present their Investment Plan to the BKPM, the Director General of Industrial Management, the Assessment Agency of Climate Policy and Industrial Quality and other related institutions. The whole presentation process will take 3 days.

c.         Data Verification by the Technical Verification Team

After the presentation, the Technical Verification Team will verify all the data presented by the corporate taxpayer and issue a result within 5 days.

d.         Coordination Meeting with the BKPM and other related institutions

The coordination meeting is convened to discuss the verification results obtained by the Technical Verification Team (3 days).

e.         The Minister of Industry Issues a Recommendation

Two days after the coordination meetings, the Minister of Industry will issue a recommendation to the Minister of Finance. The recommendation shall contain a suggestion on whether or not a corporate taxpayer shall be granted an exemption or reduction of their corporate income tax.

Remarks on the Regulations

One of the noteworthy provisions under the Tax Holiday Regulation is the provision that governs the possibility to prolong the exemption or deduction of corporate income tax. This provision requires two elements to be considered i.e: the fact that national competition needs to be maintained and an evaluation of the strategic value of a particular business. The fact that no further explanation of when or how national competition needs to be maintained or the parameters of understanding the strategic value of a particular business may create multiple interpretations of this provision. As multiple interpretations of this provision might cause uncertainty, the Government of Indonesia needs to clarify these provisions to better implement the aims of this Tax Holiday Regulation.

This article is part of our 2011 Indonesian Law Review series, in which our attorneys discuss recent legal developments over the past year and track the main trends in each industry.