Investment in Indonesia: Investors Not Attracted by Tax Incentives
Although the Indonesian government offered various attractive incentives to investors (tax holidays and tax allowances) in 2017 in an effort to encourage investment in pioneering industries (particularly the downstream oil & gas industry), there were no companies that took advantage of these incentives. How come investors were not interested in these incentives?
According to Indonesian Deputy Finance Minister Mardiasmo, the lack of response from investors could be due to confusion about procedures and the exact details of the government's investment incentives.
In its quest to attract more investment the Indonesian government offers tax holidays and tax allowances in several "pioneering" sectors, such as the downstream metal production, telecommunication, oil refinery, machinery, agricultural processing, marine transport and manufacturing industries operating in special economic zones.
For example, those companies that invest more than IDR 1 trillion (approx. $74 million) in a pioneering sector can apply for a tax holiday where their income tax requirements are waived for five to 10 years (normally corporate income tax in Indonesia is 25 percent of the company's net profit).
Another example is the five percent corporate income tax reduction (per year), up to six years. The exact length of this tax allowance depends on the amount that is invested by the company. Meanwhile, it also includes lower income tax requirements for dividend.
Another reason why no investors applied for these incentives could be that the degree of legal certainty is rather low in Indonesia and therefore investors are unsure a government promise that is made now will be kept in the future, especially in case a new government arrives after general elections. For example, when the government announced the New Mining Law in 2009 it was basically a breach of existing contracts in the mining sector and particularly made the mining business difficult (and unappealing) for foreign investors.
Indonesian Finance Minister Sri Mulyani Indrawati added that the government needs to update the formulation of the various tax incentives and adjust them to the present investment climate. This will not require a lengthy process because it involves regulations, not laws, hence the House of Representatives will not need to approve new regulations.