Tax incentives provide a considerable advantage for investors as it would make it less expensive to operate their businesses. Indonesia offers two types of tax incentives to investors, namely Tax Holiday and Tax Allowance Facility. This article will provide a general brief of both tax incentives.
Governing law and regulation
- Government Regulation (PP) No. 78/2019 on Income-Tax Facilities for Investments within Certain Business Sectors and/or Certain Regions
- The Minister of Finance Regulation (Permenkeu) No. 150/PMK.010/2018 on Corporate Income-Tax Deductions
Overview
First of all, It is important to know that the government gives tax incentives to investors whose capital is in priority business fields. Those priority business fields should meet these criteria:
- National strategic program/project
- Capital intensive
- Labor intensive
- High technology
- Pioneer industry
- Export oriented
- Research, development, and innovation oriented
They are entitled to fiscal and non-fiscal incentives. For fiscal incentives there are tax incentives and customs incentives. Tax incentives include:
- Reduction of import duty tariffs
- Tax Allowance
- Tax Holiday
- Investment Allowance
- Super Deduction for Research and Development
- Super Deduction for Vocation
In this article we will further discuss the tax allowance and tax holiday.
Tax Allowance
Tax allowance is an incentive in the form of providing income tax deductions for investors who invest their capital in certain business fields and/or certain areas. An updated tax allowance policy is regulated in Government Regulation (PP) No. 78/2019 on November 12, 2019.
Preconditions:
Tax allowance facility can be obtained by taxpayers whose business sector is set forth in the Appendix of PP No. 79/2019 and meets the following requirement:
- Possess high investment values or is export-oriented in nature;
- Absorb large workforces (i.e. are labor intensive); and
- Utilize high volumes of local content.
Deduction value:
Tax allowance provide these tax concessions to limited liability company following their investment:
- A reduction in net taxable income of 30% of the amount invested in the form of tangible fixed assets (including land), prorated at 5% for six years of the commercial production, provided that the assets invested are not being misused or transferred out within a certain period, except to be replaced with new assets.
- Acceleration of fiscal depreciation and amortization deductions.
- A reduction of the withholding tax rate on dividends paid to non-residents to 10% or the applicable reduced tax treaty rate.
- Extension of tax-loss carry forward longer than five years but not more than ten years.
Applicable business sectors:
There are 183 business fields eligible for tax allowance:
- Upstream basic metal
- Oil and gas refinery
- Petrochemicals from oil, gas, or coal
- Organic basic chemicals from agriculture, plantation, or forestry products
- Inorganic basic chemicals
- Pharmaceutical raw materials
- Irradiation, electromedical, or electrotherapy equipment
- Main components of electronics or telematics equipment, such as semiconductor wafer, backlight for LCD, electrical driver, or display
- Machinery and main components of machinery
- Robotics components that support the creation of manufacturing machinery
- Main components of power plant machinery
- Motor vehicles and main components of motor vehicles
- Main components of vessels
- Main components of trains
- Main components of aircraft and activities supporting the aerospace industry
- Agricultural, plantation, or forestry-based processing that produce pulp
- Economic infrastructure
- Digital economy which includes data processing, hosting, and related activities
Application:
Taxpayers must submit an application to obtain a tax allowance facility prior to the start of commercial production. Application is submitted via the Online Single Submission (OSS) System that is carried out:
- Along with their registrations for Business Identity Numbers (NIB) for new Taxpayers; or
- By no later than one year after the issuance of the relevant license through the OSS for investment and/or expansion purposes.
The Minister of Finance (MoF) will afford a decree on the granting of income tax facility if the application is received completely and correctly.
Tax Holiday
The tax holiday is an incentive offered in the form of a deduction of corporate income tax up to 100% for a certain time for investors who invest a certain amount of capital in a pioneering industry. The updated tax holiday policy is regulated in the Ministry of Finance Regulation (Permenkeu) No. 130/PMK.010/2020 on September 18, 2020.
Preconditions:
To obtain tax holiday facility, corporate taxpayers is required to fulfill the criteria below:
- Engaged in the pioneer industries sector. The criteria for pioneer industry classification are having broad linkages, providing high added value and externality, introducing new technology, and providing strategic value for the national economy. Each of those criteria has a sub criteria that carries a certain score and to pass the pioneer industry criteria test, the project must show a minimum score of 80%.
- An Indonesian legal entity
- Conduct new investment, for which a decision on granting or rejecting a notification of tax holiday, tax allowance facility, super tax deduction facility for a labor-intensive project, or tax facility for a special economic zone has not been issued by the MoF
- have new investment plan value in the amount of minimum IDR 1 billion rupiah
- meet the required debt-equity ratio as referred to in the MoF Regulation regarding the determination of the ratio between debt and company capital for the purposes of calculating Income Tax
Deduction value:
Different deduction value and period of tax holiday facility applies, further illustrated in the table below:
| Planned investment amount (IDR) | Deduction value | Period | |
| 100 – 500 billion | 50% of the total corporate income tax | 5 fiscal years | |
| 0.5 – 1 trillion 1 – 5 trillion 5 – 15 trillion 15-30 trillion > 30 trillion | 100% of the total corporate income tax | 5 fiscal years 7 fiscal years 10 fiscal years 15 fiscal years 20 fiscal years |
Application:
- Criteria verification. There will be an inspection whether the taxpayer’s investment fulfills the criteria to obtain a tax holiday facility or not. The verification is processed through the OSS System. This is followed by a notification on the fulfillment or non-fulfillment of criteria.
- Application submission. If the Taxpayer receives notification on the fulfillment of criteria, Taxpayer is deemed as having submitted an application for the corporate Tax-Income deduction, however, it is also required to submit these documents prior to the commencement of commercial operation:
- A softcopy of details on the investment plan’s fixed assets, as well as the relevant debt-to-equity ratio;
- A softcopy of the shareholders’ fiscal statements
Application shall be conducted:
- along with the registration to obtain NIB; or
- in no later than 1 year after the business license is issued for new investments.
For Indonesia tax incentives in SEZ, the applicant must provide the following documents:
- A softcopy of the details of fixed assets in the investment value plan
- A softcopy of the shareholders’ or business owner’s fiscal statement
- A softcopy of a stipulated document for a Business Entity to build and/or manage a business in SEZ
- Notification transfer and decision. The OSS System will forward the application to the MoF via the Director-General of Tax. The granting of corporate income-tax deductions is decided by the MoF via the Director-General of Tax no later than 5 business days after the application is received.
