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Debt-to-Equity Ratio Determined by Government

Debt-to-Equity Ratio Determined by Government

After more than 30 years, the Minister of Finance finally issued a regulation to determine the debt-to-equity ratio (the “DER”) for certain corporate taxpayers for the purpose of calculating the payable income tax of the corporate taxpayers. Article 18(1) of Law No. 7 of 1983 regarding Income Tax, dated December 31, 1983, as lastly amended by Law No. 36 of 2008, dated September 23, 2008 (the “Income Tax Law”) authorizes the Minister of Finance to determine the DER for certain corporate taxpayers.

This authority was implemented more than 30 years ago under the Minister of Finance Decree No. 1002/KMK.04/1984 dated October 8, 1984 regarding Stipulation of Debt-to-Equity Ratio for Purposes of Imposing Income Tax.  But in March 1985, the Minister of Finance issued Decree No. 254/KMK.01/1985 dated March 8, 1985 to suspend the application of the DER under the 1984 Decree.

Now the Minister of Finance has issued Regulation No. 169/PMK.010/2015 dated September 9, 2015 regarding Stipulation of Ratio between Debt and Equity for Companies for Purpose of Income Tax Calculation, (“Regulation 169”). Regulation 169 revokes both the 1984 Decree and the 1985 Decree. Regulation 169 is to be issued by the DGT to further regulate this matter.  Summary of pertinent provisions follows.

♦ Debt-to-Equity Ratio

Under Regulation 169, the maximum DER for corporate taxpayers (established or carrying out activities in Indonesia) is one to four, i.e., one for equity and four for debt.  The DER is solely for the purpose of calculating the income tax of the corporate taxpayers, rather than for other purposes such as the debt-to-equity ratio required by the Capital Investment Coordinating Board (in Indonesian in short, BKPM) for foreign capital (PMA) companies.

This limitation starts to apply for the 2016 tax year. As comparison, the 1984 Decree determined the maximum DER of one to three.

♦ What is Debt?

Under Regulation 169, ‘debt’ means long-term and short-term debts as well as interest-bearing trade debts. The amount of the debt is determined for one tax year or any part thereof based on the average amount of debt as at the end of each month within one tax year or any part of the tax year.

♦ What is Equity?

Under Regulation 169, ‘equity’ means equity/capital determined by the applicable financial accounting standards and non interest-bearing loans from parties that have special relationships with the corporate taxpayers.  The amount of equity is also determined for one tax year or any part thereof based on the average amount of equity as at the end of each month within one tax year or any part of the tax year.

♦ Deductions for Income Tax Calculation

If a debt-to-equity ratio of a corporate taxpayer exceeds 1:4, the corporate taxpayer in calculating its income tax may only deduct debt costs up to the 1:4 ratio set out in Regulation 169.

The debt costs are costs incurred by the corporate taxpayer in relation to the debts which include the following:

  1. Loan interests;
  2. Discounts and premia in relation to loans;
  3. Additional costs incurred in arrangement of borrowings;
  4. Financial costs in lease finance;
  5. Fees for guarantee for payment of loan; and
  6. Foreign exchange losses arising from non-Rupiah borrowings to the extent the losses are the result of an adjustment to the interest cost and the specific costs noted in 1 to 5 above.

♦ Exclusions of Maximum DER

The maximum DER under Regulation 169 does not apply to:

  1. Banks;
  2. Finance companies;
  3. Insurance and reinsurance companies;
  4. Corporations engaging in the oil and gas sector, general mining, or in other types of mining bound by production sharing contracts (kontrak bagi hasil), contracts of work (kontrak karya) or mining cooperation agreements (perjanjian kerjasama pengusahaan pertambangan) that specify their respective DER;[1]
  5. Corporations that have secured final income tax calculations; and
  6. Corporations in the infrastructure sector.

♦ Foreign Loan Reporting Obligation

In addition to the DER threshold, Regulation 169 requires corporate taxpayers regarding their foreign loans to the Director General of Tax (the “DGT”). Failure to report the offshore loans prevents the taxpayers from deducting the costs of its foreign loans in its income tax calculation.  The procedures for the loan reporting will be contained in a DGT regulation.

Copyright © 2015 AKSET. All rights reserved.

September 25, 2015


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The foregoing material is the property of AKSET and may not be used by any other party without prior written consent. The information herein is of general nature and should not be treated as legal advice, nor shall it be relied upon by any party for any circumstance. Specific legal advice should be sought by interested parties to address their particular circumstances.


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