New Tax Incentives Introduced for Investors in Certain Industries and/or Regions

The Government enacted Government Regulation No. 78 of 2019 dated November 13, 2019 on Granting of Income Tax Incentives for Investments in Certain Industries and/or Regions (“GR 78”) which comes into effect as at today, December 13, 2019. GR 78 revokes Government Regulation No. 18 of 2015 dated May 6, 2015 concerning the same subject.  GR 78 comes into effect on December 13, 2019.

GR 78 attempts to simplify the procedures for applying and obtaining the income tax incentives through the Online Single Submission (the “OSS”) system currently managed by the Capital Investment Coordinating Board (Badan Koordinasi Penanaman Modal/”BKPM”).

In summary, GR 78 provides certain Income Tax incentives to investors whether for new investments or business expansions (collectively, the “Tax Incentives”). The list of business activities in GR 78 that may enjoy the Tax Incentives increases from 145 to 183  business sectors. The additional industries include food, textile, coal-based products, coal refinery, basic metal, new and renewable energy power plants, pharmaceutical, drug and traditional medicine, livestock, as well as agriculture and forestry.

To be eligible to obtain the Tax Incentives, the covered business activities must meet certain criteria. The criteria are that the business activities must have (a) a high investment value or established for export purposes, (b) a high number of employees, or (c) a high local content level. The said criteria will be enumerated further in ministerial regulations relevant to the business sectors.

What are the Forms of the Tax Incentives and When Are They Applicable?

The forms of the Tax Incentives and the starting period for them to be utilized are briefly summarized in the following table.

Tax Incentives Utilization Period
Deduction of the net income in the amount of 30% of the investment value, in the form of tangible fixed assets including land used for the main business activities, given in 6 (six) years divided into 5% each year (the “Tax Incentives over Fixed Assets”). The starting date of the commercial production of a company.
Accelerated depreciation over tangible fixed assets and accelerated amortization over intangible assets obtained in the event of investment granted within certain period and tariff. The issuance of the Tax Incentives approval.
Income tax over the dividends paid to foreign Tax Payers other than permanent establishments in Indonesia at the rate of 10% (ten percent), or at a lower rate according to the applicable double taxation avoidance treaties. The issuance of the Tax Incentives approval.
Compensation for losses suffered for more than 5 years but less than 10 years with certain additional compensation as applicable. The issuance of the Tax Incentives approval (or the additional loss compensation period decision).

 

What are the Requirements for the Tax Incentives over Fixed Assets?

The Tax Incentives over Fixed Assets are given subject to the following requirements which are divided based on the form of the fixed assets (land or non-land):

Land Non-Land
a. The land is newly obtained except for purpose of relocation as an investment from another country;

b. It is stated in the investment license issued by BKPM or through the OSS system; and

c. Owned and used for the main business activities.

a. The non-land fixed asset is obtained after the business licensed is issued through the OSS system;

b. The object is obtained after the issuance of either (i) a principal license, (ii) an investment license, (iii) an investment registration, or (iv) amendments to any business licenses issued by the OSS system.

It is worth noting that under Article 6 of GR 78, tangible fixed assets that have been granted the Tax Incentives must not be (a) utilized other than for the incentive purpose, or (b) until the later of 6 years since the start of the commercial production or the end of the incentive period of the tangible fixed assets, transferred unless it is replaced with new tangible fixed assets.

How to Apply for the Tax Incentives?

To apply for the Tax Incentives, a Tax Payer must submit an application through the OSS system before the starting date of its commercial production (a) along with the application to obtain a business identification number (for a new Tax Payer); or (b) by no later than 1 (one) year after the issuance of a business license for investment and/or expansion by the OSS system. The Minister of Finance will issue its decision upon receiving a correct and complete application.

 

December 13, 2019

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