The government of Indonesia has been consistently trying to improve the economy by promoting local and foreign investment in Indonesia.  As part of that effort, the government provided corporate income tax reduction facilities to investors through the issuance of Minister of Finance Regulation No. 159 (2015) as amended by Minister of Finance Regulation No. 103 (2016).  So far, unfortunately, the government has not seen the desired result from the provision of the corporate income tax reduction facilities. Therefore, to further attract potential investors, the minister of finance recently issued Minister of Finance Regulation No. 35 (2018) on Corporate Income Tax Reduction Facility, which came into force on 4 April 2018.  This regulation is the basis for the government to grant more attractive corporate income tax reduction facilities for taxpayers in certain industries.

Implications for taxpayers

A taxpayer that meets the criteria set out in the regulation is allowed to enjoy a 100% corporate income tax reduction facility.  After the facility period is over, the taxpayer will still receive corporate income tax reduction. For the next two fiscal years after the end of the facility period, the taxpayer will receive a 50% reduction of its corporate income tax.  The facility can be enjoyed starting from the fiscal year when the taxpayer starts its commercial production. The commercial production is considered to be started when the product is first sold or self-used. The director general of tax will determine the starting time of the commercial production based on a field inspection.  A taxpayer that receives the facility is required to submit an annual report to the director general of tax, which explains the taxpayer’s production and investment realization. The deadline to submit the annual report is 30 days after the end of a fiscal year.

Who is entitled to participate?

Only corporate taxpayers are eligible to apply for this facility. The criteria to receive this facility are as follows:

 
• The taxpayer runs a business in a pioneer industry;
 
• The injection of capital is a new investment;
 
• The investment amount is a minimum of IDR500 billion (US$36 million);
 
• The company meets the debt to equity ratio stipulated under relevant Minister of Finance regulations (4:1 debt to equity ratio);
 
• The taxpayer has not previously received a rejection for an application for corporate income tax reduction from the Minister of Finance;
 
• The recipient of the facility is an Indonesian entity.
 
• Pioneer industries are defined as industries that have broad relevance, provide added value and high externality, introduce new technologies and have strategic value for the national economy. Regulation No. 35 expands on industries that are considered pioneer industries. Businesses in industries other than those stated in regulation No. 35 can apply for the facility under this regulation. To be able to apply for the facility, the taxpayer must first meet all the other above-mentioned criteria. If the other criteria are met, the taxpayer can submit an application to the Capital Investment Co-ordination Board (BKPM).

BKPM will then co-ordinate a meeting between the ministry of finance and relevant ministries to determine whether the industry meets the requirements of a pioneer industry.  In general, the following are the steps to enjoy corporate income tax reduction facilities:

 
1. A taxpayer applies to BKPM for the facility prior to its commercial production period;
 
2. BKPM checks on the fulfillment of the criteria as stipulated under regulation No. 35;
 
3. The Minister of Finance issues a response within five days after it receives the recommendation from BKPM.

If the shareholders of the applicant are domestic taxpayers, the applicant must attach fiscal certificates of all shareholders to prove that the shareholders have fulfilled their tax obligations.  If the field audit result shows that the investment realization is below the initial approved investment plan, the period of the tax holiday can be adjusted.  In general, this programme is very attractive and provides a good opportunity for new investors to seriously consider investing in Indonesia. Further consultation may be required to fully understand the details of this corporate income tax reduction facility.

Period of facility depends on amount of investment