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Indonesia to attract investors with tax benefits

September 7, 2011

Indonesia’s Minister of Finance, Agus Martowardojo, has announced that long-awaited regulations will be issued to introduce tax holidays, as well as revise the country’s tax allowances, for new direct investments in selected industries.

The introduction of a tax holiday is being looked at as providing support for the large-scale manufacturing and infrastructure projects contained within the government’s Masterplan for the Acceleration and Expansion of Economic Development of Indonesia, recently launched by President Susilo Bambang Yudhoyono.

Tax holidays will therefore be available, the Finance Minister pointed out, to substantial investments of at least IDR1 trillion (USD116.6m) in the base metal, petroleum and refining (or basic chemicals derived from petroleum and natural gas), industrial machinery, renewable resources and telecommunications equipment industries.

The tax holiday would remain for at least the first five years of a project’s commercial operations. It was reported that retroactive tax holidays would also be available for projects established up to a year before the announcement, provided that they are not yet profitable.

To obtain a tax holiday, the Coordinating Minister for Economic Affairs, Hatta Rajasa, disclosed that the investor should make a proposal to the Investment Coordinating Board (BKPM) and/or the Ministry of Industry, which will review its suitability under the established criteria.

The BKPM’s Head, Gita Wirjawan, said that there are already five companies that are waiting for tax holidays to be available before investing substantial funds in Indonesia – namely, the South Korean companies, Posco steel (an investment of some IDR60 trillion) and Hankook tyres (IDR5 trillion); Kuwait Petroleum Corporation (up to IDR70 trillion); and Caterpillar (IDR5 trillion), while the domestic textile company, Indorama, is also considered likely to begin a project of up to IDR5 trillion, and look for a tax holiday.

The government has also, Rajasa explained, increased to 128 the sectors eligible for tax allowances. However, he confirmed that, to obtain a tax allowance, a company must operate in a high priority industry on a national scale; and have a minimum investment value of IDR50bn with a workforce of at least 300 people, or a minimum investment of IDR100bn with a workforce of at least 100 people.

In addition, the industrial sector must meet one of the ten criteria already existing in the current tax allowance regulations, which, among other stipulations, require that: the investment is in a specified high priority industry; the project is located in a remote area; research, development and innovation is conducted; a partnership with micro businesses or small and medium-sized enterprises is set up; and a substantial number of jobs are provided for.

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