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Indonesia: Tax Holiday for Innovators

(Aug. 17, 2011) On August 15, 2011, Indonesia announced a plan to give major investors in some sectors of the economy a tax holiday. Companies considered to be pioneers in their fields and that have invested at least Rp1 trillion (about US$117 million) in base metals, machinery, oil refining, petrochemicals, renewable energy, or telecommunications equipment will be eligible for tax holidays of five to ten years. Businesses that are new or that have been operating for less than a year are eligible to apply for the benefit. According to Agus Martowardojo, Indonesia's Finance Minister, regulations to implement the policy will be released within the month. (Faisal Maliki Baskoro, Indonesian Government Announces Tax Holiday for High-Value, Innovative Investors, JAKARTA GLOBE (Aug. 16, 2011).)

Martowardojo said that the tax exemption will not be available to companies that already have tax allowances, defined as deductions in taxable net revenue of up to 30% of their investment over six years. Tax allowances for smaller companies are also being considered. (Id.) To qualify for the allowances, companies must invest at least Rp50 billion (about US$5.8 million). (Farida Husna & Andreas Ismar, Indonesia Offers Tax Incentives to Spur Growth, THE WALL STREET JOURNAL (Aug. 15, 2011) [full article available on subscription only].)

The purpose of the new tax holiday plan is to increase direct foreign investment in the country. M.S. Hidayat, the Minister of Industry, praised the announced plan, saying, “[t]his will boost our downstream industry, especially the agro-industry [cocoa, palm oil, rubber, etc.]. … With this incentive, industry can grow by up to 7 percent this year.” He pointed out that one project that will be helped by the tax exemption is the plan for a joint venture between Wuhan Iron & Steel Corporation of China and Indonesian's steel company, Gunung Garuda. (Baskoro, supra.)

Investments will be considered individually, to see if they qualify for any of the tax benefits. A team comprising representatives of the Ministries of Industry and Finance, plus the investment coordination board, will review proposals and make determinations of eligibility. (Husna & Ismar, supra; for background on the Indonesian tax system, see International Bureau of Fiscal Documentation, Indonesia: Key Features (Apr. 1, 2011), IBFD TAX RESEARCH PLATFORM online subscription database.)