Indonesia Introduces Tighter Regulations Regarding Tax Deductible Interest Payments
Starting per 1 January 2016, Indonesian companies’ interest payments to lenders are no longer considered tax deductible in case the company’s debt amounts to over four times its equity. Indonesian Finance Minister Bambang Brodjonegoro said such a tighter regulation regarding corporate debt financing will make it less attractive for local companies to accumulate debt, while strengthening the company's equity structure.
However, financial institutions (for example banks) and mining companies (including oil & gas companies) are to be excluded from this tighter borrowing regulation as Indonesia’s financial sector has a separate regulatory framework regarding debt and equity, while in the mining sector companies have to engage in - and comply with - government contracts.
Currently, the Indonesian government considers any interest payment made by a company as tax deductible.
The relatively high amount of foreign debt in Indonesia is a concern, particularly as the rupiah has been depreciating drastically over the past two years. According to the latest data from Bank Indonesia, the country’s foreign debt stood at USD $304.3 billion at the end of the second quarter of 2015, comprising of USD $169.7 billion private sector external debt.