Update COVID-19 in Indonesia: 365,240 confirmed infections, 12,617 deaths (19 October 2020)
19 October 2020 (closed)
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The Finance Ministry of Indonesia announced that it has removed a withholding tax on interest payments on its global sovereign bonds (surat berharga negara, or SBN). Previously this tax was set at 15 percent for Indonesia-based investors and 20 percent for non-resident investors. By removing the withholding tax Indonesia's authorities aim to see its global bond yields fall by 15-20 percent. Indonesia's bond yields have been the highest in Southeast Asia. The removal of the withholding tax is effective retroactively from 1 January 2016.
Through Finance Ministry Regulation No. 91/PMK.010/2016 Indonesia implemented this tax incentive on both Islamic and conventional foreign currency denominated notes, covering levies on gains from bond buy-backs, exchanges as well as from payments for third-party services, including fees of rating firms and legal consultants, rendered during the debt offer.
In May 2016 this tax incentive was first proposed. Back then, Suahasil Nazara, Chairman of the Fiscal Policy Agency (BKF) of Indonesia's Finance Ministry, said Indonesia had to offer expensive coupons for its sovereign bonds in order to attract investors' appetite because these investors are required to pay a withholding tax between 15 and 20 percent (undermining investors' earnings). Moreover, high coupon rates on government bonds also influence Indonesia's corporate bond yields as investors are not interested in corporate bonds that carry a significantly lower coupon rate compared to the government bonds (corporate bonds tend to use the government bond yield as reference).
Meanwhile, the implementation of the new regulation also implies that tax receipts are to decline in Indonesia. However, it is not expected to have a significant impact on tax receipts.