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Today's Headlines Tax
The upstream textile industry of Indonesia urges the Fiscal Policy Office (in Indonesian: Badan Kebijakan Fiskal, or BKF) to exempt local raw materials - supplied by local manufacturers - from VAT. Redma Gita Wirawasta, Secretary General of the Indonesian Synthetic Fiber Producers Association (APSyFI), said he has discussed this proposal during several recent meetings with the BKF.
Stakeholders in Indonesia's plastics industry are not happy to see the government eager to impose an excise tax on plastic bags in the proposed 2018 state budget. Fajar Budiyono, Secretary-General of the Indonesian Olefin, Aromatic and Plastic Industry Association (Inaplas), is against the excise tax saying it will not be a solution to environmental pollution. Instead, the government should focus on enhancing plastic waste treatment.
For several years stakeholders in Indonesia's automotive industry urged the government to cut taxes on sedan sales. Finally, the government seems willing to alter its policies. The sedan is categorized as a luxury good, implying it is subject to an additional 30-40 percent luxury goods tax. This makes the sedan vehicle more expensive compared to other car types and therefore there exists less demand for the Indonesian-made sedan, both on the domestic market and international market.
Leading American online social media and social networking service Facebook will open a permanent business entity (a foreign limited liability company, in Indonesian: perseroan terbatas penanaman modal asing, or PT PMA) in Indonesia later this month. The move is in line with Indonesian government requests. Earlier, Facebook only operated a representative office in Jakarta.
Indonesia's tax authorities are planning to revise the non-taxable income regulation again in an attempt to improve the nation's low tax ratio. Last year the government of Indonesia raised non-taxable income by 50 percent from IDR 36 million (approx. USD $2,700) to IDR 54 million (approx. USD $4,060), per year, in a bid to strengthen people's purchasing power and encourage household consumption. However, considering local minimum wages vary across the country's 34 provinces, the nation-wide non-taxable income level of IDR 54 million causes some problems.
In its "war on tax evasion" Indonesia scored another victory by reaching an agreement ("Bilateral Competent Authority Agreement") with Hong Kong to share data of Indonesian taxpayers who hold accounts in the Asian wealth management hub. Indonesia's Tax Office assumes (or better: knows) there are plenty of wealthy Indonesians who take advantage of the low tax regime in Hong Kong and deliberately do not report these funds to Indonesian authorities.
According to Ken Dwijugiasteadi, Taxation Director General at Indonesia's Finance Ministry, a tax-to-GDP ratio at 11 percent would be realistic for Indonesia's 2018 state budget (but would still require big efforts from the government). In a plenary session of Indonesia's House of Representatives (DPR) earlier this week, regarding the 2018 state budget proposals, some called for a sharp increase in the tax-to-GDP ratio to 13 percent. However, considering the expected tax revenue growth, this ratio would be highly unrealistic.
The economies of Indonesia and other countries in Southeast Asia may feel the impact of US President Donald Trump's impending tax reforms. Currently markets are focused on these reforms. On Wednesday (26/04) Trump is set to propose steep cuts in US corporate taxes (from 35 percent to 15 percent) and the tax rate on offshore earnings that are repatriated (from 35 percent to 10 percent), while individual taxes will be simplified. These proposals will require US Congress approval before implementation.
After the ending of Indonesia's tax amnesty program, property players in Southeast Asia's largest economy remain optimistic that inflows of fresh funds - originating from the tax amnesty program - will give a boost to Indonesian property sector in the second half of 2017. This should then cause some momentum, meaning property developers dare to kick-start new projects. Considering weak demand for property in Indonesia over the past couple of years, many local property developers have been postponing projects.
There is concern about Indonesia's tax buoyancy. Tax buoyancy is the indicator that measures efficiency and responsiveness of revenue mobilization in response to growth in gross domestic product (GDP) or national income. While, Indonesia's GDP accelerated 5.02 percent (y/y) in 2016, the country's tax revenue realization only rose 4.2 percent (y/y) to IDR 1,104.9 trillion (approx. USD $83.1 billion). Since 2011 (when commodity prices plunged heavily) tax buoyancy has been weakening in Indonesia.
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After the Constitutional Court had already confirmed earlier this week that Indonesia's tax amnesty program is not in violation of the nation's constitution, there occurred a second reason for celebration related to the tax amnesty program: the total of declared assets up to Wednesday (14/12) had surpassed the government's target of IDR 4,000 trillion (approx. USD $301 billion), about 3.5 months before the end of the program. Despite this success there remains reason for pessimism.
Indonesia's Communication and Information Ministry urges American multinational technology company Google to set up a permanent establishment in Indonesia. This way Google, which is owned by US multinational conglomerate Alphabet Inc, would need to start paying taxes to Indonesian authorities. Currently, Google only has a representative office in Indonesia, while transactions and revenue generated in Indonesia are booked at Google Inc's Asia Pacific headquarters located in Singapore.
Indonesia's tax revenue realization in the first half of 2016 was disappointing. According to the latest data, Southeast Asia's largest economy collected a total of IDR 518.4 trillion (approx. USD $39.6 billion) worth of tax revenue (including customs and excise) in the first six months of 2016, down 3.3 percent (y/y) from tax revenue realization in the same period one year earlier, and only 33.7 percent of total targeted tax revenue (IDR 1,539.2 trillion) set in the revised 2016 State Budget. The disappointing performance is mainly due to weak tax income from the oil and gas sector.
The government of Indonesia is preparing various investment instruments in order to absorb the (potentially large) inflow of capital following the launch of the tax amnesty program earlier this month. Besides government bonds, state-owned enterprises' bonds, real estate investment trusts (REITs), and property investment through private equity schemes (RDPTs), the government is also preparing trustees and zero coupon bonds. Without such investment instruments, bubbles are expected to appear due to the large inflow of funds into Indonesia's financial markets.
Without giving too much insight into the details and regulations, Indonesian President Joko Widodo launched the tax amnesty program on Friday (01/07) during a speech in front of hundreds of businessmen and officials at Indonesia's tax office headquarters in Jakarta. The tax amnesty program - approved by the House of Representatives in late June - is a strategy to boost state tax income by (temporarily) granting amnesty as well as offering attractive incentives to (former) tax evaders. In return, the tax dodgers have to declare and (if wanted) repatriate their offshore assets into Indonesia.
In a plenary session on Tuesday (28/06), Indonesia's House of Representatives (DPR) passed the controversial Tax Amnesty Bill into law as well as the revised 2016 state budget. The Indonesian government will be relieved to see the Tax Amnesty Bill come into effect on 1 July 2016 (ending in May 2017) as it expects the bill to boost tax revenue this year by IDR 165 trillion (approx. USD $12.4 billion). Through tax incentives and the pardoning of tax crimes, the tax amnesty program makes it attractive for tax evaders to declare their offshore assets and repatriate these into Indonesia.
In the past two weeks, two of the big international credit rating agencies released new reports about Indonesia's fiscal situation. Both agencies affirmed Indonesia's sovereign debt rating: Fitch Ratings kept Indonesia at BBB-/stable (investment grade class) and Standard & Poor's (S&P) maintained Indonesia at BB+/positive (highest junk level, one notch below investment grade). S&P's decision to keep Indonesia within the junk level category was met with disappointment among investors and Indonesian government officials but perhaps not that surprisingly.
The government of Indonesia proposes to cut the state revenue target by IDR 88 trillion (approx. USD $6.5 billion) in the Revised 2016 State Budget. Indonesian Finance Minister Bambang Brodjonegoro announced the government has sent the proposal to the House of Representatives’ Budget Committee (Banggar) on Thursday (02/06). Expectations of lower government revenue is the result of weaker-than-estimated tax collection, the lower-than-initially-assumed Indonesian crude oil price as well as the lower-than- estimated oil and gas production in Indonesia.
So far this year, realization of government revenue in Indonesia (up to 8 May 2016) has reached IDR 419.2 trillion (approx. USD $32 billion), roughly 23 percent of the full-year revenue target in 2016 (IDR 1,822.5 trillion). This result is weaker compared to last year when the government collected IDR 476.3 trillion in the period 1 January - 15 May 2015, or 27 percent of the full-year target. Meanwhile, government spending reached IDR 586.8 trillion between 1 January and 8 May 2016, or 28 percent of the full-year target (IDR 2,095.7 trillion), roughly the same as government spending during the same period last year.
More changes to Indonesia's tax system are in the pipeline. Today (11/04), Indonesia's Finance Minister Bambang Brodjonegoro said Southeast Asia's largest economy plans to cut the corporate income tax rate to 20 percent this year (from 25 percent currently). According to Brodjonegoro a 20 percent corporate tax rate is more competitive and will attract investment. Indonesia's finance minister expressed this plan in a meeting with the nation's parliamentary commission overseeing taxes (an income tax rate cut requires parliamentary approval).
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