Widened eligibility and simplified administration for Indonesia s Tax Holiday Incentive

Transcription

1 December 2018 Tax Alert Widened eligibility and simplified administration for Indonesia s Tax Holiday Incentive Summary On 26 November 2018, Indonesia s Minister of Finance (MOF) signed MOF Regulation No. 150/PMK.010/2018 (PMK-150) providing changes to MOF Regulation No. 35/ PMK.010/2018 (PMK-35) on tax holidays, as an incentive to conduct business in Indonesia. The regulation becomes effective as of 27 November 2018 and revokes PMK-35. PMK-150 is intended to be more attractive for investors since it provides for simplification of the tax holiday application process. Tax Holidays are now also potentially available in new sectors involving certain digital businesses and manufacturing using agricultural, timber and plantation products. This is the second time in 2018 that the Tax Holiday scheme has been expanded. Corporate taxpayers making new capital investments and/ or expanding their businesses in pioneer industries can apply for this incentive. Under PMK-150, the definition of pioneer industry has been expanded to cover 18 sectors. The tax holiday incentive now provides for 50% and 100% corporate tax exemptions for between 5 and 20, depending on the amount of new capital investment. There also appears to be more flexibility around applying for the Tax Holiday incentive within 12 months of obtaining the relevant business license. This alert aims to provide the main substance of PMK-150. Who is eligible for the Tax Holiday incentive? A company that makes a new capital investment in a Pioneer Industry is eligible to obtain a reduction on its corporate income tax for income earned from its Main Business Activities ( Tax Holiday incentive ). PMK-150 defines Main Business Activities as business activities and production activities as stated in the principle permit, investment permit, investment registration, or business license of the company at the time it submits the application to obtain the corporate income tax reduction, including any expansion and changes, provided it is still within the criteria of Pioneer Industry. Tax Alert: Widened eligibility and simplified administration for Indonesia s Tax Holiday Incentive 1

2 Under PMK-150, a company that can obtain Tax Holiday incentive must meet the following criteria: a) It is a Pioneer Industry; b) It is an Indonesian legal entity; c) It is a new capital investment which has not yet been issued any approval or rejection on an application to reduce corporate income tax of the company; d) It has new capital investment plan with a minimum value of IDR 100 billion; and e) It meets the Debt to Equity Ratio (DER) requirement for tax purposes (which currently is 4:1). In case the company is directly owned by local taxpayers, apart from meeting the criteria stated in a) to e) above, the company must show that all of its shareholders, which are stated in its Articles of Association, have fulfilled their tax obligations. This should be proven with a fiscal statement letter issued by the Director General of Taxation (DGT). In case there is a change in the shareholders, the condition to fulfill their tax obligations is only applicable to shareholders that are stated in the latest Articles of Association. What incentive is provided under the new Tax Holiday? Tax Holiday incentive provides 50% reduction on the corporate income tax payable for new capital investment from IDR 100 billion up to less than IDR 500 billion; and 100% reduction on the corporate income tax payable for new capital investment which is IDR 500 billion or more. The reduction period of the corporate income tax reduction is as follows: a) 5 fiscal for the new capital investment with a minimum amount of IDR 100 billion up to less than IDR 500 billion; and b) The following periods for the new capital investment with a minimum amount of IDR 500 billion: IV 15 up to less than billion up to less than 2.1 billion V billion 15 fiscal 20 fiscal Additional period of corporate income tax reduction for two fiscal is also offered following the expiration of the above tax holiday for: a) 25% of the corporate income tax payable for the new capital investment with a minimum amount of IDR 100 billion up to less than IDR 500 billion; and b) 50% of corporate income tax payable for the new capital investment with a minimum amount of IDR 500 billion. What kind of Pioneer Industry is eligible for the Tax Holiday? PMK-150 modified the existing list and expands the list of pioneer industries from 17 to 18 sectors. However, PMK-150 does not change the definition of a pioneer industry under PMK- 35, where a pioneer industry is defined as an industry that has broad connection and/or linkage, provides value added and high externalities, introduces new technology and provide strategic value for the national economy. The new list covers the following: a) Integrated upstream base metal industry (steel and nonsteel), with or without its derivatives; b) Integrated purification and/or refinery of oil and gas industry, with or without its derivatives; c) Integrated petrochemical industry with oil, natural gas or coal based, with or without its derivatives; d) Integrated basic organic chemical industry sourced from agriculture, plantation or forestry, with or without its derivatives; e) Integrated basic inorganic chemical industry, with or without its derivatives; Category New capital investment IDR USD (for reference only) Tax holiday period f) Integrated pharmaceutical raw material industry, with or without its derivatives; g) Manufacturing industry of irradiation equipment, electro medical or electrotherapy; I II 500 billion up to less than 1 1 up to less than 5 36 million up to less than 72 million 72 million up to less than 360 million 5 fiscal 7 fiscal h) Manufacturing industry of electronical or telematic equipment s main components such as semiconductors wafer, backlight for liquid crystal display (LCD), electrical driver, or display. i) Manufacturing industry of engines and main components for industrial engines; III 5 up to less than million up to less than 1.1 billion 10 fiscal j) Manufacturing industry of robotic components, which support the engines manufacturing industry; k) Manufacturing industry of main components for power plant machineries; 2 Tax Alert: Widened eligibility and simplified administration for Indonesia s Tax Holiday Incentive

3 l) Manufacturing industry of automotive and automotive main components; m) Manufacturing industry of main components for ships; n) Manufacturing industry of main components for trains; o) Manufacturing industry of main components for aircrafts and supporting activities for aerospace industry; p) Manufacturing industry with product based from agriculture, plantation, or forestry that produce pulp, with or without its derivatives; q) Economic infrastructure; or r) Digital economy that covers activities such as data processing, hosting, and other related activities. The detail of the business activities and production types of each of the above pioneer industry is determined by the Investment Coordinating Board ( BKPM ) Regulation based on the result of coordination meeting held by the Economic Coordinating Ministry. The new list shows the Indonesian Government desires to expand the local economy beyond primary production and basic assembly into value added manufacturing in many sectors. We expect the final list of ISIC (Indonesian Standard for Industrial Classifications) which will be eligible as Pioneer Industries to be issued. We understand that the preliminary list of the above ISIC has been sent by the Economic Coordinating Ministry to BKPM. Furthermore, a taxpayer may still apply for the Tax Holiday incentive even if it is engaged in an industry that is not listed as pioneer industry stated in a) to r) above. If the taxpayer meets the criteria to obtain Tax Holiday incentive (except for the pioneer industry criterion) it can still apply on the basis that it has also requested for approval for its industry to be approved as a pioneer industry. If the coordination meeting between the MOF, other relevant Ministries and the Investment Coordinating Board decides that the industry meets the criteria as a pioneer industry, the Head of BKPM can forward the application to the MOF through DGT by using Online Single Submission (OSS) system. Therefore, companies making new investments which they view as having strategic economic value for the country, substantial flow-on effects or other broad benefits, might consider an application even if they are outside the nominated categories. obtain Tax Holiday incentive, the company is considered to have submitted its application to obtain Tax Holiday incentive if it has submitted the following supporting documents: a) Softcopy of detail fixed assets in the capital investment plan and the DER amount; and b) Softcopy or an electronic document of the shareholders fiscal statement letters; through OSS before the Start of Commercial Production from the new capital investment. The application for Tax Holiday incentive should be submitted through OSS at: a) The same time when the company submits its application to obtain business registration number for a new taxpayer; or b) Within 1 (one) year after the issuance of the business license for new capital investment. The completed application that is received by OSS will be submitted by OSS to the MOF through DGT as a proposal to obtain Tax Holiday incentive. OSS will notify the taxpayer that its application has been forwarded to the MOF. The decision to grant the Tax Holiday incentive to the company will be issued by DGT for and on behalf of the MOF within five business days after it receives the complete proposal. The Tax Holiday incentive can be given by the MOF in respect of a proposal that is submitted within five of the effective date of this regulation. When can a company utilize the Tax Holiday incentive? A company can utilize the Tax Holiday incentive in the fiscal year when it starts its commercial production. The Start of Commercial Production is defined as when the company sells its products resulting from its Main Business Activities to the market for the first time and/ or the company uses its own products for further production process. The Start of Commercial Production is determined by DGT based on a field audit. The field audit is conducted by DGT after it receives a notification from Head of BKPM on the company s application to determine the Start of Commercial Production. How and when a company can apply for Tax Holiday incentive? The Tax Holiday incentive application will be processed through OSS system. OSS is defined as business licensing issued by the OSS institution for and on behalf of the ministers, head of institutions, governors, or mayors to businesses through an integrated electronic system. When a company registers its new capital investment, OSS will notify the company on whether or not it meets the criteria to obtain Tax Holiday incentive. If the company receives a notification from OSS, which states that it meets the criteria to The DGT s decision on the Start of Commercial Production contains: a) The date of the Start of Commercial Production; b) New capital investment value on the Start of Commercial Production; and c) Conformity between the realization and the Main Business Activities plan. Tax Alert: Widened eligibility and simplified administration for Indonesia s Tax Holiday Incentive 3

4 Taxpayer who receives assignment from the Government under national strategic project A taxpayer who receives an assignment from the Government in relation to the accelerated implementation for the national strategic project ( Assigned Taxpayer ) can apply to obtain the Tax Holiday incentive provided it meets the criteria. For the Assigned Taxpayer: a) It could submit its application without using OSS; b) It can start to utilize the Tax Holiday incentive provided the taxpayer has started commercial production and it has realized all of its capital investment plan; c) The utilization of Tax Holiday incentive is determined by DGT based on the results of the field audit. The field audit is conducted by DGT after it receives a notification from Head of BKPM on an Assigned Taxpayer s application to utilize the Tax Holiday incentive; d) DGT decision on the utilization of Tax Holiday incentive contains at least: 1. The date of the Start of Commercial Production and the realization date on the whole new capital investment plan; 2. New capital investment realization value; and 3. Conformity between the realization and the Main Business Activities plan. The national strategic projects are listed in a Presidential Regulation most recently number 56 of 2018, and are generally large-scale infrastructure programs. The assignment from the Government to confirm a taxpayer s income from a national strategic project shall be determined by a ministerial decree or a decree of the head of institution equivalent to a ministry. What should be done by a company obtaining the Tax Holiday incentive? A company obtaining Tax Holiday incentive must: a) Submit a report to DGT and Head of Fiscal Policy Board on an annual basis in the form of: 1. Capital investment realization report from the time it receives the MOF decision on the corporate income tax reduction until the Start of Commercial Production; or for the Assigned Taxpayer, is until it realizes all of its capital investment plan; and 2. Production realization report from the fiscal year when the company starts its commercial production until the end of the fiscal year when the tax holiday expires; or for the Assigned Taxpayer, from the fiscal year the Tax Holiday incentive is determined by DGT until the end of the fiscal year when the tax holiday expires. Both reports must be submitted within 30 days after the end of the relevant fiscal year. b) Conduct separate bookkeeping between income that falls under the Tax Holiday incentive and other income that does not have the Tax Holiday. Common expenses that cannot be separated between the two incomes in calculating the taxable income should be proportionally allocated; and c) Conduct withholding tax obligations as determined by the prevailing tax laws and regulation. Income earned by the company from its Main Business Activities is not subject to withholding tax during the period of the utilization of corporate income tax reduction (without requirement for the issuance of a withholding tax exemption letter). However, income earned by the company from other activities outside of its Main Business Activities can still be subject to withholding tax. When Tax Holiday incentive can be revoked from a company? Tax Holiday incentive can be revoked from a company if: a) Based on the field audit conducted by DGT, it is found that the company s new capital investment realization value at the Start of Commercial Production is less than IDR 100 billion; b) Based on the field audit conducted by DGT, it is found there is non-conformity between the realization and its Main Business Activities plan; c) The company imports or purchases used capital goods in its realization of new capital investment used to obtain Tax Holiday incentive (except where the used goods are relocated as a whole package of new investment from other country and it is not produced locally, and/ or the company is an Assigned Taxpayer); d) The company realized its Main Business Activities which are not in accordance with its Main Business Activities plan during the Tax Holiday period; e) The company transfers its assets during the period of the Tax Holiday, except where the transfers are conducted to increase efficiency, and it does not cause the realization of new capital investment value to be less than the new capital investment value plan; and/ or f) The company relocates its new capital investment to overseas. The revocation of Tax Holiday incentive due to a) and b) above is decided by DGT on behalf of MOF, while the revocation of Tax Holiday incentive due to c) to f) above is decided by DGT on behalf of MOF based on the recommendation from the Head of Fiscal Policy Board. 4 Tax Alert: Widened eligibility and simplified administration for Indonesia s Tax Holiday Incentive

5 If revoked, the company obtaining Tax Holiday incentive that has utilized the corporate income tax reduction, must repay the corporate income tax payable, including the penalties in accordance with the prevailing tax laws and regulations, and it cannot obtain further reduction on its corporate income tax. Implementing regulations on the Tax Holiday regulation DGT will further regulate the implementing regulations on this Tax Holiday for: a) Field audit procedures to determine the Start of Commercial Production; b) Reporting procedures for company obtaining the corporate income tax reduction; enactment of PMK-150), for which a decision has not yet been issued, shall be processed based on the provisions under PMK-35; and e) For taxpayer which has been issued a principle permit, investment license, capital investment registration, or business license issued by BKPM until up to when PMK- 159 as amended by PMK-103 entered into force, can submit its application to obtain Tax Holiday incentive to the Head of BKPM based on PMK-150, except for the criteria of a pioneer industry, which should follow the provisions under PMK-35. Please contact us to discuss whether your proposed or recent investments in Indonesia may be eligible for a Tax Holiday. c) Revocation of corporate income tax reduction procedures; and d) The use of Tax Holiday incentive for Assigned Taxpayer. Tax Holiday vs Tax Allowance The Tax Holiday incentive will be published and periodically evaluated. DGT shall submit a quarterly report to MOF on the implementation of Tax Holiday incentive. A company that has been granted with a Tax Holiday incentive is not entitled to apply for Tax Allowance incentive. However, for a company that has not yet obtained an MOF Decree on Tax Holiday incentive based on PMK-150, is entitled to apply for Tax Allowance incentive. Transitional provisions At the time PMK-150 is enacted: a) Taxpayer who has received Tax Holiday incentive based on MOF Regulation No. 130/PMK.011/2011 as amended by MOF Regulation No. 192/PMK.011/2014, can still utilize the tax incentive until the Tax Holiday expires; b) Taxpayer who has received Tax Holiday incentive based on MOF Regulation No. 159/PMK.010/2015 (PMK-159) as amended by MOF Regulation No. 103/ PMK.010/2016 (PMK-103), can still utilize the tax incentive until the Tax Holiday expires; c) Taxpayer who has received Tax Holiday incentive based on PMK-35, can still utilize the tax incentive until the Tax Holiday expires; d) Recommendation from the Head of BKPM to obtain Tax Holiday incentive that has been submitted to MOF from 4 April 2018 to 26 November 2018 (i.e. before the Tax Alert: Widened eligibility and simplified administration for Indonesia s Tax Holiday Incentive 5

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