The Indonesian Ministry of Finance (the MoF) has issued Regulation 130/PMK.011/2011 (the Regulation) which, with effect from 15 August 2011, enables qualifying businesses to apply for a five to ten year tax exemption from Indonesian income tax. Upon the expiry of such tax exemption, the taxpayer is then entitled to a 50% income tax reduction for a further two years.
The Regulation also gives the MoF the discretion to extend the period of the initial tax incentives beyond the abovementioned timeframes, based on its assessment of the competitive capacity of industries in Indonesia and the strategic value of the relevant business.
To apply for the above tax incentives under the Regulation, the taxpayer must:
- Be in a pioneer industry. A pioneer industry is an industry with wide connections, and which provides high value add and externalities, introduces new technology, and is of strategic value to the Indonesian economy. This includes industries related to base metals, processing of oil and/or organic chemicals which are derived from oil and natural gas, machinery, renewable energy, telecommunications equipment or other such industry as determined by the MoF.
- Have a planned new investment of capital of at least one trillion Indonesian Rupiah (approx US$118 million) which has been approved by the relevant Indonesian authorities (a Relevant Investment).
- Deposit at least 10% of the Relevant Investment capital mentioned above in a bank in Indonesia and such deposit cannot be withdrawn before the Relevant Investment is realised.
- Be a new Indonesian legal entity established within 12 months prior to the issue of the Regulation or established at the same time as, or after, the issue of the Regulation.
The tax payer can only benefit from any tax incentives granted provided that the Relevant Investment has been realised and commercial production has commenced.
Applications for the above mentioned tax incentives must be submitted to the Indonesian Ministry of Industry or the Head of the Indonesian Investment Coordinating Board. The Minister of Industry or the Head of the Investment Coordinating Board will then submit to the MoF, a proposal for the granting of the tax incentives. The submission of the proposal must be done within three years of the effectiveness of the Regulation (ie 15 August 2011). Obtaining the requisite approvals may prove to be a slow process as it will involve various governmental bodies, including a verification committee set up by the MoF (which will review the strategic importance of the project to the Indonesian economy and to ensure that the above criteria are met) and requires consultation with the President of Indonesia.