Indonesia's "uncompetitive" tax law has contributed to a massive drop in domestic realized investment in the first six months of the year by forcing investors to seek "foreigner" status to take advantage of lower rates in other countries, an official says.

Investment Coordination Board (BKPM) chairman Muhammad Lutfi said Thursday the first semester's "unusual" investment figures were due to a trend for local investors to invest through global legal entities to avoid paying Indonesia's taxes.

Realized local investment plunged 70 percent to around US$940 million in the first six months of this year from $3.15 billion in the same period last year.

In the same period, realized foreign investment soared to $10.38 billion, a 153 percent increase from $4.1 billion in the same period in 2007.

However, Lutfi said the figures did not represent a reluctance to invest, but rather showed that many local investors had preferred to invest though foreign legal agencies.

"After we tracked this down, we found that many Indonesian business people used foreign legal entities to benefit from lower tax rates in other countries," he said, without providing the numbers or business sectors of such companies.

Speaking after a forum on trade and economic cooperation between Indonesia and China's Guang Dong province, Lutfi said those investors perceived it was more "efficient and profitable to pay taxes overseas".

"Our tax rates were uncompetitive, compared to those in other countries," he said.

Citing examples, he said Malaysia imposed an income tax of 25 percent, Singapore 20 percent, and that "(Singapore) is heading for an 18 percent income tax as it is competing with Hong Kong".

Lutfi said he hoped the recent amendment to the tax law, which lowers taxes, would lure more investors to Indonesia so the country could rival its neighboring countries.

The new law, passed last Tuesday by the House of Representatives, stipulates that income tax for corporations in 2009 will be a flat 28 percent, before decreasing to 25 percent in the following year. The new scheme replaces the old progressive tax system.

Indonesian Employers Association chairman Sofjan Wanandi said the new law had sent the country into a competitive phase in global businesses.

"With a 25-percent income tax (subject to legal entities) to be effective by 2010, Indonesia is almost as competitive as other countries, like Thailand and Malaysia, and is better than China, which imposes higher taxes," he said.

He added that China, which currently imposes an income tax of 30 to 35 percent, will soon lower the tax to 25 percent to become more competitive.

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