T

he government has revealed the details of its plan to introduce tax incentives for foreign companies that do not repatriate their earnings overseas, a policy aimed at shielding Indonesia from seasonal capital outflows that exert pressure on the current account.

Offshore-based companies that did not repatriate their dividends overseas would receive '€œvarious tax incentives'€ if they moved instead to re-invest their earnings to expand their businesses here, Finance Minister Chatib Basri said on Sunday.

Some of the tax incentives were already available from the Investment Coordinating Board (BKPM) but were untapped, while new tax cuts were also being considered.

For instance, in the event of a company wishing to invest their dividends in a new industrial segment, the Finance Ministry could coordinate with the BKPM to provide tax allowances for pioneer businesses, the minister explained.

'€œTo prevent capital outflows we cannot impose new taxes on funds that exit the country, as they could be seen as capital controls,'€ Chatib said. '€œTherefore, we should go for incentives for businesses to keep their funds onshore.'€

The increase in foreign direct investment (FDI) in Indonesia in recent years has meant an upward surge in seasonal earnings repatriation, which normally occurs in the second and fourth quarter every year, during which the current-account deficit normally widens as foreign firms transfer their earnings to their headquarters abroad.

According to Bank Indonesia'€™s (BI) estimates, in the April-June period, the deficit in the current account '€” the broadest measurement of trade that includes exports, imports, services and transfers '€” will hit US$9 billion, or around 4 percent of the gross domestic product (GDP), more than twice the $4 billion that the country recorded in the first quarter.

Every year, high dollar demand by companies for earnings repatriation, combined with the expectation of a wider current-account deficit, usually sparks bearish sentiment toward the rupiah in the second quarter.

This year, the rupiah weakened by 6.1 percent from April to June, compared to a 7 percent appreciation from January to March, according to the Jakarta Interbank Spot Dollar Rate (JISDOR).

On Friday, Chatib held a meeting with Coordinating Economic Minister Chairul Tanjung to discuss the possible implementation of the tax breaks.

Principally, the incentives would be beneficial for businesses because, by investing their funds locally, they would effectively not have to pay the 10 percent dividend tax currently levied by the government if they moved their earnings overseas, argued Chairul, who was formerly a businessman with conglomerate group CT Corp.

'€œFunds that are re-invested onshore would have a multiplier effect on the economy, such as additional labor absorption, economic growth and [dollar-based] export proceeds,'€ he said on Friday night after the meeting.

Bank Negara Indonesia (BNI) chief economist Ryan Kiryanto noted that the tax breaks for dividend re-investment in Indonesia, if implemented, would translate into a boost in dollar liquidity onshore and thus reduce the volatility of the rupiah.

Nevertheless, it would be imperative for the government to ensure the continuous improvement of Indonesia'€™s business climate so that foreign firms would be comfortable in enlarging their investments in Indonesia, suggested David Sumual, the chief economist of Bank Central Asia (BCA).

'€œIt would be pointless if the government introduced various tax incentives, but they didn'€™t do anything to improve our business climate,'€ David said on Sunday.

'€œActually, even without any incentives, they [foreign companies] would happily re-invest their earnings in Indonesia if we had a good business climate,'€ he added.