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Omnibus law will help prevent capital outflows
JP/Nedi Putra AWThe holding period for assets repatriated under the 2016 tax amnesty will end later this month
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JP/Nedi Putra AW
The holding period for assets repatriated under the 2016 tax amnesty will end later this month. After that, those assets can either be retained at home or taken back overseas. There is certainly great concern that such capital outflows will put pressure on the rupiah, affect the balance of payments and economic growth. Therefore, preventing the outflow of repatriated assets is important as the country still needs significant investment to support its economy.
Nearly 1 million taxpayers participated in the amnesty by declaring assets and paying a redemption fee. Around 75 percent of the participating taxpayers were individuals. The Taxation Directorate General collected more than Rp 114 trillion (US$9 billion) in redemption fees.
The ratio of redemption fees compared to gross domestic product was around 0.8 percent. This ratio was the highest among other countries that had granted a tax amnesty, such as Chile (0.62 percent), India (0.58 percent), Italy (0.2 percent). Regarding asset declaration, no less than Rp 4.9 quadrillion has been declared. This number includes approximately Rp 1.03 quadrillion in offshore declarations and Rp 146 trillion in repatriated assets invested in Indonesia.
The government is optimistic that those assets will not be sent offshore because of supporting factors such as relatively high economic growth, low inflation, high returns on investment in rupiah stock and obligation or even a tax allowance and tax holiday.
Taxpayers who repatriate their assets may benefit from instruments offered by the government to ease investment. For example, there is a tax allowance for eligible taxpayers making new investments or expanding their businesses in certain sectors/regions by fulfilling requirements, such as high-value investment, being export-oriented and having high-level local content.
In 2018, the government issued Finance Ministerial Regulation No. 150/2018 on corporate income tax reduction for new investments in pioneer industries, also called a tax holiday. The benefit obtained by investors in 18 certain pioneer industries is a 50 to 100 percent reduction in corporate income tax liability for five to 20 tax years, based on investment value.
The government and the House of Representatives will soon start deliberating an omnibus bill that will stipulate facilities and rules to promote investment and economic growth and level the playing field between national and foreign business players.
The omnibus bill will bring a significant change by shifting the tax system from currently a worldwide (residence-based) system to a territorial system. Under the current tax system, a resident taxpayer is subject to income tax for income both generated Indonesia and overseas. Foreign tax credit will be provided to income tax paid in foreign tax jurisdictions in which the income is derived. The system may discourage taxpayers, including parent companies, from repatriating their incomes to their home country as they might be burdened by a higher tax rate.
Whereas under a territorial tax system, taxpayers are subject to an income tax based on the locations where the profits are generated rather than residence based. This means that, for example, an Indonesian company earning profits overseas would no longer face an additional income tax when it brings back those profits to Indonesia.
From an economic point of view, this system will theoretically reduce barriers to international capital inflows. The bill proposes “participation exemptions” in which foreign profits (dividends) received from overseas subsidiaries are excluded from domestic taxable income provided that those profits are invested in Indonesia.
In other words, exempting foreign profits from domestic income tax. Also, the draft proposes a reduction in corporate income tax rate providing additional tax incentives for Indonesian companies.
The territorial system may attract Indonesian multinational companies to relocate their headquarters abroad back home. We know that many of those companies have shifted their headquarters to low or tax haven countries for lower tax burdens.
Studies in the United States showed that the US worldwide system incentivizes companies to avoid domestic tax on their foreign profits by moving their corporate headquarters out of the country (“Tax Inversion”, Zachary Mider, Bloomberg). Therefore, the relocation of headquarters to Indonesia may boost economic growth and more taxes will be earned.
Independent tax research organization taxfoundation.org said many countries had moved toward the territorial system, including most members of the Organization for Economic Cooperation and Development. The main goal is to reduce barriers to capital inflows and increase the competitiveness of domestically headquartered multinational firms.
Also, the US, through its 2017 Tax Cut and Jobs Act, has shifted its tax system toward territorial for the same reasons, mainly to repatriate most of its multinationals’ assets.
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Officials at the Finance Ministry. The views expressed are their own.
