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CORE Indonesia: Investors Need More Than Tax Incentives

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CORE Indonesia (Center of Reform on Economics) recently released findings related to problems hindering and slowing down Indonesia’s investment climate. For example, licensing is still overly complicated and the Online Single Submission (OSS) system is still not as effective as it needs to be with various ‘teething’ issues it has had to deal with.

But according to Bisnis.Com, CORE Indonesia also consider that tax incentives are not the number one consideration for investors to want to place their funds domestically. The investment allowance as stated in the Minister of Finance Regulation (PMK) Number 16/2020 concerning the Provision of Net Income Reduction Facilities for New Investments or Business Expansion in Certain Business Fields, which are Labour-Intensive Industries, have been in effect since 2020, they’re valid for six years from the tax year when production begins, and have a reduction in net income of 10-percent per subsequent year.

Investments in labour-intensive industries can get an incentive to reduce net income by 60-percent of the total investment in the form of tangible fixed assets. The facility is given to domestic corporate taxpayers who invest in labour-intensive sectors and employ at least 300-Indonesian workers. Referring to the attachment of PMK 16/2020, there are 45-business fields that are entitled to take advantage of the investment allowance facility.

This would, on the surface, seem to be a good enough draw. But here’s the rub, and what the debate is all about – because despite the obvious benefits of these incentives, the Directorate General of Taxes (DGT) noted that in 2020 only two taxpayers applied for the investment allowance facility. The following year, only three taxpayers took advantage of the incentive.

CORE Indonesia’s economist Yusuf Rendy Manilet, argues that this slow pick up of the investment allowance facility shows that there are other important factors influencing investment apart from tax incentives, including the business climate, economic recovery, regulatory certainty, and how corruption is handled.

Yusuf explained that the business climate is closely related to the prospects for economic growth in the country concerned. Indonesia itself managed to record a fairly stable economic performance during COVID-19 because it was able to grow well in 2021 and the first quarter of 2022. Other key factors also include the ease of doing business in obtaining raw materials, access to information, and infrastructure readiness.

Yusuf suggests the government take this debate seriously. “I think the rule of thumb is still the same,” he said, “meaning that to attract investment, policies are needed on all fronts, especially to continue the structural reform process and ensure that existing regulations can run without any very significant changes.”

 

Sources: Bisnis.Com, D’Insights, CORE Indonesia

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