25 February 2021
Omnibus Law, Tax, and Investing in Indonesia
Omnibus Law has been a headline in Indonesia aside from Covid-19 during 2020. People were curious about this law as it was supposed to create a major change in Indonesian investment. As the spirit of the law is to create more jobs and promote investment, this law also attracted the attention of foreign investors. People’s curiosity has been answered once the Indonesian House of Representatives finally legalized the draft of Omnibus Law as a law on 5 October 2020. The Omnibus Law was further promulgated on 2 November 2020 and issued as Law Number 11 of 2020 on Job Creations (Omnibus Law). This law amends or revokes approximately 78 prevailing laws and regulations. Following the issuance of this law, the government has also issued 49 new governing regulations, which will serve as implementing regulations of the Omnibus Law.
This publication will highlight the Omnibus Law (and its implementing regulations) from a tax and investment perspective for investors. Several important changes brought by Omnibus Law (and its implementing regulations) and Law Number 2 of 2020 on the Stipulation of Government Regulation In Place of Law Number 1 of 2020 on State Financial and the Stability of the Financial System Policies for the Mitigation of Coronavirus Disease 2019 (Covid-19) Pandemic and/or to Deal with Threats that are Potentially Harmful to the National Economy and/or the Stability of the Financial System (Law 2) for investment in Indonesia from tax perspective relates to (i) reduction of corporate income tax rate, (ii) tax facilities for priority industries, (iii) non-taxable dividend, (iv) adjustment on interest tax tariff, (v) amendment to VAT tax object, and (vi) amendment on sanction and interest return tariff.
Reduction of Corporate Income Tax Rate
Before the issuance of the Omnibus Law, the government has issued Law 2 in response to the Covid-19 situation which has impaired the world’s economic systems, including Indonesia’s. The government intends to create easement on taxpayers and help their business by the issuance of this law. One of the important regulations in Law 2 that may impact investment in Indonesia is the decrease of the corporate income tax rate.
Law 2 has decreased the corporate income tax rate, which was previously at the rate of 25% to be 22% for the financial year of 2020-2021, 20% for the financial year of 2022. In addition, a qualified public company may obtain a further 3% lower rate than the previously mentioned rate.
Tax Facilities for Priority Industries
In line with the spirit of Omnibus Law, the government recently issued Presidential Regulation Number 10 of 2021 on Investment Business Field (Perpres 10). The main purpose of this Perpres 10 is to regulate lines of businesses that are closed for foreign investment or conditionally open for foreign investment. In addition to the main objectives, Perpres 10 also contains a list of prioritized lines of businesses (priority industries) that will be given be given fiscal and non-fiscal incentives.
To be categorized as priority industries, the line of businesses must fulfill the following criteria it can be considered as national strategic projects, it is capital intensive, it is labor-intensive, it uses high technology, it is a pioneer industry, it is an export-oriented industry, and/or it is a research, development and innovation-oriented industry. Comprehensive lists of these industries, including additional criteria that must be fulfilled for certain industries, can be found in Attachment 1 to Perpres 10.
The selective line of businesses will be given fiscal incentives in the form of a tax holiday, tax allowance, investment allowance, customs incentives. They will also enjoy non-fiscal incentives in the form of easement of licensing procedures, support on procurement of infrastructures, immigration matter, manpower matter.
Non-Taxable Dividend
The Omnibus Law opens an opportunity for dividends earned by local taxpayers to be non-taxable. The local taxpayers are defined as the following in the Omnibus Law:
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Indonesian citizens or foreign citizens who (i) resides in Indonesia, (ii) are present in Indonesia for more than 183 days in twelve months, or (iii) are present in Indonesia in a fiscal year and have an intention to reside in Indonesia;
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entities established or having domicile in Indonesia; or
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undivided inheritance.
Government Regulation Number 9 of 2021 on Tax Treatments to Support Ease of Doing Business (PP 9), which are issued as one of the implementing of the Omnibus Law defines the exempted dividends as (i) dividends that are distributed by a general meeting of shareholders or interim dividend; and/or (ii) after-tax income from an offshore permanent establishment and offshore active income not from a permanent establishment. PP 9 also regulates that the dividends that are qualified to be exempted are dividends obtained/distributed after the issuance of the Omnibus Law.
One of the key requirements to enjoy this easement is that the local taxpayers must first have such dividends re-invested in Indonesia. Specific for dividends earned from foreign companies, there are additional requirements, in which, the invested amount should be at least 30% of the profit after tax.
Based on a press conference hold by the government, we note that the ultimate purpose of this exemption is to encourage local taxpayers to invest their money in Indonesia – in line with the main objectives of the Omnibus Law, to promote investment in Indonesia. The government hopes that by this exemption, the local taxpayers will choose to invest in Indonesia other than saving their money or invest in other jurisdictions. Hence, this will help to boost Indonesian economics.
Adjustment on Interest Tax Tariff
The Omnibus Law regulates that government may reduce the interest tax tariff for the domestic interest from loan repayment guarantee received by foreign taxpayers, which currently is at the rate of 20%. In line with this, the newly issued PP 9 reduces the interest rate to 10% or in line with the tax treaty’s rate for bond interests received by non-permanent establishment foreign tax subjects. The bond interests include (i) interest on bonds with coupons that is equal to the gross amount of the interest under the bond’s term of ownership, (ii) discount on bonds with coupons that is equal to the difference between the selling price or nominal value above the cost of the bonds, excluding the current interest, and (iii) discount of the interest-free bonds that is equal to the difference between the selling price or the nominal value above the bond acquisition price. The reduced tariff will be effective within six months as of the effective date of the PP 9, i.e., on 3 August 2021.
PP 9 regulates that the withholding of the interest tax should be conducted by (i) bond issuers or custodians as the appointed payment agent, and/or (ii) securities companies, dealers, or banks as the intermediary sellers and/or buyers.
Amendment to VAT Tax Object
The Omnibus Law excludes a transfer of Taxable Goods in the framework of mergers, consolidations, expansions, spin-offs, and acquisitions, and transfer of Taxable Goods for capital injection in place of shares, which are conducted by Taxable Entrepreneurs from the definition of delivery of Taxable Goods. PP 9 further clarifies that capital participation in the form of goods (or also known as inbreng) is part of capital injection in place of shares, as stipulated in the Omnibus Law.
Amendment on Sanction and Interest Return Tariff
Before the issuance of Omnibus Law, administrative sanctions and interest return tariffs are generally fixed at the rate of 2% per month. After the issuance of the Omnibus Law, this tariff is changed to a floating rate, referring to the rate to be determined by the Minister of Finance. The Minister of Finance explains that the purpose of this change is to promote fairness – so that the tariff will reflect the actual situation not fixed at a certain rate.
Below is a summary of the difference in the regulations pre and post-Omnibus Law:
Administrative Sanctions
|
|
Pre-Omnibus Law |
Post-Omnibus Law |
|
If the taxpayers voluntarily correct the tax return that results in higher tax debts |
2% |
Floating rate issued by the Minister of Finance (MoF)
Note: The floating rate issued by the MoF will be calculated based on the benchmark interest rate plus 5% and divided by 12 effective on the date the calculation of the sanctions. |
|
If the taxpayers voluntarily submit the tax return or correct the tax return during preliminary investigations but before notification to the prosecutors |
150% of underpayment |
100% of underpayment |
|
If the taxpayers voluntarily disclose improper filing of the tax return during an investigation by the directorate general of taxation but before the issuance of a notice of tax assessment |
An increase of 50% |
Based on the benchmark interest rate plus 10% and divided by 12 effective on the date the calculation of the sanctions |
Interest Return
If there is a tax overpayment, a taxpayer may request for return from the tax office, which will also include interest payment. Before the issuance of Omnibus Law, the interest return tariff, in this case, was fixed at 2% per month. After the issuance of Omnibus Law, the interest return will be floating based on the rate issued by the MoF, which will be calculated based on the benchmark interest rate divided by 12 effective on the date the calculation of the interest return.
PP 9 regulates the following transitional provisions for the calculation of administrative sanctions and interest return which calculation was effective before 2 November 2020:
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for administrative sanctions based on a notice of tax assessment issued as of 2 November, which calculation of administrative sanctions started before 2 November 2020, the calculation of the administrative sanction will be based on the tariff as issued by the MoF effective in November 2020;
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for disclosure of improper filing, which was submitted on 2 November 2020, which calculation of administrative sanctions started before 2 November 2020, the calculation of the administrative sanction will be based on the tariff as issued by the MoF effective in November 2020;
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for interest return given pursuant determination, decision or ruling issued on 2 November 2020, which calculation of interest return started before 2 November 2020, the calculation of the interest return will be based on the tariff as issued by the MoF effective in November 2020.
Author’s Note
In general, we note that the government tries to provide easement on taxpayers through the issuance of Omnibus Law and its implementing regulations. From the decrease of the corporate income tax rate, exclusion of exempted dividends from income tax, the decrease of tax interest on bonds, tax allowances, and lastly reduction of administrative sanctions. These easements will provide positive impacts for the investors in investing in Indonesia.
For further information, please contact:
Freddy Karyadi, Partner, ABNR
+62 818 103 949
fkaryadi@abnrlaw.com
Anastasia Irawati, Senior Associate, ABNR
airawati@abnrlaw.com
