Lynn Lee – Indonesia is set to unveil a tax holiday scheme for large investors as early as next week, officials say, as the country ramps up efforts to woo manufacturing and infrastructure investment.
The first beneficiary of the incentive is expected to be South Korean steelmaker Posco, which inked a US$6 billion (S$7.6 billion) deal with state-owned Krakatau Steel last year. Their venture is an integrated steel mill in West Java, which will create more than 200,000 jobs and is likely to be operational by end-2013.
Details of the tax holiday have not been released, but recent comments by invest-ment officials indicate that investors could receive a tax break of between five and eight years after they turn a profit.
The tax holiday will be granted selectively, to companies which create jobs for locals, bring in new technology, and preferably set up shop in less developed areas.
Indonesia's corporate tax rate is 25 per cent for private companies, while the rate is 30 per cent in Thailand and 17 per cent in Singapore.
Last week, Mr Himawan Hariyoga, a deputy chairman at the government's Investment Coordinating Board, told reporters the tax holiday policy announce-ment could come before the start of a three-day infrastructure conference next week, where an estimated US$32 billion worth of projects will go on offer.
Indonesia is wooing domestic and foreign infrastructure investors as it can muster only around one-third of the US$200 billion it needs to build roads, railways, ports and power plants over the next five years.
Legislator Kemal Stamboel, a former senior partner at a Big Four accounting firm, said the tax holiday policy is symbolic of efforts to "lower the barriers" to doing business in Indonesia.
"If the tax holiday attracts more private-sector involvement in infrastructure, it will allow us to break up most of the bottlenecks that have hampered economic growth," he said, referring to oft-heard complaints from businessmen of high transport costs and poor distribution networks within the archipelago.
Mr Lee Yee Fung, trade agency IE Singapore's regional director for South-east Asia, said tax breaks could spur more big manufacturers to look at Indonesia. "And when the bigger boys start to invest, there could be positive trickle-down effects, enticing Singapore companies, for instance those in precision engineering component manufacturing, to look at Indonesia as a potential manufacturing destination as well."
The tax holiday scheme has been debated at length by government officials and politicians, with one concern being that it will depress tax receipts and affect the annual budget. But proponents of the scheme say it will encourage more investment inflows over the long term, which would offset any potential losses to the taxman.
Economist Muhammad Ikhsan, a special adviser to Vice-President Boediono, said tax holidays are traditionally more attractive to Japanese and South Korean firms than to "firms from Anglo-Saxon countries".
"Studies show that the tax rate is not among the top five issues of concern cited by most investors when it comes to doing business here," he said yesterday, adding that their concerns had more to do with how transparent the taxman would be in ruling on a tax dispute.
The issue of unclear regulations came up when two trade delegations from the United States visited Jakarta early this week. Undersecretary for Commerce Francisco Sanchez told Reuters on Monday that US firms are eyeing investments in Indonesia, but remain concerned about issues like 'protection of intellectual property rights and overall transparency'.
Arbitrary policy changes have also been a concern, with certain political parties and local businessmen lobbying for rules aimed at reducing foreign ownership or involvement in business.
Mr Dennis Heffernan, a member of the board of governors at the American Chamber of Commerce in Indonesia and a horticulture businessman, gave an example to an agri-business mission yesterday of a Bill passed by the Indonesian Parliament last year limiting foreign ownership in the horticulture business to 30 per cent. The Bill is retroactive and foreign entities have to transfer their excess stakes to domestic players in the next four years.