Indonesia’s Investment Incentives: Opportunities in 2023
Presidential Regulation (PR) 10/2021 enumerates 245 priority industries in Schedule 1. These sectors include “Pioneer Industries”, export-oriented manufacturing, capital-intensive enterprises, national infrastructure projects, digital economy, labor-intensive industries, and research and development activities, which are eligible for income tax holidays or so-called tax relief. The Ministry of Finance (MoF) Regulation No. 130/2020 sets out the provisions for tax holidays, and details of tax relief/facilitation can be found in the Ministry of Finance (MoF) Regulation No. 78/2019 (as amended). Generally speaking, industries identified as “pioneer industries” and “national strategic projects” can enjoy a 5 to 20-year income tax holiday.
For companies whose business is neither a pioneer industry nor a national strategic project, the incentives offered include a reduction in net taxable income (up to 30% of the investment amount), a proportional reduction of 5% within six years of commercial production, The premise is that the invested assets have not been transferred out within six years. Furthermore, one may also qualify for accelerated fiscal depreciation deduction for tangible assets and accelerated amortization of intangible assets, tax loss carry-forward periods of up to ten years (compared to the normal five years) and reduced withholding tax rates for non-residents Dividends paid are taxed at the rate of 10% (was 20%) or the rate stipulated in the applicable double taxation agreement, whichever is lower.
The Ministry of Finance Regulation 78/2019, as amended by the Ministry of Finance Regulation 96/2020, sets four criteria for projects eligible for these incentives: The project must have a high financial value or involve a substantial investment; its objective should be that of a product or service; It exports; it creates a lot of jobs; it uses a lot of local ingredients in its products. The regulation specifies specific information on export volumes, employment numbers or local content requirements, and lists 166 industries, as well as 17 other industries in Indonesian provinces, whose investments may be eligible for these incentives. However, companies granted tax holidays and companies operating in comprehensive economic development zones are not eligible for these general incentives.
Ministry of Finance Regulation No. 130/2020 provides avenues for companies not classified as pioneer industries to claim income tax relief. Businesses can complete the self-assessment form through the online form. Instead, the assessment examines various attributes of applicant entities, such as their involvement with new technologies and their level of utilization of domestic raw materials.
In addition, the regulation makes additional investment in national strategic projects eligible for tax holidays. This applies especially to items created as spinoffs. Therefore, these spin-off projects can enjoy the same tax break period traditionally granted to pioneer industries.
Government Regulation No. 45/2019 introduces a “superior deduction” for companies engaged in labor-intensive industries, as well as those involved in carrying out internship and vocational training programs or engaging in research and development. According to the regulations, companies in labor-intensive industries that do not enjoy tax holidays or allowances can apply for a significant reduction in taxable net income. This reduction can be as high as 60% of the value of investment in tangible fixed assets. The Ministry of Finance Regulation No. 16/2020 outlines the specific eligibility requirements and the process for obtaining these super deductions.
In view of the impact of the epidemic on the economy, the Ministry of Finance introduced a series of relief measures under Regulation No. 149/2021. This provision greatly expanded the number of sectors eligible for various forms of tax relief. The number of sectors eligible for import duty relief increased from 132 to 397. It also expanded the number of sectors eligible for a 50% reduction in monthly corporate tax (from 216 to 481), as well as sectors that could benefit from simplified tax incentives. VAT refund process (changed from 132 to 229). To continue supporting these industries, Finance Ministry Regulation No. 114/2022 extends these incentives until the end of 2022.
Presidential Regulation (PR) 10/2021 outlines a list of 245 industries prioritized in Schedule 1. Under the framework of the Government Regulation (GR) in Lieu of Law 2/2022 (also known as GR 2/2022), these industries are able to obtain various tax and non-tax incentives. The regulation comes into effect at the end of 2022 and replaces the 2020 Omnibus Job Creation Act. Industries included in the list include leading industries, export-oriented manufacturing, capital-intensive enterprises, national infrastructure projects, digital economy, labor-intensive industries, and research and development activities. To obtain these benefits, businesses need to invest at least Rp 10 billion (excluding land and buildings). Technology start-ups operating in special economic zones are exempt from this requirement.
Under the Ministry of Finance (MoF) Regulation No. 130/2020, which replaced the Ministry of Finance Regulation No. 150/2018, the maximum tax holiday remains at 20 years. This applies to industries classified as pioneers. In addition, the regulation also lowered the minimum capital investment required to qualify for the program from Rp 500 billion to Rp 100 billion. There is also a tax holiday of up to 20 years for projects costing more than $30 trillion.
The Ministry of Finance Regulation No. 130/2020 contains other significant amendments. One is to expand the list of pioneer industries. Second, the regulation removed the requirement that applicant companies must be newly established, meaning existing companies investing in new projects are also eligible. Any company that considers its activities to be a pioneer industry can self-assess whether its project meets the quantitative criteria of the pioneer industry classification. This could mean that the project has extensive linkages with other industries, provides high added value, introduces new technology, or has strategic value to the Indonesian economy. The Investment Ministry (formerly known as the Investment Coordinating Board, or BKPM) promised to make a decision on the tax holiday within five working days.
Projects with higher capital investments are eligible for a 100% tax deduction under certain conditions. Investments between Rp 500 billion and Rp 1 trillion can apply for a 100% income tax deduction for five fiscal years. Businesses from Rp 1 trillion to Rp 5 may be eligible for tax holidays for seven fiscal years. Investments between 5 trillion and 15 trillion can enjoy a tax holiday of 10 fiscal years. Amounts between $15 trillion and $30 trillion are eligible for 15 financial years, and any investment of $30 trillion or more is eligible for a 20-year tax holiday. The tax holiday begins when commercial production begins. After the end of the first tax holiday, an additional incentive may be offered, namely a 50% reduction in corporate income tax for a further two years.
Some manufacturing industries are classified as pioneer manufacturing industries, including: upstream metal industries, oil and gas refining, petrochemicals derived from oil, gas, or coal, basic inorganic and organic chemicals, pharmaceutical raw materials, certain types of medical devices, electronics Major components or telematics equipment, machinery and major components, specific robots used in manufacturing, mechanical components of power plants, motor vehicles and their major components, ship, train and aircraft components, activities supporting the aerospace industry, production of pulp industries such as agroprocessing, digital data processing and hosting, and economic infrastructure projects, including those funded by public-private partnerships (PPPs).
However, companies that receive tax breaks or incentives in SEZs may not be eligible for tax holidays. This provision ensures a balanced distribution of tax benefits among different industries and business conditions. Furthermore, specific industries also enjoy
Focusing on the automobile industry, the GR 73/2019 and GR 74/2021 bills introduced by the Indonesian government in recent years are to provide luxury tax (LST, Luxury-goods sales tax) relief for environment-friendly cars, with the purpose of increasing the electric Adoption of the car. The degree of LST reduction depends on the vehicle’s fuel consumption rate, carbon emissions and other functions related to the use of electric energy.
PR 55/2019 is a further step to reduce the tax on battery electric vehicles (BEV) and related supply chain commodities, and provide a series of incentives to stimulate domestic production and manufacturing, including financing support. Furthermore, PR 55/2019 is aimed at the proportion of local materials to be covered in the manufacturing regulations for BEVs and related components. Similarly, traditional fuel vehicles for export purposes can also apply for subsidies, such as exemption from invisible tariffs.
Government Regulation (GR) 27/2017 amended GR 79/2010 and introduced various incentives for upstream oil and gas operators holding Production Sharing Contracts (PSCs) with the government. These benefits include exemption from import duties on physical imports during the exploration and extraction phases. 100% reduction in land tax and construction tax during the exploration phase, and up to 100% reduction during the mining phase. There are value-added tax (VAT) deductions and withholding tax exemptions for income derived from shared asset fees, and income tax and VAT exemptions for overhead costs incurred by the contractor’s head office.
One of the important non-tax incentives introduced by GR 27/2017 is the tax-free treatment of income arising from the promotion and transfer of participating interests in PSCs after deduction of final income tax. Although not expressly provided for in GR 27/2017, this provision means that the transfer of a PSC participating interest will not be subject to branch profit tax.
GR 27/2017 and Energy and Mineral Resources Ministry (ESDM) Regulation 8/2017 effectively eliminates the cost recovery mechanism available to upstream oil and gas contractors. Instead, they introduced a total split system when formulating new product sharing contracts. However, Regulation No. 12/2020 reinstated the cost recovery mechanism and gave the Ministry of Energy the option of either such a system or a general sharing arrangement.
Under the total split system, the government no longer reimburses contractors for the upfront costs of exploration and production. Instead, they will be able to keep most of the recovered oil and gas. After deducting income tax, the total oil production will be distributed by the government and contractors in a ratio of 57:43 and natural gas 52:48, with the larger share going to the government. In theory, the contractor’s final share could be higher, depending on variables.
Both capital and operating expenditures are deductible in determining income tax, although the government no longer reimburses contractors for development costs under the aggregate points mechanism. This income tax must be paid before the split, which is a change from the previous system where income tax was paid after the contractor collected its share. GR 53/2017 provides detailed specifications on the tax treatment of gross split PSCs.
The terms of the PSC are negotiated between the investor and ESDM’s unit, SKK Migas. They have stockpiled “first oil” equivalent to 10% of production for the ministry. After-tax profit distributions are not affected by the new tax implementation, but dividends are still subject to tax. Companies participating in oil and gas product sharing contracts are exempt from import duties and capital goods VAT.
Under GR 18/2015, investments in refineries and geothermal projects reduce taxable income by 30% over six years. Imported capital equipment used in geothermal projects is also exempt from VAT and luxury goods sales tax. The amended BKPM Regulation 16/2015 grants companies engaged in production at public power plants the right to import capital goods duty-free for a period of two to three years, provided the Director-General of Electricity approves the following list of goods to be imported.
Law 21/2014 states that the government is responsible for the initial exploration of geothermal steam before granting concessions to independent power producers. ESDM Regulation 17/2014 increased the feed-in tariff (FiT) for geothermal power, a guaranteed price paid by state-owned power utility Perusahaan Listrik Negara. The regulations set a tiered feed-in tariff, imposing higher prices on geothermal plants that require more time to explore and develop, and projects in remote areas.
GR 2/2022 removes the requirement for holders of geothermal operating permits to pay production fees for direct use of geothermal energy. Instead, they are now only required to pay local taxes and fees. The new law also abolishes the provisions of the Geothermal Law that require a separate permit from the Ministry of Oceans and Fisheries for the indirect use of geothermal resources in protected water sources. Finally, PR 112/2022, published by President Joko Widodo in September 2022, introduced various incentives for renewable energy projects, including income tax relief and exemptions from land and building taxes and import duties. The ministries are expected to issue regulations specifying these incentives in 2023.
Under the Omnibus Law 2020 and GR 2/2022, the rules regarding mining rights have changed. Holders of these rights, participating in coal value-added activities, are no longer required to pay production royalties. These fees are typically 2-7% of the selling price, depending on the type of coal. In addition, coal companies that build their own mine-mouth steam power plants are also eligible to enjoy this incentive. However, it is worth noting that coal mined directly from source is now subject to value-added tax (VAT).
To incentivize mining companies to set up smelters, the Ministry of Finance issued Regulation No. 153/2014. The regulation aims to reduce export tariffs for companies during the construction of processing facilities. Additionally, BKPM Regulation No. 16/2015 provides that the government may reduce or defer import duties and VAT on capital goods imports by coal mining companies. To qualify for this incentive, a recommendation from the Directorate General of Mines and Coal is required.
The Integrated Economic Development Zone, also known as Kawasan Pengembangan Ekonomi Terpadu (Kapet), offers a range of incentives to businesses operating within its borders. This includes a taxable income reduction of up to 30% relative to the investment amount, apportioned at 5% for the first six years of commercial production. It is a condition of obtaining this permit that the investment assets do not move out of the zone within a period of six years. In addition, companies can benefit from accelerated depreciation deductions and an extension of the tax loss carryforward period to ten years, significantly longer than the standard five years. Finally, the withholding tax rate on dividends paid to non-residents was reduced from 20% to 10%.
By the end of 2022, 13 districts have been designated as Kapets. These areas are mainly located in the economically backward eastern regions. To qualify for the above incentives, businesses must obtain a recommendation from the Ministry of Investment (formerly known as the Investment Coordinating Board (BKPM)) and then submit an application to the Directorate General of Taxation.
In addition, companies located in bonded areas are eligible for further incentives. These include exemption from value-added tax and sales tax on certain luxury goods transactions, exemption from advance income tax on imported capital goods and equipment used directly in production activities, and deferment of import duties on capital goods, equipment and processing materials. There is also a four-year exemption from import duties on machinery and certain spare parts. Goods can be imported into a bonded area and re-exported without incurring customs duties, unless the goods are sent to Indonesia’s regular customs area. The main purpose of the bonded zone is to facilitate the processing of goods and materials, which includes design, engineering, sorting, preliminary inspection and packaging.
As of December 2022, Indonesia has 135 industrial zones. Being located in one of these areas offers businesses a streamlined application process for building and related permits, thereby circumventing complex land use regulations. BKPM oversees the approval process. Law No. 39/2009 sets out the master plan for the establishment of special economic zones, which include bonded zones, industrial zones, export processing zones and free trade zones.
Export Orientation Incentives and Parks
In Indonesia, goods can be imported into the bonded zone (Bonded Zone), and then exported and subject to customs duties on the relevant goods. However, if these goods are not exported to the bonded zone, but the general customs area, then you need to pay customs duties. Bonded areas are specially designed for the processing of goods and materials. This includes various steps involved in the production process such as design, engineering, sorting, initial inspection and packaging.
Regulations established by the Ministry of Finance (MoF), in particular MoF Regulation 237/2020 as amended by MoF Regulation No. 33/2021, allow companies operating in Freeport Zones, Special Economic Zones (SEZ) and Bonded Zones to import tariffs on capital goods – Investment Free for two years during the construction phase of the project. Depending on the duration of the construction, this period may be extended. The imported capital goods must be capital goods that Indonesia cannot supply in sufficient quantity or meet the corresponding specifications.
Foreign investment approval in industrial bonded zones and industrial zones is managed by the Ministry of Investment (formerly known as the Investment Coordinating Board (BKPM)). However, domestic investment approvals in these areas still fall within the purview of the respective local governments. Indonesia has 135 industrial zones by the end of 2022. These parks offer a streamlined application process for building and related permits, and offer a way around complex land use rules.
Government Regulation (GR) 142/2015 states that companies located in these industrial areas may qualify for regional tax relief. Development zone developers can also be exempted from environmental impact assessments if they have already met this requirement. Law No. 39/2009 sets out the master plan for the creation of SEZs, Article 3 defines SEZs as areas covering various economic activities such as export processing, logistics, industrial production, technology development, tourism, energy production, etc.
SEZs are also designated for processing the abundant natural resources in which they are located. Companies operating in SEZs can enjoy fiscal incentives such as the suspension of import duties, exemption from consumption tax on imported raw materials, exemption from value-added tax and consumption tax on luxury goods, exemption from income tax on imported goods, and reduced land and building taxes. In addition, they may receive exemptions or reductions from local taxes. According to the Ministry of Finance Regulation No. 237/2020, companies operating in special economic zones can enjoy income tax relief of up to 100% for a period of 10 to 20 years, depending on their level of investment. Non-fiscal incentives include easier access to land titles and faster processing of various permits.
The Omnibus Job Creation Law of 2020 and its successor GR 2/2022 expanded the scope of business activities permitted to operate in SEZs by amending Law No. 39/2009. GR 12/2020 and GR 40/2021 update the incentives offered to developers, managers and businesses operating in these areas. Indonesia has 15 SEZs in operation by the end of 2022, with several others under development. These include the Riau Islands SEZ off the coast of Singapore, which includes Batam, Bintan, and Karimun, as well as free trade zones on nearby islands; the Sabang SEZ in Aceh province; Tanjung Lesong in Banten province; Lesung); and Sei Mangkei in North Sumatra. In 2019, the government established three new special economic zones covering 2,200 hectares in East Kalimantan, North Sulawesi and North Maluku.
Outside bonded areas and special economic zones, manufacturers whose products export more than 65% can apply for a refund of import duties and exemption from value-added tax and business tax on luxury goods and materials purchased domestically during their production process. In order to qualify for import duty exemption, a company must submit a prescribed application form to BKPM. The GAC is also facilitating exporters operating at ports of entry, allowing eligible exporters to recover import duties within seven days. The benefits are also available to manufacturers who export other products, with certain exceptions, including coffee, clothing, natural gas, oil, plywood, rubber, tin and products covered by export or quota agreements.