Business Has Mixed Feelings Towards Indonesia’s Tax Reforms

by Mary Swire, Tax-News.com, Hong Kong

28 September 2005

The Indonesian parliament is set to debate a package of key tax reforms that would cut corporate tax rates and expand the tax base over the coming years.

Under the proposed legislation, which is set to go into effect in January, corporate tax will be cut to 25% from the current level of 30% over the next five years. However, while the tax cuts have been broadly welcomed, both local and foreign businesses have expressed concern that the tax reforms do not go far enough to address some of the major barriers to investment caused by the country's tax system.

Indeed, it is feared by some that the new legislation will in actual fact make the situation worse with its tough new anti-avoidance provisions, which give the tax authority wide discretionary powers to launch tax audits, challenge tax returns and impose stiff fines and penalties. Critics fear that such proposals will serve to increase the effective tax rate on listed companies operating in Indonesia to something like 40%.

"The headline reforms are being subverted by the enforcement details and the arbitrariness," one Indonesian accounting executive was quoted as observing by the Wall Street Journal. "This is more draconian than in the past," he added.

Corruption, inconsistencies and evasion in the Indonesian tax system means that currently, only 3.5 million of the country's 230 million population pay any tax, a situation that has long been deemed as unhealthy for the local economy by international bodies such as the World Bank and the International Monetary Fund.

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