Indonesian Government Planning Corporate Flat Tax

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

14 February 2008

It has emerged that the Indonesian government is planning to reduce the country's corporate income tax to a flat rate of 25%.

According to a report in the Jakarta Post, the government and the lower house of Parliament are set to introduce an amendment to the income tax law bringing about the change.

Companies in Indonesia are currently taxed at corporate tax rates of between 15% and 30%, but as a result of reforms discussed last year, the government intends to first flatten the tax at a rate of 30%, then reduce it in the subsequent two years to 28% and 25% respectively.

With this reform, the government hopes to lift private sector investment and help Indonesia compete more effectively with other economies in the region, such as Malaysia, Singapore and Hong Kong.

"There has been a lot of support for an immediate income tax cut to 25% to make the country more competitive in netting investors. We will see where this deliberation takes us," Sumihar Petrus Tambunan, Indonesia's director of income tax, told the Post.

The Indonesian government has been keen to use tax breaks to attract higher investment, particularly in projects to improve the national infrastructure.

In February 2007, legislation granting tax breaks to companies in fifteen industries to attract higher volumes of investment to Indonesia came into force.

Companies in, among others, the textile, chemical, pulp and paper board, pharmaceutical, rubber, iron and steelmaking, electronics, and automotive component industries qualify for the tax breaks, which include a special 10% tax on dividends paid to foreign beneficiaries, and accelerated depreciation on investment in fixed assets.

Both domestic and foreign direct investment are eligible for the tax breaks, either for new investment or expansion of existing plants.

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