The Economics of Indonesia's Foreign Investment Incentives
13 November, 2017
Indonesia's economy remains robust. According to the June 2017 report of World Bank, the country's quarterly GDP grew from 4.9 percent in 2016 (October to December) to 5 percent from January to March 2017. WB also foresees a GDP hike from 5.2 percent in 2017 to 5.3 percent by 2018.
Many factors contribute to the positive outlook. WB cites a stable rupiah and inflation, strong export, lower financing rate, and increased consumer and government consumption. But the primary reason is a better business or economic value.
Over the last few years, the country has put a lot of effort in attracting foreign investments. WB, for one, mentions how foreign direct investments (FDIs) have increased over the last decade or so.
One of the strategies is investment incentives. The country's Investment Coordinating Board called BKPM (Badan Koordinasi Penanaman Modal) provides a verycomprehensive list here.
The list is long, so we choose to focus on the more important points:
- Income tax holiday or exemption that can be as long as 20 years (with extension) depending on the Minister of Finance's discretion
- Import duty exemption for 2 years for goods, materials, and machines (up to 4 years on the additional product if 30 percent of the machineries the company uses is locally produced)
- More than 140 fields where you can declare a tax allowance
- Accelerated amortisation and depreciation, which brings down taxable income
- Tax allowance as much as 30 percent of the company's realized investment through a reduced taxable income over a period of 6 years
Reading these investment incentives, however, is barely touching the surface. If you are planning to invest in the country, it is essential you have a broader, more holistic picture of what you can get and what the country expects in return for the concessions they provide you.
Some notes to consider include the following:
Strong Domestic Support – Indonesia may be inviting more foreign investors, but it's also protective of its domestic resources, from raw materials to its people. For example, you can take advantage of the import duty exemption of machineries if the equipment isn't produced locally or that the domestic machines do not fulfil the criteria especially in terms of purpose or the quantity is not enough to support the business.
Additionally, some businesses will require foreign company to cooperate with local company. As an example, an e-commerce business should cooperate with local suppliers in order to do local product trading (not only imported products).
The government may provide a tax allowance for compensation losses that are more than 5 years but not over 10 years based on certain conditions such as the use of 70 percent domestic raw materials and absorption of at least 500 local workers.
For Serious Foreign Companies Only – Indonesia has a very high capital requirement for foreign companies (that should be fulfilled within 1 to 3 years) , and even then, you cannot compete with MSMEs. A similar idea applies to investment incentives. The Minister of Finance can reduce corporate income tax by 50 percent for companies in telecommunication and information technology if their new capital investment is around IDR 500 (~ $37 million) billion but no more than IDR 1 trillion (~ $70 million). The firm may enjoy the reduction for a period from 5 years to as long as 20 years.
Largely Improved Ease of Doing Business. Based on theNegative Investment List, Indonesia still closes some of its industries to foreign investments. However, it also eased the cap on many of them. For instance, foreign companies can now have full control of high-power-capacity plants under the PPP scheme. Ownership in the pharmaceutical industry also went up from 75 to 85 percent. Distribution trading business also went up from 33 percent to 67 percent of foreign investor. In addition, many e-commerce and IT company invest in Indonesia since its fully open for foreign investors. Besides, Indonesia is open for fintech business where foreigner can have major shares on the company (of up to 85 percent).
Further, while the country needs to enhance its processes further, it's showing marked improvements in company registration. As an example, it'simplementing a 3-hour license service for energy, industrial, and manufacturing firms.
How Cekindo Can Help You
As a business, one of your objectives is to maximise all these foreign investment incentives. Cekindo can help through:
- Market research and analysis
- Setup of company and representative offices
- Shelf companies to speed up your entry into the market
- Product registration
- Business and product licensing
We have business consultants, buying agents, researchers, lawyers, accountants, and other professionals ready to create a solid investment plan that guarantees fast BKPM approval. Our knowledge and expertise in the business environment in the country also ensures you can avoid errors that can result to prolonged licensing or registration time, as well as the chance to qualify for these investment incentives.
Call us today at +6221 80660999. Let's talk about bringing your business here in Indonesia.
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