The government has shortlisted two islands near Singapore as candidates for its own tax haven in order to keep investments within Indonesia's territory, Luhut BInsar Panjaitan said on Friday (12/08). (Antara Photo/Widodo S. Jusuf)

Indonesia to Gradually Cut Corporate Tax Rate to Below 18%


MAY 11, 2015

Indonesia will gradually cut its corporate tax rate to discourage companies from booking profits in lower- tax countries such as Singapore, President Joko Widodo’s top aide said.

The government will cut the rate from 25 percent currently to “maybe 17.8 or 17.5 percent,” Luhut Panjaitan, the president’s chief of staff, said in an interview in Jakarta on May 8. The move adds to plans for a tax amnesty for citizens as the government tries to lift revenue collection.

“We’re going to do it, it’s already being ordered by the president,” Luhut, 67, said at his office in the state palace. “It’s not going to be too much gap from Singapore,” said Luhut, a former ambassador to the neighboring city-state.

Widodo, known as Jokowi, is focusing on shoring up state coffers as he seeks funds to improve the nation’s infrastructure and reach growth of 7 percent. A decline in government spending contributed to a further slowdown in Southeast Asia’s biggest economy last quarter, and Indonesia’s tax collection is falling short of target so far this year.

Economic growth, which cooled to a more than five-year low of 4.7 percent from a year earlier in the three months through March, could recover to 5.3 percent this quarter after the government started to spend its budget in April, Luhut said. The effects of increased state spending will be seen in June or July, he said.

Not paying

The tax cuts will narrow the gap with Singapore’s rate of 17 percent to stop “transfer pricing,” Luhut said. The term typically refers to the practice of companies transfering goods to a parent overseas before selling internationally and then paying a different tax rate on profits abroad. Indonesia is the world’s largest exporter of palm oil, coal for power stations and refined tin.

“A lot of big companies don’t pay,” said Luhut, the founder of Toba Sejahtra, a group with interests in coal, power and agriculture. Luhut said he paid 1 trillion rupiah ($76 million) in tax a year in the past three years.

The government is closely supervising tax officers in its drive to tackle evasion, he said.

The planned tax cuts may prompt some retention of profits onshore, yet it remains to be seen whether that would offset the lower levy, said Wellian Wiranto, an economist at Oversea- Chinese Banking Corp. in Singapore.

Tricky time

“It comes at a tricky time as well when the government is trying to boost the overall tax take,” said Wiranto. “If Indonesia offers enough investment opportunities overall, corporations would be incentivized to keep their earnings onshore on their own accord for better returns.”

Luhut, previously a four-star general in the army’s special forces and a trade and industry minister under former President Abdurrahman Wahid, was hired by Jokowi in December, two months after the president took office and inaugurated his cabinet. His mission is to advise the president on the economy, politics and relations between parliament and political parties, he said.

Jokowi wants his ministers to move quickly, and a cabinet reshuffle can’t be ruled out in the coming months, Luhut said.

“Anything is quite possible,” said Luhut, who maintains a military bearing and a clipped mustache. “I think the president could evaluate this very well and he will make up his mind anytime in June or July whether he can do it after Lebaran,” he said, referring to the Indonesian name for the Muslim celebration of Eid al-Fitr.

Political divisions

Political divisions between the government and an opposition led by Prabowo Subianto, a former commando who served with Luhut, have improved in recent months, the chief of staff said. He declined to comment on speculation that the National Mandate Party and Golkar party could seek to switch sides to join the Jokowi government in return for cabinet seats.

The government will implement electronic systems to improve tax collection, to boost the number of individual tax payers and reach a tax-to-gross domestic product ratio of 15 percent, Luhut said.

The government is starting a campaign to improve collection by allowing citizens to avoid penalties if they pay five years of unpaid taxes, Finance Minister Bambang Brodjonegoro said in an interview earlier this month.

Indonesia’s tax-to-GDP “ratio is only 11 percent,” Luhut said. “There’s something wrong with this country.”