Indonesia Offers Tax Incentives for Exporters

APRIL 23, 2015

Jakarta. Indonesia is offering tax breaks to firms which export at least 30 percent of their production in a bid to encourage shipments of manufactured goods now that the commodity boom is over.

The package, signed by President Joko Widodo earlier this month and effective in early May, also includes tax breaks for multinational firms which re-invest their profits locally instead of paying dividends to overseas stockholders, a move aimed at narrowing the current account deficit.

In 2014, growth in Southeast Asia's largest economy slipped to the slowest in five years at 5.02 percent. Widodo has said he wants growth to average 7 percent during his five-year term, with investment, rather than consumption, as the driver.

Widodo is aiming for economic growth of 5.7 percent this year, though many economist that target will be hard to reach.

Underpinned for years by soaring commodity prices, Indonesia's exports have faltered this year, amid plunging prices for coal and other commodities. In the first quarter, exports fell by 11.67 percent from the same period a year earlier.

But analysts say tax incentives alone will not revive exports, which have contracted on a year-on-year basis for six months straight.

"The government wants to push companies to export, but whether or not companies do so will depend on their business model," said Eric Sugandi, an economist at Standard Chartered.

"If a company is domestic market oriented - a lot of FMCG (fast-moving consumer goods) company are - it won't suddenly export its production just because of this incentive."

Investment is not likely to pick up sharply, Sugandi added. "It would need more than a tax incentive to attract investors. What investors want are infrastructure and land."

The new package, which relaxes a similar set of tax incentives issued in 2011, no longer requires firms to have a specific amount of investment or number of workers to be eligible for tax breaks.

The government has also expanded the sectors that can apply for the incentives, adding firms that assemble computers and others than process metal ores, for example.