Government Regulation No. 94/2010, which was instituted early this year, has paved the way for tax holidays. Companies may now be granted income tax exemptions or reductions for several years if they make new investments in pioneer industries, that is, industries with linkages to others, that provide high added value, that introduce new technology or that are strategically positioned within the nation’s economic priorities.
Regulations on implementation have yet to be issued, so it is too early to judge how attractive this will be to investors. But, surely, any tax burden-reducing measures will be welcomed by the business community.
Bearing this in mind, tax holidays can serve to leverage the investment climate and attract new investments. However, the much bigger challenge is to keep investments sustainable with the maximum benefits for the country and investors.
Short-term and temporary measures that include tax holidays can do little to respond to the challenge. Lili Yan Ling suggested focusing on non-tax permanent facilities such as business licensing systems, logistics and transportation infrastructure and labor standardization to underpin sustainable investments (The Jakarta Post, Jan. 24, 2011).
Improving the overall tax system is also of great importance given that taxes have been identified by the World Bank as one of the top three constraints for doing business in Indonesia. Measures need to be taken in this regard.
First, redeploy the authority and functions currently centralized in the Directorate General of Taxation (DGT) into three different institutions. While the DGT may preserve its task of collecting taxes and overseeing tax compliance, while tax dispute handling and tax regulation issuing should be assigned to two separate directorates.
The goal is to avoid potential conflicts of interest within the directorates and thereby obtain fair treatment for taxpayers, especially in tax dispute resolution.
All directorate performance should be reasonably assessed. The DGT’s overall performance, for example, may be measured by the tax ratio and taxpayer compliance levels.
In this respect, tax revenue should exclude tax assessments in dispute but include tax disputes that were resolved in the DGT’s favor.
This approach should promote professionalism within the DGT especially when dealing with audits.
The tax dispute resolution directorate should aim to resolve tax disputes at the objection level and thereby minimize cases brought to the tax court.
Its performance should therefore be assessed with reference to the number of taxpayers who won cases resolved by the tax court.
Those numbers should provide feedback to the directorate on how to better handle tax disputes. If the number grows, for instance, the directorate may need to revisit its approach.
At the end of the day, the directorate should remove the image that tax objections are merely a formal stamping process of going to the tax court and instead should help resolve the mounting number of cases.
Second, create and maintain legal certainty. In this regard, the tax regulation directorate should aim to issue tax regulations and provide tax law interpretations in accordance with the true intent of the law and with minimum bias towards government interests.
The retroactive application of tax regulations should be avoided unless it is in the taxpayers’ favor and accepted by the DGT. It may also be worth developing tax precedent rules with reference to tax court decisions to help streamline the tax dispute resolution process. This may also serve as additional guidance for tax auditors.
Third, tax law enforcement should not unnecessarily create or prolong disruptions. By way of example, there is a strong reason to pursue cross-border intercompany transactions fairly with reference to the internationally accepted standard on transfer pricing.
However, applying the same standard to domestic intercompany transactions can potentially create disruptions on the part of taxpayers that may, from a macro perspective, outweigh the benefits derived by the DGT. Simpler and less disruptive procedures should be thought of to achieve the same objective of the DGT.
Streamlining the tax refund procedure may also help remove taxpayer liquidity disruptions. The current tax system has been in place for more than 25 years.
Function and procedure automation is more and more widespread within the DGT including e-tax returns and the e-filing system. However, it still takes the DGT 12 months to decide on a tax refund request. Worse still, Value-added Tax (VAT) refunds, which previously could be applied for on a monthly basis, now must be requested annually. This is just another challenge to be resolved by the DGT.
In conclusion, leveraging the investment climate with a tax holiday will cost the government the amount of potential tax that it must forgo. For investors, due to its temporariness, tax holidays may be no more than a sweetener.
Investors should have better reasons to continue to invest in Indonesia so that investors and the government reap the benefits. In this context, it is very important to put in place a sound and solid tax system, in addition to permanent infrastructure and facilities.
The writer is a managing partner at PreciousNine in Jakarta.
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