Debt restructuring via JITF will enjoy a 30 percent tax discount

Debt restructuring via JITF will enjoy a 30 percent tax discount

JAKARTA (JP): The government will soon issue a new tax ruling
allowing indebted companies to enjoy a 30 percent income tax
discount if their restructuring process is mediated via the
Jakarta Initiative Task Force (JITF), a senior tax official said.

Director of taxation at the finance ministry Gunadi said on
Thursday the tax discount would be given to debtors who have
gained a debt "haircut" (debt reduction) facility from their
creditors.

"30 percent of the revenue gained from the debt reduction will
be exempted from income tax," he told a debt restructuring
conference.

"The income tax on the other 70 percent can be paid in
installments up to five years," he added.

According to the tax law, a debt reduction is regarded as a
gain to the debtors and should be taxed.

The tax discount is part of the tax incentives the government
will provide to accelerate the restructuring of the country's
massive corporate debt. The tax incentives for debtors and
creditors are allowed under the new income tax law recently
approved by the parliament.

"In case of debt-to-asset swap, there will be no income tax
due on gain from asset transfer as long as it is valued at the
book value," Gunadi said, adding that the difference between book
value of the transferred asset and the debt book value, which
would result in a gain on the debtor's side, will receive similar
benefits as a "haircut".

"In case of debt-to-equity swap, there is no tax consequence
if the amount of shareholding participation is valued the same as
the debt book value," he added.

Gunadi said the tax incentives would only be provided for debt
restructuring conducted via the JITF, not those initiated by the
Indonesian Bank Restructuring Agency (IBRA).

He said the new ruling had been submitted to the state
secretary and would be approved by President Abdurrahman Wahid
some time this month.

JITF mediates between debtors and creditors. Debts which are
eligible to be processed by the task force are foreign currency
or rupiah denominated debts worth more than Rp 100 billion (US$11
million) or which involve foreign creditors.

The tax incentives are the "carrots" (reward) to be provided
by JITF to encourage debtors and creditors to reach a
restructuring deal. The task force also provides
"sticks"(punishment) which includes possible legal sanctions
against uncooperative debtors.

So far, some $5.2 billion in corporate debts had been
restructured via JITF. The agency hopes to restructure some
$8billion to $10 billion debts this year.

According to the World Bank, Indonesia's corporate debts have
reached around $120 billion, of which $85 billion was owed by
large companies, and the balance owed by state-owned companies
and small to medium-sized firms.

Some 49 percent of the total corporate debt is owed to foreign
creditors and the remaining 51 percent to domestic creditors.
Around 72 percent of the total debt stock is dominated in foreign
currencies.

World Bank country director in Indonesia Mark Baird said at
the debt conference that the slower the country restructured its
private debts, the longer it would take to mobilize new private
investment to drive the economy and achieve a sustainable growth.

Baird also said the government needed to provide more
"carrots" and "sticks" to accelerate corporate restructuring.

He said the additional "sticks" could include the appointment
of more ad hoc judges to handle insolvency cases, while the
additional "carrots" could include the removal of the remaining
regulatory impediments to corporate restructuring.

Meanwhile, the International Monetary Fund representative in
Jakarta John Dodsworth said the government must speed up the sale
of assets under IBRA to help revive investor confidence.

"Selling assets now is important because it helps the recovery
process," Dodsworth said.

"If you don't sell, you will see lower prices because the
recovery won't begin," he added.

IBRA controls more than Rp 600 trillion worth of assets
transferred and taken over from the domestic banking sector. The
agency is mandated to dispose the assets to raise cash to help
finance the costly bank restructuring and recapitalization
program.

The government has recently postponed the key sale of its
ownership in Bank Central Asia (BCA) to next year on grounds that
selling it now would result in lower proceeds due to the current
unfavorable market conditions.

Dodsworth said it was important to sell some of the assets now
even at reduced prices because the proceeds are needed to support
the economic recovery.

"We may sell some assets this year, perhaps at reduced prices,
and some next year at higher prices," he said. (rei)