Sat, 04 Nov 2000

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)