Economist warns of 50-year tax incentive risks in Indonesia's PFII

Jakarta (ANTARA) - Rahma Gafmi, a professor at the Faculty of Economics and Business at Universitas Airlangga (Unair), has warned of the risks posed by the planned 50-year tax incentives for businesses operating within Indonesia’s International Financial Centre (PFII).

She considered a 50-year commitment to be a technically rigid long-term commitment. Should significant changes occur in the global taxation landscape over the next decade, with rules becoming stricter, Indonesia risks becoming trapped by commitments it has already granted.

“This creates a long-term fiscal risk that could restrict the fiscal space of the state budget for domestic development needs, while the economic benefits received from the PFII may not be commensurate with the tax revenue sacrificed,” Rahma told ANTARA by telephone in Jakarta on Friday.

Rahma also warned that granting incentives for 50 years without strict economic substance requirements could potentially create perverse incentives. Under such circumstances, the PFII would risk being dominated by shell companies.

This situation, she said, could pose a reputational risk for Indonesia, including being perceived as a tax haven or at risk of being placed on the Financial Action Task Force (FATF) grey list.

Such perceptions could reduce the interest of global institutional investors who prioritise compliance as well as environmental, social, and governance (ESG) standards.

Rahma noted that Indonesia in fact possesses a competitive advantage in the form of its large domestic market. However, the main challenge for investment is not merely tax rates, but legal certainty.

“There are still overlapping regulations, even among government agencies themselves, which make investors doubtful about the protection of property rights or the certainty of contract enforcement,” she said.