Megawati agrees with tax holiday plan: BKPM

Megawati agrees with tax holiday plan: BKPM

Adianto P. Simamora, The Jakarta Post, Jakarta

President Megawati Soekarnoputri has agreed with plans to promote
a tax holiday to attract more foreign investment into the
country, according to Chairman of the Investment Coordinating
Board (BKPM) Theo Toemion.

"Ibu Megawati has, in principle, agreed with our proposal to
provide a tax holiday to foreign investors," Theo told reporters
after meeting with Megawati on Monday.

However, he said that the Cabinet would still have to debate
the plan before proposing it to the House of Representatives for
approval.

He said that if agreed by the Cabinet, which will discuss the
issue next month, the tax holiday proposal would be included in
the new investment bill currently being drafted by his office.

But Minister of Finance Boediono, who is under pressure to
generate more tax revenue to finance the state budget, is likely
to oppose the tax holiday. The International Monetary Fund,
which is sponsoring the country's economic reform program, would
also be unhappy with such a proposal.

Theo has said that the government must provide tax incentives
to compete with other neighboring countries in the region to
attract investors.

He argued that even countries with better infrastructure and
security were offering tax incentives to attract investment.

Foreign direct investment (FDI) approvals dropped last year to
US$9 billion, from $15.42 billion. In the first two months of
this year, FDI fell by 79 percent to $489 million, from $2.33
billion in the same period in 2001.

The government abolished tax holidays in 1983 following the
enactment of a new tax law, although investors in certain sectors
and areas of the country were eligible for a tax allowance
facility.

But opponents of a tax holiday scheme argued that such tax
incentives would not only result in the loss of revenue to the
government but also erode the standard of tax systems.

Tax holidays were also prone to pressure from vested interests
as they favored particular sectors or regions. Incentives could
be abused through improper accounting schemes that shifted income
into the holiday period. The incentives also encouraged the
false closure and establishment of firms in order to extend the
length of the holiday period.

There also are doubts about whether the government could
prevent the abuse of tax incentives.

Calls for the introduction of a tax holiday have come from
various quarters, including from Japanese business organizations.
Japan is the largest investor in the country.

The Jakarta Japan Club Foundation said in a letter sent to
BPKM, (a copy of which was obtained by this newspaper), that
applying a tax holiday would boost Japanese investments here,
which could generate jobs for more than 80,000 workers per year.