New tax laws curb outflows of insurance premiums overseas
New tax laws curb outflows of insurance premiums overseas
JAKARTA (JP): The new tax law will effectively curb the
mounting outflow of insurance premiums overseas, says an
executive of the Indonesian Insurance Council.
J.T. Sianipar, the head of the council's reinsurance division,
said here yesterday that the imposition of a 20 percent
withholding tax upon the premium payments to foreign insurance or
reinsurance companies would discourage individuals and companies
from using foreign insurance services.
"The new tax system, therefore, means a better business
climate for the local insurance and reinsurance businesses," he
told The Jakarta Post.
Under the newly amended tax laws, the rate of the tax on the
premiums paid to foreign insurance companies is 20 percent of the
estimated net income, which is now calculated under a different
formula than previously.
The estimated net income of the premiums paid by local policy
holders, for example, is 50 percent of the total premiums, while
those paid from local insurance firms is 10 percent of the total
premiums. For reinsurance companies, the estimated net income is
five percent of the total premiums.
The high amount of insurance premiums flowing out to foreign
countries is a chronic issue in the country's insurance industry,
Sianipar said. Before the introduction of insurance reform in
1988, the government imposed non-tax barriers to curb the premium
outflow.
Sources said that more than 40 percent of the insurance
coverage value in the country is reinsured to foreign insurance
firms due to a lack of financial capability on the part of local
companies.
"Before 1988, reinsuring over 75 percent of the coverage value
with foreign reinsurers had to be approved by the government," he
said.
He was of the opinion that the imposition of the tax barrier
is more acceptable as the system is not only more effective but
more commonly used worldwide.
Consolidation
Sianipar described the introduction of the tax on insurance
premiums as "momentum" for local insurance companies to
consolidate their operations in anticipation of globalization of
the service industry.
He said that Indonesia will have no choice but to open its
insurance market to foreign companies in the next 10 years to
comply with free trade arrangements.
He cautioned, however, that the government's 20 percent
withholding tax on the premium income will require more detailed
explanation, especially regarding the premiums paid by local
insurance firms to foreign reinsurance companies under non-
proportional arrangements.
According to Sianipar, the segments of the premiums paid to
foreign insurance firms under such arrangements is costly to
local insurance firms.
"That part of the premiums is, therefore, not taxable," he
said.
Sophar Toruan, the director of insurance affairs of the
Ministry of Fiance, said recently that the introduction of the 20
percent withholding tax on insurance premiums is part of the
government's incentive offerings to further develop the insurance
industry.
"The tax facility improves the business climate and local
insurance firms have to take the advantage of it," he said. (hen)