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)