New tax measures announced

New tax measures announced

JAKARTA (JP): The transfer of assets between two banks which
are in the process of merging has been exempted from capital
gains tax, under one of six new tax regulations announced by Tax
Director General Fuad Bawazier yesterday.

Faud said the exemption was designed to encourage smaller
banks to merge with each other in order to strengthen their
capital.

The other five regulations cover the tax treatment of build,
operate, transfer (BOT) arrangements between land owners and
investors; equity participation of venture capital in small and
medium-sized companies; and income from dividends and interest on
bonds.

The tax director general said that, under the new regulations,
unaffiliated banks are permitted to merge with one another.

Decree of the Minister of Finance No. 249/KMK.04/1995, which
was issued on June 2, also eased bank merger requirements.

"Under the 1994 ruling on business mergers, only banks which
had special relationships with one another could merge," Fuad
said while announcing the new regulations.

The new ruling means that the transfer of assets from one bank
to other banks in the process of a merger process is exempted
from capital gains tax, even where the merging banks are not
affiliated.

However, the requirement that there be a previously-existing
special relationship will remain in respect of companies outside
the financial sector. Thus the transfer of assets from one non-
financial company to another will be exempted from capital gains
tax only when the merging companies are affiliated with one
another and only when the merger is conducted in context of an
initial public offering of shares.

"Despite tax incentives, banks still faced difficulties in
merging under the old ruling because of the requirement of a
special relationship between the merging banks," Fuad said.

He said he hoped the new rules would encourage smaller banks
to strengthen their capital by merging.

"If the merging banks are owned by different business groups,
so much the better," he added.

BOT arrangements

The new provision on the tax treatment of BOT arrangements
between land owners and investors is contained in Decree of the
Minister of Finance No. 248/KMK.04/1995, dated June 2.

Faud said that the new regulation, specially designed to
promote BOT business deals in the country, allows investors to
amortize all their investments on an annual basis during the BOT
contract period.

"The most important element of this regulation is the
clarification that the transfer of land to the investor (under a
BOT contract) is not considered renting or leasing. It is,
therefore, exempted from income tax," he said.

He said that land owners were required to pay income tax after
the term of the contract had been completed at a rate of five
percent of the gross value of the property transferred by the
investor.

The revised tax treatment for capital ventures is contained in
Decree of the Minister of Finance No. 250/KMK.04/1995, which
stipulates, among other things, that the dividend income received
by venture capital companies from their equity participation in
small and medium-sized companies is exempted from income tax.

The regulation defines small and medium-sized businesses as
those with annual net sales turnovers of Rp 5 billion (US$2.2
million) or less.

However, the regulation limits the equity ownership of venture
capital companies in small and medium-sized enterprises to a
maximum of 10 years.

The regulation also requires venture capital companies to sell
their shares in listed companies within three years of the
initial public offering.

In a circular yesterday, Faud clarified that interest incomes
from bonds and dividend incomes from shares, whether listed on
the capital market or not, were subject to income tax at the flat
rate of 15 percent of the gross amount.

Another circular issued yesterday said that companies
intending to obtain the status of businesses operating in remote
areas could now apply for such status from the provincial office
of the tax directorate general, instead of from the tax director
general, as was previously required.

Companies classified as businesses operating in remote areas
are granted additional tax benefits. They are, for example,
allowed to deduct various allowances and perks granted in kind to
their employees from their taxable income. (hen)