S'pore, Japan to lobby IMF on tax incentives

JAKARTA (JP): Singapore and Japan have promised to help Indonesia lobby the International Monetary Fund (IMF) to maintain tax incentives in the industrial bonded zones of Batam, Bintan and Karimun islands.

Indonesia's Ambassador to Singapore Luhut Panjaitan said on Wednesday the Japanese and Singaporean governments shared the concerns of their businesspeople over Indonesia's decision to impose value-added taxes (VAT) and sales taxes on luxury goods on the islands.

"The ambassadors of Singapore and Japan have met us in their efforts to lobby the IMF to ease its requirements (on Indonesia), especially in the industrial bonded zones of Batam, Bintan and Karimun," he said during a meeting with the Batam Island Authority.

Luhut said the IMF had made an incorrect decision in requiring Indonesia to scrap its free tax facilities on Batam as part of the country's economic reform.

"Batam has contributed about US$4.7 million in foreign exchange earnings per year thanks to huge foreign investments on the island," he said, adding that the tax-free facilities had been very successful in luring foreign investors to the island.

Many investors felt tricked because Indonesia broke its promise to investors that it would not impose taxes on companies operating on the islands, he said.

In an attempt to attract investors to Batam, the government made Batam, some 19 kilometers south of Singapore, an industrial bonded zone in 1978. Later, several islands near Batam, including Karimun and Bintan, were included in the bonded zone.

According to the previous policy governing this bonded zone, businesses on Batam and the other islands in the zone were free from all import duties and "other government levies".

However, the government issued a decree in 1998 waiving the tax incentives at the prompting of the International Monetary Fund.

Under the new tax regulation, which took effect on April 1, export-oriented companies will receive refunds for VAT and luxury good tax payments only after they show proof they exported their products.

Some 67 foreign companies currently operating on Batam have threatened to leave the island in protest of the new tax policy, according to the chairman of the Batam chapter of the National Chamber of Commerce and Industry, Asman Abnur.

He said the firms were considering relocating their businesses to Singapore. At least three foreign companies -- Unocal, Natuna and Seagate, all of which operate in the oil industry -- have moved to Singapore since the government applied the new tax policy on April 1, he added.

Batam's local government reportedly agreed to temporarily postpone imposing the value added tax in response to mounting protest from the public.

Thousands of Batam residents staged a demonstration on Monday to protest the new tax regulation. According to reports, residents will stage another demonstration on Thursday.

However, the director general of taxation, Machfud Sidik, said the Batam administration's decision to postpone the tax policy must first be approved by the House of Representatives.

He defended the government's change in tax policy, insisting it would not scare off investors. "We believe investors will not run away just because we impose the taxes. Investors do not choose Batam only for its tax-free facility, but also for its strategic location, infrastructure and other things."

Economist Pande Radja Silalahi echoed Machfud's opinion, saying investors were "just bluffing" when they said would leave the island in response to the new tax policy. (cst)