Tax holiday needed to attract investment: BKPM

Tax holiday needed to attract investment: BKPM

Adianto P. Simamora, The Jakarta Post, Jakarta

Indonesia must provide tax incentives if it hopes to compete with
other countries in the region in attracting badly needed foreign
investment, according to Investment Coordinating Board (BKPM)
chairman Theo Toemion.

Theo said on Monday that even countries in the region with
better infrastructure and security were offering tax incentives
to attract investment.

"At this time, Indonesia no longer has the competitive
advantages that can be offered to attract foreign investors ...
so we must provide tax incentives," he told The Jakarta Post.

The Japan External Trade Organization earlier suggested that
the government follow the example of China and other member
countries of the Association of Southeast Asian Nations (ASEAN)
in providing incentives to woo foreign investors, particularly
from Japan.

Japan is Indonesia's largest investor and creditor.

According to data from the ASEAN Secretariat, a number of the
association's member states, including Malaysia, the Philippines,
Singapore, Thailand, Vietnam and Brunei, have offered tax
holidays to lure foreign investors. China and South Korea also
are providing tax facilities.

China, along with its territory Hong Kong, last year attracted
80 percent of the foreign direct investment (FDI) in the Asian
region outside of Japan. The country offered tax holidays to
foreign investors during the first two years of their operation.

In Indonesia, FDI approvals in 2001 dropped sharply by 41.5
percent to US$9.02 billion, compared with $15.42 billion the
previous year.

Besides exports and domestic consumption, foreign investment
is seen as essential in overcoming the current crisis and
achieving economic recovery.

Foreign investors largely have shunned Indonesia since the
country plunged into an economic and political crisis in 1998.

According to analysts, foreign investors remain reluctant to
enter the country due to the continuing security problems and an
unstable social and political situation.

Both local and foreign investors also repeatedly have voiced
concern over uncertainty in the country's legal system.

"With such a (grim) picture, we need to provide tax
incentives," Theo asserted.

He said his office had drafted a new investment bill that
would soon be submitted to the House of Representatives. The
proposed law would allow the use of tax incentives, including tax
holidays, to attract foreign investment.

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 according to sources, the Ministry of Finance, which is
under pressure to generate more tax revenue to finance the state
budget, opposes tax incentives. As an alternative, the ministry
has introduced several new measures such as making capital goods
and raw materials exempt from import duties.

"(But) these regulations are not enough to attract investors,"
Theo said.

But he admitted that tax holidays were not the most important
factor in attracting foreign investors, saying a favorable
investment climate played a more significant role.

Under the investment law proposed by the Investment
Coordinating Board, the government would offer such fiscal
incentives and facilities as tax holidays, making capital goods
and raw materials exempt from import duties for two years
production, exempting imported capital goods from the value added
tax and offering an exemption from dividend taxes.