CORPORATE INCOME TAX (CIT) INCENTIVES

Under Law Number 7 of 1983 concerning Income Tax, as amended, most recently by Law Number 6 of 2023, Indonesia maintains a Corporate Income Tax (CIT) rate of 22%. However, beyond the standard CIT rate, there are various tax incentives aimed at enhancing investment attractiveness and economic growth. These incentives are crucial for creating a conducive business environment and often target specific criteria such as enterprise size, sector, investment value, or geographical location.

One of the key incentives is the provision of reduced tax rates or exemptions for small enterprises. These incentives are designed to support the growth and development of smaller businesses, promoting entrepreneurship by alleviating their tax burden. For instance, small enterprises meeting certain criteria may benefit from reduced CIT rates or even tax holidays.

Additionally, there are sector-specific incentives to encourage investment in strategic industries. For example, businesses in high-priority sectors like renewable energy, technology, and manufacturing might receive tax reductions or credits to stimulate their activities and contributions to the economy.

Geographical incentives are also significant, with certain regions designated for special economic zones (SEZs) where businesses can enjoy various tax benefits. These benefits include not only reduced CIT rates but also other forms of tax relief such as exemptions from import duties and value-added taxes (VAT).

For foreign companies, operating through a permanent establishment (PE) in Indonesia entails fulfilling the same tax obligations as resident taxpayers, but they may also qualify for specific incentives based on their investment in targeted sectors or regions. Moreover, foreign investments are encouraged through incentives that can include deductions for certain capital expenditures and accelerated depreciation.

In conclusion, while the standard CIT rate in Indonesia is 22%, a range of incentives is available to reduce the effective tax burden on businesses, particularly those that align with the government's economic priorities. These incentives are critical tools for fostering a vibrant and competitive business landscape in Indonesia.

**Law Number 7 of 1983 regarding Income Tax as amended several times, lastly by Law Number 6 of 2023.

3.1 Public company incentive

Public companies meeting a minimum listing requirement of 40% and other specified criteria qualify for a tax incentive, receiving a 3% reduction from the standard rate. This results in an effective tax rate of 19%.

3.2 Small business incentive

Small business incentives in Indonesia are outlined in Article 7, Paragraph 4 of PMK/03/2021. According to this regulation, small business entities, as defined in Paragraph 2, must meet specific criteria to qualify. Firstly, corporate taxpayers must not be included in the Large Taxpayers Office (BUT). Additionally, they must generate income from business activities with a gross turnover not exceeding IDR 4,800,000,000.00 (four billion eight hundred million rupiah) within one tax year. This regulation aims to provide tax benefits to small enterprises, offering them a 50% tax reduction from the standard rate. This reduction is applied proportionally to taxable income, particularly benefiting businesses with gross turnover up to IDR 4.8 billion. Furthermore, certain qualifying enterprises with gross turnover not exceeding IDR 4.8 billion are subject to a final income tax rate of 0.5% of their turnover, providing additional support to small businesses in Indonesia.

3.3 Tax Holidays

The Ministry of Finance (MoF) may grant a tax holiday, exempting 100% of the Corporate Income Tax (CIT) for a duration of 5 to 20 years starting from the commencement of commercial production, provided the capital investment plan exceeds IDR 500 billion. Following the expiration of the tax holiday period, companies will benefit from a 50% reduction in CIT for two subsequent years.

Moreover, the MoF offers a 50% CIT reduction for five years from the onset of commercial production for capital investment plans ranging from IDR 100 billion up to less than IDR 500 billion. Upon completion of the CIT reduction period, taxpayers will receive a 25% reduction in CIT payable for the subsequent two years.

These incentives are extended to companies operating in pioneer industries with broad connections, adding significant value and externalities, introducing new technologies, and holding strategic importance for the national economy. Presently, these incentives are accessible to business sectors falling under specific Indonesian Standard Classification of Business Fields (Klasifikasi Baku Lapangan Usaha or KBLI) as outlined in the regulations. Business sectors not listed may also apply by meeting the criteria established through a self-assessed quantitative scoring system to demonstrate their status as a pioneer industry.

Typically, applications must be submitted through the Online Single Submission (OSS) system, which verifies eligibility before forwarding to the MoF. As per the latest regulations, proposals can be submitted to the MoF until October 8, 2024.

18 industries entitled to apply tax holiday in Indonesia:

• Automotive industry and its main components including electric vehicle.
• Basic inorganic chemical industry.
• Digital economy data processing, hosting and its related activities.
• Economic infrastructure including a power plant, a toll road with low IRR, a seaport with low IRR, oil tanking, TOD.
• Industrial manufacturing of irradiated, electromedical or electrotherapy equipment.
• Industrial manufacturing of main components for electric power generation machinery.
• Machinery industry, the making of main engine or components for machine.
• Main components for electronic industry or telematics equipment, such as semiconductor wafers, lcd, etc.
• Main raw material for the pharmaceutical industry.
• Manufacture of the main component for aircraft and supporting activities for the aerospace industry.
• Manufacture of the main component for train.
• Oil & gas refining without or integrated with its derivatives industry.
• Organic based chemical industry sourced from agricultural, plantation or forestry products.
• Petrochemical industry from oil, gas, or coal, without or with derivative.
• Processing industries based on agriculture, plantation, or forestry products, with or without its derivatives.
• Robotic component industry for manufacturing machinery industry.
• Shipbuilding industry and manufacture of its main component.
• Upstream base metal industry / smelter (iron steel or others).

** Government Regulation (PP) Number 52 of 2011 concerning the Granting of Facilities for Reduction of Corporate Income Tax in the Context of Investment in Certain Business Fields and/or in Certain Regions and Minister of Finance Regulation (PMK) Number 130 of 2020 concerning the Granting of Facilities for Reduction of Corporate Income Tax.

3.4 Tax Allowance

The MoF may grant various tax concessions to Limited Liability (PT) companies following their investments in specific designated business areas or regions:

• A deduction of 30% of the invested amount in tangible fixed assets (including land) from net taxable income, spread over six years of commercial production, subject to the condition that the invested assets are not misused or transferred out within a specified period, except for replacement with new assets.
• Acceleration of fiscal depreciation and amortization deductions.
• Reduction of the withholding tax (WHT) rate on dividends paid to non-residents to 10% or the applicable reduced tax treaty rate.
• Extension of tax loss carryforward beyond five years but not exceeding ten years.
• Applicants must meet one of the following high-level criteria to qualify for the aforementioned tax incentives:
• Significant investment value or intended for export purposes.
• High absorption of manpower.
• High local content.

As with tax holidays, applications for tax allowances are typically processed through the OSS system and approved by the MoF.

** Minister of Finance Regulation Number: 144/PMK.011/2012

3.5 Super Tax Deduction

The super tax deduction facility is provided to taxpayers who do not benefit from tax holiday or tax allowance programs. This facility applies to various business activities or expenses, including:

• Expansion or investment in labor-intensive industries: This entails an investment allowance for tangible fixed assets, including land used for primary business activities. The investment allowance is spread evenly over six years, starting from the fiscal year of commercial production initiation. To qualify, taxpayers must meet specific conditions: they must be domestic corporate taxpayers, engage in eligible industrial sectors, and employ a minimum average of 300 Indonesian workers.
• Human resources development programs: This facility offers an additional deduction for qualifying expenses related to apprenticeship, internship, or learning programs. The maximum deduction allowed is 100%, resulting in a total maximum deduction of 200% of the qualifying expenses.
• Research and development activities: The facility allows for an additional deduction of qualifying expenses related to research and development endeavors. The maximum deduction permitted is 200%, resulting in a total maximum deduction of 300% of the qualifying expenses.

**Minister of Finance Regulation Number 128/PMK.10/2019