CAPITAL EXPENDITURE (CAPEX)

Capital expenditures (CapEx) refer to substantial investments made by companies to enhance their future performance. These expenditures encompass the acquisition of tangible assets like property, plant, and equipment (PP&E), as well as intangible assets such as patents and technological advancements. These investments are crucial for bolstering a company's operational capabilities and competitiveness over time. For instance, when an oil company invests in a new drilling rig, it constitutes a significant CapEx.

What distinguishes capital expenditures is their longevity, ensuring that the benefits derived from these investments extend beyond a single tax year. This longevity aspect is particularly relevant in the context of taxation, as capital expenditures often entail depreciation or amortization over their useful life, allowing companies to spread out the tax impact of these investments across multiple periods. This approach aligns with tax regulations that recognize the enduring value of capital assets and provide provisions for their tax treatment over time

Source: https://www.law.cornell.edu/wex/capitalized_expenditure

4.1 Determining Deductible Expenses for Tax Purposes

Typically, all expenses incurred in the course of conducting business activities that contribute to generating, collecting, or preserving income are eligible for deduction from assessable income when calculating taxable income.

4.2 Depreciation and Amortization

Assets or expenses with a lifespan exceeding one year, excluding land rights, are eligible for depreciation or amortization based on their respective useful lives. The depreciation methods, such as straight-line or double-declining balance, must be consistently applied across assets or expenses.

Notes:

• The remaining book value would be depreciated in full at the end of the useful life.

**Indonesia’s Minister of Finance (MoF) issued Regulation Number 72 of 2023 (PMK-72)

4.3 Transfer of land and/or buildings

Transfer of land and/or buildings typically incurs a final income tax, with rates varying based on specific circumstances. Generally, this tax is levied at a rate of 2.5% of the transaction value. However, specific scenarios warrant different rates: for instance, the transfer of basic houses or basic apartments by taxpayers primarily engaged in land and/or building transfers is subject to a reduced 1% final tax rate. Notably, a 0% rate applies when transferring land and/or buildings to the government for public interest purposes. On the other hand, the purchaser or recipient of the property may be subject to a duty on the acquisition of land and/or building rights, amounting to up to 5% of the transaction value or the sale value of the property, whichever is higher.

Certain exemptions are available for specific types of land and/or building transfers. These exemptions encompass scenarios such as grants, inheritances, mergers with book values endorsed by the Ministry of Finance (MoF), transfers by non-taxpayers, and sales of properties valued at less than IDR 60 million by individual taxpayers whose annual income falls below the threshold for taxable income. Understanding these tax implications is crucial for both buyers and sellers involved in land and/or building transactions.

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

4.4 Tax-neutral merger, consolidation, expansion, or acquisitions

Typically, when assets are transferred as part of business mergers, consolidations, expansions, or acquisitions, they are valued at market rates, potentially leading to taxable gains. However, with approval from the Directorate General of Taxes (Direktorat Jenderal Pajak/DJP), these assets can instead be transferred at their fiscal book value, provided certain criteria, including business purpose tests, are met.

These business purpose tests involve the following conditions:

1. The primary aim of the merger, consolidation, expansion, or acquisition is to foster robust business synergy and bolster the capital structure, rather than engaging in tax avoidance;
2. The transferring entity's business operations remain ongoing until the effective date of the business reorganization or acquisition;
3. Both the dissolving and surviving entities must continue their business activities for at least five years following the effective date; and
4. The assets are not permitted to be transferred for a minimum of two years after the effective date of the business merger, consolidation, expansion, or acquisition, except in cases aimed at enhancing efficiency.