Indonesia will gradually cut its corporate tax rate to discourage companies from booking profits in lower-tax countries such as Singapore, Indonesian President Joko Widodo’s top aide said.
The government will cut the rate from 25 percent to “maybe 17.8 or 17.5 percent,” Luhut Panjaitan, Widodo’s chief of staff, said in an interview in Jakarta on Friday last week.
The move adds to plans for a tax amnesty for citizens as the government tries to lift revenue collection.
“We’re going to do it, it’s already being ordered by the president,” Luhut, 67, said at his office in the state palace.
EMULATING SINGAPORE
“It’s not going to be too much gap from Singapore,” said Luhut, a former ambassador to the city-state.
Widodo is focusing on shoring up state coffers as he seeks funds to improve the nation’s infrastructure and reach growth of 7 percent.
A decline in government spending contributed to a further slowdown in Southeast Asia’s biggest economy last quarter, and Indonesia’s tax collection is falling short of target so far this year.
Economic growth, which cooled to a more than five-year low of 4.7 percent from a year earlier in the three months through March, could recover to 5.3 percent this quarter after the government started to spend its budget last month, Luhut said.
The effects of increased state spending will be seen next month or in July, he said.
The tax cuts will narrow the gap with Singapore’s rate of 17 percent to stop “transfer pricing,” Luhut said.
The term typically refers to the practice of companies transferring goods to a parent overseas before selling internationally and then paying a different tax rate on profits abroad.
Indonesia is the world’s largest exporter of palm oil, coal for power stations and refined tin.
“A lot of big companies don’t pay,” said Luhut, the founder of PT Toba Sejahtra, a group with interests in coal, power and agriculture.
Luhut said he paid 1 trillion rupiah (US$76 million) in tax a year in the past three years.
The government is closely supervising tax officers in its drive to tackle evasion, he said.
The planned tax cuts may prompt some retention of profits onshore, yet it remains to be seen whether that would offset the lower levy, said Wellian Wiranto, an economist at Oversea-Chinese Banking Corp in Singapore.
TIMING IS KEY
“It comes at a tricky time as well when the government is trying to boost the overall tax take,” Wiranto said. “If Indonesia offers enough investment opportunities overall, corporations would be incentivized to keep their earnings onshore on their own accord for better returns.”
Luhut, previously a four-star general in the army’s special forces and a trade and industry minister under former Indonesian president Abdurrahman Wahid, was hired by Jokowi in December last year, two months after the president took office and inaugurated his Cabinet.
His mission is to advise the president on the economy, politics and relations between parliament and political parties, he said.
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