Indonesia to give tax holiday

The scheme for major direct investors is intended to spur record levels of FDI

JAKARTA: Indonesia will give a tax holiday for investors committing at least one trillion rupiah (US$117mil) into sectors including metals and energy, an effort to spur record levels of foreign direct investment in South-East Asia's biggest economy.

The G-20 member aims to become a world top 10 economy by 2025 through boosting investment, improving infrastructure and developing industries that add value to its position as a leading producer of resources such as tin, palm oil and coal.

Finance Minister Agus Martowardojo said he would issue a regulation on the scheme, which will cover base metals, oil refining, petrochemicals, renewable energy, machinery and telecoms equipment.

This would exempt investors from paying taxes for between five and 10 years after their companies start operations, though the duration was still being discussed, he said.

Existing investors that had operated commercially for under one year may also ask for a tax holiday, he added.

“The impact will be huge. It can help us reach our 2011 investment target,” said the country's investment chief Gita Wirjawan, referring to a target to get 240 trillion rupiah of investment this year.

Some investors have announced plans to build manufacturing plants in the country but have been waiting for the details of the mooted tax holiday scheme before starting operations.

Planned investments include US$6bil in a joint-venture steel plant by South Korea's POSCO , the world's No. 3 steelmaker, US$4.5bil by South Korea's Honam Petrochemical Corp for a petrochemical complex, and US$8bilUS$9bil from Kuwait Petroleum Corp to build a new oil refinery.

Foreign direct investment surged 21% in the second quarter of 2011 from a year earlier as strong commodity prices attracted investors into the mining sector, even without a tax holiday.

Purbaya Yudhi Sadewa, economist at Danareksa Research Institute in Jakarta, said the tax holiday was a good strategic move for the sectors chosen.

“I don't think we have to question that we're losing money from tax for five to 10 years if they don't come we still don't get it anyway ... On oil refining it could help cut fuel shipments to Indonesia as we haven't built any new refinery since the 1990s,” he said.

The oil producer's ageing refineries mean it relies on petroleum and diesel imports from neighbour Singapore to meet its growing fuel demand.

Chief Economics Minister Hatta Rajasa said the government was also planning this month to revise an existing tax allowance regulation for smaller investments, involving either 50 billion rupiah and 300 workers or 100 billion rupiah and 100 workers.

Martowardojo said if the investors already had this tax allowance they would be exempted from getting the tax holiday. - Reuters