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Indonesia considers cutting corporate tax rate to attract investment

[JAKARTA] Indonesia is considering cutting its corporate tax rate to as low as 17.5 per cent from 25 per cent to attract more investment from companies that are operating in the region, a tax ministry official said on Monday.

Indonesia, which posted the weakest economic growth since 2009 in the first quarter, has one of the lowest tax collection rates in Southeast Asia.

The corporate tax cut being considered will bring it closer to its neighbour, Singapore, which offers 17 per cent. "If the tax rate difference is reduced, there may be more incentives for multi-national companies that are operating in regional countries to shift their investment to Indonesia directly," said a tax ministry official who declined to be named as he was not authorised to speak to the media.

The proposed tax cut, which will apply to all companies, may hurt tax collection in the short term, but "in the not so long term, we hope we can enjoy the result as we need investment to drive economic growth," the official said.

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The tax office is trying to recoup an estimated 200 trillion rupiah (US$15.6 billion) in lost state income due to transfer pricing, mainly in the commodities sector, Sigit Priadi Pramudito, the director-general of taxes, told Reuters in February.

Under the transfer pricing method, an Indonesian company sells its goods to a subsidiary in another country below market prices, and the subsidiary in turn sells them to the market. This effectively reduces profits in Indonesia and increases them in that foreign country.

During his presidential campaign last year, President Joko Widodo had pledged to increase tax collection to 16 per cent of gross domestic product from about 12 per cent partly by cracking down on tax avoidance. "I think the earlier efforts to raise tax income for the government through stricter collection mechanisms were actually having a negative effect," John Kurtz, head of Asia Pacific for business consultancy AT Kearney, told Reuters. "So by lowering the corporate tax rate, I would expect potentially additional commitment from corporations to invest in Indonesia or to rebalance their portfolio," Mr Kurtz said."Companies are still, even now, looking for reasons to believe in Indonesia and to invest in Indonesia."