Indonesia weighs tax cut for bond investors after rupiah falls to 20-year low

[JAKARTA] Indonesia is weighing proposals to cut the levy on gains from its sovereign bonds and extend tax breaks to exporters who will park their dollar earnings in local banks for a longer period as part of measures to shore up a weakening currency.

Lower bond taxes could attract more inflows and help "deepen domestic financial markets," Robert Pakpahan, director general of taxes, said in an interview in Jakarta. Officials are also tweaking rules to grant exporters a tax break on foreign-exchange deposits beyond six months, he said.

Foreign investors, except those from jurisdictions with tax treaties with Indonesia, currently pay a 20 per cent tax on Indonesian bonds, while locals are taxed at 15 per cent. There is no decision yet on the magnitude of the reduction, Mr Pakpahan said on Sept 28.

The proposals are the latest in a series of steps by policy makers to bolster the rupiah, which weakened past 15,000 per US dollar for the first time in 20 years on Tuesday. Inflows such as those into stocks and bonds have become more crucial in boosting the supply of dollars as the central bank drains its reserves to slow the currency's slide.

Indonesia is among the hardest hit by the emerging-market selloff this year, with the currency losing about 10 per cent. Foreign inflows into its bonds stood at a paltry US$832 million in the nine months through September, compared with US$11.5 billion a year earlier, data compiled by Bloomberg show.

Foreign investors have trimmed their holding of rupiah bonds from a record 41.5 per cent in January to about 37 per cent. The yield on benchmark 10-year bonds has risen 177 basis points this year.

DEPOSIT ROLLOVER

Since early 2016, the government has provided tax exemption for exporters depositing earnings in local banks for a certain period. Still, not many made use of the facility as the incentives ended with the rollover of the proceeds into a new deposit, Mr Pakapahan said.

"That's why we are trying to fix that rollover requirement now," Mr Pakpahan said. "When the exporters roll over their foreign-exchange earnings, they will still get the incentives." The new rule will soon take effect, he said.

In a boost to the government's efforts to stabilize the currency, exporters have also pledged to convert about 40 per cent of their revenue to the rupiah, according to Rosan P Roeslani, chairman of the Indonesian Chamber of Commerce and Industry.

While exporters repatriated more than 90 per cent of their earnings in the second quarter, only 14 percent of that was converted into rupiah, according to data from the central bank.

"After a series of discussions with the government, Bank Indonesia and the Financial Service Authority, we have committed to convert about 40 per cent of the repatriated earnings into the rupiah," Mr Roeslani said on Monday. "This new rollover policy will help to realize such a target."

BLOOMBERG