Jakarta mulls over onshore financial centre as part of sweeping tax revamp

Jakarta

INDONESIA is considering forming a special region that will serve as an onshore financial centre in which domestic firms can create shell companies without having to go to tax haven countries, its finance minister said late on Wednesday.

South-east Asia's largest economy is in the early stages of overhauling its tax system. It has announced many plans that the government hopes will get more people to pay taxes and empower the tax authority, including a proposed tax amnesty.

Currently, only 27 million people of the 250 million population are registered taxpayers and around a million people filed tax reports.

Finance Minister Bambang Brodjonegoro told reporters that after the tax amnesty programme ends, the region under consideration will allow Indonesian firms investing abroad to get lower tax rates and easier rules to open a financial company that would serve them as a special purpose vehicle (SPV).

The country's tax office has found at least 2,000 SPVs set up by Indonesians and 6,000 saving accounts in many tax haven countries, Mr Brodjonegoro had said previously. "We want our companies with offshore business to have their headquarters here, not in tax havens in other parts of the world, like Panama or Mauritius," he noted, adding that the low tax rates would not apply to firms with onshore business.

The government has proposed to Parliament to offer tax amnesty starting from July until the end of the year and has projected 165 trillion rupiah (S$16.8 billion) of additional income from the programme.

Under the scheme, the government will offer low rates for taxpayers who declare untaxed assets at home and abroad in order to broaden the country's tax base.

Mr Brodjonegoro said Parliament was close to reaching a decision on a bill backing the amnesty plan and may vote upon the bill before it goes into recess next week.

In a bid to lower government bond yields, Indonesia will absorb a levy on interest payments on its global bonds, effectively reducing the rate to zero.

The incentive applies to its Islamic and non-Islamic foreign-currency notes issued overseas, according to a Finance Ministry rule formalised on June 17. The measure takes retroactive effect from Jan 1 and covers levies on gains from bond buybacks, exchanges and from payments for third-party services, such as fees of rating companies and legal consultants, rendered during the debt offer.

The ministry announced the plan in May, saying the move would help lower government bond yields and result in lower interest costs on corporate debt. Domestic investors were subject to a 15 per cent withholding tax on the nation's bonds, while foreign funds were charged 20 per cent.

"This incentive will be a positive catalyst for Indonesia's global bond yields to fall as much as the 15 to 20 per cent tax, or more," said Ariawan, a fixed-income analyst at PT BNI Securities in Jakarta. "Tax receipts will decline, but only slightly as the amount isn't significant."

Mr Ariawan, like some Indonesians, uses only one name.

The yield on Indonesia's dollar debt due January 2026 fell three basis points to 3.84 per cent as of 3:56pm in Jakarta, compared with 2.60 per cent on comparable Philippine notes, data compiled by Bloomberg show. REUTERS, BLOOMBERG