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December 7, 2020
2020-2819

Indonesia updates tax holiday incentive and provides guidance for 300% R&D super deduction

Indonesia issued new regulations for the tax holiday incentive on 18 September 2020 and on 9 October 2020 released implementing regulations for the 300% super deduction incentive for research and development (R&D) activities. The regulations are effective from 8 October and 9 October 2020, respectively.

This Tax Alert highlights the key aspects of these regulations.

Tax holiday incentive

1. Benefits and investment value thresholds

The benefits and investment value thresholds are unchanged in the new regulation.

Investment (US$*)

CIT** exemption

Period

$6.7 < $33 million

50%

5 years

$33 < $68 million

100%

5 years

$68 < $338 million

7 years

$0.34< $1 billion

10 years

$1 < $2 billion

15 years

> $2 billion

20 years

*Approximate translations of Indonesian Rupiah thresholds

**Corporate Income Tax

2. Eligible pioneer sectors

The new regulation reconfirms 18 predetermined pioneer sectors.1 In addition, it provides significant clarifications for the discretionary tax holiday procedures for other pioneer sectors outside the 18 predetermined pioneer sectors. Any new company or investment in pioneer sectors may apply for the tax holiday incentive if it meets the minimum requirements across the following quantitative criteria: (1) high integration; (2) high value added; (3) use of new technology; and (4) a national priority.

3. Application procedures

The incentive application is required to be submitted by the company online through the Online Single Submission (OSS) website. To provide more certainty to the investors, the application process is now streamlined and centralized within Indonesia's Investment Coordination Board (whereas previously several authorities were involved in the approval process).

300% super deduction incentive for R&D activities

Certain R&D activities2 carried out by a taxpayer on or after 26 June 20193 focusing on promoted sectors4 may qualify for a super deduction of up to 300% of the R&D costs incurred, based on the following qualifying conditions (separately or in aggregate):

  1. 100% ordinary deduction for actual qualified costs incurred.
  2. 50% bonus deduction if patent or plant variety protection rights (PVT rights) are registered in Indonesia.
  3. 25% bonus deduction if patent or PVT rights are registered in both Indonesia and overseas.
  4. 100% bonus deduction if R&D activities reach commercialization stage.
  5. 25% bonus deduction if R&D activities involve collaboration with Indonesia's government R&D institution(s) and/or higher education institution(s) in Indonesia.

The application for the incentive is required to be submitted by the company online through the OSS website and an attachment of the R&D proposal and other supporting documents. The proposal will be reviewed and approved by the Ministry of Research and Technology together with the relevant ministry before the companies are granted super deduction benefits.

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ENDNOTES

1 A pioneer sector is defined as a sector that is vastly interconnected, provides a high value add, introduces new technology or has strategic value for the national economy. The 18 predetermined pioneer sectors are:

  1. Integrated upstream base metal industry (steel and non-steel), with or without its derivatives
  2. Integrated purification and/or refinery of oil and gas industry, with or without its derivatives
  3. Integrated petrochemical industry with oil, natural gas or coal based, with or without its derivatives
  4. Integrated basic organic chemical industry sourced from agriculture, plantation or forestry, with or without its derivatives
  5. Integrated basic inorganic chemical industry, with or without its derivatives
  6. Integrated pharmaceutical raw material industry, with or without its derivatives
  7. Manufacturing of irradiation equipment, electro medical or electrotherapy
  8. Manufacturing of electronical or telematic equipment's main components
  9. Manufacturing of engines and main components for engines
  10. Manufacturing of robotic components, which support the engines manufacturing industry
  11. Manufacturing of main components for power plant machineries
  12. Manufacturing of automotive and automotive main components
  13. Manufacturing of main components for ships
  14. Manufacturing of main components for trains
  15. Manufacturing of main components for aircrafts and supporting activities for aerospace industry
  16. Manufacturing with product derived from agriculture, plantation, or forestry that produce pulp, with or without its derivatives
  17. Economic infrastructure
  18. Digital economy that covers activities such as data processing, hosting, and other related activities

2. The R&D activities must meet the following criteria: (1) intended for a new invention; (2) based on a concept or an original hypothesis; (3) has uncertainty of the final result; (4) planned and has a specific budget; and (5) intended to create something that can be freely transferred or traded in the market.

3. The enactment date of Government Regulation No. 45 Year 2019 which introduces the super deduction program. See Global Tax Alert, Indonesia announces 300% super deduction for R&D and other incentives, dated 29 July 2019.

4. Promoted sectors include food, pharmaceuticals, cosmetics, medical equipment, military equipment, textile, leather, energy and agroindustry.

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CONTACTS

For additional information with respect to this Alert, please contact the following:

EY Indonesia, Jakarta

  • Santoso Goentoro
    santoso.goentoro@id.ey.com
  • Peter Ng
    peter.ng@id.ey.com
  • Peter Mitchell
    peter.mitchell@id.ey.com

Ernst & Young LLP (United States), Indonesia Tax Desk, New York

  • Puspitasari Sahal
    puspitasari.sahal@ey.com

Ernst & Young LLP (United States), Asia Pacific Business Group, New York

  • Chris Finnerty
    chris.finnerty1@ey.com
  • Bee-Khun Yap
    bee-khun.yap@ey.com
  • Dhara Sampat
    dhara.sampat2@ey.com

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