Indonesia’s Government Regulation No. 40 of 2021 (GR 40/2021) aims to implement the latest provisions for special economic zones (SEZ) in the country.
GR 40/2021 highlights the various tax incentives to attract foreign investors into operating in an SEZ. These include reductions in corporate income tax (CIT), the non-collection of value-added tax (VAT), and import duty exemptions.
With 12 operational SEZs in the country and another six currently in the developmental phase, Indonesia seeks to stimulate economic dynamism through investments in its economic zones.
Furthermore, these SEZs are spread throughout the archipelago to help address regional imbalances in economic development. For instance, Java island accounts for 60 percent of the population — making it the world’s most populous island — and 58 percent of total GDP.
Proposing an SEZ
Indonesian businesses or regional governments can propose an area for the Development of an SEZ if they adhere to the following criteria:
- The proposed land is not a protected area, nor does it have the potential to disturb protected areas. The land must also be in accordance with regional spatial plans;
- At least 50 percent of the required proportion of the land must already be possessed; and
- The land must have clear boundaries.
Within the SEZ, the following business activities can be undertaken:
- Production and processing;
- Logistics and distribution;
- Research, digital economy, and technology development;
- Energy development;
- Financial services;
- Creative industries;
- SEZ development and management; and
- Procurement of SEZ infrastructure.
What fiscal incentives are available?
Income tax facilities
GR 40/2021 stipulates that entities investing in any business activities that are the primary focus of the SEZ may be entitled to a reduction in CIT on any income accrued from the said business activities.
Business entities that invest in primary business activities but do not obtain CIT reduction can secure the following incentives:
- A deduction of net income of 30 percent of the amount of total investment;
- Accelerated depreciation and amortization of assets;
- The imposition of a 10 percent tax on dividends unless an applicable tax treaty provides lower rates; and
- Compensation of losses of up to 10 years.
Additionally, foreigners who work in an SEZ, possess certain skills and spend more than 183 days within a 12-month period in Indonesia, maybe taxed on Indonesian-sourced income (rather than worldwide income) for four years.
Value-added tax facilities
VAT will not be collected in relation to the following activities:
- Delivery of taxable tangible goods from another Indonesian customs area, free trade zones, and bonded storage facilities to a business entity;
- The import of taxable tangible goods into an SEZ by a business entity;
- The import of consumer goods into a tourism SEZ; and
- Delivery of taxable services or goods, including land or buildings by a business entity in an SEZ to another business entity in the same or another SEZ.
The non-collection of VAT now also applies to raw materials needed to produce taxable services or goods related to ship and aircraft maintenance, repair, and overhaul (MRO) activities.
Import tax and customs facilities
The import of consumer goods into an SEZ by a business entity is eligible for the exemption for import duties as well as the non-collection of import taxes, and luxury goods sales tax.
The facilities granted will differ depending on the stage of business activity the business entity is currently implementing (e.g., construction, development, or beyond), in addition to the origins/destinations of the goods that enter or exit the SEZ.
There are additional tax relief for businesses that import raw materials or capital goods used in relation to tourism activities (tourism SEZ), such as accommodation supplies, food and beverages services, entertainment services, among others.
Further, imported goods into an SEZ may not be subject to import limitations and will not be subject to the Indonesian National Standard (SNI) system.
Businesses in an SEZ are eligible for a reduction, relief, or exemption from regional taxes by the local government of between 50 and 100 percent.
Foreign visitors to an SEZ for tourism, education, research and development, family, industry-related, or as government delegations can obtain visitor visas, limited stay visas, limited stay permits, and permanent stay permits.