Page 10 - Working Paper (Tax Incentives: An Alternative to Revenue Enhancement)

DDTC Working Paper 1115
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strategy towards export, having a high number authorities in order to promote FDI. Not to mention
of workers and use high local content for their coordination across line ministries in terms of
production. The facility will provide an investment regulations synchronization and implementation.
allowance at 30 percent of total investment. Other
than that, it will also take into account accelerated Tax incentives and other tax measures to attract
depreciation, a lower income tax rate for dividends foreign investments are costly and ineffective for
paid to foreigner, loss compensation for 5 to 10 developing countries if not done properly. The
years depending on the conditions of location, economic cost of tax incentives is one of the major
number of local workers, capital expenditure for problems in trying to attract foreign investment.
social infrastructure, research and development Tax incentives might also distort decision-making,
expenses, and utilization of domestic raw materials. erode the tax base, may lead the government to
surrender the ability to tax domestic taxpayers
Publicly listed companies also receive income to avoid discriminatory treatment, and may
tax reductions. To be eligible, taxpayers should bring negative nontax economic effects to the
list a minimum of 40 percent of stocks, owned by host country, including the creation of greater
at least 300 parties, where each owns less than income inequality between individuals or regions
5 percent of all stocks. The corporate income tax in a developing country, environmental damage,
rate reduction is 5 percent lower than the normal erosion of the tax base, and crowding out the local
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rate. Started around the third quarter of 2013, the capabilities . Tax incentives might also create
Government has delivered a package that is focused trade wars with neighboring countries
on economic stabilization and structural reforms
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and has four pillars . First, supporting foreign There are many other issues developing
countries including Indonesia must work on
direct investment by removing impediments to
correcting before engaging in the implementation
progressing with key strategic investment projects,
of tax incentives. Tax incentives for FDI provide
simplifying licensing requirements, and expediting
host country benefits only if the country has
the revision of the negative investment list. Second,
achieved minimum level of human capital, stock,
measures aimed at improving the current account
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infrastructure, etc . Further, developing countries
balance, by providing tax breaks for export-
must address issues such as political instability,
oriented firms, and raise domestically produced
infrastructure, regulation, and others before
biodiesel requirements in the fuel mix (to help
deciding to apply tax breaks to attract investments.
dampen fuel imports). Third, measures aimed at
If manage properly, tax incentives provide benefits
maintaining employment growth, including tax
for developing countries because the investment
breaks for labor-intensive sector, relaxation of
create new employment, infrastructure, and
some restrictions in bounded zones, and revisions
transfer of technology. In the end, these countries
to the minimum wage setting process. Fourth,
must provide a safe investment climate, political
measures to counter inflation, mainly by replacing
and social stability, transparent and reduction of
import restriction with price-based mechanisms
corruption and a reliable legal structure to provide
for beef and horticultural products.
more certainty to investors. Let alone tax incentives
will not create incremental benefit to the economy.
6. Conclusion and Recommendation
Effective tax incentives also minimize moral
This paper tries to address that providing hazard and adverse selection problems. Moral
tax incentives is a strategy to complement other hazard problem arises because some companies
government tools to attract foreign investment. only want to extract short-term profits in the
Previous literature, indeed, suggest that the expense of greater government revenue loss. In
incentives may play some roles in determining addition, current regulations that specifically
foreign investors to locate their investment in based on location, size and business sectors create
Indonesia. Tax incentives are more a function as the adverse selection problems. It is much better to
sufficient condition rather than as the necessary provide incentives to foreign companies that fulfill
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one . Political stability; macroeconomic volatility list of criteria prepared by BKPM, Ministry of Trade,
and complex institutional conditions such as Ministry of Industry, and Ministry of Home Affairs.
regulatory framework and enforcement; capacity
and readiness of the administration appear to be
the most important investment climate variables
that need to be addressed and improved by
21. The World Bank, “Indonesia Economic Quarterly: Continuing 23. McDaniel, Op.Cit., at 282
Adjustment”, October 2013. 24. Ibid.
22. Iksan, Moh,”