Page 8 - Working Paper (Tax Incentives: An Alternative to Revenue Enhancement)

DDTC Working Paper 1115
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many other less obvious costs. They influence the climate . Tax policies, according to recent studies,
investment decisions of private investors, which become more important as a determinant to
can distort the allocation of resources. Those foreign investments. Increasing regional economic
investors might just want to get short-term profits. integration has driven tax policies as an important
Another cost relates to tax authorities’ limited determinant to attract foreign investment.
capacity and capability leading to unachievable
incentives targets. Foreign investments are also influenced by an
accelerated revision of the Revised Negative Lists
(Daftar Negatif List – DNI) on foreign investment
Figure 1 - The Theory Investment across business sectors. The principle of
government strategies to keep revising the DNI is
Rate of Return
to incorporate on foreign equity investment which
apply in some sectors (e.g. horticulture sector), but
provides clarity and relaxation for foreign equity in
other sectors such as tourism and transport.
r
5. Indonesia’s Experience with Tax
r*
Incentives
Marginal
product of The governmenT is offering
capital various Type of Tax incenTives
such as Tax holidays; Tax
allowances for invesTmenT in
I I* Investment cerTain business secTors or
0
regions; simplificaTion of income
Tax calculaTion wiTh cerTain
Tax incentives can be justified if they address amounT of gross income; income
some form of market failure, most notably those Tax reducTions for publicly lisTed
involving externalities (economic consequences
beyond the specific beneficiary of the tax companies; and Tax reducTions for
incentive). For example, incentives targeted to residenT corporaTe Taxpayers.
promote high-technology industries that promise
to confer significant positive externalities on the In 2015, the Government has conducted various
rest of the economy are usually legitimate. By far fiscal and monetary mix policies to anticipate
the most compelling case for granting targeted challenging global economic trends that affecting
incentives is for meeting regional development Indonesia’s economy. Following the Budget
needs of these countries. Nevertheless, not all Revision in January 2015, the Government needs
incentives are equally suited for achieving such to execute its reform agenda that are particularly
objectives and some are less cost-effective than infrastructure, maritime, agriculture, and social
others. Unfortunately, the most prevalent forms of programs. Effective execution of the budget will
incentives found in developing countries tend to be require increasing in budgeted revenues. However,
the least meritorious. the Governments will likely face the challenge
of adjusting spending to account for lower than
Previous research identified that the statistical
expected realized revenues. Tax revenue accounted
determinants of the location of investment are
only 94 percent of the 2014 revised budget target
market size, labor cost, infrastructure quality,
of IDR 1,635.4 trillion. Lower value-added tax
share of industry to Gross Domestic Product, level
(VAT) growth was a major contribution to the weak
of FDI, growing domestic markets, and stable
performance of revenue in 2014. VAT collection
18
international relations . Over the past few decades
growth in 2014 was only 5.8 percent, relative to an
time-series econometric analysis and numerous
18.8 percent average for 2009 – 2013 and only 85.1
surveys of international investors have shown that
percent relative to the revised 2014 Budget target.
tax incentives are not the most influential factor for
multinationals in selecting investment locations.
Both analysis and surveys have confirmed that tax
incentives are poor instrument for compensating The introduction of a final tax of 1 percent
for negative factors in a country’s investment on annual gross turnover for small medium
enterprises with gross turnover below IDR 4.8
18. United Nations,” Report of the International Conference on Financing
for Development,” Monterrey, Mexico, Mar. 18-22, 2002. 19. Morisset, Jacquest, Op.Cit., page 2