By John Aglionby in Jakarta

Published: September 3 2008 12:31 | Last updated: September 3 2008 12:31

Copyright The Financial Times Limited 2008

Jakarta hopes to gain revenue and investment by cutting tax brackets, increasing collections. If all goes well, at the first of 2009 Indonesia will engineer a radical redesign of its tax structure, instituting election-year tax sweeteners, slashing income taxes and eliminating the country’s hated Rp1 million (US$108.71) departure tax for local residents and registered foreign workers.

The changes, finalized recently by Indonesia’s House of Representatives, are extremely important to the business community, particularly the foreign one. A September, 2007 study by the International Finance Corporation, a World Bank unit, found that despite the fact that Indonesia is reforming its government structures faster than any other Asian country except China, its performance still ranks below every country in the region except the Philippines.

The tax changes are thus an integral part of the country’s continuing reforms, which began in 2002 and picked up steam with President Susilo Bambang Yudhoyono’s campaign to improve the business and investment climate. The changes are scheduled to be voted on when the legislature reopens. They follow a steadily increasing number of simplifications in the tax structure over the last year.

The projected reforms would give tax breaks to companies that list at least 40 percent of their shares on the market and seek to increase revenues by improved tax collection to offset the tax breaks. Overall tax revenues as a percentage of gross domestic product amount to only 11.4 percent. By contrast, the figure for the world’s top 10 countries, led by Sweden, Denmark and Belgium, is more than 40 percent.

Under the legislation, which is expected to pass the House of Representatives in the new session, Indonesia would fine unregistered taxpayers 20 percent of their total taxes if they fail to register by the end of this year. With 225 million residents, the country has only 4-6 million registered taxpayers and only about a third of them actually pay. Darmin Nasution, the director general of taxation, said he expects registered taxpayers to rise to 10 million by the end of 2008.

The barrier to increased tax collections is widespread corruption. According to the Business Anti-Corruption Portal, an anti-corruption website based in Copenhagen, while foreign investment is on the rise, investors still point at corruption, red tape and an uncertain legal environment as the main challenges when conducting business in the country. Companies report that they pay bribes amounting to nearly 40 percent of their taxes despite the campaign vow by Yudhoyono to eliminate backhanders.

Although the tax cuts could cost government coffers as much as Rp40 trillion (US$4.35 billion) in potential tax revenue, Darmin Nasution told the House of Representatives in May that the government projects that tax revenue would increase by 21 percent because of the improving economic picture, healthy exports and increases in tax collections. The 2008 state budget projects tax revenue at Rp580.20 trillion, climbing to Rp702.04 trillion in 2009.

First-half tax revenues were Rp265.18 trillion, a 50.78 percent increase year-on-year, driven by Indonesia’s 5.5 percent GDP growth and heady increases in revenues from energy and mining exports.

Indonesia’s exit tax (or fiscal as it is called locally) was kicked up by 150 percent at the height at the Asian financial crisis of 1997-1998 in an effort to discourage residents from moving their money overseas, particularly to convenient banks in Singapore. In an effort to increase registrations, initially only those who have registered as taxpayers and their families will be exempted from the tax. By 2011, the tax-free policy is to be extended to all citizens. Tourists pay Rp100,000 in departure tax.

Along with other changes in the tax code, the top corporate rate is to be dropped to 28 percent in 2009 to 25 percent in 2010. Companies going public will have their income tax cut by 5 percent to 23 percent in 2009, then to 20 percent in 2010. Companies that earn less than Rp50 billion a year will have taxes cut in half to 14 percent in 2009 and 12.5 percent in 2010. Maximum dividend taxes will drop 10 percent, down from 20 percent.

In an effort to ease the collection process, the government is opening tax offices in malls throughout the country, supplementing post offices or regional state-owned banks as payment outlets.

Reforms have moved forward steadily, according to an International Monetary Fund study of developments from 2001 to 2007 by economists John Brondolo, Carlos Silvani, Eric Le Borgne, and Frank Bosch, because of strong political support from the ministry of finance and other senior officials, the appointment of capable staff to oversee the reforms, setting achievable targets to protect the tax regime from being overwhelmed by the reforms and linking the reforms to the country’s fiscal adjustment program.

Jakarta, July 25 – Indonesia’s largest listed plantation company, PT Astra Agro Lestari Tbk, said on Friday its first-half net profit rose 134 percent from a year ago, supported by strong palm oil sales.

The firm, controlled by Indonesia’s top automotive distributor, PT Astra International Tbk, had previously reported a 20 percent increase in its crude palm oil (CPO) sales volume in the first half, paired with 58.9 percent rise in the average CPO price.

Astra Agro, which has a market capitalisation of nearly $3.5 billion, said in a statement that its January-June net profit climbed to 1.59 trillion rupiah ($174.3 million) from 682.5 billion a year ago.

Sales revenue rose 94.1 percent to 4.64 trillion rupiah.

Like many palm oil plantation companies in the region, Astra Agro is riding a boom in global palm oil due to demand from the biofuel industry and fast-growing China and India.

Palm oil–used in products from soaps to biodiesel– rallied to an all time high of 4,486 ringgit a tonne in March, although have since fallen back 31.5 percent.

Indonesia has overtaken Malaysia as the world’s top palm oil producer. It is expected to produce 18.4 mi

Director general for forest product management at the Forestry Ministry, Hadi S. Pasaribu, said the pulp factory would have the capacity to produce 1.5 million tons of pulp per year. “They are planning to establish a 500,000-hectare plantation forest to support the pulp factory,” he said, as quoted by Antara.

Hadi said Central Kalimantan and Papua had been chosen as the investment locations despite a lack of supporting infrastructure because no similar businesses operated there. International Paper revealed their interest directly to Forestry Minister MS Kaban last month.

Representative president of International Paper Asia, Thomas Gestrich, and the company’s director for strategic planning and development in Asia, Aaron Yu, met with Hadi last week to discuss their plans. International Paper is currently rated among the three largest pulp and paper producers in the world. They operate two factories in Brazil and Canada.

The company chose Indonesia for its business expansion, Hadi said, after conducting a six-month feasibility survey in a number of Asian countries. He said the company planned to use 25 percent of its forest for biodiversity conservation. “They plan to allocate a further 25 percent of the forest to be managed in partnership with the community or small-scale domestic enterprises.

The company will manage the remaining 50 percent,” Hadi said. The government offered International Paper two options: to develop a new forest or to acquire existing forests owned by other companies. Hadi said he had requested International Paper follow Indonesian investment regulations by establishing a local company here. By 2007, Indonesia had 84 integrated pulp and paper mills, with a total production capacity of 6.5 million tonnes.

Two of its largest pulp and paper companies are PT Indah Kiat, a unit of Asia Pulp and Paper, and PT Riau Andalan, a subsidiary of APRIL, which is part of the Raja Garuda Mas International group. These two companies produce more than 65 percent of Indonesia’s total pulp output.

The companies require a total of 9 million tonnes of wood each year. Some raw material suppliers for the two companies have been banned by the police from logging since last year, because of illegal logging cases, making it difficult for the companies to obtain raw materials. “If the bans continue to be enforced throughout this year, the factories may need to import wood chips,” said president of the Indonesian Pulp and Paper Association HM Mansur. He said the situation could result in a total loss of 4 billion tonnes of wood production, worth at least $3 billion. (lva) Source: The Jakarta Post – www.thejakartapost.com