Indonesia plans to cut its corporate tax rate to 20 per cent this year from 25 per cent, as it tries to attract investment to spur the economy.
The move comes as President Joko Widodo's government is falling short of its revenue collection targets, putting its 2016 Budget spending plans at risk, said Bloomberg.
Indonesia will gradually cut its corporate tax rate to around 17.5 per cent to discourage companies from booking profits in lower-tax countries such as Singapore, Mr Luhut Panjaitan, then the President's chief of staff, told Bloomberg in an interview in May last year.
Singapore's headline corporate tax rate is 17 per cent.
The move to cut the corporate tax rate will need the approval of Indonesia's Parliament.
We're seeking a figure that's in line with neighbouring countries but also not too far from other Asean countries. So we think 20 per cent is still competitive in Asean.
FINANCE MINISTER BAMBANG BRODJONEGORO
Finance Minister Bambang Brodjonegoro said yesterday that a 20 per cent rate will be "competitive". He said: "We're seeking a figure that's in line with neighbouring countries but also not too far from other Asean countries. So we think 20 per cent is still competitive in Asean."
The move aims to discourage companies from booking profits in lower-tax countries such as Singapore, which is one of the top three destinations for Indonesians to keep funds overseas.
The others are the British Virgin Islands and the Cook Islands.
Mr Brodjonegoro said the government intends to chase funds in these three countries. Meanwhile, lawmakers are holding up the Indonesian government's Bill for a tax amnesty, aimed at raising more than US$4 billion (S$5.4 billion) by persuading Indonesians to bring home money from overseas.
Mr Chester Wee, international tax services partner at EY, noted that Indonesia already has in place existing anti-avoidance rules to deter offshoring of profits.
He also pointed out that, "even without the change in Indonesia's tax rate, Indonesia is competitive in terms of cost, and labour-intensive manufacturing operations have long relocated to locations like Batam".
While a number of regional markets, such as Thailand and Taiwan, have also significantly reduced their corporate tax rates in recent times, Singapore has maintained its headline corporate tax rate of 17 per cent, said Mr Loh Eng Kiat, tax partner at Baker Tilly TFW.
This is because tax reform here is "at a more mature phase", with a focus on sharpening existing fiscal measures while maintaining a close watch on traditional competitors like Hong Kong, he added.
EY's Mr Wee noted that the move by Indonesia will make it more attractive for investors in sectors such as automotive, agriculture and manufacturing.