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To realize sustainable economic development as one of the pillars of achieving Indonesia's Vision 2045 as a country with high economic growth and to become one of the world's great economic powers, Indonesia needs to show economic growth every year. Therefore, it takes numerous income resources to meet all the needs for development financing in order to support economic growth, including investment from public and private sectors to close the gap between development needs and the Government's fiscal capacity which is indicated to be inadequate.
One steps chosen by the Government related to this problem is to open opportunities for foreign investors in fulfilling national development financing, particularly through foreign direct investment (FDl). The government has made efforts to improve the investment climate and facilitate efforts to increase FDI by forming an institution that is able to become a strategic partner for foreign investors, with a strong legal and institutional foundation, and applies international practices and standards, which can become a intermediary for foreign investors in placing investment in Indonesia.
In line with the conditions and challenges above, as well as to create the widest possible job opportunities, the Government together, together with the House of Representatives of the Republic of Indonesia have agreed to form an Investment Management Institution (LPI) enacted in Job Creation Act. The Investment Management Institution is a sui generis institution that manages government investment. The formation of LPI is intended to increase and optimize the investment value that is managed in the long term in order to support sustainable development. To realize these functions and objectives, LPI aims to make this institution to be flexible and professional in increasing investment value, as well as a strategic partner for foreign investors.
The government has issued several derivative regulations regarding Investment Management Institutions stipulated in Government Regulation Number 73 of 2020 concerning Initial Capital for Investment Management Institutions and Government Regulation Number 74 of 2020 concerning Investment Management Institutions which took effect since December 15, 2020. To improve regulations regarding Investment Management Institutions, especially in the field of taxation, the Government issued Government Regulation Number 49 of 2021 on February 2, 2021.
This rule is prepared based on Article 165 paragraph (1) of Law Number 11 of 2020 concerning Job Creation which regulates the formation of LPI. This regulation was prepared in order to support the LPI to grow and be independent to attract foreign investors. At the beginning of LPI’s formation the ownership period and the term of cooperation ended, it was necessary to regulate tax treatment and / or tax incentives for LPI, investment partner and management power while implementing fair and transparent tax governance principles.
Government Regulation Number 49 of 2021 regulates the treatment of Income Tax and Value Added Tax and/or Value Added Tax and Sales Tax on Luxury Goods for LPI and/or its entities, including third parties who make transaction with LPI and/or the entities it owns.
Tax Subject
LPI is Domestic Entity Tax Subjects, while entities owned by LPI and third parties (including investment partners, investment managers, State-Owned Enterprises, Government Agencies or Institutions, and/or other entities both domestically and abroad) can be a Domestic Tax Subject or a Foreign Tax Subject. Domestic tax subjects are required to register, own a Taxpayer Identification Number, as well as to report their business to Tax Office. All Tax Subjects, both Domestic and Foreign are required to carry out other tax obligations.
Tax Objects
- Interest income from bonds originating from within the country (Income Tax Objects)
- Acquisition of assets in the form of land and/or buildings as a substitute for shares or capital participation for LPI and / or the entities it owns (BPHTB Objects)
- Income in the form of dividends originating from repayment due to liquidation which exceeds the amount of paid-up capital or the initial investment value received by a third party in the form of SPLN that collaborates with LPI directly and Domestic Entities that do not invest or do not use the income to support business needs other in the territory of Republic of Indonesia within a period of at least 3 (three) years since the income in the form of dividends due to liquidation is received or obtained (Final Income Tax Objects are at 7.5% rate or according to Tax Treaty rates)
- Income in the form of other dividends in whatever name and form is received by a third party in the form of SPLN that collaborates directly with LPI, and the entity or form of cooperation is a DN Entity tax subject (Final Income Tax Object with a rate of 7.5% or according to tax treaty rates)
The final income tax above is deducted by the entity or a form of cooperation between LPI and a third party is carried out at the end of the month when the income is paid, provided for the payment of income; or the due date of payment of the income concerned, depending on which event occurred first. Withholding income tax is carried out by making proof of deduction in accordance with Attachment to PP Number 49 of 2021 (page 20) and must be reported on the Periodic Income Tax Return.
Excluded from Tax Objects
- Income received or earned in the form of interest from loans to entities owned by LPI or joint ventures (Exceptions for withholding or collecting income tax are made without a certificate of free withholding or collection of income tax)
- Income in the form of dividends from repayment due to liquidation which exceeds the amount of paid-up capital or the initial investment value received by a third party in the form of SPDN.
- Income in the form of other dividends in whatever name and form is received by third parties in the form of SPDN.
Not a Tax Object
Income in the form of dividends originating from repayment due to liquidation that exceeds the amount of paid-up capital or the initial investment value received by a third party in the form of SPLN that collaborates with LPI directly and Domestic Agencies that invest or use that income to support other business needs in territory of the Republic of Indonesia within 3 (three) years since the income in the form of dividends due to liquidation is received or obtained.
Subtraction from LPI's Gross Income
- Costs for obtaining, collecting and maintaining income in accordance with the Income Tax Law are expenses that can be deducted from gross income by LPI.
- The formation of Compulsory Reserves can be deducted from gross income by LPI with the condition that the compulsory reserves formed in the previous year are in accordance with the provisions of laws and regulations and are only allowed until the first tax year, depending on which event occurs first between the compulsory reserves of LPI reaching 50% of LPI's capital and distribution of dividends or share of profits to the government in accordance with the provisions of laws and regulations.
- Fees for the acquisition of land and building rights as a substitute for shares or equity participation for LPI and/or the entities it owns.
Excluded from the LPI's Gross Income Deduction
Costs to obtain, collect, and maintain income in the form of dividends arising from repayment due to liquidation which exceeds the amount of paid-up capital or initial investment value received by third parties and income in the form of other dividends in whatever name and form received by the third party.
The establishment of an Investment Management Institution (LPI) actually reaps various pros and cons from the community. One of the views of an independent economist, Bhima Yudhistira, which is contained in the national news page.kontan.co.id said that the formation of an Investment Management Institution in the midst of a state situation that is experiencing a widening budget deficit is inappropriate and the Government should focus on reducing ICOR (Incremental Capital-Output Ratio). ) rather than forming a new institution. Investment Management Institutions are considered to have a gap to harm state finances in the long run if the value of state assets decreases due to mismanagement and is high risk because it can lead to asset confiscation in the event of default.
Apart from the pros and cons related to the establishment of LPI, LPI Supervisory Board was inaugurated by the President on January 27, 2021 and then through Presidential Decree No. 6/P/2021 concerning Membership Appointment of Investment Management and Supervisory Boards. Such event is a convincing evidence that LPI is indeed formed as a follow-up to the implementation of Job Creation Act. It is hoped that the goal of forming the LPI can be realized and furthermore it can provide maximum benefits for the wider community.
References:
[1] Law of the Republic of Indonesia Number 11 of 2020
[2] Government Regulation Number 49 of 2021
[3] Government Regulation Number 73 of 2020
[4] Government Regulation Number 74 of 2020
[5] Suryanti, Venny. 2020. Ekonom Indef: Pembentukan Lembaga Pengelola Investasi Tidak Tepat.
government-regulation-number-49-of-2021 , investment-management-agency
