Aprisal W. Malale

MICHIGAN

After being reduced slightly to 25 percent from 28 percent in 2010, the idea to reduce the corporate tax rate to 17 percent through the proposed revision of the Income Tax Law was raised by President Joko “Jokowi” Widodo in 2016, and then again by Prabowo Subianto, his rival in the April presidential elections.

The blunt reasons behind this idea were to increase competitiveness and draw in foreign investment by simply matching it with Singapore’s corporate tax rate. Although those reasons sound compelling, there are so many interdependent variables that should be taken into account and analyzed carefully before making this significant policy change.

As one of Indonesia’s closest neighbors, it makes sense that Jokowi and Prabowo would want to increase economic competitiveness as Indonesia is below Singapore. In fact, Indonesia is left behind not only economically but in almost all aspects, including global competitiveness, ranking 45th vs. Singapore’s second, life expectancy of 83 versus 70 years old, and foreign investment grade of Aaa vs. Baa2.

Thus corporate tax rates should not be considered as the critical variable to significantly increase competitiveness, even with the assumption that Singapore also has the same tax incentive frameworks.

While there is a strong tendency to follow the downward trend of corporate tax cuts among neighboring countries, there is no evidence showing a link between tax rate and increased competitiveness. Mostly it is not fair to only consider Singapore as a neighbor while other Southeast Asian countries with apples-to-apples comparison are within the same range of corporate tax rate at around 20 to 30 percent.

Another reason why both these presidential candidates wanted to reduce the corporate tax rate is because less corporate tax tends to attract foreign investors.

This is somewhat true. Tax cuts, on average, increase foreign direct investment. A lower corporate tax rate gives investors incentives to spend extra cash to put into capital expansion. But there is more to just lowering the tax rate to stimulate investment from abroad, especially for Indonesia.

Attracting foreign investment is not just about giving extra money to companies through tax payments, but also about political stability, ease of doing business, transparency, bureaucratic efficiency, suitable labor force competency and business language, among other things.

These components are directly related and far more important to attract foreign business, as they are prime variables that affect whether a company makes a profit or a loss.

In terms of government budget and expenditure, the corporate tax reduction plan will obviously threaten government revenue, which has not achieved 100 percent of its target since 2008.

The government revenue structure in 2019 still heavily relies on corporate income tax between 25 and 28 percent of total revenue, and implementing a decrease of more than 30 percent from the previous rate will create a revenue shortfall of between Rp 31 trillion (US$2.12 billion) and Rp 34 trillion.

This risk is simply too much to bear while at the same time mitigating other risks such as global economy slowdown, United States’ trade policies and flight-to-quality risk, global economy competition, and untapped, rapidly growing e-commerce transactions as well as transfer pricing.

Furthermore, whether it’s Jokowi or Prabowo who is elected as president, he will likely increase debt to cover the budget deficit.

Like many other countries, the Indonesian government gives special treatment to a specific group of taxpayers through tax incentives in terms of exclusions, deductions, deferrals, credits, and tax rates that support favored activities or assist favored groups of taxpayers.

Right now, the effective corporate tax rate spans widely from 12.5 to 25 percent. This range indicates that the government is currently giving a much lower rate, probably far lower than that of Singapore. The current statutory tax rate can’t be the only indicator of how corporates bear tax without considering all tax incentives that they have received including last year’s Tax Amnesty Program.

Passing the tax cut bill without considering and adapting these incentives is reckless and very dangerous.

Tax cut policies are a part of popular economic programs across the world and used to campaign during election periods. With the upcoming 2019 presidential election, it seems unlikely that Jokowi’s or Prabowo’s motivation to cut corporate tax is formed by anything other than a political campaign strategy to win voters.

Thus, a corporate tax cut proposal should not be followed through without robust analysis taking into account all interdependent variables related to this policy that has nationwide impacts.

Underprepared corporate tax cut policy implementation poses a serious risk to government revenue and creates distortion on the effective tax rate.

Although tax cuts are attractive to foreign investors and presumably good for increasing competitiveness with Singapore, there are more important things to deal with in the first place before addressing this fundamental macroeconomic change.

The writer is a Fulbright grantee currently pursuing a Master of Public Policy at the University of Michigan. This is a personal view.