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Jakarta Post

Govt plans tax on corporate offshore debts

Posted: Sat, December 29 2012 | 11:36 am

The Finance Ministry is considering the imposition of taxes on foreign borrowing of the private sector in a bid to put the brakes on the escalating increase of the country’s corporate foreign debt.

 “We hope that this taxation rule will help us to curb high foreign exchange borrowing by the private sector,” Finance Ministry’s interim head of fiscal agency, Bambang Brodjonegoro told reporters at his Jakarta office on Friday.

He said that the amount would depend on the debt to equity ratio of the borrowers.

He said that before introducing such a tax plan, the ministry would first require the private sector to report their foreign debt to the tax office.

“The tax imposition will be introduced later: First we will set rules requiring private companies to report their foreign exchange loans,” he said after coordinating with top officials from Bank Indonesia ( BI ), the Deposit Insurance Institution ( LPS ) and the Financial Services Authority ( OJK ) in a regular meeting of the Financial Sector Stability Coordination Forum ( FKSSK ).

According to BI data, the private sector’s dollar-based borrowing topped US$123.27 billion as of September this year, an “alarming” figure that has sparked concerns among local economists and policymakers.

Indonesia’s debt-to-service ( DSR ) ratio, which measures the country’s ability to pay its debt, currently stands at around 30 percent, around the same level recorded during the 1997-1998 financial crisis, when many private companies unable to pay their foreign debt went bust following the sharp drop in the value of
the rupiah.

Top government officials such as Finance Minister Agus Martowardojo and BI Governor Darmin Nasution have warned of the threat posed by soaring foreign borrowing to Indonesia’s macroeconomic fundamentals, acknowledging that it needed to be addressed soon in the formulation of a policy.

“Our foreign debt may look safe if it is observed through aggregate figures but if you look at each [private company’s foreign debts] one by one you will see that there are troubles here and there,” Darmin said on Friday in Jakarta.

In line with Indonesia’s robust economic growth, private companies in the country have seen a significant increase in profits. Consequently, to expand business companies look abroad for additional financing, given that Indonesian companies borrow at cheaper rates due to the investment grade status granted to the archipelago by global rating agencies.

Imposing tax on the private sector’s offshore debts is a good start to address the spike in foreign borrowing, Bank Internasional Indonesia ( BII ) economist Juniman said.

The implementation of such a policy is imperative as failing to address the issue in the short-run will cause the shortage of dollar supply in the domestic currency market, consequently prompting instability to the rupiah, he said.

“At the moment, the liquidity pumped in to the Asian market is around five times higher than during the 1997-1998 financial crisis, meaning our currency will suffer economic risk that is five times more destructive if there is a sudden capital flight overseas,” he said on Friday.

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