The Indonesia tax amnesty bill was finally approved by lawmakers on Tuesday. Having highlighted the possibility of a tax amnesty bill on 9 June 2016, we provide details of the scheme that was approved by the parliament.
In exchange for forgiveness of undeclared tax liability, taxpayers will only need to pay a small penalty of 2 to 10%. This is a limited window of 9 months before banking data is allowed to be shared between countries under the Automatic Exchange of Information (AEOI) in 2018.
The types of assets the repatriated funds can be invested have been further expanded to include property, bonds and equities. For bonds, they can be invested into Government, SOEs, and corporate bonds. For equities, the funds can be invested into stocks and mutual funds.
Highlights of the tax amnesty scheme:
For individuals, the tax penalty depends on the repatriation status of the declared assets.
- Tax rate for repatriated assets:
- 2% within 3 months of the bill
- 3% within 4-6 months of the bill
- 5% within 7-9 months of the bill
- Tax rate for non-repatriated assets:
- 4% within 3 months of the bill
- 6% within 4-6 months of the bill
- 10% within 7-9 months of the bill
For SME taxpayers, the tax penalty depends on the size of declared assets.
- 0.5% for Rp$4.8bn to Rp$10bn assets
- 2% for more than Rp$10bn assets
Positive Impact to bonds, properties and infrastructure sector
The Bank of Indonesia estimates Rp$560tn of offshore funds will be repatriated back to the country, resulting in Rp$53trn (US$4bn) of additional tax revenue. This is much higher than similar programs in the past where Rp$52bn and Rp$7.5tn were collected in 1984 and 2008’s “sunset policy”. The tax revenue is expected to increase 2016 GDP by 0.3% and reduce fiscal deficit to 2.4% of GDP.
Bonds will also benefit from repatriation flow and support the economy with lower yields. The 10 year Indonesia bond yield is hovering around 7.5%. If it breaks the April lows of 7.4%, it may decline to below 7% yield. This will be boost government finances and result in the strengthening of Indonesia Rupiah.
5-year chart of 10 year Indonesia bond yield
For the property sector, we expect benefits in the form of stronger pre-sales. Assuming 2% of the repatriated funds make its way to physical property, it will make up to 18% of estimated potential presales pipeline on offer by major Indonesian developers in 2017.
Property sector had been previously de-rated on the back of uncertainties over tax policies affecting pre-sales of properties. With the removal of this uncertainty and repatriation of funds, the property sector is expected to re-rate and enjoy earnings growth arising from stronger property sales.
Another beneficiary is the Infrastructure sector as concern on insufficient government funding for infrastructure will be allayed. The government is expected to inject capital into state-owned construction companies and enable them to gear up for larger infrastructure projects. In addition, infrastructure bonds is also expected be issued to absorb capital inflows. This will benefit infrastructure spending and help to finance part of the fiscal deficit.
Overweight Indonesia, Underweight Developed Markets!
Long-time friends of Stirling as well as readers of our newsletter will be well aware that we have been very bullish on Indonesia’s economic fundamentals for sometime already. The latest passing of the tax amnesty bill, on top of 12 economic packages announced in Indonesia over the last year, is a clear harbinger of things to come – that emerging markets such as Indonesia will continue to get its act together, while that of Developed markets such as Britain and EU (Brexit), Japan (failure of Abenomics), USA (rise of Trumpism) may further mire in political turmoil and stagnating economic growth. We will advise investors to tilt their portfolios more towards emerging countries with big domestic markets.
Given that our strategic shareholder (Pollux Properties Ltd) have a strong network of contacts and super property developments opportunities in Indonesia , feel free to have a chat with us if you wish to find out more about private and public investment opportunities in Indonesia.