Economic overview
As revealed in a recent study by the US think tank Brookings, the pandemic caused by the spread of the coronavirus has inflicted deep wounds on the socio-economic fabric of Southeast Asian countries, imposing an abrupt halt to the vigorous growth process embarked on in the last decade by so-called “Southeast Asian tigers”. And, among the nations most affected certainly is the case of Indonesia, which is the largest and most populous economy in the region, which in 2020 reported the first contraction of its GDP since the late nineties.
At the time, the former Dutch colony had paid a heavy tribute to the financial crisis that struck the entire East Asia in the two-year period 1997-98, also due to bad governance and chronic corruption that gripped the authoritarian regime headed by President Suharto. which had to give way to the progressive democratization of the country.
Net of the significant political and institutional differences that distinguish today’s Indonesia from Suharto’s autocracy, even in the case of the response to the Covid-19 threat, the Indonesian ruling class offered late and incomplete measures, which certainly worsened the economic impact of the pandemic. From this point of view, the administration led by Jokowi “Joko” Widodo has not only proved unable to stop the economic bleeding that led to a 2% reduction in national GDP at the end of 2020, but has also shown considerable hesitation in breaking the chain of infections by introducing restrictions on the movement of people.
As expected, the economic slowdown recorded in 2020 triggered a negative dynamic in terms of investments, private consumption, public spending and exports, also reflected in a jump in the country’s unemployment rate which reached 7%, the peak historical since 2011. According to the most accredited estimates, since the outbreak of the pandemic over 2 million and 600 thousand Indonesian citizens (equal to 7% of the country’s workforce) have in fact lost their jobs, with an increase of 37% compared to the figure for 2019.
Main sectors of industry
Net of the significant political and institutional differences that distinguish today’s Indonesia from Suharto’s autocracy, even in the case of the response to the Covid-19 threat, the Indonesian ruling class offered late and incomplete measures, which certainly worsened the economic impact of the pandemic. From this point of view, the administration led by Jokowi “Joko” Widodo has not only proved unable to stop the economic bleeding that led to a 2% reduction in national GDP at the end of 2020, but has also shown considerable hesitation in breaking the chain of infections by introducing restrictions on the movement of people.
As expected, the economic slowdown recorded in 2020 triggered a negative dynamic in terms of investments, private consumption, public spending and exports, also reflected in a jump in the country’s unemployment rate which reached 7%, the peak historical since 2011. According to the most accredited estimates, since the outbreak of the pandemic over 2 million and 600 thousand Indonesian citizens (equal to 7% of the country’s workforce) have in fact lost their jobs, with an increase of 37% compared to the figure for 2019.
Taxation for businesses in Indonesia
A legal person is considered to be a resident if it has its principal place of business or its head office in Indonesia. Permanent establishments of foreign companies are considered resident for tax purposes, if the same conditions are met.
Resident companies are taxed on their income wherever they are produced. Conversely, non-resident taxable persons without a permanent establishment are taxed on the income earned in the territory of the State which, therefore, will be subject to a withholding tax by the Indonesian lender.
The taxable amount is determined by the result for the year, adjusted in application of the rules governing domestic tax and accounting regulations. In particular, capital gains usually contribute to the formation of the taxable matter. However, the capital gains generated by the sale of land and buildings are subject to a rate of 2.5% and the value considered as a tax base is determined according to the amount negotiated for the sale or the value ascertained by the local government authority, if greater.
In general, the expenses related to the production activity are deductible for tax purposes, in particular the interest expense deriving from mortgages taken out for the pursuit of the corporate purpose, donations in favor of the development of structures with specific purposes for national benefit, contributions to the development of sports disciplines and services for culture and non-performing loans when they are considered uncollectible under the specific conditions provided for by internal regulations; while fines, fines and default interest for taxes not paid or paid late are non-deductible.
Losses can be reported in the reduction of the taxable amount for 5 tax periods following the year of accrual, but there is no provision for carry-over backwards. The rate applied to the taxable amount is 25%.
Investing in Indonesia
The global economic crisis that followed the spread of Covid-19 caught President Joko “Jokowi” Widodo, who had ambitious macroeconomic plans for Indonesia, by surprise. The government of Jakarta was committed to implementing a dense reform agenda, aimed at economic and social well-being, to stimulate manufacturing production and above all to attract foreign investors interested in doing business in Southeast Asia. While the pandemic has changed government priorities, attracting foreign capital investment remains crucial for economic recovery.
Despite the financial measures designed to cope with the crisis, the macroeconomic structure of many Southeast Asian countries relies heavily on the inflow of foreign direct investment (FDI), and Indonesia is no exception. ASEAN’s flagship sectors, such as manufacturing, retail, transportation and telecommunications, have led the bloc to become a true economic powerhouse, with an estimated GDP of $ 9.3 trillion as of 2019. Indonesia accounts for about 40% of the economic output of ASEAN, which is on the verge of becoming the world’s fourth largest economy by 2050. According to ASEAN Briefing, efforts made in recent years by governments in Southeast Asia to promote systems attractive regulations for those looking to do business in the region are one of the carriers that will continue to ensure the inflow of FDI, even during recovery efforts in Indonesia.