Page 10 - Working Paper (Tax Incentives: An Alternative to Revenue Enhancement)
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DDTC Working Paper 1115

                   strategy towards export, having a high number    authorities in order to promote FDI. Not to mention
                   of  workers  and use high local  content for  their   coordination across  line ministries  in terms  of
                   production. The facility will provide an investment   regulations synchronization and implementation.
                   allowance at 30 percent of total investment. Other
                   than that, it will also take into account accelerated   Tax incentives and other tax measures to attract
                   depreciation, a lower income tax rate for dividends   foreign investments are costly and ineffective for
                   paid to foreigner, loss compensation for  5 to 10   developing countries  if  not done  properly. The
                   years  depending on the conditions  of location,   economic cost of tax incentives is one of the major
                   number of  local  workers,  capital  expenditure for   problems in trying to attract  foreign investment.
                   social infrastructure, research  and development   Tax incentives might also distort decision-making,
                   expenses, and utilization of domestic raw materials.   erode  the tax  base,  may lead the government  to
                                                                    surrender  the ability  to tax  domestic  taxpayers
                      Publicly listed companies also  receive income   to avoid  discriminatory  treatment, and may
                   tax  reductions. To be eligible,  taxpayers  should   bring  negative nontax  economic effects to the
                   list a minimum of 40 percent of stocks, owned by   host country, including the creation of greater
                   at  least  300 parties, where each owns  less than   income inequality between individuals or regions
                   5 percent of all stocks. The corporate income tax   in a developing country, environmental  damage,
                   rate reduction is 5 percent lower than the normal   erosion of the tax base, and crowding out the local
                   rate. Started around the third quarter of 2013, the   capabilities .  Tax  incentives  might  also  create
                   Government has delivered a package that is focused   trade wars with neighboring countries
                   on  economic  stabilization  and  structural  reforms
                   and  has  four pillars .  First,  supporting foreign   There are many other issues  developing
                                                                    countries including Indonesia  must  work  on
                   direct investment by removing impediments  to
                                                                    correcting before engaging in the implementation
                   progressing with key strategic investment projects,
                                                                    of  tax  incentives.  Tax  incentives  for  FDI  provide
                   simplifying licensing requirements, and expediting
                                                                    host  country  benefits  only  if  the  country  has
                   the revision of the negative investment list. Second,
                                                                    achieved minimum level of human  capital,  stock,
                   measures aimed at improving the current account
                                                                    infrastructure, etc . Further, developing countries
                   balance,  by providing  tax  breaks for  export-
                                                                    must address  issues  such as political  instability,
                   oriented  firms,  and  raise  domestically  produced
                                                                    infrastructure, regulation,  and others  before
                   biodiesel  requirements  in the  fuel mix (to  help
                                                                    deciding to apply tax breaks to attract investments.
                   dampen  fuel  imports). Third, measures aimed at
                                                                    If manage properly, tax incentives provide benefits
                   maintaining  employment  growth,  including  tax
                                                                    for  developing  countries  because the investment
                   breaks for labor-intensive sector, relaxation  of
                                                                    create new employment, infrastructure, and
                   some restrictions in bounded zones, and revisions
                                                                    transfer of technology. In the end, these countries
                   to  the  minimum wage setting process.  Fourth,
                                                                    must provide  a safe investment climate, political
                   measures to counter inflation, mainly by replacing
                                                                    and  social  stability,  transparent  and  reduction of
                   import restriction  with price-based mechanisms
                                                                    corruption and a reliable legal structure to provide
                   for beef and horticultural products.
                                                                    more certainty to investors. Let alone tax incentives
                                                                    will not create incremental benefit to the economy.
                   6. Conclusion and Recommendation
                                                                       Effective  tax  incentives  also  minimize  moral
                      This  paper  tries  to  address that providing   hazard  and  adverse  selection  problems.  Moral
                   tax  incentives  is a strategy to complement other   hazard  problem  arises  because  some  companies
                   government tools to attract  foreign investment.   only  want  to  extract  short-term  profits  in  the
                   Previous  literature, indeed,  suggest that the   expense of  greater  government  revenue loss.  In
                   incentives may play some roles in determining    addition,  current  regulations  that  specifically
                   foreign  investors  to  locate  their  investment in   based on location, size and business sectors create
                   Indonesia. Tax incentives are more a function as the   adverse  selection problems.  It  is much better to
                   sufficient  condition  rather  than  as  the  necessary   provide incentives to foreign companies that fulfill
                   one . Political stability; macroeconomic volatility   list of criteria prepared by BKPM, Ministry of Trade,
                   and complex institutional  conditions  such  as   Ministry of Industry, and Ministry of Home Affairs.
                   regulatory  framework  and enforcement; capacity
                   and readiness of the administration appear to be
                   the most important investment climate  variables
                   that  need  to be addressed  and improved  by
                   21. The World Bank, “Indonesia Economic Quarterly: Continuing   23. McDaniel, Op.Cit., at 282
                   Adjustment”, October 2013.                       24. Ibid.
                   22. Iksan, Moh,”
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