Indonesia’s new armour – Thin Capitalization Rules
Tax Alert:September 2015/Indonesia
As a step towards curbing the burgeoning offshore loans and preventing excessive borrowing from related parties, the Indonesian Minister of Finance (MoF) reintroduced the Thin Capitalization Rules in Indonesia on 9 September 2015. Thin capitalization refers to the situation in which a company is financed through a relatively high level of debt compared to equity.This regulation titled “Determination of Company’s Debt and Equity Ratio for Income Tax Calculation Purpose” is set out in the Indonesian Minister of Finance Regulation (PMK) Number 169/PMK.010/2015 (PMK-169). (Tax Alert:September 2015/Indonesia)
PMK-169, which is effective on 9 September 2015, provides detailed guidance on the scope of related parties, definition of debts and equity, prescribed threshold for DER, and other compliance requirements.
This alert looks at some of the key features of PMK-169;
(1) Debt-to-equity ratio of 4:1
(2) Definition and calculation of debt and equity
(3) Exemptions from this regulation
(4) Impact on Cost of Borrowing
(5) Foreign private debt needs to be reported
Deloitte Tohmatsu Tax Co. provides Japanese companies are considering developing business overseas with one-stop international tax services in relation to foreign investment to support their globally appropriate, optimal tax risk/cost management that is aligned with their business operations through Deloitte’s global network.