• Updated Regulation on Debt-to-Equity Ratio
Newsletter:

Updated Regulation on Debt-to-Equity Ratio

23 January 2018

On 9 September 2015, Indonesia’s Minister of Finance issued Regulation Number 169/PMK.010/2015 (PMK-169) on Debt-to-Equity Ratio (DER), which is effective from Fiscal Year 2016.

This ratio is applied for corporate taxpayers that are established or domiciled in Indonesia whose capital consists of shares. However, the ratio is exempted for the following taxpayers:

  • Financing Institutions
  • Insurance and reinsurance companies
  • Taxpayers in oil and gas mining, general mining, and other mining companies under Profit Sharing Contracts, Contract of Works, or Mining Cooperation Agreements, and the relevant contract/agreement contains provisions governing DER. If the contract/agreement does not contain such a provision or the contract/agreement has expired, the relevant taxpayer is subject to the ratio
  • Taxpayers whose entire income is subject to final tax
  • Taxpayers in infrastructure sector

The ratio applicable is 4:1, which means if the amount of debt exceeds four times the amount of equity, there is an adjustment on the deductible financing cost.

The financing costs are defined as below:

  • Loan interest
  • Discount and premium of a loan
  • Additional cost which include in arrangement of borrowings
  • Financing cost in leases
  • Guarantee fee
  • Foreign exchange differences on financing costs in foreign currency

The Updates

To provide more details in implementing PMK-169, on 28 November 2017 the Directorate General of Taxation issued Regulation No. PER-25/PJ/2017 (PER-25).

According to PMK-169, it already stipulates that the non-deductible financing costs are as follow:

  • Financing costs related to debt which exceeds the DER threshold of 4:1;
  • Financing costs from related party loans which failed to meet the arm’s length principle;
  • Financing costs related to debt which is used to generate non-taxable income; and
  • Financing costs related to debt which is used to generate income subject to final tax.

Further to the above list of non-deductible financing costs, PER-25 now excludes debt which cannot be verified legitimately or legally.

PER-25 further states that the financing costs will be deemed as dividends if the taxpayer cannot fulfil the requirements of an arm’s length transaction and the tax withheld has to be remitted to the Indonesian tax office.

In addition, if the financing costs are capitalized as part of the value of an asset acquisition, the depreciation expenses which are associated with the financing costs are also not deductible.

Taxpayers who have offshore loans, shall attach the DER calculation and summary of offshore loans with the Annual Corporate Income Tax Return as per the attachment of PER-25. Failure to do this will result in the CITR considered as incomplete and the financing costs for the offshore loans considered as non-deductible.

 

BDO INDONESIA BDO PROVIDES A FULL SPECTRUM OF TAX AND BUSINESS ADVISORY SERVICES TO LOCAL ENTERPRISES, PUBLIC-LISTED COMPANIES, MULTI-NATIONAL COMPANIES AND INDIVIDUALS.

 

For more information on how PT BDO Bisnis Solusi Indonesia can help you in planning and navigate these major changes, please contact our experts:

Irwan Kusumanto
Head of Tax BDO Indonesia
ikusumanto@bdo.co.id

Budi Prasongko
Associate Director of Tax
bprasongko@bdo.co.id