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Indonesia: Central Government Advocates Lower Local Real Estate Taxes

(July 21, 2016) Indonesia’s national government has asked municipal governments to reduce the building and land acquisition taxes they impose and to allow special tax treatment for real estate investment trusts (REITs). The purpose of the reductions would be to increase Indonesia’s competitiveness in attracting investment. (Anton Hermansyah, Govt to Give Local REITS Special Tax Treatment, JAKARTA POST (July 18, 2016).)

The Coordinating Economic Minister, Darmin Nasution, speaking on July 18, 2016, said that although the national tax rate for REITs had been reduced to 5% as of March 29, 2016, in some places the leaders have not cut local building and land acquisition taxes. (Id.; Kristo Molina, New Tax Incentives for Indonesian REITs, CASE & WHITE (Apr. 8, 2016).) He pointed out that while the rate taxation for REITs in Singapore is only 3%, in Indonesia it is about 8%, including the 5% central government tax and additional taxes imposed by municipal governments. (Govt to Give Local REITS Special Tax Treatment, supra.) However, representatives from only five local governments – East Jakarta, Jakarta, South Sulawesi, West Java, and Yogyakarta – attended the July 18 meeting with Nasution and Indonesia’s President, Joko Widodo. (Id.) Jakarta had already cut the applicable local taxes to 1% by late May. (Anton Hermansyah, Regional Issues Hold Reits Stimulus Package Incentives Back, JAKARTA POST (May 31, 2016).)

The advantage of attracting investment in REITs was described by Poltak Hotradero, the head of research for the Indonesia Stock Exchange, who noted that “REITs actually provide a great benefit for regional administrations in boosting infrastructure development. Let’s say for the new airport in Kulon Progo, Yogyakarta. If the commercial area is securitized with REITs, they would raise a large amount of capital to build other infrastructure.” (Id.)

Background

Reduction in taxes for REITs had been promised as part of Indonesia’s economic stimulus policies. Investors in REITs will apparently have to wait for the local portion of their tax burden to be reduced, because regional governments are reluctant to lose the extra income. (Id.)

Since 2007, REITs have been regulated in Indonesia as “Real Estate Investment Funding in the Form of Collective Investment Contracts,” but although such REITs have the ability to accept investments for real estate assets, they have not been popular with investors. The tax rate has been cited as one of the reasons. (Molina, supra.)