Indonesia Weighs Tax Cut for Bond Investors to Prop Currency

(Bloomberg) -- Indonesia is weighing proposals to cut the levy on gains from its sovereign bonds and extend tax breaks to exporters who will park their dollar earnings in local banks for a longer period as part of measures to shore up a weakening currency.

Lower bond taxes could attract more inflows and help “deepen domestic financial markets,” Robert Pakpahan, director general of taxes, said in an interview in Jakarta. Officials are also tweaking rules to grant exporters a tax break on foreign-exchange deposits beyond six months, he said.

Foreign investors, except those from jurisdictions with tax treaties with Indonesia, currently pay a 20 percent tax on Indonesian bonds, while locals are taxed at 15 percent. There is no decision yet on the magnitude of the reduction, Pakpahan said on Sept. 28.

Indonesia Weighs Tax Cut for Bond Investors to Prop Currency

The proposals are the latest in a series of steps by policy makers to bolster the rupiah, which weakened past 15,000 per dollar for the first time in 20 years on Tuesday. Inflows such as those into stocks and bonds have become more crucial in boosting the supply of dollars as the central bank drains its reserves to slow the currency’s slide. The rupiah closed 0.2 percent lower at 15,075 on Wednesday.

Indonesia is among the hardest hit by the emerging-market selloff this year, with the currency losing about 10 percent. Foreign inflows into its bonds stood at a paltry $832 million in the nine months through September, compared with $11.5 billion a year earlier, data compiled by Bloomberg show.

Foreign investors have trimmed their holding of rupiah bonds from a record 41.5 percent in January to about 37 percent. The yield on benchmark 10-year bonds has risen 192 basis points this year.

Deposit Rollover

Since early 2016, the government has provided tax exemption for exporters depositing earnings in local banks for a certain period. Still, not many made use of the facility as the incentives ended with the rollover of the proceeds into a new deposit, Pakpahan said.

“That’s why we are trying to fix that rollover requirement now,” Pakpahan said. “When the exporters roll over their foreign-exchange earnings, they will still get the incentives.” The new rule will soon take effect, he said.

In a boost to the government’s efforts to stabilize the currency, exporters have also pledged to convert about 40 percent of their revenue to the rupiah, according to Rosan P. Roeslani, chairman of the Indonesian Chamber of Commerce and Industry.

While exporters repatriated more than 90 percent of their earnings in the second quarter, only 14 percent of that was converted into rupiah, according to data from the central bank.

“After a series of discussions with the government, Bank Indonesia and the Financial Service Authority, we have committed to convert about 40 percent of the repatriated earnings into the rupiah,” Roeslani said on Monday. “This new rollover policy will help to realize such a target.”

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