The coronavirus crisis already has had far-reaching and devastating impacts on the global economy and international business. Corporate profits have nosedived, and most experts predict it will be at least a year before the situation stabilizes sufficiently to resume normal business activity. Even then, company investments will take longer to recover, and CEOs will be looking to capitalize on only the very best opportunities.
Indonesia’s digital economy, which was already on an upward trajectory before the crisis, is likely to play a pivotal role in Indonesia’s own recovery from the virus. As Southeast Asia’s fastest growing and largest digital economy with the potential to reach US$133 billion in value by 2025, the Indonesian digital economy will be a key driver of jobs and economic growth. In charting a path toward economic recovery, Indonesia has sought to improve its investment climate by benchmarking its tax and other policies with those of its competitors.
Like many countries in the Asia Pacific, Indonesia is involved in negotiations at the Organization for Economic Cooperation and Development (OECD) to achieve international consensus on tax challenges arising from the digitalization of the economy, so that corporate income taxes are rebalanced toward countries where products and services are consumed. The OECD hopes to reach a consensus by the end of 2020.
By harmonizing its national approach with the global consensus, Indonesia can ensure that its tax regime follows international best practices, while collecting additional tax revenues. This will strengthen Indonesia’s attractiveness as a destination for foreign investment across industries, given that almost all multinational companies use data, computers and internet connectivity to power their products and services.
Together with improvements on ease of doing business and cutting bureaucratic red tape, a harmonized tax regime will amply serve President Jokowi in achieving his vision to boost job creation and attract new foreign investment. Such reform efforts are even more urgent in the post-coronavirus climate, where countries will be locked in fierce competition for a more limited pool of foreign direct investments. Ensuring that its tax regime is aligned with international best practices will be critical to helping Indonesia attract these investment dollars.
Since many of the multinational companies in this space are based in the US, an international tax regime that adheres to international standards will also boost US-Indonesian ties. Before the COVID-19 crisis, we saw welcome momentum in our relations. President Donald Trump had been ready to welcome President Joko “Jokowi” Widodo for a bilateral visit to Washington, and the CEO of the new US Development Finance Corporation (DFC), Adam Boehler, had signaled the DFC’s commitment to invest up to $5 billion to support new US projects in Indonesia. Indonesia’s energy and infrastructure sectors appear poised to be early beneficiaries of this cooperation.
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