Earning Stripping Rule (ESR) Of Indonisia/Abubakar Alexander Emor

Since first Tax Reformation in 1983, Ministry of Finance (MoF) is mandated to regulate Thin Capitalization Rule (TCR) and following it up on 1984 Decree, even though was freezed in 1985, and revive back 30 years later. Although deviate from Earning Stripping Rule (ESR) approach derived by BEPS Action Plan 4 Final Report Best Practices, DER Rule is now implemented based on Income Tax provisions sole availability text provision. As recent law amendment,Government Regulations No.55 of 2022 (GR-55/2022)brought the latest ESR approach. Is it really impactful?

Significance of Change

The ineffectivity of DER indeed require refinements. Unfortunately, GR-55/2022 has not concrete implementation to date. According DDTC News survey, DER provides edge of certainty for companies in determining loan, while ESR reflects company's economic conditions reality and meets international tax practices, promoting aggressive tax planningprevention. With ESR implemented varies by countries, flexibility comes under 2 selected scenarios, namely fixed ratio or group ratio including the amount of the ratio.Currently, Indonesia may select DER, ESR, and other methods whichever business circumstances with GR-55/2022.

TCR provides adjustments to expense subjects and expense objects. Although TCR has anti tax avoidance effects, especially non-manufacture sectors, companies are able to reduce impact of TCR and utilize the time frame of tax collection. Learn from China, Indonesia's tax policy is suggested should be non-disincentive to business activities,including upgrading the DER structure, detailing the arm's length principle application, revising debt's definition and scope, improving regulations on time basis of interest financing, late debt payment penalties, rejection of borrower's claim over interest income, and non-forwardable interest expenses.

Thin Capitalization related to Anti Tax Avoidance.

The calculation of debt burden is more appropriate in relation to tax avoidance restrictions. Gunadi (2007:248) argues that debt deemed as capital provisions in Income Tax Law Art. 18(3) should be preserved if happened between affiliate relationship to be acceptable in society. Rohatgi (2002:400)suggest that loan from foreign affiliate should comply withInterest expense over debt from affiliate shareholder above limited ratio is undeductible, Interest payment above limited ratio deemed as dividend, and partly or whole debt from affiliate shareholder should be treated as equity capital. Debt must meet 3 cumulative criteria to meet the arm's length principle, namely debt needs, loan capacity, and being at a reasonable debt to equity ratio. Transfer Pricing Policy should be applied to by assessing the relationship of the parties involved.

CONCLUSION

Debt financing is more beneficial than equity financing and regulations in Indonesia should have concrete implementation to optimize its tax regime domestically and internationally.After 30 years, Indonesia finally regulates TCR concretely. However, with the unclear technical guidelines of GR-55 of 2022, Indonesia seems to have investment dilemma to limit loans. Author also logically derived that the application of interest deductibility limitation will have impact on hybrid mismatch arrangements over interest income in creditor side against upward adjustments income in debtor side.