Indonesia to tighten corporate debt financing rules
May 13 Indonesia’s finance ministry plans to tighten a tax regulation to ensure firms’ have sufficient cash buffers against the amount of debt they take in a bid to better manage their foreign debt exposure and boost the government’s tax revenue.
Finance Minister Bambang Brodjonegoro told a press conference on Wednesday that the government will only recognise interest payments as tax deductible if a firm’s debt-to-equity ratio is not more than 4 to 1.
“We have seen our private offshore loans rising and that has been perceived as a risk by foreign investors. We are improving things so that offshore loans won’t rise too rapidly,” Brodjonegoro said, adding that the regulation will also apply to debt from local lenders.
Currently, there is no regulation on the ratio and the government recognises all interest payments as tax deductible.
Banking and finance firms and the oil and gas sector will be exempt from the rule.
The central bank has warned firms against unhedged foreign loans as the rupiah, currently the worst performing currency in emerging Asia, slides. Last year, Bank Indonesia ordered firms to hedge a portion of their loans prior to maturity.
Indonesian private companies’ offshore loans have grown rapidly in recent years. As of February 2015, firms borrowed $164.13 billion from offshore lenders, 13.8 percent higher than a year ago, and almost twice the size of such loans in 2010.
The new regulation will be issued this year, and will become effective next year to allow for a transition period.
The tighter rules will also enable the tax office to collect more dues from firms with debt-to-equity ratio higher than the requirement.
“I think this is good not only to secure tax revenue, but also for the health of companies themselves. I think a company with debt-to-equity ratio of more than 4 is already over leveraged. A ratio of 3 or 2 is more ideal,” said Rosan Roeslani, deputy chairman of Indonesia’s chamber of commerce.
