A Change in Fiscal Strategy: Government Prepares New Rules According to OECD

The government is currently drafting new regulations to apply the net interest ratio to earnings before interest, taxes, depreciation, and amortization (“EBITDA”). Coordinating Ministry for Economic Affairs (Kementerian Koordinator Bidang Perekonomian – “Kemenko Perekonomian”) Spokesperson Haryo Limanseto said that EBITDA will be used in the context of financial analysis to limit the value of borrowing costs that can be charged by taxpayers in calculating their Income Tax (Pajak Penghasilan – “PPh”) payable.

"The government is continuing to detail the understanding of the principle and rules, the discussion and implementation of which will be carried out by each K/L," Haryo told Hukumonline.

Based on the transfer pricing country profile report published by the Organization for Economic Co-operation and Development (“OECD”), it is stated that along with the enactment of Law No. 7 of 2021 on Harmonization of Tax Regulations (“UU 7/2021”), the Indonesian government is committed to changing its approach from a thin capitalization rule to an earnings stripping limitation in order to comply with Base Erosion and Profit Shifting (BEPS) Action 4.

This transition will use the net interest/EBITDA threshold to reclassify the company's debt-to-equity ratio with the debt-to-equity ratio of independent parties or other relevant data. Given that the Directorate General of Taxes (Direktorat Jenderal Pajak – “DJP”) is currently still implementing Regulation of the Minister of Finance No.  169/PMK.10/2015 of 2015 on Determining the Amount of the Comparison Between Debt and Company Capital for Income Tax Calculation Purposes (“PMK 169/2015”), as a guideline in determining the debt-to-equity ratio for PPh purposes.

“The details of the amendments or revisions to the PMK are currently being discussed by the Ministry of Finance,” he added.