What Is a Pioneer Industry in Tax Holiday?

To encourage investments while supporting job creation and employment, the government provides a variety of tax incentives. This policy is one of the government’s strategies to improve factors that may stimulate investments.

One type of tax incentive provided is the tax holiday. The latest provisions on the granting of tax holidays are outlined under MoF Reg. No. 130/2020. Promulgated on 24 September 2020, this regulation came into force 15 days later.

The enactment of this regulation also revokes the former regulation, MoF Reg. 150/2018. However, similar to the former provisions, a pioneer industry is the main requirement for the granting of the tax holiday beyond other administrative requirements. As such, what exactly is a pioneer industry?

Definition
Referring to the IBFD International Tax Glossary (2015) pioneer industry refers to an industry that is new or that does not exist on an adequate scale in the taxing jurisdiction. 

Pioneer industries, also known as infant industries, are frequently encountered in the legislation of developing countries that seek to encourage setting up such industries. Pioneer industries are granted tax and other concessions, sometimes referred to as ‘pioneer relief’. 

The pioneer relief may include tax holidays, exemption from customs duties on imports of building materials, equipment and raw materials for a limited period and other relief or facilities.

On the other hand, referring to Article 1 number 2 of MoF Reg. 130/2020, a pioneer industry is an industry that has broad linkages, provides added value and high externalities, introduces new technology, and has strategic values for the national economy.

However, MoF Reg. 130/2020 does not provide further elaboration on the definition of ‘an industry that has broad linkages, provides added value and high externalities, introduces new technology, and has strategic values for the national economy’.

Nonetheless, referring to Article 3 paragraph (2) of MoF Reg. 130/2020, 18 industrial sectors are included in the scope of pioneer industries. First, the upstream base metals industry, both the iron steel and non-steel industries, without or with its integrated derivatives.

Second, the oil and gas refining industry without or with their integrated derivatives. Third, the organic basic chemical industry sourced from oil, natural gas and/or coal without or with their integrated derivatives.

Fourth, the organic basic chemical industry originating from agricultural, plantation, or forestry products without or with their integrated derivatives. Fifth, inorganic basic chemical industry without or with its integrated derivatives.

Sixth, the pharmaceutical main raw material industry without or with its integrated derivatives. Seventh, irradiation, electromedical, or electrotherapy equipment manufacturing industry. Eighth, the main component manufacturing industry for electronic or telematic equipment.

Ninth, machinery and machine main components manufacturing industry. Tenth, the robotic component manufacturing industry that supports the manufacturing industry of manufacturing machinery. Eleventh, the main component of the power generation engine manufacturing industry.

Twelfth, the motor vehicle and main components of motor vehicles manufacturing industry. Thirteenth, ship main component manufacturing industry. Fourteenth, the railway main component manufacturing industry.

Fifteenth, aircraft main component manufacturing industry and aerospace industry supporting activities. Sixteenth, agricultural, plantation, or forestry product-based processing industries that produce pulp without or with their derivatives. Seventeenth, economic infrastructure.

Eighteenth, the digital economy which includes data processing activities, hosting and related activities. The details of the business fields and types of production of each pioneer industry scope are determined based on the Indonesia Investment Coordinating Board Regulation.

The scope of pioneer industries listed in MoF Reg. 130/2020 remains the same as MoF Reg. 150/2018. However, when juxtaposed with the former provisions, the current scope of pioneer industries is broader than that under MoF Reg. 35/2018 and MoF Reg. 159/2015 as amended by MoF Reg. 103/2016.

However, to obtain a tax holiday, taxpayers must apply and fulfil various criteria and requirements. These criteria and requirements include having a new investment plan value of a minimum of IDR100 billion and having the status of an Indonesian legal entity.

Moreover, taxpayers investing in business fields that are not included in the pioneer industries may continue to apply for a tax holiday. This applies insofar as the taxpayers fulfil the specified requirements and criteria.

The tax holiday is indeed one of the most common forms of tax incentives granted to attract investments. Not only in Indonesia, many other countries also grant tax holidays to render an attractive investment climate for investors.

The tax holiday is in the form of exemption from corporate Income Tax burdens or the reduction of corporate Income Tax rate for companies performing new domestic investments for a certain period.

Another possible modification of the tax holiday is the combination of the two, namely corporate Income Tax exemption continued with the reduction within a certain period. Tax holidays are often placed in certain industries to drive growth.

Although the latest provisions on tax holidays for pioneer industries were published in September 2020, the tax holiday policies have actually existed since 1967. The first tax holiday policies in Indonesia are outlined in Law No.1/1967. (Bsi)