Jakarta. Indonesia’s upcoming international financial center will likely offer double incentives to attract foreign investors, although economists have warned about how the government should structure the special facilities.

Indonesia is forging ahead with a plan to set up a tax-friendly international financial center. The government is inching closer to picking Bali’s special economic zones (SEZs), namely the Kura-Kura and Sanur, as its location, although they had not made any final decision yet. SEZs naturally come with incentives such as exemptions on entry duties, value-added tax, income tax, among others.

“Let’s say we set up the financial center on an SEZ. [Investors] will automatically get the SEZ facilities and whatever special treatment that we offer at the international financial center,” Susiwijono Moegiarso, the secretary at the Coordinating Ministry for Economic Affairs, told the press on Monday. 

“It’d be best if we have this center in the SEZ. So they would complement each other.”

Indonesia is currently drafting the regulation on the center’s tax incentives. This includes a 100% corporate income tax reduction facility for businesses operating in the financial and non-financial sectors. The same goes for foreigners who work in the financial sector. However, University of Indonesia economist Telisa Aulia Falianty said that the government needed to plan carefully.

“A 100% reduction risks turning into a moral hazard. It’s not advisable in international business practices,” Telisa told a parliamentary hearing in Jakarta on Monday.

“I suppose a 70-80% cut is more than enough as an incentive.”

Yusuf Rendy Manilet, an economist at the think-tank Core Indonesia, acknowledged that incentives could catch investors’ attention. However, it is not the only factor that determines the competitiveness of a financial center. 

Global investors also take into account the country’s policy stability, contract certainty, long-term reputation, and financial market depth. Rivaling countries can easily copy tax incentives.

"Therefore, capital that comes simply because of lower tax rates also tends to be easily transferred when a more attractive offer arises," Yusuf said.