Indonesia Effectively Lowers Bond Tax to Zero by Absorbing Levy

  • Incentive applies to all foreign-currency bonds sold overseas
  • Finance Ministry rule is effective retroactively from Jan. 1

Indonesia will bear a withholding tax on interest payments on its global bonds, effectively reducing the rate to zero, in a bid to lower the highest yields in Southeast Asia.

The incentive applies to its Islamic and non-Islamic foreign-currency notes issued overseas, according to a Finance Ministry rule formalized June 17. The measure takes retroactive effect from Jan. 1 and covers levies on gains from bond buybacks, exchanges and from payments for third-party services, such as fees of rating companies and legal consultants, rendered during the debt offer.

The ministry announced the plan in May, saying the move would help lower government bond yields and result in lower interest costs on corporate debt. Domestic investors were subject to a 15 percent withholding tax on the nation’s bonds, while foreign funds were charged 20 percent.

“This incentive will be a positive catalyst for Indonesia’s global bond yields to fall as much as the 15 to 20 percent tax, or more,” said Ariawan, a fixed-income analyst at PT BNI Securities in Jakarta. “Tax receipts will decline, but only slightly as the amount isn’t significant.” Ariawan, like some Indonesians, uses only one name.

The yield on Indonesia’s dollar debt due January 2026 fell three basis points to 3.84 percent as of 3:56 p.m. in Jakarta, compared with 2.60 percent on comparable Philippine notes, data compiled by Bloomberg show.

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