R&D Tax Incentives Regime: How about Indonesia?

By 2021, Indonesia's gross domestic expenditure on research and development (GERD) is only 0.28% of its gross domestic product (GDP). This means that the total budget allocated for research and development is still low. Indonesia's GERD is significantly lower than that of other countries, such as South Korea (4.93%), China (3.78%), and the United States (3.46%).

These countries invest more in R&D, which has helped them to achieve economic and technological progress. Indonesia also needs to focus and invest more in R&D to achieve its goal of becoming a developed country by 2045.

Based on OECD Corporate Tax Statistics 2023, nowadays, many governments are prioritizing businesses incentives to invest in research and development (R&D) to boost their innovation potential. Over the past few decades, R&D tax incentives have become a popular tool for this purpose. These incentives, often offered alongside direct support like grants or government contracts, can take various forms, such as reducing taxes on R&D expenses or lowering taxes on income generated from R&D activities.
The playing field isn't always level when it comes to R&D tax incentives. Different companies get different benefits depending on their size and profitability. This indicator proves these inequalities, showing how much bigger players and profitable firms enjoy the benefits compared to the SMEs. In some countries, like Australia and Canada, that offer enhanced tax relief provisions for SMEs that are not available to large firms, the indicator shows the difference in the implied subsidies offered to each firm type.

For companies that aren't making any profits? That's where refunds and carry-over provisions come in. Refunds, like those offered in Austria and Norway, simply give the companies back any unused tax breaks as cash. This puts profitable and loss-making companies on the same footing. Carry-over provisions, like those in Spain and Portugal, are more like a savings account. The companies store their unused benefits for future use, when they hopefully have enough taxable income to claim them. This means loss-making companies get a smaller benefit right now, but they can still save it for later. In countries like Brazil and Japan, there's no such safety net. If the companies not making money, they will lose out on all of their tax benefit.

Then, how about Indonesia?

Since October 2020, The Indonesian government has introduced a new tax incentive scheme to encourage businesses to invest in research and development (R&D). The scheme, known as the Super Deduction Tax, allows businesses to deduct up to 300% of their R&D costs from their taxable income. Of course not every business can take the benefit of the Super Deduction Tax, businesses must meet several criteria, such as conduct R&D activities in
Indonesia, register any intellectual property rights (IPRs) that are generated from their R&D activities, and collaborate with a government research and development institution or a higher education institution in Indonesia. The Super Deduction Tax can help businesses to reduce their tax burden and to recoup their R&D costs more quickly. The scheme is expected to boost innovation and economic growth in Indonesia.

Before the implementation of the Super Deduction Tax, Indonesia ranked 85th in the Global Innovation Index (GII) 2019. This ranking has improved over time. By 2023, Indonesia has risen to 61st place. The implementation of the Super Deduction Tax seen as one of the main factor in Indonesia's improved ranking in the GII. The incentive has made it more affordable for businesses to invest in R&D, which has led to increased innovation and economic growth.

It is important to ensure that the Super Deduction Tax is used effectively through strict supervision. The government should monitor the implementation of the tax incentive to guarantee that it is being used for its intended purpose not for any tax avoidance. The government should also work with businesses to ensure that they are aware of the requirements of the tax incentive. Businesses should be required to submit documentation to the government to support their claims for the tax incentive. By taking these steps, the government can be sure that the super deduction tax is used to its full potential.