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June 29, 2017

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AEC will challenge Indonesian builders over higher borrowing costs and taxes

The Jakarta Post/Asia News Network--The implementation of the ASEAN Economic Community (AEC) at the end of 2015 will provide huge opportunities for construction companies operating in the region to strengthen their foothold in Southeast Asia.

Indonesian construction firms, however, are not so optimistic.

In the common ASEAN market, which will have a combined gross domestic product (GDP) of US$2.1 trillion, high domestic lending costs and high taxes mean Indonesian firms will be less competitive than their ASEAN peers.

"Issues of interest rates and taxes could hamper local construction firms in expanding their businesses to neighboring countries," Indonesian Contractors Association (AKI) chairman Sudarto told The Jakarta Post recently.

He said Indonesian construction firms had to pay around 13.5 percent in interest while their counterparts in Malaysia, Singapore and Thailand pay only 3 to 4 percent to their respective commercial banks.

State-owned construction firm PT Wijaya Karya (WIKA), which has become a subcontractor for several infrastructure projects in Africa, the Middle East and Timor Leste, has raised the same concern.

"We have a strong financial posture, but expensive construction costs will remain a constraint on our expansion plans," WIKA corporate secretary Natal Argawan said, adding that his firm aimed to pocket 500 billion rupiah (US$44.02 million) from overseas projects this year.

Natal said that in addition to high interest rates, local construction firms carrying out overseas projects generally had to pay taxes both in Indonesia and in the host country.

"We do expect that there will be an agreement among all ASEAN countries that will allow us to pay taxes only to our country of origin, Indonesia," he said.

According to data from the Finance Ministry, Indonesia has signed bilateral double tax treaties (P3B) with 57 countries, including all ASEAN countries, except Cambodia, Laos and Myanmar.

A bilateral double tax treaty exempts Indonesian construction firms carrying out projects in bilateral partner countries from paying similar taxes already paid to the Indonesian government.

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