Taxes on Build-Operate-Transfer (BOT) Investments

Currently, many forms of investment cooperation using the Build-Operate-Transfer (BOT) system have been implemented, either between the government and investors or between land owners and investors.

As such, what is the Income Tax treatment of parties cooperating in the form of BOT agreements? Before further discussing the tax treatment of BOT, it is important to first comprehend the definition of build-operate-transfer (BOT).

BOT is a form of cooperation agreement entered into between the holder of the rights to land and an investor, which states that the holder of the rights to land grants the right to the investor to construct buildings during the period of the build-operate-transfer agreement and transfer the ownership of the buildings to the holder of the rights to land after the build-operate-transfer period expires.

This definition is outlined in the Minister of Finance Decree Nomor 248/KMK.04/1995 in conjunction with Director General of Taxes Circular Number SE-38/PJ.4/1995 concerning the Income Tax Treatment of Parties Cooperating in the Form of Build-Operate-Transfer Agreements.

Buildings constructed by the investors may be in the form of office buildings, apartments, shopping centres, shophouses, hotels and/or other buildings.

The parties that enter into build-operate-transfer agreements are investors given the right to construct buildings and use or operate the buildings during the build-operate-transfer agreement period and the holder of land rights granting the rights to the investors.

Tax Subjects and Taxable Objects

Parties cooperating in the form of Build-Operate-Transfer (BOT) agreements.

The Tax Aspect for Investors

1. Income for Investors

Investors’ income in connection with build-operate-transfer agreements is income received or accrued by investors from the operation of constructed buildings, including:

• Rent and income in connection with the use of property;

• Income in connection with building concession rights, such as income from the operation of hotels, sports centres, entertainment venues and so forth

• Considerations or remunerations received or accrued from the holder of land rights if the build-operate-transfer agreement period is shortened from the specified period.

1. Expenses for Investors.

• Deductible expenses for investors are the costs referred to in Article 6 paragraph (1) and with due observance of Article 9 paragraph (1) of the Income Tax Law concerning the concession of buildings constructed based on build-operate-transfer agreements.

• The costs incurred by investors to construct the buildings are the acquisition value of the investors to obtain the right to use or the right to operate the buildings and the acquisition value is amortised by the investors in equal parts every year during the build-operate-transfer agreement period.

The Tax Aspect for Holders of Land Rights

1. Income for Holders of Land Rights

Income received or accrued by holders of land rights in connection with build-operate-transfer agreements may be in the form of:

• Periodic payments by investors to holders of land rights within or during the build-to-use period;

• Fraction of the building rent;

• The share of profits from building concessions in whatever name and form that has been provided by the investors;

• Other Income in connection with build-operate-transfer agreements received or accrued by holders of land rights.

1. Expenses for Holders of Land Rights

Deductible expenses for holders of land rights during the build-operate-transfer period are the costs referred to in Article 6 paragraph (1) and with due observance of Article 9 paragraph (1) of the Income Tax Law.

Tax Rates

Income Tax payable of 5% of the gross amount of the higher value between the market value and the Sales Value of Taxable Object (NJOP) of the buildings transferred by the holder of land rights is the acquisition value of the builders for the holder of land rights.

Payment of Income Tax of 5% (five percent) by a holder of land rights for the transfer of buildings by investors for individual taxpayers is final and for corporate taxpayers constitutes a payment of Article 25 Income Tax which can be set off against Income Tax payable for the tax year concerned.

Excluded from the imposition of Article 15 Income Tax for companies in the form of BOT by 5% are holders of land rights that constitute government agencies.

Procedures for Remittance and Filing

Filing must be performed on the 20th of the month in which taxes are paid. However, the tax payment due date varies and must be settled by the taxpayers no later than the 15th of the month after the BOT period ends.

If the buildings constructed by investors do not entirely become the right of the investors but part of the buildings is transferred to the holder of land rights, Income Tax payable of 5% must be settled by the holder of land rights no later than the 15th of the following month after the transfer.