Pre-operating and start-up costs in Indonesia do not receive a single tax treatment simply because they are incurred before revenue begins. Routine operating costs can generally be deducted in the year they are incurred, while pre-commercial costs that provide a benefit for more than one year must generally be capitalized and amortized.
Which Start-Up Costs Can Be Deducted Immediately?
Indonesia’s corporate tax rules generally allow business expenses incurred to obtain, collect, and maintain taxable income to be deducted, subject to the applicable requirements.
Routine costs incurred before commercial operations are not automatically treated as long-term start-up costs. The tax rules specifically distinguish expenses such as employee salaries, electricity, telephone, and ordinary office costs from pre-commercial expenditure that must be capitalized. These routine costs are generally deducted in the year they are incurred.
Costs connected with establishing or expanding a company receive separate treatment. Establishment and capital-expansion costs may generally be deducted in the year incurred or amortized under the applicable tax rules.
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The tax treatment consequently depends on what the company actually spent the money on, rather than simply whether the expense arose before its first sale.
Which Pre-Operating Costs Must Be Capitalized?
Pre-commercial expenditure that provides a benefit for more than one year must generally be capitalized and amortized. The tax rules identify feasibility studies and trial-production costs as examples of expenditure that can fall within this treatment.
This creates an important distinction for a foreign-owned company. A feasibility study expected to benefit the business for several years may need to be capitalized, while salaries and ordinary office expenses incurred during the same pre-operating period are generally deducted when incurred.
Tangible assets require separate treatment. Equipment, machinery, vehicles, and other depreciable assets with a useful life exceeding one year are subject to Indonesia’s tax depreciation rules rather than being treated as immediately deductible start-up costs.
For expenditure subject to amortization, Indonesian tax rules generally provide that amortization begins in the month the expenditure is incurred, except for certain business sectors subject to separate rules.
How Should Head Office and Related-Party Start-Up Costs Be Treated?
Foreign investors may incur Indonesian market-entry costs through a parent company, regional headquarters, or another group entity before the local company becomes operational.
A charge to the Indonesian company is not deductible simply because the wider group incurred the expenditure. The expense must relate to the Indonesian company’s business and satisfy the applicable deductibility requirements.
Where costs are charged by a related party, transfer pricing rules can also apply. The Indonesian company may need to show what service or benefit it received and whether the amount charged complies with the arm’s-length principle.
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Where an expense benefits several group companies, the amount charged to the Indonesian company should reflect the portion attributable to its business rather than the cost of the wider regional project.
How Do Start-Up Costs Affect Indonesian Tax Losses?
Ordinary Indonesian corporate tax losses can generally be carried forward for up to five consecutive tax years after the year in which the loss is incurred, although longer periods can apply under specific tax facilities.
Routine start-up costs deducted in an early tax year can increase the tax loss arising in that year and begin the corresponding carryforward period. Costs that must be capitalized instead generate deductions through depreciation or amortization over the applicable periods.
For a company with a long development period, the distinction can affect how much of its accumulated tax losses remains available when the business becomes profitable.
What Documentation Is Needed for Start-Up Costs?
The records should show what the company paid for and support the tax treatment applied. Depending on the expense, this can include invoices, agreements, proof of payment, descriptions of services received, and asset records.
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Where accounting and tax treatment differ, the adjustment should be identifiable in the company’s corporate tax return. Related-party charges may also require evidence supporting the service received, allocation method, and transfer pricing treatment.
These records support the deduction, depreciation, or amortization claimed if the expenditure is later examined during a tax audit.
Manage Pre-Operating and Start-Up Costs with MAP Resources Indonesia
MAP Resources Indonesia advises foreign-owned companies on the Indonesian tax treatment of pre-operating and start-up expenditure. Contact us today at info@mapresourcesindonesia.com.
