Indonesia Finance Ministry to cap tax deductions for tobacco companies..

July 3, 2009 -Tax Regulations Might Snuff Out Ads for Cigarettes.. Finance Minister Sri Mulyani Indrawati issued the regulations on Tuesday, June 30, 2009 to cap tax deductions tobacco and pharmaceutical companies can claim for spending on advertising could provide tens of millions of dollars in additional government revenue.

Additionally, the companies are obliged to submit a report on their promotional and distribution spending plans or they will be unable to subtract the costs from total revenues at the end of the year. According to tax office chief Darmin Nasution, the regulation was aimed at limiting the amount of the costs for promotion and distribution that would be subtracted from the companies’ gross revenues, which eventually affect tax revenues.

In 2008, the tobacco industry paid IDR 60 trillion (EUR 4.2 billion) in taxes or about 10 per cent of total government earnings from taxes. Tobacco companies spent IDR 375 billion on advertising in the first quarter of this year, according to AGB Nielsen Media Research. (pi)

Industry players warned it would burden a sector that directly and indirectly employs more than one million people.

The rules cap the advertising tax deduction for cigarette producers with annual gross revenue of more than Rp 5 trillion ($490 million) at 1 percent of gross revenue, and less than Rp 100 billion overall. Deductions for companies with annual gross revenue of between Rp 500 billion and Rp 5 trillion have capped at 2 percent of gross revenue, up to a maximum of Rp 30 billion. Deductions for companies with annual gross revenue of Rp 500 billion or less have been capped at 3 percent, up to a maximum of Rp 10 billion.

The corporate income tax rate currently stands at 28 percent after all deductible components are taken out. With the latest change in the rules, the tax burden on cigarette firms is likely to increase significantly.

Niken Rachmat, head of corporate communications at PT HM Sampoerna, one of the country’s biggest cigarette manufacturers, said the company would be forced to cut advertising spend to comply with the new regulations, because the more it spends, the more tax it will have to pay.
“It’s capped at Rp 100 billion,” Niken said. “If we spent Rp 200 billion on ads, what would happen to the additional Rp 100 billion? We would have to include it in our revenue and it would be taxed. The bottom line is that it’s an attempt to limit our advertising.” Under the new regulations, Niken said, producers would be forced to choose between cutting ad spending or paying more taxes.

According to Sampoerna’s 2008 financial statements, the company posted Rp 34.68 trillion in revenue, while spending on advertising and promotions stood at Rp 1.165 trillion, or 3.36 percent of gross revenue — higher than the 1 percent cap and significantly higher than the Rp 100 billion maximum limit in the new rules.

Despite the threat of higher taxes, Naya Tirambintang, a tobacco industry analyst, said that cigarette firms were unlikely to cut spending on advertising. “Because of the nature of the business, their sales are highly dependent on the images they create through advertising,” Naya said. “If they are forced to cut their ad spending, there’s a possibility that sales could fall. This will pose a challenge to companies and shareholders, as their dividend payouts will also be lower.”

Both Niken and Naya said the new regulations could prove particularly damaging to the media industry, which garners a great deal of its advertising revenue from lavish tobacco campaigns.

One tax official denied that the government was trying to curtail cigarette advertising. “We’re not out to limit it,” Syarifuddin Alsah, the tax service’s director of taxation regulation, told the Jakarta Globe by telephone.

References: Tax Sweetener Won’t Curb Smoking Rate, Jakarta Globe, 7/1/2009; Govt caps deductible revenue for tobacco firms, Aditya Suharmoko and Benget Besalicto Tnb., The Jakarta Post, 7/1/2009; Deductible revenue for tobacco firms limited, Tobacco Journal International, 7/1/2009.

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Click on image to enlarge, An Indonesian that refused to quit..