THE EFFECT OF TAX TREATY ON FOREIGN DIRECT INVESTMENT IN INDONESIA

Hutomo Nurman Satrio,,Nur Indah Lestari

doi:10.32493/jabi.v1i3.y2018.p278-288

Hutomo Nurman Satrio,, Nur Indah Lestari

Open Access

https://doi.org/10.32493/jabi.v1i3.y2018.p278-288

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Abstract

This paper examines the effect of tax treaty, so called Perjanjian Penghindaran Pajak Berganda (P3B), on foreign direct investment inflow to Indonesia in short, middle and long term. From 67 countries that have P3B with Indonesia, we work only with 51 countries because of no longer P3B exist or lack of completed data. Using panel data set of 51 countries from 2000 to 2015 and applying fixed effect model, we find that P3B has insignificant relationship to foreign direct investment inflows in short term. However, tax treaty, both in middle and long term, have a positive relationship on Indonesiaâ€™s foreign direct investment inflow with 10%and 1% significant level, respectively. Furthermore, the data show that in all term there are Rp0 foreign direct investment inflow from corresponding countries, which are 58% countries in short terms, 61% in middle term, and 64% in long term. From all those countries that has no investment agreement, majority of them are lower middle income countries. So, Government should evaluate tax treaty that are present and consider more about macroeconomics factor from partner country before signing an agreement.

Highlights

As one of the developing countries, Indonesia succeeded in obtaining FDI with a proportion of 68 percent of the total realized investment over the last five years
The control variables used by Murthy and Bhasin (2015) research indicate that the growth domestic product (GDP) ratio of home country and host country, financial openness and population growth are the main factors driving FDI
Other control variables such as trade openness are from Bhasin and Manocha (2016) research and the exchange rate of partner countries against US dollar is based on Ohno (2010)

Summary

INTRODUCTION

As one of the developing countries, Indonesia succeeded in obtaining FDI with a proportion of 68 percent of the total realized investment over the last five years. FDI inflows increase after the signing of P3B between Indonesia and some countries such as Singapore, Malaysia, England, Germany and Netherlands (Appendix 1) This is consistent with either et al (2011) and Hines (1998) concluded that government policies such as P3B and tax incentives to investors have a significant impact on FDI inflows to host country. There are countries that have had P3B with Indonesia for more than 5 years and had shown zero FDI inflows’value, such as Pakistan and Poland (Appendix 1) This is not in line with the results of Ohno (2010) explained that the tax treaty has a positive and significant effect on FDI inflows to Japan in the long term that is within more than 4 years after the signing of tax treaty.

LITERATURE REVIEW

DATA AND RESEARCH TECHNIQUE ANALISYS

AND DISCUSSION

Findings

CONCLUSION