Strategic Tax Planning for Indonesia’s Palm Oil Industry Amid Global Turbulence
Overview of the Palm Oil Industry
Indonesia’s palm oil industry is one of the country’s most critical economic drivers, a linchpin of the national economy. Below are essential facts that highlight its importance.
1. Indonesia's Position in the Global Market
Indonesia is the world’s largest producer of crude palm oil (CPO), outpacing Malaysia. This is supported by over 16 million hectares of oil palm plantations across major provinces, including Riau, Kalimantan, North Sumatra, and Aceh. With this scale, Indonesia contributes approximately 55–60% of global CPO output, making palm oil one of the nation’s top export commodities, alongside coal and other mining products.
2. Industry Structure
The industry comprises three main segments, including large private plantations, smallholder plantations, and state-owned plantations. Large private plantations are operated by private companies, which currently account for the majority of national production and exports. Smallholder plantations are managed by individual farmers (both plasma and independent) and account for around 40% of the total plantation area. Meanwhile, state-owned plantations are managed by state-owned enterprises such as PTPN.
3. Economic Impact
The palm oil sector generates over USD 20 billion annually in export earnings and significantly boosts regional GDP in producing areas. It also provides livelihoods, both directly and indirectly, to millions of Indonesians, particularly in rural areas.
Palm Oil Export Performance in 2024
In 2024, the export value of Indonesian palm oil products reached USD 27.76 billion (IDR 440 trillion), down 8.44% from USD 30.32 billion (IDR 463 trillion) in 2023. Several main factors contributed to this decline.
Total export volume dropped by 2.68 million tons, from 32.2 million tons in 2023 to 29.5 million tons in 2024 (PIR Palm Oil Farmers Association, 07/03/25). This was mainly due to a plunging demand from large markets such as China and India. Exports to China and India plummeted by 2.38 million and 1.14 million tons, respectively. In terms of domestic consumption, particularly for biodiesel, the figure rose to 11.45 million tons, a 7.51% increase from the previous year.
In addition to these market shifts, rising import tariffs in the United States and geopolitical tensions, such as the conflict between India and Pakistan, have weighed heavily on the industry. Both countries are major export destinations for Indonesian palm oil, and disruptions in global trade dynamics have eroded profits, increased operational and capital expenses, and strained corporate cash flow.
Tax Planning Strategies to Stabilize Cash Flow
To maintain stable cash flow, palm oil companies can adopt several tax strategies:
- Under Government Regulation No. 49/2022, businesses may apply for VAT exemptions on imports of strategic goods related to the palm oil sector, including processing machinery, mill equipment, and oil palm seeds or seedlings to be planted in polybags.
- Companies that are making new capital investments, whether to establish a new business or expand existing operations, may be eligible for tax incentives. This includes investments in downstream palm oil industries as outlined in Capital Investment Coordinating Board Regulation Number 7 of 2020 on the classification of business fields and pioneer industries eligible for corporate income tax incentives. Qualifying sectors include food-based downstream products (e.g., palm cooking oil, margarine, vegetable fats), non-food downstream products that undergo chemical processing (e.g., fatty acids, fatty alcohols, glycerin), and renewable energy products (e.g., biodiesel and biogas). These companies can leverage corporate income tax incentives under Minister of Finance Regulation Number 130/PMK.010/2020, as amended by Minister of Finance Regulation Number 69 of 2024 concerning the Granting of Corporate Income Tax Incentives, and income tax incentives under Government Regulation Number 78 of 2019 concerning Income Tax Incentives for Capital Investment in Specified Business Sectors and/or Designated Regions.
- Businesses with tax overpayments (VAT or income tax) can seek refunds through the preliminary refund scheme as set out in Articles 17C and 17D of Law of the Republic of Indonesia Number 6 of 1983 concerning General Provisions and Tax Procedures, as amended by Law of the Republic of Indonesia Number 7 of 2021, and its derivative regulations, including Minister of Finance Regulation Number 39/PMK.03/2018 concerning Procedures for Preliminary Tax Refunds of Tax Overpayments, as amended by Minister of Finance Regulation Number 119 of 2024.
- A complete understanding of all tax obligations relevant to the palm oil industry may prevent costly penalties due to non-compliance. These obligations include Article 21 income tax on employee salaries and wages, Article 22 income tax on purchases of fresh fruit bunches from third-party suppliers, Article 23 income tax on payments for vehicle and equipment rentals used to transport fresh fruit bunches, Article 4(2) final income tax on rental payments for housing, warehouse space, and other property, VAT on the sale of CPO and its derivative products, land and building tax on plantation land and processing facilities, and corporate income tax on companies’ fiscal profits calculation.
Conclusion
This era of economic unpredictability due to increased tariffs from the United States and China, and escalating tensions between India and Pakistan, continues to pose risks for Indonesia’s palm oil sector. These challenges threaten both export volume and price stability. Therefore, businesses must adopt proactive tax strategies to safeguard financial stability to mitigate these risks.
