Taxation Aspects of Build-Operate-Transfer
Jakarta, Ideatax -- The Head of the Ministry of National Development Planning (Bappenas), Suharso Monoarfa, stated that one of the schemes to be used in the construction of Nusantara Capital City is build-operate-transfer (CNN Indonesia, 2021). He explained that the implementation of the build-operate-transfer (BOT) scheme is intended to increase investor participation in Nusantara Capital City and reduce the dependency of the construction on the state budget (CNN Indonesia, 2021).
In general, build-operate-transfer (BOT) is defined as a form of cooperative contract between the land rights holder and the investor which states that the land rights holder grants the investor the right to construct buildings during the BOT contract. Additionally, the BOT contract also regulates that the investor will transfer ownership of the building to the land rights holder after the BOT contract period ends.
In the IBFD Tax Glossary, BOT is defined as a business scheme that specifies that the operator will build, finance, operate and maintain infrastructure facilities (IBFD, 2015).
In the context of state finance, BOT is defined as the use of State Property in the form of land by other parties by constructing buildings or facilities along with their facilities to be utilized by other parties for a certain period of time and handed back to the state once finished. This is regulated in Article 1 of Government Regulation Number 27 of 2014 concerning Management of State/Regional Property.
Since there is a process of construction, operation and transfer of assets in the BOT scheme, there are several aspects of taxation that must be considered in this activity.
Tax Aspects for Investors
As mentioned earlier, BOT activities involve two main parties: the investor and the land rights holder. In BOT, the investor is obliged to carry out the construction, operation and transfer of assets to the land rights holder. Therefore, there are several tax obligations of the investor that can be identified as follows:
- At the time of construction, investors are obliged to withhold Income Tax Article 4(2) on construction services both for planning, implementation and construction supervision as regulated in Government Regulation Number 51 of 2008 concerning Income Tax on Income from Construction Services Business as amended by Government Regulation Number 9 of 2022.
- When the construction is carried out without using the services of a contractor, the investor must collect Value Added Tax (VAT) on Self-Building Activities (KMS) at an effective rate of 2.2% of the Tax Imposition Base. This regulation can be found in the Ministry of Finance Regulation Number 61 of 2022 concerning Value Added Tax on Self-Building Activities.
- At the time of operation, investors are obliged to report income in connection with building concession rights such as income from the operation of hotels, sports centers, entertainment venues and other businesses. This regulation can be found in Circular Letter of Director General of Taxes Number SE-38/PJ.04/1995 concerning Income Tax Treatment of Income in Connection with build-operate-transfer contract.
- Investors have an obligation to deposit Income Tax Article 4(2) on land and building leases at a rate of 2.5% as regulated in Government Regulation Number 34 of 2017 concerning Income Tax on Land and Building Leases for income in the form of rent in connection with the use of property.
- In the event that the investor receives compensation from the holder of the land and building rights due to the shortening of the period of the build-operate-transfer contract, then the income is payable to income tax.
Although there are various obligations of the investor for the construction, operation and transfer of land and building rights in the BOT scheme, the Decree of the Ministry of Finance No. 248/KMK.04/1995 regulates that the investor is entitled to amortize the costs incurred to construct the building in the framework of the BOT scheme. Furthermore, KMK 248 also regulates that the cost to construct the building is amortized in the same amount each year during the term of the BOT contract.
For example, PT A as an investor conducts a build-operate-transfer contract with PT B as the owner of land rights to build a sports hall. The cost of building the sports hall is twelve billion with a contract period of twelve years. Based on the BOT contract, PT A can amortize the cost of building the sports hall by one billion per year.
The Ministry of Finance Regulation No. 248 of 1995 also regulates that the investor can amortize the construction cost as soon as the building is put into use or operated and if the operating period of the building is shorter than the previously agreed build-operate-transfer contract, the investor can amortize the construction cost in a lump sum in the last year of the BOT period.
For example, in the ninth year of the BOT contract between PT A and PT B, it is known that PT A will only operate the sports hall for ten years. Based on this, then in the tenth year, PT A can amortize the cost of building the sports hall for the tenth, eleventh and twelfth years at once.
On the contrary, if the implementation of the BOT contract is longer than the original contract due to additional buildings, then the construction costs can be added to the unamortized costs. As an illustration, in the tenth year of the BOT contract, PT A added facilities to the sports hall in the form of tennis courts for five billion and the BOT contract period was extended to seven years. Thus, the unamortized cost of building the sports hall in year ten of two billion plus the cost of building a tennis court of five billion will be amortized over seven years.
Tax aspects for land rights holders
Circular Letter of the Director General of Taxes number SE-38/PJ.04/1995, among others, also regulates that there are at least four incomes that can be received or obtained by the land rights holder both during the building operation period and at the end of the build-operate-transfer contract. The first income that may be obtained by the land rights holder is periodic payments made by the investor to the land rights holder. Such income is subject to Article 17 of the Income Tax Law and the land rights holder must report it in its annual tax return.
The second type of income that land rights holders may receive under a BOT contract is rental income. It could be that in the BOT contract, the investor pays the land lease fee to the land rights holder. For this income, the land rights holder is subject to Final Income Tax Article 4(2) on land and building leases at a rate of 10%.
The third type of income that a land title holder may receive or earn is profit sharing on the operation of buildings. On such income, the general rate of income tax is imposed.
Furthermore, if the land rights holder receives the transfer of the building at the end of the build-operate-transfer contract period, then the transfer of the building is subject to Final Income Tax Article 4(2) on the transfer of land and buildings at a rate of 2.5% as regulated in Government Regulation Number 34 of 2016 concerning Income Tax on Income from the Transfer of Rights and Purchase and Sale Contract on Land and/or Building and its amendments.
This is the review of the taxation aspects of build-operate-transfer activities. If you have any questions or need further assistance, Ideatax is ready to help.
- Law No. 7 of 1983 concerning Income Tax as last amended by Law No. 7 of 2021 concerning Harmonization of Tax Regulations
- Government Regulation Number 51 of 2008 concerning Income Tax on Income from Construction Services Business as last amended by Government Regulation Number 9 of 2022
- Government Regulation Number 27 of 2014 concerning Management of State/Regional Property
- Government Regulation No. 34 of 2016 on Income Tax on Income from Transfer of Rights and Purchase and Sale Contract on Land and/or Building and its amendments
- Decree of the Ministry of Finance Number 248/KMK.04/1995 concerning Income Tax Treatment of Parties Cooperating in the Form of a build-operate-transfer contract
- Ministry of Finance Regulation Number 61 Year 2022 on Value Added Tax on Self-Building Activities
- Circular Letter of Director General of Taxes Number SE-38/PJ.04/1995 on Income Tax Treatment of Income in Connection with build-operate-transfer contracts
CNN Indonesia. (2021, Februari 09). Ibu Kota Baru Akan Dibangun dengan Skema Bangun, Guna, Serah. Retrieved from CNN Indonesia: https://www.cnnindonesia.com/ekonomi/20210209150240-532-604218/ibu-kota-baru-akan-dibangun-dengan-skema-bangun-guna-serah
IBFD. (2015). IBFD International Tax Glossary 7th Edition. London: IBFD.
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