Investors threaten to quit Batam

New value added tax will raise costs, say foreign firms; representatives going to Jakarta to seek exemption.

AT LEAST 60 foreign companies operating in Batam have threatened to relocate to Singapore after Jakarta imposed value added taxes (VAT) on Indonesia’s industrial showpiece.

Mr Asman Abnur, chairman of the Batam chamber of commerce, said 67 companies had informed his office of their intention to go.

Most of them, involved mainly in oil and shipping, are American or Japanese, plus a handful of Singaporean firms. Among them are Mobil Oil, PT Unocal, PT Natuna and PT Seagate, said Mr Asman.

He told The Straits Times yesterday: “They are concerned that their operational costs will rise once they have to pay the VAT.

“For many of them, this will mean losing their competitive edge. Why stay in Batam and pay taxes when they can go to Johor, Singapore, Subic in the Philippines or Vietnam?”

The companies will send a team of representatives to Jakarta early next week to meet Indonesian ministers to seek exemption, Mr Ismeth Abdullah, chairman of the Batam Industrial Development Authority (Bida), told The Straits Times yesterday.

Batam was a tax-free haven until this month when a 10 per cent VAT was introduced. However, the tax is not imposed on companies making products for export, including the components they buy in Batam for production purposes.

As a result, all 89 companies at the Batam-Indo Industrial Park, managed by SembCorp Industries, enjoy this tax-exempt status.

Batam has 17 industrial parks with 700 companies altogether.

Sources at Bida, in confirming the threat from several major foreign investors, acknowledged that they cited the VAT as the main reason.

Said an official, who declined to be named: “Batam does not have any natural resources except being tax-free. That is our only selling point.

“We are also not going to attract foreign investors by being inconsistent in our policy on imposing taxes.”

Pressure has been building on Jakarta to revoke the VAT which the Indonesian government imposed reluctantly on the insistence of the International Monetary Fund (IMF).

The IMF, in its January letter of intent to Indonesia, suggested that only “bonded warehouses” or export-oriented firms be exempted.

The VAT would raise labour costs as it would raise the cost of living.

Analysts said that minimum monthly wages have gone up nearly 50 per cent in the past year – from Rp 290,000 to Rp 425,000 – and that foreign companies would reduce new investments if the trend continues.

However, some are sceptical that the companies would pack up and go just because of VAT. The relocation costs alone could be prohibitive, they argued.

Said a foreign investor who has been a Batam resident for more than a decade: “It is a bluff to get the government to call off the VAT. Many will think twice about pulling out because the relocation costs are very much higher.”

An oil industry source believed that several companies were considering a move mainly because of a decline in business activity and revenue in the last six months.

Posted in Indonesia