ABSTRAK
Foreign Investment is believed can accelerate economic growth especially Foreign DirectInvestment. FDI has benefit to host country among others in: - Improvement current balance due to capital inflow in foreign currency for initialactivities and export proceeds (if any). - Reduction of unemployment rate - Increasing economic activities due to more people has more income. - Bringing an international market access to local business. - Increasing demand for domestic sources when raw material for production is suppliedfrom local market. On the other hand it will cost host country in inter-alia: - Weakening current balance in the long run if profit repatriated is generated fromdomestic market. - Diminishing local business that similar to what FDI business activities.Survey of Foreign Direct Investment flow in 1998 states that Asia Pacific still a favorableplace. Growing areas such as Latin America, East Europe will become a thoughcompetitor to Asia Pacific. Most of them remain unchanged their investment value inAsia Pacific even some will expand their investment. It is believed could initiate a fastereconomic growth for Asia countries (see: UNCTAD & ICC survey 1998 & AsianDevelopment Outlook 1999 and ADO 2000). Indonesia is among Asia Pacific country, which currently needs FDI. Since 1980 thetrend shows a steadily increasing, but financial crisis started 1997 has totally change thetrend. Now everybody believed that FDI could help to restore and accelerate economicgrowth. From investor point of view, taxation in host country is part of their consideration beforearriving to invest or not decision. Tax is a direct deduction to cashflow generated andrepatriated to parent company. Return from their investment is partly depends on taxation. Suppose MNC can make thesanie level of profit from operation, a heavier tax burden in one country could alterinvestment place to another country, which offered a lesser tax burden. Tax burden in thiscase is consisting of Corporate or Enterprise Tax and Dividend Tax. Tax burden is heavily depends on tax rate applied and incentives offered related to thatrate. There are some criteria used before granting an incentive. Those criteria could bebecome an instrument to achieve fiscal policy target. 1f one country has a certain target ofunemployment rate, then labor-intensive FDI will get an incentive, because by attractingmore labor-intensive FDI then unemployment rate could be reduced. Another item in taxation considered, as the most important issue in cross-countryoperation is transfer pricing (see: Ernst & Young survey 1999). UnavailabilitY of transferpricing detail regulations and capable persons to implement those regulations could leadinvestment into a higher level uncertainty. There are opportunities to generate moreprofits from investment on one hand and threat to be treated unfairly -means additionalcharge to investment return-on the other hand. In brief, from investor point of view they need as low as possible tax rate or maximumtax incentives to minimize reduction to their return of investment, and a higher certaintyin transfer pricing regulations and practices due to their cross border operation.Indonesian taxation in said above points shows a condition that is not conducive to attractEDI. We only apply one rate for corporate and dividend tax. It makes tax burden sogeneral and applied to all kind of investment or business. There is no specific incentiveavailable to attract FD1. Indonesian tax rate is not the highest but having applied possibleincentive could be utilized, tax burden in Indonesia is the highest. It?s beóause there is noincentive to reduce tax burden. By doing this it seems that government of Indonesia willcollect as much as possible tax regardless multiplier effect of investment. Incentive givenwill reduce government revenue in the short-term, but in the long run along withincreasing economic activities, total revenue will be higher. China has estabLished a detail transfer pricing regulations and personnel. Thailand ispreparing those. Study says transfer pricing still occuffed in China. Indonesia has not yethad those and has a high tax rate. It will push investor to do transfer pricing due to a hightax rate that they try to avoid. Government will not collect an optimum tax becausetransfer pricing makes profit in host country minimum and corporate tax accordingly.