comparative study on corporate income taxes of japan and indonesia based on tax misery index and...

8/7/2019 Comparative Study on Corporate Income Taxes of Japan and Indonesia Based on Tax Misery Index and Index of Economic Freedom

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Comparative study on Corporate Income Taxes of Japan and Indonesia

Based on Tax Misery Index and Index of Economic Freedom

Abstract

This paper examines corporate income tax rate as a main source of taxburden causality in Japan and Indonesia from fiscal policy and

macroeconomic perspective. It employs data from the Tax Misery Index

and the Index of Economic Freedom to compare the tax burden betweenJapan and Indonesia. It then creates a mixture index comparison, which

provides more representative look at relative tax burdens from investors’

and policy maker viewpoint.

I. Introduction

1. Corporate income tax by definition

According to A Dictionary of Economics (Black, 2002) definition of corporate

income tax is:

“A tax on the profits of firms, as distinct from taxation of the incomes of

their owners. There are strong arguments for having separate income tax

schemes for firms and individuals: the system of allowances and progressive

tax rates appropriate for a tax on individual incomes is quite different from aibl h f t i fi ”1



For additional information, company not only responsible for corporation tax rate

however they also have obligation for enterprise tax and inhabitants tax which attributesas local tax refer to where they are domicile

3.

3. Overview of corporate income tax rate in Indonesia

In Indonesia, a corporation for tax purposes is classified as “resident” or “non-

resident”. Residency is determined on the basis of place of incorporation 4. Resident

corporations are taxed on their worldwide income. Tax credits are allowed for incomethat was taxed outside the country. Non-residents are taxed only on income derived from

Indonesian sources, subject to any relief available under double taxation agreements

Taxable income is defined as any increase in economic prosperity received or

accrued by taxpayer, whether originating from within or outside Indonesia, which may

used for consumption or to increase the recipient’s wealth in whatever name and form5.

Tax Rate

Income tax in Indonesia is progressive and a self-assessment method is used to

compute the tax. Since January 1, 2001 corporate tax rate are shown below6

:

Table 2

Tax Rates for General Corporate Income in Indonesia

Taxable Annual Income Tax Rate

Up to 50 million rupiah 10%

Over 50 million rupiah to 100 million rupiah 15%



investments financed by debt and by equity are taxed, and the various ways

in which taxable income may be defined and calculated.

Therefore, comparisons that do not fully account for such differences and

intricacies must be interpreted with full-care. Since the exact comparison is difficult to beaccomplished, then the analysis is conducted in another perspective. The analysis here

take a micro approach to public finance by examining certain aspects of taxation andpublic finance from the perspective of taxpayer and policy maker, using the Forbes Tax

Misery Index and Index of Economic Freedom.

2. Tax Misery Index

Each year, Forbes magazine releases a study on tax misery. The Forbes Global

Misery & Reform Index is a proxy for evaluating whether tax policy attracts or repels

capital and talent. It is computed by adding the top marginal tax rate for the corporate

income tax, individual income tax, wealth tax, employers’ and employee’s social security

tax and value added tax. The higher number of the total, the more the misery, because tax

burden which carried out by taxpayers become higher8

.The 2005 tax misery index was used for this comparative study. Several countries

are ranked. Table 3 contains selected countries that were included in the Index from

selected developed and developing countries in term of comparison purposes.

Table 3

Tax Misery for 2005, selected countries9

Rank Country Corp.

I

Indiv.

I

Wealth Employer

S S

Employee

S S

VAT Misery

2005



Table 4

Changes in Tax Misery in Asian Countries

From 2002 -2005 (selected countries)Rank Tax Misery Increased

(Decreased)

2002 to2005

Country 2005 2004 2003 2002

2 China 160.0 160.0 160.0 154.5 4.0

18 Japan 123.3 121.5 124.9 117.3 (0.3)

43 Indonesia 89.0 89.0 80.7 80.7 8.353 Hong

Kong

43.5 43.0 43.0 41.0 2.5

The information on the table shows that during 2002 to 2005, tax misery index in

Japan has decreased by 0.3 point compared with Indonesia which has increased by 8.3

point. However, from Table 4 it shows that tax misery grade for Japan is still higher with

123.3 point compared with Indonesia with 89.0 point.

3. Index of Economic Freedom

Another way to compare the public finance systems of various countries is by

comparing their top marginal individual and corporate income tax rates and their year-to-

year change in government expenditures as a percentage of GDP. These are the variables

d t t th fi l b d f 161 t i i th I d t E i



4. Comparison of Index and analysis

Which index is provides better measurement of competitiveness especially from

the investors’ point of view? When speaking of competitiveness, one usually thinks of the attractiveness of investing or setting up a business in a particular country. Thus, the

corporate income tax is an essential component of getting that decision. However, thecorporate income tax is not the only measure that investors considers when deciding

where to invest. They consider other costs of doing business, such as employee payrolltaxes or property taxes. These taxes are including in Tax Misery Index variables

assumptions, whereas the Index of Economic Freedom did not. Nevertheless, Tax Misery

Index also includes some taxes that probably do not affect directly a corporation’s cost of

doing business, such as the wealth tax and the individual income tax. These differences in

assumption and construction variable of terms as a consequence will lead to different

result.

A better index to use probably should including the corporate income tax, the

employer portion of social security taxes and the Value Added Taxes (VAT) or

consumption tax. Those taxes are the most affecting consideration of cost of performingbusiness. Therefore, if the aim is to determine which countries are the best to set up

business, perhaps only the taxes that affect the cost of doing business should be included

in the index. For the side of policy making Tax Misery Index perhaps provides better

information, otherwise for outside investors, perhaps Index of Economic Freedom

provides better overview.

For the case of Japan and Indonesia, during period of year 2002 until 2005 there

is increasing tax misery for Indonesia (8.3 point) and on the other hand there isd i t i f J ( 0 3 i t) It i th i d I d i



III. Concluding remarks

The Tax Misery Index and Index of economic freedom (tax burden index) revealthe relative degree of tax burden aspect between Japan and Indonesia. Regarding

different methodologies, both indexes are ensuing in different results. In policymakerpoints of view, Tax Misery index provide better arguments to decide a new policy. On

the other hand, from investors’ perspective, Index of Economic Freedom offers obviousguidelines in where to invest.

Absolutely, there are many other factors that investors need to consider beforedeciding whether to invest in a country. A strong rule of law is ultimately very important,

which includes strong protection of property rights and enforcement of contracts.

Corruption level and the extent of the underground economy, effectiveness of monetary

policy, trade policy and the skill level of the labor are fundamental factors as well.



References

Anderson, Jack. 2005. The Tax World Gets Flat & Happy. Forbes Global May 23, onlineedition.

Black, J. A Dictionary of Economics. Oxford University Press, 2002. Oxford Reference

Online. Oxford University Press. CUNY Baruch College.

Congressional Budget Office-The Congress of United States. 2005. Corporate Income

Tax Rates: International Comparisons (Electronic version).

Flannery, Russell. 2005. Time Bomb. Forbes Global, May 23 online edition.Lee, Y & Gordon, R.H. 2004. Tax structure and economic growth.

Marsden, K. 1983. Links between taxes and economic growth: Some empirical evidence.World bank working paper No. 605.

McGee, Robert W. 2006. Tax Misery and Tax Happiness: A Comparative Study of

Selected Asian Countries. Miami. Andreas School of Business Working Paper Series,Barry University.

Ministry of Finance, Japan. 2006. Current Japanese fiscal conditions and issues to beconsidered. A brochure paper

Ministry of Finance, Japan. 2006. Let’s talk about taxes. A brochure paper

Ministry of Finance. 2006. Comprehensive Handbook of Japanese Taxes 2006

[Electronic version] pp. 76-89

Nicholson, W & Snyder, C. 2005. Intermediate Microeconomics and Its Application.

(10th

ed) Ohio. Thomson-South Western.

Republic of Indonesia, Law Number 17 Year 2000 on Income Tax

Retrieved at 26 December 2006http://www.oxfordreference.com/views/ENTRY.html?subview=Main&entry=t19.e599

R ld A 1985 S I t ti l C i f S l Sid T P li C t

http://www.oxfordreference.com/views/ENTRY.html?subview=Main&entry=t19.e599





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