Tax Incentive Analysis to Encourage Venture Capital Investing in
Digital Start-up Companies
Yosephine Uliarta and Milla Sepliana Setyowati
Fiscal Administrative Science, Faculty of Administrative Science, Universitas Indonesia,
Jl. Prof. Dr. Selo Soemardjan, Depok, 16424, Indonesia
Keywords: Tax Incentive, Venture Capital, Digital Start-up
Abstract: Digital start-up are generally the main drivers of the development of the digital economy. As a company that
promotes innovation, investing in startups has a very high risk. One of the startup funding comes from venture
capital investment. The purpose of this study is to analyze tax policy in Indonesia, which aims to encourage
venture capital investment in startups and illustrate tax incentives for venture capital investment implemented
in Singapore and China. This research was conducted using a qualitative approach and qualitative data
analysis techniques. The results of this study indicate that to support venture capital investing in startups, the
Indonesian government provides tax incentives in the form of tax exemptions on dividends. The tax incentives
provided are not attractive because they do not fit into the venture capital investment model. Tax incentives
for venture capital applied in Singapore are provided in the form of tax exemptions on capital gains, interest,
and dividends, while China provides tax incentives in the form of tax reductions.
1 INTRODUCTION
The government has committed to establishing a tax
incentive scheme for venture capital that funds
companies in certain categories, including startup
companies, which are listed in the 2017-2019
Electronic-Based National Trade System Roadmap
(SPNBE), and realize it by issuing PMK No. 48 /
PMK.010 / 2018 Concerning Taxation Treatment of
Equity Participation of Venture Capital Companies in
Micro, Small and Medium Enterprises (PMK
48/2018). However, this regulation does not create an
attractive tax incentive scheme for Venture Capital
Companies. The tax treatment of venture capital in
PMK 48/2018 has not changed from the previous
regulation; namely, the dividends received by venture
capital companies from investee companies are not
subject to tax on certain conditions. This regulation
only changes the maximum threshold of net sales of
investee companies that receive venture capital
funding from the provisions previously stipulated in
KMK No. 250 of 1995. The exclusion of dividends as
a tax object, as stipulated in PMK 48/2018, is
considered to be attractive for venture capital
investors. There are several alternative tax policies to
encourage investment from venture capital in the
form of incentives that can be given that have been
implemented in other countries. The forms of
incentives are tax exemption or exemption from
taxation on certain income as applied in Singapore,
and tax incentives in the form of tax reduction
implemented in China. Singapore and China were
chosen as benchmarks in this study because the
venture capital industry in both countries is fairly
advanced, and both are Indonesian competitors in
terms of venture capital investment in startups in the
Asian region. In addition, the two countries also paid
special attention to the development of the initial
stage of business and the use of technology and the
development of innovation in business. Based on this
background, the research questions raised are as
follows: (1) how tax policies to encourage venture
capital investing in digital startups (startups) that
currently apply in Indonesia and (2) how tax policies
in Singapore and China to encourage venture capital
that invests in start-up companies.
Uliarta, Y. and Setyowati, M.
Tax Incentive Analysis to Encourage Venture Capital Investing in Digital Start-up Companies.
DOI: 10.5220/0009402402290238
In Proceedings of the 1st International Conference on Anti-Corruption and Integrity (ICOACI 2019), pages 229-238
ISBN: 978-989-758-461-9
Copyright
c
 2020 by SCITEPRESS – Science and Technology Publications, Lda. All rights reserved
229

2 LITERATURE REVIEW
2.1 Start-up
Initially, the concept of startup refers to business
entities that have just entered the market. But over
time, the definition of a startup is associated with
specific business categories related to the
development of information and communication
technology, especially the internet as a universal,
direct, and unlimited communication media. The
startup is also associated with breakthroughs in the
economic, social, and even civilizational dimensions
related to the spread of information and
communication technology, especially the internet.
(Scale, 2019). Gaujarad (2008) explained that startup
companies have the following characteristics:
a) The company has not been long established
(usually 3 years or less).
b) The company has few employees or workers,
usually less than 20 people. This is intended to
save the cost of paying employee salaries.
Employees tend to have the ability to hold
several tasks/responsibilities at one time
(multitasking).
c) Very close to the use of technology and
applications.
d) There are operations carried out on websites. A
startup company can certainly have a site as a
corporate identity because the operations used
are in that field. Even though the services
offered are in the form of real products or
services that use applications, startup
companies will still have a website.
e) The company is still in the development stage.
2.2 Ventura Capital
Venture capital is a risk-equity investment (Gerken
and Wesley, 2014). Venture capital is a long-term
investment in the form of risk-giving capital, where
the capital provider (venture capitalist) expects
capital gains (Tony Lorenz in Rivai, 2007). Venture
capital is financial capital provided for early-stage
companies that have high potential and grow quickly
and are high risk. Venture capitalists make money by
having equity in invested companies, which usually
has new technology or business models in high-tech
industries, such as biotechnology, information
technology, software, and others (Maynard, Warren,
and Trevino, 2010). According to (Klonowski, 2010),
there are several advantages of companies that are
funded by venture capital companies. First, venture
capital financing does not expect regular interim
payments. Second, the addition of capital increases
the creditworthiness of an investee company by
increasing its capital base, thereby increasing the
value of its net assets. This is important for investee
companies when looking for additional bank
financing or leasing arrangements. Third, venture
capital financing generally increases the credibility of
investee companies with customers, material
suppliers, distributors, banks, and other financial
institutions. This credibility is based on the
assumption that venture capitalists are very selective
in their choices and only invest in companies with
strong potential for growth. Investee company
stakeholders know that venture capitalist only benefit
if the investee company continues to succeed, and this
serves to increase the credibility of the investee
company. Fourth, capital provided by venture
capitalists does not require investee companies to pay
dividends to ensure that founders can run their
business without operational constraints
2.3 Tax Incentives for Venture Capital
Investment
The provision of tax incentives for venture capital is
one of the efforts to deepen the market because this
industry has certain characteristics that are different
from other financial industries. Compared to
financing sources from banks, venture capital plays
an important role in facilitating the development of
young companies with high growth potential. In a
journal titled "Venture Capital, Entrepreneurship, and
Regional Economic Growth" Samila and Sorenson
(2011) argue that venture capital companies fill a
niche that allows capital needed to reach some of the
undeveloped and most uncertain ideas as stated
below: "venture capital firms fill a niche that allows
the necessary capital to reach some of the least
developed and most uncertain ideas. "He also
believes that traditional bank financing cannot
replace venture capital.
The high risk from startup requires banks to
charge very high-interest rates to internalize risk.
However, in general, the applicable law does not
accommodate this. In addition, when considering
lending, banks are more likely to choose safer
options, for example, companies with collateral and
credit history. Likewise, investment banks are limited
by regulatory constraints. Therefore, 'safe'
investments are made by banks, but risky businesses
are left unfunded. In this regard, venture capital helps
fill in the gaps. Players in both industries can also be
distinguished, because usually, venture capital
players are sophisticated investors, that is, investors
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who have deep market experience and knowledge.
Usually, they are investors who also have qualified
information about technological developments.
3 RESEARCH METHODOLOGY
This research uses a qualitative approach. Research
with a qualitative approach is research that intends to
explore and understand social problems that occur by
involving questions and procedures, with data
collected from participants and analyzed inductively,
and then the researcher makes an interpretation of the
data. The purpose of this study is to describe and
describe tax incentives as a public policy aimed at
venture capital companies that invest their capital in
Indonesian digital startups and map income tax
incentives for venture capital companies in Singapore
and China.
The formulation of public policy will have an
impact or produce good results if it is based on a
rational thought process that is supported by complete
or comprehensive data or information (Hoogerwerf in
Islamy, 2004). In designing tax incentives to
encourage venture capital investment, there are
several things that the government must consider.
This can be grouped into three main categories in the
design of tax incentive features for venture capital
investment, as formulated by the European
Commission (2017) in Table 1.
Table 1. Design Feature of Tax Incentive for VC Investment
Design
Feature of
Tax Incentive
for VC
Investment
Qualifying criteria for tax incentives
Business Qualification
Investor Qualification
Investment Qualification
Investment Duration
Scope of tax incentive
Form of tax incentive
The term on giving incentives at the investment stage
Ttax inccentive administration
Discretion
Monitoring fiscal costs
Monitoring the impact of providing incentives
The policy analysis set out in PMK 48/2018 in this
study will be reviewed from these three categories by
also seeing whether the provisions regarding the
scope, qualification criteria, and administration that
currently apply in PMK 48/2018 have been
formulated based on rational thought processes and
supported by comprehensive information. However,
in designing a policy, problem identification is very
basic and becomes very important for the government
to be able to take the right actions. Problems (core
problems) that are not well defined are weaknesses in
a policy (Patton and Sawicki, 1986). For this reason,
in this discussion, it is first analyzed what is
formulated by the government as a core problem in
PMK 48/2018 through the background and purpose
of its formation.
Based on the research objectives, this study is
included in descriptive research. Descriptive
research, according to Neuman (2014: 38), begins
with questions or defining issues and tries to describe
them accurately. The results of the study are detailed
descriptions of the issue or answers to research
questions. Data collection techniques used to obtain
information relevant to the problem of this study are
in-depth interviews and literature studies. In-depth
interviews were conducted with 12 informants, as
listed in Table 2.
4 DISCUSSION AND
CONCLUSION
4.1 Qualification Criteria
Esson & Zolt (2002) explained that tax incentives are
tax expenditures specifically targeted at certain types
of taxpayers or certain taxable activities. The
targeting is achieved by using qualification criteria
that explicitly limit eligibility. This is an important
part of the design of tax incentives to support the
achievement of underlying policy objectives and limit
the fiscal costs borne by the government. The design
of tax incentives for venture capital must be targeted
at companies with certain criteria. The investor
qualification criteria set out in PMK 48/2018 are
Venture Capital Companies that are registered with
OJK and invest in certain companies, including start-
up companies. This also indicates that the business
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Table 2. Summary of data sources
No. of
informants
Position of informants Institution Role
1
Head of Income Tax Facilities
Subdivision
Badan Kebijakan Fiskal / Fiscal
Policy Agency
Policymakers
1
The staff of Directorate of Taxation
Regulations II
Directorate General of Taxation
/ Direktorat Jenderal Pajak
The organizer of the
formulation and implementation
of policies
1
Acting Director of Informatics
Empowerment
Ministry of Communication and
Informatics
The ministry that promotes
programs to develop the digital
industry
1
The staff of Directorate of Informatics
Empowerment
Ministry of Communication and
Informatics
1 Investment Manager VC M Venture Capitalist
1
Head of Investment and Venture Fund
VC M Venture Capitalist
1
Investment Officer
VC K Venture Capitalist
1
Investment Officer
VC X Venture Capitalist
1 Secretary-General Amvesindo
Venture Capital Association for
Indonesian Startups
The association consists of
venture capital companies for
startups in the technology and
other creative fields
1 Tax Researcher Danny Darussalam Tax Center
Tax Researcher
2 Lecturer Universitas Indonesia Academician
qualification criteria for obtaining investment are
certain companies, including startup companies.
PMK No.48 / 2018 does not specifically target groups
of venture capital companies that invest in startup
companies. This regulation uses MSME criteria as an
eligible investment recipient qualification. The
MSME criteria used are the net sales threshold. The
PMK 48/2018 changed the threshold for UMKM net
sales as a PMV business partner that was previously
Rp. 5,000,000,000.00 (5 billion) in a year to Rp.
50,000,000,000.00 (50 billion) in a year. This change
was made because the old boundaries were obsolet.
While the figure of Rp 50,000,000,000.00 is
determined by referring to Law Number 20 of 2008
concerning Micro, Small, and Medium Enterprises. In
addition, PMK 48/2018 also explained further that the
limitation of net sales for a year is intended to be the
net income for the tax year when PMV makes capital
participation to a Business Partner Company (PPU)
or an investee company. This was previously not
regulated in KMK 250/1995. This additional
explanation is intended to avoid multiple
interpretations of whether the net sales threshold is
applied annually during the investment period or only
in the year before the investment is made.
The definition of a startup company itself
theoretically has experienced a narrowing of the
meaning of being an early stage company engaged in
technology and its close relationship with innovation.
However, no specific definition was agreed upon. In
practice in Indonesia, there is no specific regulation
governing startup companies to date. In PMK
48/2018, the definition of a startup company that is
currently indirectly agreed by the regulator is an
early-stage company that in the process of developing
its business, still needs assistance or in other words, it
is not yet mature. In addition, PMK 48/2018 states
that the conditions for utilizing dividend exclusions
apply only to PMVs that invest in PPU that have not
been listed on the stock exchange. Indirectly, this
clause incorporates the characteristics of startup
companies, because companies which take the floor
on the exchange are generally considered to have
been established or mature so that they cannot be
called startup companies. The criteria for qualifying
investment recipients do not limit the business sector
and are only limited to income limits. Refinement of
the definition of startup companies - as explained in
the theoretical framework, namely companies that
rely on technology and promote innovation in their
business, are not applied to the criteria of investee
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companies in PMK 48/2018. Thus, the qualification
criteria in this regulation are more general but do not
negate the definition of a startup company.
Although there are several characteristics of
MSMEs that intersect with the characteristics of
startup companies, there are differences between the
two, namely, in terms of funding sources. At present,
access to MSME capital has been easier since the
availability of People's Business Credit (KUR) in
various banks. In contrast to MSMEs, startup
companies find it difficult to accept funding through
KUR because the risks are large and usually do not
have guarantees. In addition, startup companies are
usually not funded by ordinary investors, but by
investors with knowledge of innovations and
technologies related to startup funded, or also called
sophisticated investors. Thus, funding sources are
more exclusive or limited.
Qualification criteria that limit the size of
investments that meet the requirements are not
regulated in PMK 48/2018. While the qualification
criteria in the form of duration, namely, the minimum
investment period before obtaining tax incentives is
not regulated. However, PMK 48/2018 limits the
maximum duration of incentive utilization, which is
10 years. The 10 year limit is a rational decision
because theoretically, the age of venture capital
investment is around 10 years. After this period,
venture capital companies will usually divest because
they have succeeded in increasing the valuation of the
investee company. Thus, the existence of a limit on
the use of incentives for 10 years will indirectly
encourage venture capital companies to try to
increase the company's valuation within a maximum
period of 10 years.
4.2 Scope
The scope of tax incentives is a key factor or main
determinant of the function of giving incentives, and
their selection is driven by the underlying policy
objectives. As previously explained, the incentives
provided for Venture Capital Companies are provided
in the form of an exemption from income tax on
income received or obtained by PMV in the form of
profit share from the Business Partner. These
incentives — when viewed from the types of tax
incentives according to the European Commission
(2015), are tax exemptions or tax exemptions, i.e.,
incentives provided in the form of exempting certain
tax bases from the scope of certain taxes. In this case,
tax incentives are applied on a tax basis during the
holding period, which is income in the form of profit
or dividends. According to BKF, the reason why the
form of incentives provided is the exclusion of
taxation on dividends is to restore the nature of the
venture capital business that has not been reflected in
the Indonesian venture capital industry, namely
capital participation. With the exception of dividends,
it is hoped that the venture capital industry in
Indonesia will return to its business nature.
The determination of the scope of tax incentives
is driven by the underlying policy objectives
(European Commission, 2017). If the direction of
government support is to restore the venture capital
business model in accordance with its nature and to
encourage the development of the venture capital
industry, the tax exemption on dividends will become
irrelevant. The alternative chosen by the government
is not yet in line with the policy objectives due to the
lack of a comprehensive understanding of the venture
capital business model. Soemitra (2010: 308) states
that investments made by venture capital are not
carried out in order to receive short-term dividends,
but together with investee companies to develop and
increase the valuations of investee-funded
companies. In the end, the investment must be sold,
and the capital paid back to the investor.
Theoretically, the characteristics of venture capital
compared to other types of financing are venture
capital financing that is long-term (although there is a
certain time limit), so it does not expect profits by
trading its shares in the short term, but rather targeting
the gains in the form of capital gains after a certain
period . Capital gain is the profit obtained by the PMV
when divesting from a Business Partner Company
(PPU) or investee, which arises due to an increase in
valuation from PPU. The types of income received by
venture capitalists include management assistance
fees in return for management services received from
investee companies, interest in return for productive
loans, channeling fees in return for investee
companies channeling services with investors, and
capital gains. The same thing was stated by VC X, VC
K, VC M, and Asmevindo. The main income
expected from an investee company is the capital gain
obtained when selling PPU when it has succeeded in
increasing its valuations, while income in the form of
dividends has never been received, and will be very
unlikely to be received.
The perspective of policymakers on the venture
capital business model is not based on general and
theoretical concepts. Venture capital business
activities in Indonesia are unique compared to general
practice in other countries and on a theoretical level.
Both in general practice in other countries and on a
theoretical level, venture capital is a financing
business that is carried out through equity
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participation. However, in Indonesia, venture capital
companies registered with OJK are more dominant in
venture capital ventures in the form of financing
transactions in the form of loans, as shown in Figure
1.
Figure 1. Percentage of Types of Business Activities of
Venture Capital Companies Registered at the Financial
Services Authority (Otoritas Jasa Keuangan) as of
December 2018
Source: Otoritas Jasa Keuangan, 2018
Compared to the core of the business of venture
capital that should be - that is, equity participation,
venture capital companies in Indonesia that are
registered with OJK are more likely to resemble
financing institutions whose characteristics are debt
financing. This type of financing is actually
accommodated by regulations issued by the FSA,
namely in POJK 35 which states that venture capital
businesses consist of equity participation,
participation through the purchase of convertible
bonds (quasi-equity participation), financing through
the purchase of bonds issued by the Spouse
Businesses at the start-up stage and/or business
development; and/or productive business financing.
The POJK 35 provides a minimum inclusion
obligation as a revitalization step, but only sets a ratio
of 15% for a minimum inclusion obligation.
Policymakers must choose the best alternative -
that is, the value of the consequences that are most
suitable (rational) with the goals that have been set
when formulating a policy (Islamy, 2004). The choice
of incentive that is not in accordance with the
characteristics of venture capital business indicates
that the current policy is not an alternative that has the
most suitable consequences for the objectives to be
achieved. The current tax incentives are not attractive
because the incentives do not reduce the distortion
caused by taxes on the venture capital business.
Taxation, in general, is explained by economists as a
distortion of business. Thus, providing convenience
or relief in the form of tax incentives can be an
investment attraction aimed at attracting as many
investors as possible to invest in Indonesia. If
dividends do not cause distortion, then tax incentives
for dividends will not provide significant investment
attractiveness. Tax incentives that are more desirable
for venture capital are incentives that can reduce
distortions arising from the taxation of capital gains
when venture capital makes an exit strategy, for
example, when selling investee companies that
already have high valuations.
4.3 Administration
Tax incentives must be regularly monitored and
evaluated in the interests of transparency, efficiency,
and fiscal control. Governments must regularly
prepare tax expense reports to measure and monitor
costs, and they must be regularly reviewed to assess
their effectiveness (European Commission, 2017).
For this reason, the government must determine and
use appropriate methodologies that can accurately
measure investment trends so that the need for public
sector interventions can be demonstrated, and the
impact of these interventions can be measured. In
PMK 48/2010, administrative requirements that must
be met to be used by the government to carry out
control and evaluation are in Article 3, which states
that venture capital companies are required to book
separately income that is an Income Tax Object and
income that is not an Income Tax Object, then
reported together with the Annual Corporate Income
Tax Notification Letter. Until now, there has been no
fiscal control to measure or monitor the use of these
incentives.
4.3.1 Tax Policy to Encourage Venture
Capital Investment in Singapore
Tax incentives in Singapore are included in the
Income Tax Act Section 13H (S13H). The S13H is
awarded after fulfilling the requirements which
require direct investment into a locally based
company and develop fund management expertise in
Singapore. Tax exemption is a type of tax incentive
that can be said to be the most "generous" because it
is given by removing the entire tax base, both
permanently and temporarily. Income from certain
investments that are exempt from tax is (1) gains
arising from divestment of approved portfolio
holdings, (2) dividends from approved foreign
portfolio companies; and (3) interest arising from the
agreed convertible loan stock.
For tax purposes, in general, VC funds in
Singapore are considered tax transparent. Taxes will
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be imposed on the income of each investor according
to the applicable tax rate (Singapore Venture Capital
& Private Equity Association, 2019). Thus, this tax
incentive will be applied at the investor level. Tax
exemptions on profits occur when an exit strategy is
conducted, while exceptions to dividends and interest
occur in the holding period. Theoretical and empirical
literature shows that higher tax rates on capital gains
can have a negative impact on the quantity and quality
of investments (Poterba, 1989a and 1989b,
Keuschnigg, 2004 and Keuschnigg and Nielsen,
2004a, 2004b and 2004c in European Commission,
2017). This is the basis for giving tax exemption on
capital gains. Meanwhile, the tax incentives provided
in the holding period are less relevant for venture
capital investment for early-stage companies, but the
provision of tax incentives in the holding period in the
S13H scheme becomes relevant considering the
investment targets in these incentives are not only
intended for investment in early-stage companies, but
also for investments in established companies (later
stage investment), as stipulated in the qualifications
of investee companies.
4.3.2 Tax Policy to Encourage Venture
Capital Investment in China
Tax incentives for venture capital in China are
contained in Circular 55. These tax incentives allow
venture capital investors to get tax deductions equal
to 70% of the investment provided by meeting certain
conditions. The requirements for venture capital
companies that can claim these incentives are: First,
it is established in mainland China (People's Republic
of China) and is a tax resident (in the form of a
company or partnership). Venture capital in the form
of a partnership is the subject of an examination for
tax purposes (within the framework of the verification
process), and the partnership is not owned by the
founder of the invested technology startup company.
Second, submit to the National Development and
Reform Commission (NDRC) as a venture capital
company in accordance with the Provisional
Measures in the Administration of the Interim
Measures on Supervision and Administration of
Private Investment Fund, which is officially regulated
by NDRC on November 15, 2005. The venture capital
company must also comply with article 8 (Special
Provisions relating to the Venture Capital Investment
Fund) of the Temporary Act of Supervision and
Administration of the Private Investment Fund
promulgated by the China Securities Regulatory
Commission on August 21, 2014. Third, they may not
own - together with its affiliates, 50% or more equity
in a startup company that is invested two years after
the investment (International Financial Law Review,
2018).
The investment targets in Circular 55 are
companies that are in the seed stage or startup stage
engaged in technology. Qualified investee companies
are tax-resident companies that: (1) are established in
mainland China and are subject to audits for tax
purposes, (2) at the time of investment, there are no
more than 200 employees, and at least 30% of the
tertiary education), (3) total assets or annual income
does not exceed RMB30 million ($ 4.63 million or
around 56 billion Rupiah), (4) at the time of
investment, not more than five years (60 months), (5
) is not listed on the stock exchange (domestic or
foreign) at the time of investment and for two years
thereafter; and (6) has research and development
costs of not less than 20% of the total costs and
expenses in the investment tax year.
In contrast to tax incentives in Singapore, tax
incentives for venture capital in China are more
focused on developing technology and developing
investee companies. This can be seen from the
qualification criteria of investee companies that are
limited through (1) targeting business size (limiting
the number of employees, limiting total assets, and
exceptions for listed companies), (2) company age,
and indirectly (3) sector, namely the technology
sector. Meanwhile, Singapore provides broader
qualification criteria because the policy focus is to
attract funds into the country. More specifically, the
existence of criteria for the level of employee
education and minimum requirements for the use of
research and development costs in the investment tax
year indicate the direction of this policy is to
encourage the development of innovation and
technology.
4.3.3 Alternative Tax Policy to Encourage
Venture Capital Investment in
Indonesia in Digital Startup
Companies
From the analysis of tax incentives in China and
Singapore, it can be seen that the purpose of
providing tax incentives for venture capital in China
is more relevant to the goal of establishing tax
incentives for venture capital in Indonesia as
mandated by Perpres 74 on the Roadmap for
Electronic-Based National Trade Systems which was
later realized in the PMK 48/2018, which is to support
the growth of startups. Tax incentives in Singapore
allow no taxes to be collected during the investment
period in venture funds. Singapore applies a tax
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235

incentive that is fairly "generous" because the country
needs funds going into the country, given that
Singapore's economic structure relies heavily on the
non-real sector or financial sector, in contrast to
Indonesia, which focuses on the real sector. This
affects the tax incentives provided; namely,
Singapore gives more incentives to portfolio
investment, while Indonesia is more focused on
providing incentives to direct investment, for
example, foreign direct investment in pioneering
companies.
As explained earlier, tax incentives for venture
capital in China focus more on encouraging the
development of high-tech industries and knowledge-
based economies through encouraging startup
companies to increase competitiveness and promote
sustainable growth, while providing tax incentives for
venture capital in Singapore is more aimed at
encouraging inflows and anchors of local and foreign
venture capital funds to Singapore regardless of
whether the company invested is still at the startup
stage or not. These different objectives are then
reflected in the form of incentives and specified
qualification criteria. In contrast to Singapore's core
problem, the core problem that the Chinese
government is focusing on in the Circular 55 tax
incentive instrument is the need for encouragement to
develop innovation and technology through startups
and SMEs that are directed at employment. The core
problem that has been clearly defined makes the
policy in Circular 55 formulated in accordance with
the objectives to be achieved. In contrast to
Singapore, which provides tax incentives in the form
of tax exemptions on capital gains, the Chinese
government chose the form of tax incentives in the
form of an investment allowance. There are several
things that need to be considered in designing
investment allowance: (1) investment criteria that
qualify (eligible investment), (2) the amount of
allowance given, is generally given in the form of a
percentage, (3) time period (duration) and other limits
which limits the duration of incentives that can be
utilized. The investment criteria set out in Circular 55
clearly indicate the direction of the policy
(encouraging innovation, technology, and small
companies). This can be seen from the targeting of a
business size determined by limiting the number of
employees, limiting total assets, and the exception of
companies listed on the exchange), age limits of the
company, and the business sector, namely the
technology sector.
Similar to China, the background to the idea of
creating a tax incentive scheme for venture capital in
Indonesia begins with the development of startup
companies. Since Indonesian startups began to show
growth, the government began to pay attention to the
venture capital industry by revitalizing venture
capital by imposing various regulations. In addition,
Indonesia also needs encouragement in terms of
technology and innovation. Based on a report
released by Cornell University, INSEAD, and the
World Intellectual Property Organization (2018) in its
report titled "The Global Innovation Index 2018",
Indonesia is ranked 85th. Compared to neighboring
countries, this ranking is still fairly low. Singapore
ranked 5th, Malaysia ranked 35th, Thailand, and
Vietnam ranked 44th and 45th, respectively.
Meanwhile, China itself entered the list of the 20 most
innovative countries in the report, ranking 17th. The
ranking is a representation from breakthroughs made
in overall development, especially in the economic
field. The Chinese government also now prioritizes
research and sustainable development.
4.3.4 Alternative Tax Policy to Encourage
Venture Capital Investment in
Indonesia in Digital Startup
Companies
From the analysis of tax incentives in China and
Singapore, it can be seen that the purpose of
providing tax incentives for venture capital in China
is more relevant to the goal of establishing tax
incentives for venture capital in Indonesia as
mandated by Perpres 74 on the Roadmap for
Electronic-Based National Trade Systems which was
later realized in the PMK 48/2018, which is to support
the growth of startups. Tax incentives in Singapore
allow no taxes to be collected during the investment
period in venture funds. Singapore applies a tax
incentive that is fairly "generous" because the country
needs funds going into the country, given that
Singapore's economic structure relies heavily on the
non-real sector or financial sector, in contrast to
Indonesia, which focuses on the real sector. This
affects the tax incentives provided; namely,
Singapore gives more incentives to portfolio
investment, while Indonesia is more focused on
providing incentives to direct investment, for
example, foreign direct investment in pioneering
companies. Gunadi, in an in-depth interview, also
explained the same thing, that Indonesia was indeed
not focused on the financial sector because the sector
was not Indonesia's superiority. In addition,
according to him, this tax exemption will only benefit
people with high income (high net worth individuals).
As explained earlier, tax incentives for venture
capital in China focus more on encouraging the
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development of high-tech industries and knowledge-
based economies through encouraging startup
companies to increase competitiveness and promote
sustainable growth, while providing tax incentives for
venture capital in Singapore is more aimed at
encouraging inflows and anchors of local and foreign
venture capital funds to Singapore regardless of
whether the company invested is still at the startup
stage or not. These different objectives are then
reflected in the form of incentives and specified
qualification criteria. In contrast to Singapore's core
problem, the core problem that the Chinese
government is focusing on in the Circular 55 tax
incentive instrument is the need for encouragement to
develop innovation and technology through startups
and SMEs that are directed at employment. The core
problem that has been clearly defined makes the
policy in Circular 55 formulated in accordance with
the objectives to be achieved. In contrast to
Singapore, which provides tax incentives in the form
of tax exemptions on capital gains, the Chinese
government chose the form of tax incentives in the
form of an investment allowance. There are several
things that need to be considered in designing
investment allowance: (1) investment criteria that
qualify (eligible investment), (2) the amount of
allowance given, is generally given in the form of a
percentage, (3) time period (duration) and other limits
which limits the duration of incentives that can be
utilized. The investment criteria set out in Circular 55
clearly indicate the direction of the policy
(encouraging innovation, technology, and small
companies). This can be seen from the targeting of a
business size determined by limiting the number of
employees, limiting total assets, and the exception of
companies listed on the exchange), age limits of the
company, and the business sector, namely the
technology sector.
Similar to China, the background to the idea of
creating a tax incentive scheme for venture capital in
Indonesia begins with the development of startup
companies. Since Indonesian startups began to show
growth, the government began to pay attention to the
venture capital industry by revitalizing venture
capital by imposing various regulations. In addition,
Indonesia also needs encouragement in terms of
technology and innovation. Based on a report
released by Cornell University, INSEAD, and the
World Intellectual Property Organization (2018) in its
report titled "The Global Innovation Index 2018",
Indonesia is ranked 85th. Compared to neighboring
countries, this ranking is still fairly low. Singapore
ranked 5th, Malaysia ranked 35th, Thailand, and
Vietnam ranked 44th and 45th respectively.
Meanwhile, China itself entered the list of the 20 most
innovative countries in the report, ranking 17th. The
ranking is a representation from breakthroughs made
in overall development, especially in the economic
field. The Chinese government also now prioritizes
research and sustainable development.
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