Indonesia studies tax on capital inflows

Monday, 15 November 2010 22:46 - - {{hitsCtrl.values.hits}}

JAKARTA, (Reuters) - Indonesia is studying the possibility of taxing capital inflows, and also has funds to buy back government bonds in case of a reversal in hot money coming into the country, a government official said on Monday.

A tax on capital inflows could deter some investors from continuing to pour money into Indonesia’s debt and equity markets, though analysts say authorities’ efforts to manage hot money are unlikely to extend to outright capital controls.

Agus Suprijanto, acting head of fiscal policy office at the finance ministry, described the potential tax as a “less favourable” option, as the government looks at measures to manage hot money and curb volatility in its rupiah currency.

“Whether imposing a tax when they are entering, or imposing a tax on them when they are already here so they don’t flow out -- this is still in study,” he said.

Thailand has imposed a 15 percent withholding tax on interest and capital gains earned by foreign investors on bonds, while Brazil’s government last month twice raised taxes on foreigners buying local bonds and trading in foreign exchange derivatives, though both countries continue to draw investment flows.

Ultraloose monetary policy in the West has pushed a flood of money into fast-growing emerging markets as investors seek higher returns, while the U.S. Federal Reserve Bank’s renewed decision to create more money to buy Treasury bonds has worried Asian policymakers of a fresh surge in hot money flows.

“We also have funds in the state budget to buy back government bonds if there is a (capital) reversal,” said Suprijanto, without disclosing the figure.

G20 member Indonesia is worried that a reversal in risk sentiment could spur outflows.