Tax Holiday and Foreign Direct Investment In Indonesia EcceS: Economics Social and Development Studies

Tax Holiday and Foreign Direct Investment in Indonesia Foreign Direct Investment Inflows is important aspect of promoting economic growth and decreasing the unemployment rate. One of investment incentive applied in Indonesia is Tax Holiday. Meanwhile, research on tax holiday and their relation to foreign investment in Indonesia is still rare. This paper is aimed to measure the impact of Tax Holiday toward Foreign Direct Investment inflows in Indonesia. So, this study also compares the impact of tax holidays on 18 industries in Indonesia. The research found that the Tax Holiday incentive did not reach the expected target. Only 9 out of 18 business sectors affected by this policy, accounted for only 50% of its industrial target. The government’s role is highly expected to evaluate the target of Tax Holiday, for example giving priority and adding incentives for industrial sectors that are clearly affected by the tax holiday policy.


INTRODUCTION
Foreign Direct Investment (FDI) has an essential role in the economy of a country.
According to Kok dan Ersoy (2009), PMA has an effect on income, production, employment, economic growth, and general development and welfare in the host country. Apart from bringing in capital/capital, FDI also facilitates the transfer of technology, practice, and managerial and organizational skills, and facilitates access to international trade (UNCTAD, 2000). The size and relative stability of FDI make it the most important source of external financing for developing countries than portfolio investment, remittances, Official Development Assistance (ODA), and other investments (UNCTAD, 2019).
The presence of PMA in Indonesia is one solution to reducing the unemployment rate in Indonesia. Compared to other ASEAN-5 countries (Singapore, Malaysia, Thailand, and the Philippines), the unemployment rate in Indonesia is the highest with 4.3%, followed by Singapore and Malaysia with 3.8% and 3.4% (World Bank, 2018). The increase in the inflow of FDI in Indonesia is an essential factor in supporting sustainable economic growth,  In connection with the trade war between the United States and China since 2018, Indonesia is expected to take advantage of this situation. Every country competes to make its territory an investment destination country, including developing countries like Indonesia.
The Indonesian government has carried out various investment promotions to attract foreign investors interested in diverting their investment locations from America or China.
Investment incentives in the form of fiscal were expanded and improved. However, they were still deemed to have failed in attracting FDI inflows to Indonesia. It is evidenced that The amount of FDI inflows to Indonesia has been relatively constant at 2-2.5% of total GDP in Indonesia over the past decade. In 2016 there was a significant decrease to 0.49%, possibly due to the global economy's instability, which resulted in many countries choosing to invest in developed countries rather than developing countries and transition economies. In 2017, FDI inflows in Indonesia stabilized towards 2.02%. Source: Data proceed from BKPM, 2020 In the last few decades, many countries, especially developing countries, have made efforts to increase the attractiveness of foreign direct investment in host countries. The steps taken include economic liberalization, guaranteeing profit repatriation, infrastructure provision, low labor wages, and tax incentives. Among these efforts, the provision of tax incentives is the most common because it can provide facilities directly to investors and place them in strategic positions, hoping that investors can improve their performance and continue to invest in the country (Abille et al. 2020 (Saini and Singhania, 2018). Meanwhile, at the national level, the Government provides convenience in investing by issuing investment facilities such as tax incentive policies. Tax incentives include a reduced tax on profits/profits, tax holiday, accounting regulations, reduced tariffs on imported equipment/components / raw materials, or increased tariffs to protect the domestic market for investment projects import substitutes (UNCTAD, 2000).
Meanwhile, at the national level, the Government provides convenience in investing by issuing investment facilities such as tax incentive policies. Tax incentives include a reduced tax on profits/profits, tax holiday, accounting regulations, reduced tariffs on imported equipment/components / raw materials, or increased tariffs to protect the domestic market for investment projects import substitutes. A World Bank (2016) study of 118 countries over six years found that a 10 percent reduction in tax administration burden (as measured by the number of tax payments per year and time required to pay taxes) led to an increase in the number of incoming businesses by 3 percent per year. The analysis results indicate that the provision of investment incentives is considered adequate. It would be better to create a methodology or instrument to analyze the policy's effectiveness (Cedidlova, 2013). According to Sari, Dewi, & Sun (2015), the Tax Holiday policy is considered to positively influence investment activities in Indonesia; however, Indonesia still has to prioritize improving infrastructure and bureaucracy.
The study conducted by Deng, Falvey dan Blake (2012) shows that the reform of the corporate income tax system impacts increasing the spillover productivity of FDI in the long run because it can help strengthen the existence of foreign investment. However, initially, it will cause a temporary decrease in the spillover productivity of FDI. Du, Harrison dan Jefferson (2014) analyzed tax subsidies to specific FDI business fields. The study results proved that the FDI business sectors with tax subsidies could produce higher productivity than those without tax subsidies. Countries in Asia use tax holidays as a tool to attract foreign investment, but it has different impacts on effective tax rates, depending on the capital allowance system they have (Suzuki, 2014).
The implementation of a policy should have goals to be achieved and policies in the form of incentives. The purpose of tax incentives should be planned and designed according to the objectives (Zolt, 2015). ). In Zolt's research, it is said that although economists have made much progress in determining the correlation between tax incentives and increased investment, it is difficult to determine which tax incentives increase investment. This may be due to the difficulty in calculating the marginal amount of investment associated with tax incentives, so it is suggested that the implementation of tax incentive policies has clear objectives. The provision of tax incentives in developing countries, which are supposed to attract foreign direct investment due to lower production costs, often has a poor design, lack of transparency, and complicated administration (Ugwu, 2018). ). Another problem that may arise from the application of tax incentives is raised by Daude, Gutierrez dan Melguizo (2017), who illustrates that the tax incentive mechanism can run the risk of making the tax system rigid and unstable, so the possibility of inefficiency is enormous. Therefore, tax incentive policies need to be reviewed and reformed according to each country's political and economic circumstances.
This study will use an investment incentive instrument in the form of a Tax Holiday to measure its effectiveness in attracting foreign investors and explicitly targets 18 pioneer

THEORETICAL REVIEW
Foreign Direct Investment (FDI) is an essential factor in growth and development.
Developing countries' main objective in attracting foreign direct investment is to maximize investment opportunities by accumulating capital, which absorbs a lot of labor (Durham and Purrington 2011 Various theories justify the critical position of FDI inflows in boosting economic growth and investors' returns in investing abroad. Experts in economic growth theory from the neoclassical era emphasized the importance of capital formation in economic growth (Ranis and Fei, 1961;Jorgenson, 1963). Neo-classical theorists were the first to describe the relationship between tax incentives and foreign capital's attractiveness in their efforts to carry out classical economic reforms (Munongo et al., 2017).
Capital arbitrage theory regarding the movement of foreign capital claims that differences in return rates can affect the movements of foreign capital, and investors act as arbitrators who determine the movements of capital to be invested (Yelpaala, 1985). Capital arbitrage theory identifies a robust causal relationship between tax incentives and FDI location determination (Munongo et al., 2017). Another theory that supports a positive relationship between tax incentives and FDI is the neoclassical investment theory developed by Jorgenson (1963). Neo-classical investment theory holds that businesses will continue to invest as long as the costs are less than the returns. The literature review conducted by Munongo et al. (2017) indicates that in neoclassical investment theory, tax incentives encourage existing companies' growth through reinvestment and attract new investment.
Tax incentives are considered to reduce the cost of capital.
The New Economic Geography Theory (NEG Theory) explains the core area's concept and the periphery (core-periphery). It concludes that there is a direct positive relationship between reducing tax rates and an increase in investment (Parys and James, 2010).
indicates that in neoclassical investment theory, tax incentives encourage existing companies' growth through reinvestment and attract new investment. Tax incentives are considered to reduce the cost of capital.
The New Economic Geography Theory (NEG Theory) explains the core area's concept and the periphery (core-periphery). It concludes that there is a direct positive relationship between reducing tax rates and an increase in investment. Munongo et al. (2017) assume that when the core is formed, there will be a risk of decreasing FDI's attractiveness in periphery areas. This is because foreign investors will prefer to invest in locations where there are already many businesses/companies, even though those areas have higher tax rates.

The most dominant theory among these hypotheses is the O-L-I Framework or
Eclectic Theory, which explains the factors that motivate foreign investment, namely: ownership advantages, place advantages, and the internalization of multinational companies (MNEs) (Dunning 2001). O-L-I refers to Ownership, Location, and Internalization, three potential sources that determine a company's decision to become a multinational company.
Ownership Advantage is a competitive advantage obtained by the owner or company when carrying out production activities abroad. Location Advantage explains the advantage of location factors, and internalization is an advantage related to cost or cost-efficiency. The O-L-I Framework is synonymous with the factors that determine a person/company to invest abroad. Previous studies in the determinant sub-sector of PMA generally used macroeconomic variables, but regulatory changes are also essential to consider. Data from UNCTAD (2016) and World Bank (2016) show that the number of changes in PMA regulations that liberalize or support FDI inflows has exceeded the expected target.
In Boghean dan State (2015) research, PMA has several essential characteristics, namely: a long-term investment in foreign capital; aims to build new investments or purchase existing company assets; it can take the form of transfer of machinery, installations, equipment, measuring instruments, which contribute to an increase in fixed capital, and also skills in management and marketing; a large proportion of these transfers represent real (productive) capital, which allows the investor company to have the right to control, in whole or in part, the right to participate in decision-making, when its shares exceed 10% of total assets; the internal investment structure consists of a net contribution to capital, reinvested profits made from overseas subsidiaries, and loans made in local or  (2017) shows that tax incentive policies can change the inflow of FDI in the non-oil and gas industry. Reductions in corporate taxes in the mining, manufacturing, and service sectors also affect foreign investment in these sectors (Obeng 2014). In contrast to previous research, the results of a study conducted by Peters dan Kiabel (2015) show that the relationship between tax incentives and foreign direct investment flows is negative. It is recommended to re-evaluate the effect of tax incentives on the agricultural and manufacturing sectors separately.

METHODS
This research is quantitative descriptive research, which is research conducted to emphasize its analysis on numerical data (in the form of numbers), which is processed by specific statistical methods and interpreted in a description (Sugiyono, 2014 This study uses control variables in the form of factors that influence foreign investment flows, namely: Tax Rate, which is the percentage of tax imposed on companies.
In the form of taxes on income and profits (percentage of revenue) in Indonesia (data source: World Bank); Inflation to show the rate of change in prices in the economy as a whole and is measured by the annual GDP implicit deflator (the ratio of GDP in current local currency to GDP in local currency is constant) (data source: World Bank); Market Size, which is measured as the percentage of annual growth in GDP per capita based on constant local currency, where GDP per capita is the gross domestic product divided by the population at mid-year (data source: World Bank); and Trade Openness, which is measured by the percentage of total exports and imports as a share of gross domestic product (data source: World Bank).
The research model is as follows: Where FDI: FDI Inflows, TH: Tax   Based on data processing, the model estimation results for nine business fields are as follows: If the relationship is positive, if the value of the independent variable increases by one unit, then the value of FDI Inflows will increase by β1, β2, β3, β4, and β5 one unit (consecutively) in each model. If the relationship is negative, then if the value of the independent variable increases by one unit, then the value of FDI Inflows will decrease by β1, β2, β3, β4, and β5 one unit (sequentially) in each model. The research results prove that the O-L-I Framework's internalization benefits are quite influential as a determining factor for investors in investing. Internalization deals with benefits related to cost or cost-efficiency. The provision of tax incentives is considered to provide benefits in lower costs for foreign investment. The ease of exporting goods is one of the foreign investors' considerations in determining its location and selection. It is expected to have a positive sectoral relationship with FDI (Obeng,s 2014). Business fields considered to be export-oriented will be closely related to currency exchange rates. Therefore, the depreciation of the currency exchange rate can increase FDI inflows in export-oriented business sectors (Obeng, 2014). The primary metal industry, the chemical industry, and chemical products, rubber industry, and materials from rubber and plastics are three of the five industries that contribute positively to exports (Kemenperin, 2018 Indonesia. This study's results are by O-L-I Theory, which states that the motivation of foreign investors to invest, among others, are for-profit and cost-efficiency. Based on this theory, tax incentives can minimize costs so that company profits will be greater and cost-efficiency can be achieved. So, it can be concluded that Tax Holiday is quite effective in attracting foreign investors to invest in Indonesia. However, we need to note that the Tax Holiday is not achieving its target well. This can be seen from the number of industrial sectors affected by the Tax Holiday, which only reached approximately 50% of the target.

RESULTS AND DISCUSSION
Therefore, it is essential to know other possibilities that cause weakness in Indonesia's competitiveness at a global level. Based on this, policymakers could consider evaluating the effectiveness of tax holidays against their industrial targets. They may prioritize and increase incentives for industrial sectors affected by the tax holiday policy. For industrial targets that are unlikely to make this incentive an attraction, other types of investment incentives that are more appropriate can be given. The government should also pay attention to other aspects that affect Indonesia's FDI, especially those related to increasing global competitiveness. Three things, namely the country's development, the quality of access, and innovation, can be the primary concerns this year for designing policies, regulations, and incentives to support the economy.