Journal of Accounting Auditing and Business - Vol.4, No.2, 2021 10.24198/jaab.v4i2.

34397

The Impact of Tax Incentives on Foreign Direct Investment:

The Case of Tax Holiday and Corporate Income Tax Rates in
Indonesia

Muhammad Ikhsan S. Bella

Faculty of Economics and Business
Universitas Padjadjaran

Ivan Yudianto
Faculty of Economics and Business
Universitas Padjadjaran

Abstract: This study aims to analyse the impact of tax incentives, namely tax holidays and corporate
income tax rates, on Foreign Direct Investment (FDI) in Indonesia from 1981 to 2020. The sampling
technique used in this study was purposive sampling so that 40 samples were obtained from 1981 until
2020 of each variable, namely FDI inflows as the dependent variable, tax holiday and corporate income
tax rates as independent variables, and gross domestic product growth, inflation, and trade openness as
control variables. Analysis of the data used in this study is the method of multiple regression analysis.
This study consisted of two models, namely testing without control variables and with control variables.
The study results without control variables show that the tax holiday positively and significantly affects
FDI inflows. In contrast, the corporate income tax rate has a negative and significant effect on FDI
inflows. The study results with control variables show that the tax holiday positively and significantly
affects FDI inflows, income tax rates, and trade openness negatively and significantly affects FDI
inflows. In contrast, Gross Domestic Product (GDP) growth and inflation have no significant effect on
FDI inflows.
Keywords: tax incentives, tax holiday, corporate income tax rates, foreign direct investment (FDI),
gross domestic product (GDP) growth, inflation, trade openness

Introduction Indonesian government’s agendas is attracting

foreign investors to invest directly, where FDI
Indonesia is a developing country that has many has close economic relations with Indonesia.
resources, both natural resources and human The government is trying to target the required
resources. Currently, these resources cannot be level of investment by promoting various
adequately maximised because Indonesia has investment opportunities in Indonesia, which
not managed all its resources. This is due to one can attract foreign investors to invest in
of the factors, namely limited capital. Economic Indonesia. In 2017, Indonesia was in the 47th
activities related to increasing capital can be position in the world based on the number of
through investment to increase the capital incoming foreign investment flows with a total
stock. The investment that enters Indonesia will of US$23 billion. Besides that, Indonesia also
affect the condition of the Indonesian economy occupies the fourth position as an investment
through the amount of national revenue. destination country from the survey results in
Therefore, the government has an essential role 2014-2016 (UNCTAD, 2018 ). This is
in improving the investment climate by issuing evidenced by the fact that in 2020, Indonesia
policies that can attract both domestic and won a credit rating with an investment grade
foreign investors to invest in Indonesia. (BBB) rating by Fitch, one of the international
The government is currently trying to rating agencies. Indonesia experienced an
get foreign investors to invest in Indonesia. FDI economic crisis in 1998, where it caused the
is considered to have the potential to increase inflow of foreign direct investment to
the rate of economic growth. One of the experience a significant decline until it reached

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Journal of Accounting Auditing and Business - Vol.4, No.2, 2021 10.24198/jaab.v4i2.34397

-$4,550 million in 2000. After that, foreign where inflows decreased to $ 4,542 million in
direct investment increased in 2008 and reached 2016 and then increased again in 2019,
the highest increase in 2014, which amounted amounting to $ 24,947 million.
to $ 25,121 million, but FDI inflows fluctuated,

Figure 1. Development of Foreign Direct Investment in Indonesia, 1981-2019 (In US$)

$35.000.000.000
$30.000.000.000
$25.000.000.000
$20.000.000.000
$15.000.000.000
$10.000.000.000
$5.000.000.000
$0
-$5.000.000.000
-$10.000.000.000

FDI Inflow (net)

Source: WDI Indonesia Data 2019 (Data processed by the researcher)

In 1998, the OECD discussed the need for of Corporate Income Tax Exemption or
global attention regarding the publication Reduction Facilities as amended by becoming
through the publication of “Harmful Tax PMK Number 192/PMK/011/2014. The
Competition: An Emerging Global Issue”. government made changes to the provisions to
Competition in reducing tariffs also continues simplify and simplify the provision of tax
even though it is considered as one of the causes holiday facilities to foreign investors as stated
of the complexity of resolving the 2008 global in PMK Number 159/PMK.010/2015. A year
financial crisis (Dietsch, 2015). According to later, this regulation was again changed to PMK
the OECD (2019), in 2000, the average Number 103/PMK.010/2016, where this
corporate income tax rate in 94 countries was change was made to eliminate the processing
28.6%. About 18 years later, the rate was set at industry, the primary industry in Special
7%, so that the average corporate income tax Economic Zones (SEZ) pioneer industries that
rate was only 21.4%. Regionally, countries in obtain tax holiday facilities. The Indonesian
Africa still have relatively higher corporate government has revised the previous regulation
income tax rates than globally and in other to PMK Number 35/PMK.010/2018. The
regions. In developing countries, tax government considers two changes, namely,
competition is generally more focused on extending the period and increasing the number
offerings than drastically reducing tax rates of pioneer industries given tax rate cuts.
(Abbas and Klemm, 2012). Developing Within months of implementing the
countries often use tax holiday incentives to regulation, the Minister of Finance revoked
develop durable capital investment and direct PMK Number 35/PMK.010/2018 and replaced
long-term economic development (Mintz, it with PMK Number 150/PMK.010/2018
1990). concerning the provision of Corporate Income
In the framework of implementing Law Tax Reduction Facilities. The change is in
Number 25 of 2007 concerning Investment, the adding one pioneer industry, namely the digital
Indonesian government issued a tax regulation economy-related to data processing & hosting.
that regulates tax holidays in the Minister of The relaxation in regulations related to tax
Finance of the Republic of Indonesia holidays is carried out as an effort by the
Regulation (PMK) Number government. The tax incentives provided are
130/PMK/011/2011 concerning the Provision not strict and do not make it difficult for foreign

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Journal of Accounting Auditing and Business - Vol.4, No.2, 2021 10.24198/jaab.v4i2.34397

investors to comply with the previous investments. Third, for non-pioneer industries,
regulations regarding the criteria, procedures, tax holiday incentives can still be given based
and requirements for foreign investors on quantitative criteria for pioneer industries,
obtaining these incentives. Then in 2020, the and scoring is carried out to determine the
Minister of Finance again issued PMK Number granting of tax holiday facilities.
130/PMK.010/2020 and revoked PMK Number Indonesia’s investment value is lower
150/PMK.010/2021 as the government’s effort than other countries in the Southeast Asian
to improve the provision of this tax holiday region. Investors tend to be more interested in
incentive facility. investing in Vietnam than in Indonesia.
Based on the Ministry of Finance data, According to the Minister of Finance (2020),
as of October 2020, the realisation of the considerable value of investment entering
investments with a 100% tax exemption facility Vietnam is due to various facilities offered by
or tax holiday has only been 3 (three) corporate the local government, including fiscal policies.
taxpayers worth IDR 27.15 trillion. This In addition, the corporate income tax that
amount is only equivalent to 2.2% of the total companies must pay to the government in
investment plan that gets the facility, namely Vietnam is the smallest in the ASEAN region,
Rp. 1,261.2 trillion, which includes 82 which is 20%. The current corporate income tax
taxpayers. Entrepreneurs complain about the in Indonesia is 22%. However, in terms of tax
difficulty in obtaining these incentives in terms holiday incentives, Indonesia and Vietnam have
of licensing. On the other hand, when the policies that are not much different. The tax
government has facilitated licensing and holiday policy in Indonesia is quite progressive
provided tax holiday incentives, investors have because it is given for up to 20 years, while
not realised their investment. Therefore, Vietnam’s tax holiday policy can be extended
Investment Coordinating Board (BKPM) plans for up to 13 years according to the type of
to revoke the tax holiday incentive for investment.
companies that are slow to realise an The country of Vietnam prioritises
investment in Indonesia. several sectors, including high-technology and
Several factors cause investors never to sectors that have significant social effects, such
realise their investments. First, the tax holiday as education, vocational, health, culture, sports,
incentive is one of the things that investors look and the environment. Likewise, in Indonesia,
at when investing in a country. Second, the the priority sectors are also almost the same,
ongoing Covid-19 pandemic, not only in namely vocational and education, so it can be
Indonesia but globally, which also affects said that Indonesia’s benchmarking is not too
investors, tends to rethink and prioritise different from Vietnam. According to the
essential steps to get through these times of former Managing Director of the World Bank
crisis. The tax holiday incentive is already (2019), Vietnam has a particular, fiscal policy
desirable to investors, but due to the Covid-19 for under-developed regions, namely cutting
conditions, it affects the industrial sectors in the corporate income tax rate by 3% below the
Indonesia (Ajib, 2021). usual rate of 17%. In fact, for very
According to Hestu (2020), the underdeveloped regions, a cut of up to half is
provisions related to the obligation of investors given, namely 10%. Meanwhile, in Indonesia,
to realise their investment a maximum of one there has been no reduction in corporate income
year after the tax holiday decision was set were tax rates as implemented by Vietnam.
triggered by the government’s desire to In addition to the tax holiday, a
encourage investors to realise their investments. reduction in the corporate income tax rate is
PMK Principle Number 130/2020 reviews three also needed to attract foreign direct investment
essential points in the process of granting tax inflows. The government is increasingly ready
holiday facilities. The first is the delegation of to implement a plan to reduce the corporate
authority to the Head of BKPM to grant a tax income tax rate, to maintain competitiveness in
holiday. Second, the addition of commitment attracting foreign investors. One of the reasons
requirements to start realising investment no for the low interest of foreign investors to enter
later than one year after the tax holiday or Indonesia is that Indonesia’s corporate income
reduction of corporate income tax is given. tax rate is currently higher than in Vietnam.
These points are made to guarantee that Although lowering corporate income tax rates
potential investors will immediately make is welcome, this policy can negatively affect

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Journal of Accounting Auditing and Business - Vol.4, No.2, 2021 10.24198/jaab.v4i2.34397

because lowering corporate income tax rates in investors will see good opportunities when a
Indonesia risks hitting state revenues. country’s economy proliferates.
Entrepreneurs want corporate income tax to The increase in returns on FDI was also
decrease to encourage investment, but this is a generated by the low inflation rate, in which the
dilemma for the government because it can “host country” was experiencing internal
pose a considerable risk to tax revenues. economic stability. Thus, countries with low
Reducing corporate income tax does inflation rates encourage foreign investors to
not necessarily become the correct answer to invest their capital because the nominal interest
attract investment in Indonesia because there rate decreases, and consequently, the cost of
are still several tax and non-tax issues that capital is low. The availability of capital and
hinder investment inflows in the country. This low-interest rates will maximise their return on
is evidenced by the 22% corporate income tax investment. Research conducted by Kassahun
rate, which is relatively moderate; even some (2015) and Fahmi (2012) found that inflation
countries apply a tax rate of up to 30%, positively affects FDI, where the country’s
including India and Japan. Meanwhile, the economic stability supports the FDI inflow.
United States is at 27%, and China, South The openness of the country’s trade
Korea, and Myanmar are at 25%, which is also affects FDI inflow, where the country’s
higher than Indonesia at 22%. Then, Indonesia economy allows or conducts international trade.
still has tax payment compliance problems. In This opens up tremendous market
addition, the reduction in corporate income tax opportunities. Kassahun (2015) explains that
rates does not guarantee a rapid entry of FDI; trade openness means the ability of a country’s
for example, Singapore, which has a tax rate of economy to open up opportunities to obtain
17%, experienced an average FDI growth of sources of funds from other countries’
only 2.6% during 2015-2018. Brunei’s average economies and the willingness to invest in other
FDI growth for the same period experienced countries. Research conducted by Fahmi (2012)
minus 163.48% with a corporate income tax found that trade openness has a positive effect
rate of 18.5%. on FDI, where the openness of a country to
The study results (Abdioglu, 2016 & open markets encourages export-import
Fahmi, 2012) found that the corporate income Based on this description, the authors
tax rate had a significant negative effect on FDI can identify problems including: (1) How is the
inflows. This indicates that foreign investors effect of the tax holiday on FDI inflows in
are encouraged to invest in countries with lower Indonesia. (2) How is the corporate income tax
income tax rates. Another study conducted by rate affect FDI in Indonesia. (3) How are the
Kassahun (2015) found that the tax holiday has effects of GDP growth, inflation and trade
a significant positive effect on FDI cash openness on FDI in Indonesia
inflows, then a low tax rate will increase after-
tax profit for investors. This policy of providing
tax holiday facilities, in the short term, will Literature Reviews
reduce state revenues in the tax sector. Eclectic Theory
However, the provision of a tax holiday is
believed to attract investors and create a The eclectic theory was first developed by
favourable investment climate for Indonesia. Dunning (1988). Based on this theory, there are
With the investment, it will form a multiplier three conditions that a company must meet if it
effect. engages in FDI, namely: 1) Ownership
The presence of FDI in Indonesia has Advantage, 2) Internalisation Advantage and 3)
an important role, one of which is a driving Location Advantage
factor in achieving economic growth and Ownership Advantage, Companies
maintaining sustainable development, must have a competitive advantage over other
especially in the manufacturing sector. companies that arise due to ownership of
Manufacturing or processing industries can tangible and intangible assets. These are also
generate significant added value in the known as ownership benefits, including rights
economic sector and contribute to GDP in to specific technologies, the power and size of
Indonesia. The study results (Abdioglu, 2016 & a monopoly, access to raw materials, and access
Van Parys, 2010) found that GDP growth has a to low-cost finance. Internalisation Advantage,
significant positive effect on FDI, where

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Journal of Accounting Auditing and Business - Vol.4, No.2, 2021 10.24198/jaab.v4i2.34397

Internalisation advantage refers to the interest of foreign investors at the expense of

company’s choice to expand its business or other countries.
expand within the company or sell the rights The tax policy (often countries with a
(license) to expand to other companies. lower tax rate) is an instrument to see whether
Location Advantage, Determination of a tax competition allows the country to gain a
specific (typical) and strategic location by the competitive advantage (Steichen, 2002). They
company will result in a location advantage for are providing tax incentives to investors
the company to place its production facilities following the provisions regulated by the host
abroad. Location advantages can include country based on the primary business activity
investment destination countries with sector or specific companies. For example,
considerable market growth potential, cheap reducing the corporate income tax rate under
labour, needed natural resources, attractive tax laws or abolishing corporate tax regardless
incentives. of income or beneficiary status are available tax
The eclectic theory holds that all forms incentives. In contrast, deductions from limited
of FDI can be explained by reference to their tax rates, such as income from manufacturing,
conditions. It is recognised that the benefits finance, income earned by foreign taxpayers, or
arising from ownership, internalisation, and withholding taxes on interest earned from non-
location may change over time. Country- resident taxpayers, are special tax incentives
specific characteristics are important (Pinto, 2002).
determinants of FDI, and it may not be
appropriate to generalise from country-to- Foreign Direct Investment
country experience (Moosa, 2002).
According to Kurniati (2007), FDI can be
defined as a long-term investment made by one
Tax Competition Theory country to another in a business field to
generate wealth under total or partial control of
Chales Tieobout (1956) first introduced the asset owners. The concept of FDI is considered
theory of tax competition and defined tax very important as a catalyst for the economic
competition as something that is desirable and transformation of countries in general and
should not be limited in any way because voters developing countries in particular (Alshamsi,
have the right to choose the most suitable 2015).
location according to their wishes based on FDI creates linkages between countries
subjective evaluations of the balance between by stimulating technology transfer and
the tax burden and public services. knowledge exchange, increasing productivity
Tax competition is a reduction in the and creating a more competitive economy (EU
tax burden to improve the economy and welfare 2018). The effect of foreign companies is
by increasing business competitiveness in limited to capital inflows and the exchange of
attracting foreign investors. This brief technology, knowledge, and managerial
understanding highlights the objective and capabilities. Since the mid-1980s, FDI has
subjective aspects of tax competition theory. increased its importance by transferring
The objective aspect is reducing the direct tax technology and establishing trade and
burden imposed in a country on specific procurement networks for foreign markets
categories of taxpayers. This reduction in the (Swenson 2004, Osano & Koine 2016). FDI is
tax burden can be achieved through the considered one of the elements that influence
provision of different tax incentives. other macroeconomic variables, such as
Meanwhile, a country’s subjective aspect employment, exports, consumption, and
concerns the goals achieved by reducing the savings (Koojaroenprasit 2012).
direct tax burden. According to Pinto (2002), The critical role of FDI in economic
this theory states that there may be suitable or growth and productivity causes the government
desirable tax competition as opposed to bad to use policy instruments to attract FDI
forms, depending on the intention of reducing (Abdioglu, Bini¸s & Arslan 2016). The
the direct tax burden, whether it is intended to government will attract net FDI inflows by
improve a country’s economy and provide providing good economic benefits to
benefits to taxpayers or is directed to attract the investment firms, and one way is by offering a
competitive tax climate (Mohs et al., 2016). Tax

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policy affects FDI inflows and increases direct income taxes, including taxes on income
investment abroad, increasing a country’s net returned abroad (UNCTAD, 2000).
domestic income (OECD 2008).
Tax Holiday
Tax Incentive Policy Ismawan (2001) defines a tax holiday as a tax
exemption from the use of taxation imposed on
According to UNCTAD (United Nation, company profits and profits paid to
Conference on Trade and Development) in shareholders. A tax holiday is a type of tax
Prasetyo (2008), tax incentives are all forms of incentive often used by developing countries to
incentives to reduce the company’s tax burden encourage investment in a country (Easson and
to attract companies to invest in specific Zolt, 2004). This incentive is intended for
projects or sectors. The types of tax incentives companies that have just invested in a country
provided by a country to investors, including 1) and not currently operating companies. New
Reduction of corporate income tax rate; 2) Tax companies that receive tax holiday incentives
holidays; 3) Loss carry-forwards; 4) Investment will be given a specific period during which
allowances; 5) Investment tax credit and 6) Tax they will be exempt from the income tax
deduction on dividends and interest paid burden.
abroad. Regulations governing tax holidays in
Reduction of the corporate income tax Indonesia are regulated in Law Number 25 of
rate is one of the incentives provided with the 2007 concerning Investment Article 18
best approach to competing in tax policy where paragraph 5 regulates the provision of tax
lower tax rates can increase after-tax returns to holiday facilities which reads as follows:
investors (Shome, 1995). According to “Exemption or reduction of corporate income
Darussalam et al. (2015), the tax holiday is an tax in a certain amount and time can only be
exemption from the burden of corporate income granted to new investment which is a pioneer
tax, or it can also be in the form of reducing the industry, namely an industry that has broad
corporate income tax rate for companies that linkages, provides added value and high
make foreign investments in the country within externalities, introduces new technology and
a certain period. Loss carry-forwards are has strategic value for the economy national.”
incentives that allow a company to reduce its In addition, other provisions
future tax burden, i.e., reducing future profits governing the tax holiday facility are regulated
with current losses. Investment allowance can in the PMK Number 130/PMK.010/2020
be defined as a deduction from taxable income concerning the Provision of Income Tax
based on a percentage of new investment Reduction Facilities. New investment in
(depreciation). Investment tax credits can be pioneer industries carried out by corporate
divided into two, namely flat and additional taxpayers will receive a reduction in corporate
investment tax credits. A flat investment tax Income Tax imposed on income derived from
credit can be obtained as a fixed percentage of their primary business activities as stated in
the investment expenditure incurred by the Article 2 paragraphs 2 and 3 as regulated in
company in a year on qualifying or targeted PMK Number 130/PMK.010/2020 concerning
capital. Provision of Corporate Income Tax Reduction
On the other hand, additional Facility, namely the value of the new
investment tax credits can be obtained as a fixed investment is at least IDR 100,000,000,000.00
percentage of investment spending in a year by providing a reduction of 100% of the amount
over a moving average basis, for example, the of corporate Income Tax payable for new
average investment spending by tax-paying investment with a value of at least IDR
companies over the previous three years. An 500,000,000,000.00 and 50% of the total
increase in the dividend tax rate will make corporate Income Tax payable for new
investors less interested in expanding their investment with a value of at least IDR
investment. Therefore, this incentive is 100,000,000,000.00 and at most less than IDR
provided with the intention that this tax can be 500,000,000,000,000. Article 2 paragraph 4
discounted to maintain investor interest. These also explains the provisions on the period given
incentives are also usually combined with tax to an investment company with an investment
holiday incentives by exempting all types of

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value of at least IDR 500,000,000.00, namely 5

tax years up to 20 tax years. H1: Tax holiday has a positive and significant
effect on FDI.
Corporate Income Tax Rate
The Effect of Corporate Income Tax Rates on
Waluyo (2017) defines the tax rate as the rate Foreign Direct Investment
used to calculate the amount of tax payable (tax
to be paid). The basis used to calculate the In tax competition theory, it has also been
amount of tax payable is Taxable Income. In explained that corporate income tax must be
calculating this Taxable Income, it must be lower than other countries to attract foreign
sourced from the company’s financial investors. A decrease in the tax burden on
statements (profit and loss statement) after investment occurs when there is higher capital
positive and negative fiscal corrections have mobility so that the tax rate on investment is
been made to obtain net income after fiscal reduced. This indicates that the government
corrections. determines the tax rate considers capital inflows
The statutory tax rate is the most basic to cause capital outflows in a country. Each
income tax measure. Corporate income taxes country can choose to cut tax rates in attracting
are often imposed at more than one level of FDI to its country. Therefore, the tax incentive
government. A high tax rate does not policy in the form of a lower corporate income
necessarily imply high tax payments, tax rate is expected to attract more foreign
depending on the tax base. Determination of a investment. Previous research (Abdioglu, 2016;
country’s tax rate is an essential factor that can Samuel Kassahun, 2015; Klemm and Parys,
attract multinational companies to invest. When 2011; Saidu, 2015; and Etim, 2019) found that
companies have decided which country they corporate income tax rates have a significant
will invest, they are expected to follow the negative effect on FDI.
criteria and conditions set in a jurisdiction to be
taxed on income tax laws have determined. H2: The corporate income tax rate has a
Therefore, the determination of corporate significant and negative effect on FDI.
income tax based on tax laws is critical in
determining where multinational companies
carry out their main business activities in a Research Methods
country (Devereux, 2006).
The type of research used is a quantitative
Effect of Tax Holiday on Foreign Direct approach and descriptive method. The
Investment population in this study is data from 1967 to
2020, wherein in 1967, the Indonesian
In the eclectic theory, it has been explained that government first implemented a tax holiday
three conditions must be met by companies facility policy. The total research population is
involved in FDI, namely ownership, location, 54 members, each consisting of data on tax
and internalisation. In the location hypothesis, holiday recipients, FDI inflows, and income tax
when the host country provides certain rates.
advantages to foreign investors, namely tax The sampling technique used is non-
incentive facilities that can attract foreign probability sampling, namely by purposive
investors, low labour costs, good labour sampling, where the number of respondents is
productivity, and adequate infrastructure determined by using the Slovin formula as
quality, foreign investors will consider many as 40 data. The data used in this research
investing in the host country. In addition, is secondary data. Data collection techniques in
investment companies can choose which this study are document analysis with
countries can provide tax holiday incentive observation techniques through internet
facilities to invest in that country. Previous research and literature. Data on FDI inflows in
research (Cleeve, 2008, Samuel Kassahun, Indonesia were obtained from the World Bank,
2015, Klemm and Parys, 2011) found that tax recipients of tax holidays were obtained from
holidays significantly positively affect FDI. the Ministry of Industry, Ministry of Finance
(TK I DJP), BKPM, and corporate income tax

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rates taxfoundation.org and Indonesian tax

regulations. FDI = ß₀ + ß₁TH + ß₂TR + ɛ
The variables studied in this study consist FDI = ß₀ + ß₁GDP Growth + ß₂Inflation +
of the dependent variable, namely FDI inflows ß₃Openness + ß4TH+ ß5TR + ɛ
as measured by net inflows in US$, the
independent variable being tax holidays as Wherein, FDI: FDI inflow, TH: Tax Holiday,
measured by the number of companies TR: Tax Rate, ß₀,1...: Koefisien, ɛ: std. error
receiving tax holidays in Indonesia, and
corporate income tax rates as measured by the
highest tax rates. According to the Indonesian Results and Discussion
Taxation Law and control variables, which
include GDP growth as measured by the GDP Descriptive Analysis
growth ratio, inflation as measured by the
annual inflation rate, and trade openness as The descriptive statistical analysis used in this
measured by the ratio obtained from the value study includes the average, maximum,
of exports+imports/GDP. The data analysis minimum, and standard deviation values. The
technique used to hone and test the data is summary of test results is presented in the
multiple regression analysis. In this study, there following table:
are two regression models tested, namely:

Table 1. Descriptive Statistics

N Minimum Maximum Mean Std. Deviation

FDI 40 -4550355286 28666300000 6895271721 9335438612
TAXHOL 40 0 48 3,60 9,465
TAXRATE 40 0,22 0,45 0,3100 0,05611
GDP 40 -0,1313 0,0822 0,048520 0,0350214
INFLATION 40 0,0168 0,7763 0,089037 0,1163078
OPENNESS 40 0,28708 0,96186 0,5221525 0,11139945

The results of the descriptive analysis show that was 8.904%, and the highest inflation rate
the average FDI entering Indonesia is US$ reached 77.63%, which occurred in 1998, while
6,895,271,721,598, and the highest is US$ the lowest was 1.68% which occurred in 2020.
28,666.3 million in 2020, while the lowest is The average trade openness ratio in Indonesia
US$ -4,550,355,286 which occurred in 2000. was 52.215%, and the highest trade openness
The average tax holiday recipient in Indonesia reached 96.186%, which occurred in 1998,
was 3.60, and the highest was 48 tax holiday while the lowest was 28.708% which occurred
recipients in 2019, while the lowest was 0 tax in 2020.
holiday recipients in 1983-1995, 2000, 2008,
2010, and 2016-2017. The average corporate Simultaneous Testing (F Test)
income tax rate ratio in Indonesia is 4.852%, and
the highest tax rate is 45% which occurred in The statistical test used to test this
1981-1983, while the lowest was 22% in 2020. simultaneous hypothesis is the F test. The F
table value used as a critical value in this
The average GDP growth ratio in simultaneous hypothesis test is 2.49 obtained
Indonesia, namely 5.523% and the highest from the attachment of the F distribution
growth reached 8.22%, which occurred in 1995, table with df1 = 5 and df2 = 34 (Table 2 )
while the lowest was -13.13% which occurred with a significance level of 5%.
in 1998. The average inflation ratio in Indonesia

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Table 2. Results of Simultaneous Hypothesis Testing (Test F) ANOVAa

Model Sum of Squares df Mean Square F Sig.

1 Regression 2431506517856922600000 5 486301303571384500000 17,092 0,000b
Residual 967359631294095700000 34 28451753861591050000
Total 3398866149151018600000 39
a. Dependent Variable: FDI
b. Predictors: (Constant), Openness, Tax rate, Tax holiday, GDP, Inflation

From table 2 above, information is obtained Partial test (t-Test)

that the F count obtained is 17,092, and the
value is much greater than the F-table value of This research was conducted by using a partial
2,975 (F count > F table) with a Sig value. hypothesis test (t-test). This test consists of
0.000 < 0.05 (a) so that it falls in the area of multiple linear regression analysis models,
rejection of Ho, then with a confidence level namely multiple linear regression analysis
of 95%, it can be decided to reject Ho and models without control variables and control
accept Ha, which means tax holiday, corporate variables. The results of partial hypothesis
income tax rates, GDP growth, inflation, and testing without control variables are presented
trade openness simultaneously affect in the following table
significantly to FDI.

Table 3. Results of Multiple Linear Regression Analysis (t-Test) Without Control Variable

Standardised
Unstandardised Coefficients Coefficients
Model B Std. Error Beta t Sig.
1 (Constant) 39722484315,337 5550212685,288 7,157 0,000
TAXHOL 345815427,675 107493430,024 0,338 3,217 0,003
TAXRATE -109882266927,994 17459836101,059 -0,660 -6,293 0,000
a. Dependent Variable: FDI
inflows and vice versa.
Based on the regression equation and table 3
above, it is known that the effect of the variable 2) The variable corporate income tax rate on
tax holiday and corporate income tax rates on FDI shows the information on the value of
FDI without involving the control variables t count, which is -6.293 smaller than t-
partially is: table, namely -2.026 (-t count < -t table)
with a value of Sig. 0.00 < 0.05 (α). This
1) the tax holiday variable on FDI shows the indicates that H0 is rejected and Ha is
information on the value of t count, which accepted, which means that the corporate
is 3,217, which is greater than t-table, income tax rate has a negative and
which is 2,026 (t count > t table) with a significant effect on FDI, where the lower
value of Sig. 0.003 < 0.05 (α). This the corporate income tax rate will affect
indicates that H0 is rejected and Ha is the higher FDI inflows and vice versa.
accepted, which means that the tax holiday
has a positive and significant effect on After doing multiple linear regression analysis
FDI, where the higher the recipient of the without control variables, it is necessary to
tax holiday will affect the higher FDI analyse with control variables as follow

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Table 4. Multiple Linear Regression Analysis (t-Test) With Control Variables

Standardised
Unstandardised Coefficients Coefficients
Model B Std. Error Beta t Sig.
1 (Constant) 56791139142,315 7120849949,538 7,975 0,000
TAXHOL 231318329,629 103967039,534 ,226 2,225 0,033
TAXRATE -103774112677,099 16155382352,749 -,624 -6,424 0,000
GDP 35935135101,780 40892325010,852 ,135 ,879 0,386
INFLATION 27895676250,729 15605459572,298 ,348 1,788 0,083
OPENNESS -43627464291,665 12546293367,410 -,521 -3,477 0,001
a. Dependent Variable: FDI

Based on the regression equation and table 4 growth does not necessarily affect FDI
above, it is known that the effect of the variable inflows.
tax holiday and corporate income tax rates on 4) The inflation variable on FDI shows the
FDI by involving the control variables partially information on the value of t count, which
is: is 1.788, which is smaller than the t-table,
1) The tax holiday variable on FDI shows the which is 2.032 (t count > t table) with a
information on the value of t count, which value of Sig. 0.083 > 0.05 (α). This
is 2.225, greater than t table, which is indicates that H0 is accepted, which means
2.032 (t count > t table) with a value of Sig. that inflation does not significantly affect
0.033 < 0.05 (α). This indicates that H0 is FDI, where higher or lower inflation does
rejected and Ha is accepted, which means not necessarily affect FDI inflows.
that the tax holiday has a positive and 5) The variable of trade openness to FDI
significant effect on FDI, where the higher shows that the information value of t count
the recipient of the tax holiday will affect is -3.477 smaller than t-table, which is -
the higher FDI inflows and vice versa. 2.032 (-t count < -t table) with a Sig value.
2) The variable of the corporate income tax 0.001 < 0.05 (α). This indicates that H0 is
rate on FDI shows the information value of rejected and Ha is accepted, which means
t count, which is -6.424 smaller than t that trade openness has a negative and
table, namely -2.032 (-t count < -t table) significant effect on FDI, where the lower
with a value of Sig. 0.00 < 0.05 (α). This the trade openness ratio will affect the
indicates that H0 is rejected and Ha is higher FDI inflows and vice versa.
accepted, which means that the corporate
income tax rate has a negative and Coefficient of Determination Test
significant effect on FDI, where the lower
the corporate income tax rate will affect This test was conducted to measure how far the
the higher FDI inflows and vice versa. model’s ability to explain the variation of the
3) The GDP growth variable against FDI dependent variable. This study uses the
shows the information on the value of t coefficient of determination determined by the
count, which is 0.879, which is smaller value of R Square. This test consists of two
than t-table, which is 2.032 (t-count > t models, namely, testing the coefficient of
table) with a value of Sig. 0.386 > 0.05 (α). determination without control variables and
This indicates that H0 is accepted, which with control variables. The results of the
means GDP growth does not significantly determination coefficient test are presented in
affect FDI, where higher or lower GDP the following table

Table 5. Coefficient of Determination Test Results (R2) Without Control Variables

Model R R Square Adjusted R Square Std. Error of the Estimate
1 0,773a 0,597 0,575 6084739789,02345
a. Predictors: (Constant), Tax Rate, Tax Holiday

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Journal of Accounting Auditing and Business - Vol.4, No.2, 2021 10.24198/jaab.v4i2.34397

Based on the results of the coefficient of corporate income tax rates simultaneously
determination test without the control contributes 59.7% to FDI inflows, while the
variables in table 5. it can be seen that the R2 remaining 40.3% is the influence
value obtained is 0.597. This means that the contribution given by other factors not
variable receiving the tax holiday and examined in this study.

Table 6. Coefficient of Determination Test Results (R2) With Control Variables

Model R R Square Adjusted R Square Std. Error of the Estimate

1 0,846a 0,715 0,674 5334018547,17351
a. Predictors: (Constant), Openness, Tax Rate, Tax Holiday, GDP, Inflation

Based on the results of the coefficient of research conducted by (Setyo, 2020) which
determination test with the control variable in states that tax holidays have a positive and
table 6, it can be seen that the R2 value obtained significant effect on FDI. This indicates that the
is 0.715. This means that the variables receiving more companies or investors that are given tax
tax holidays, corporate income tax rates, GDP holiday incentives by the government the
growth, inflation, and trade openness higher the FDI inflows. Therefore, the state
simultaneously contribute 71.5% influence on needs to create a tax holiday incentive policy
FDI inflows, while the remaining 28.5% is the that can attract foreign investors directly by
influence contribution given by other factors providing ease of licensing and technical
not examined in this study provisions to eliminate investor doubts over the
uncertainty of the implementation of the tax
holiday so that more and more investors register
Discussion for this incentive.

The Effect of Tax Holiday on Foreign Direct The Effect of Corporate Income Tax Rates on
Investment Foreign Direct Investment

Based on the partial test results with the Based on the partial test results with the
regression model without control variables, the regression model without control variables, the
regression coefficient value for the tax holiday regression coefficient value for the corporate
is 345.815,427,675 and has a Sig value. 0.003 income tax rate variable is -
< 0.05 (α). This means that the tax holiday has 109,882,266,927,994 and has a Sig value. 0.000
a positive and significant effect on FDI. In < 0.05 (α). This means that the corporate
addition, the tax holiday variable also has a income tax rate has a negative and significant
correlation coefficient value of 0.401, which effect on FDI. In addition, the corporate income
means that the tax holiday has a fairly strong tax rate variable also has a correlation
relationship with FDI. Then, the results of a coefficient value of -0.696, which means that
partial test with a regression model involving the corporate income tax rate has a strong
the control variable, the regression coefficient relationship with FDI. Then, the results of a
value for the corporate income tax rate variable partial test with a regression model involving
is 231,318,329,629 and has a Sig value. 0.033 the control variable, the regression coefficient
< 0.05 (α). This means that the tax holiday value for the corporate income tax rate variable
involving the control variables for GDP growth, is -103.774.112.677,099 and has a Sig value.
inflation, and trade openness has a positive and 0.000 < 0.05 (α). This means that the corporate
significant effect on FDI, where the results are income tax rate involving the control variables
not different from the regression model without of GDP growth, inflation and trade openness
control variables. The results of this research has a negative and significant effect on FDI,
analysis are following the proposed hypothesis, where the results are not different from the
and the results of this study are supported by regression model without control variables. The

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results of this research analysis are following has a weak relationship with FDI. The results of
the proposed hypothesis, and the results of this the analysis of this study are the same as the
study are supported by research conducted by research conducted by (Abdioglu, 2016), but
(Abdioglu, 2016; Klemm and Parys, 2011; different from the research conducted by (Van
Saidu, 2015 and Etim, 2019) which states that Parys, 2010; Klemm and Parys, 2011 and
the corporate income tax rate has a negative and Fahmi, 2012) which said in his research that
significant effect. inflation had a positive and significant effect. It
Countries that impose relatively low is different from the research conducted by
corporate income tax rates will attract more (Kassahun, 2015 and Setyo, 2020), which says
foreign investors to invest in the country (Insah, that inflation has a negative and significant
2013). This means that the higher the tax rate of effect on FDI. It means that a low inflation rate
a country will reduce the number of investors can attract foreign investors to invest, while a
who will invest in that country because a high high inflation rate causes the level of risk of
tax rate will reduce the number of profits from business failure to be also high so that investors
the company, so that companies will invest in are less attractive to invest in that country.
countries with low tax rates.

The Effect of Trade Openness on Foreign

The Effect of GDP Growth on Foreign Direct Direct Investment
Investment
Based on the partial test results, the regression
Based on the partial test results, the regression coefficient value for the trade openness variable
coefficient value for the GDP growth variable is - 43,627,464,291,665 and has a Sig value.
is 35.935.135.101.780 and has a Sig value. 0.001 < 0.05 (α). This means that trade
0.386 > 0.05 (α). This means that GDP growth openness has a negative and significant effect
does not have a significant effect on FDI. In on FDI. In addition, the trade openness variable
addition, the GDP growth variable also has a also has a correlation coefficient value of -0.516
correlation coefficient of 0.007, which means which means that trade openness has a fairly
that GDP growth has a very weak relationship strong relationship with FDI. The results of this
with FDI. The results of the analysis of this study are the same as the results of research
study are the same as the research conducted by conducted by (Cleeve, 2008; Van Parys, 2010
(Fahmi, 2012 and Saidu, 2015), but different and Abdioglu, 2016). The trade openness ratio
from the research conducted by (Van Parys, has a negative effect on FDI due to the trade
2010; Insah, 2013; Abdioglu, 2015 and Putu, balance deficit (import value is more than
2015) which in his research said that GDP export value) of a country. This indicates that
growth has a positive and significant effect on the demand for imports in a country shows a
FDI. This means that the higher the GDP promising market for imported products, thus
growth rate of a country, the more interested attracting investors to invest their capital in
investors are to invest in that country. This producing imported products. In other words,
growth indicates the ability of a country to an increase in imports can encourage FDI into
improve the country’s economy and affects the the country.
ability of a country to produce goods and
services so that the situation is positive and
profitable for investors to invest in the country. Conclusions and Suggestions

The Effect of Inflation on Foreign Direct Conclusions

Investment
Based on the results of data analysis and
Based on the partial test results, the regression discussions that have been carried out, the
coefficient value for the inflation variable is researchers obtained the following conclusions:
27.895.676.250,729 and has a Sig value. 0.083 1. The tax holiday and corporate income tax
> 0.05 (α). This means that inflation does not rates involving the control variables of
have a significant effect on FDI. In addition, the GDP growth, inflation, and trade openness
inflation variable also has a correlation simultaneously significantly influence
coefficient of -0.230 which means that inflation foreign direct investment (FDI) in

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Indonesia. They simultaneously also investors to invest their capital.

contribute 71.5% effect on FDI inflows in 2. The government must foster, supervise and
Indonesia. Indonesia. If, without involving review regulations and policies related to
control variables, the tax holiday and the implementation of tax holidays
corporate income tax rates simultaneously following the needs of investors to attract
contribute 59.7% of the influence of FDI foreign investors by simplifying the
inflows in Indonesia. bureaucracy to facilitate investment
2. The tax holiday, corporate income tax rates, licensing and making it easier for investors
GDP growth, inflation, and trade openness to obtain these incentive facilities.
partially affect foreign direct investment 3. The government is expected to create good
(FDI) in Indonesia. Each of these macroeconomic stability through
influences includes: programs in economic development, such
a) The tax holiday has a positive and as building/repairing infrastructure,
significant effect on FDI. The higher improving the quality of human resources,
the investor or company receiving the etc.
tax holiday, the higher the FDI inflow 4. The government must ensure that
in Indonesia. The lower the investor or exploration carried out by investors who
company receiving the tax holiday, the receive tax holiday incentives also has a
lower the FDI in Indonesia. good impact on Indonesia, where investors
b) The corporate income tax rate has a who create jobs can reduce unemployment
negative and significant effect, where and improve people’s welfare, technology
the higher the corporate income tax rate transfer that occurs must be appropriately
will affect decreasing FDI inflows in utilised and develop local production so
Indonesia. Conversely, the lower the that can compete in the global market.
corporate income tax rate will affect the
higher FDI inflows in Indonesia.
c) GDP growth does not have a significant References
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