A Qualitative Perspective on The Implementation of Indonesian Dividend Tax Exemption: Hopes and Challenges

1. Introduction

Tax policy is one of the tools employed by governments to enhance investment. However, not all tax policies yield positive effects on investment. A country's tax regime can positively and negatively impact investment. Poorly designed tax policies can adversely affect investment (OECD, 2006). Therefore, policymakers are encouraged to create policies that impose an acceptable tax burden and ensure low compliance costs.

One of the tools used by various countries to encourage investment is to change the policy regarding taxes on dividends. The change in tax policy on dividends in Sweden was motivated by the need to encourage entrepreneurship and investment in general (Alstadsæter et al., 2017). Meanwhile in China, tax policy changes in 2012 were aimed at encouraging long-term investment and curbing short-term speculative activity of individual investors (Li et al., 2017). In the context of dividend tax reform in the United States, the President of the United States stated that this dividend tax cut would provide short-term support for investment, capital to build factories and buy equipment, and employ more people (Yagan, 2015).

The Indonesian government has implemented several tax policies aimed at increasing investment. In 2016, the government introduced the Tax Amnesty policy, which included provisions for lower tax rates if undisclosed assets were declared and subsequently invested within a specified period. Furthermore, in 2019, the Indonesian government issued tax incentives to promote investment through Government Regulation No. 45 of 2019. Under this regulation, taxpayers undertaking new capital investments in designated pioneer industries could receive exemptions or reductions in corporate income tax. A more recent example of a tax policy designed to encourage investment is Law No. 7 of 2021 on the Harmonization of Tax Regulations (UU HPP), which exempts dividend income from income tax, provided that the dividends are reinvested in specified investment instruments.

In every tax incentive given by the government, some consequences must be borne by the Government, namely the loss of potential tax revenue. Of course, in every decision to provide this incentive, the government hopes that its policies will run well and will provide greater economic benefits than the value of the loss of potential tax revenue. Beyond the revenue loss, Zee et al. (2002), highlight three additional costs associated with investment tax incentives: distortions between incentivized and non-incentivized investments, administrative costs required to manage these policies, and the social cost arising from potential misuse or abuse of the incentives.

Studies to see how this policy change affects the ultimate goal, influencing investment, have been conducted by many previous researchers. Empirical studies on the impact of dividend tax rate changes on investment have reached inconclusive results. Studies in the United States concluded that a reduction in dividend tax rates does not affect corporate investment (Chay et al., 2023; Yagan, 2015). While study in Switzerland reported that companies affected by the policy increased their dividend payments by 30% (Isakov et al., 2021). However, the reduction in dividend taxes did not stimulate investment. In contrast, study in South Korea found that a reduction in dividend tax rates increases corporate investment (Lee & Park, 2023).

To measure the impact on investment, researchers typically categorize their analyses into two perspectives, commonly referred to as the Old Viewand the New View. The traditional perspective, known as the Old View, assumes that corporate investment financing is conducted through the acquisition of new capital. Therefore, the ability to obtain new capital is closely linked to what is termed the cost of capital. Under the Old View, an increase in dividend taxes raises the cost of capital, and conversely, a reduction in dividend taxes lowers the cost of capital. As such, a decrease in dividend tax rates is expected to boost corporate investment, as companies can acquire capital at a lower cost of capital. However, an opposing perspective to the Old View has also gained traction in various studies. This perspective, known as the New View (Jacob, 2022), considers the availability of internal corporate funds as a determinant of a company's ability to finance its investments. From this viewpoint, dividend taxes do not affect corporate investment.

The design of the dividend tax exemption policy in Indonesia differs from that of other countries, as indicated by previous studies. Furthermore, the dividend tax exemption policy in Indonesia includes administrative requirements for taxpayers seeking to benefit from this facility. Therefore, the author considers it necessary to conduct a study to examine how the implementation of this policy aligns with its intended objectives. This research aims to address how policy expectations and challenges are responded to, as well as the challenges in policy implementation.

Previous studies predominantly employed quantitative approaches to examine the impact of tax exemption policies on dividends, utilizing data derived from financial reports. Similar qualitative studies have previously been conducted using survey data from executives of public companies in Indonesia (Baker & Powell, 2012) and also in the United States (Brav et al., 2008). The novelty of this study lies in its focus on the policy context in Indonesia and its use of interviews with various relevant informants to conclude.

2. Method

The quantitative approach is a popular choice in financial research (Dewasiri & Weerakoon, 2016). However, the quantitative approach, which typically relies on proxies as tools to study the behavior of financial decision-makers, may not fully capture their actual decision-making processes (Dewasiri et al., 2018). Therefore, a qualitative approach is also necessary to complement research in finance (Burton, 2007). This study employs a qualitative approach to explore in depth the impact of income tax exemption policies on investment. This approach is chosen with the expectation of providing a more comprehensive understanding of stakeholders' perspectives on the policy. The primary method used is in-depth interviews, aiming to uncover the views, experiences, and challenges faced by various groups of informants in the context of tax policy and investment (Patton, 2002).

This research uses a qualitative approach that utilizes data obtained through in-depth interviews involving various stakeholders. Informants were selected purposively based on their expertise and involvement in taxation and dividend policy (Bryman, 2012). In-depth interviews in this study were also conducted with the consent of the informants. Informants were given sufficient explanation regarding the purpose of their research and their role in this study. Thus, each informant has the freedom to decide whether to be willing to be interviewed or refuse to participate in the in-depth interview. Thus, it can be said that this in-depth interview was conducted voluntarily and with the consent of each informant and respects ethical principles.

These interviews are conducted with respondents categorized into four groups. The first group consists of regulators, represented by the Ministry of Finance, which introduced the policy of income tax exemption on dividends. Specifically, the regulators in this study include the Directorate General of Taxes (DGT), covering the Directorate of Tax Regulations, the Directorate of Tax Data and Information, and the Directorate of Audit and Collection. Additionally, the Fiscal Policy Agency (Badan Kebijakan Fiskal or BKF), as a policy advisory partner, also represents the regulatory perspective. The second group consists of professional associations, including the Indonesian Public Listed Companies Association (Asosiasi Emiten Indonesia) and the Tax Consultants Association (Ikatan Konsultan Pajak Indonesia or IKPI). Professional and business associations often serve as intermediaries between their members and regulators, making their perspectives particularly important to examine. The third group represents taxpayers directly impacted by the policy are represented by listed company finance that act as direct taxpayers. From these taxpayers, insights can be gained into the factors they consider when determining dividend policy and their perspectives on the implementation of the dividend tax exemption policy. The fourth group comprises academics and tax policy observers. This group includes tax experts who contributed to drafting academic papers and participated in discussions on legislative proposals, expert witnesses in domestic and international tax trials, university lecturers, tax commentators in mass media, and tax policy researchers.

Qualitative research often presents challenges, including the intensive and time-consuming nature of qualitative data collection, sampling and analysis biases, and interpretation biases (Priyatni et al., 2020). The use of NVivo software application is recommended to address this issue. NVivo assists researchers in managing qualitative data by organizing and classifying it systematically according to the characteristics of qualitative research. The software helps streamline and facilitate the organization process, ensuring data is neatly categorized and easily analyzed.

3. Results

3.1. In-Depth Interview

In this study, in-depth interviews were conducted with several respondents or informants. The informants were categorized into four groups to facilitate the coding process: Regulators, Associations, Operators, and Academics.

The interviews covered various topics, including the background of the dividend tax incentive policy implementation, which is expected to support macroeconomic development, particularly investment, as emphasized by regulators. Another key issue discussed was the allocation of investment instruments, as there is no specific prioritization among the 12 available investment instruments. Additionally, the interviews addressed the effectiveness of policy implementation, policy evaluation concerning information technology aspects highlighted by several informants, as well as data integration and inter-agency coordination. Another crucial aspect discussed was the need for implementing regulations, such as technical guidelines and specific regulations, to support the execution of the dividend tax exemption policy.

In terms of the impact of the policy on increasing dividend distribution to shareholders, informants revealed that taxes on dividends are not the main determining factor. The factor that has a greater influence on dividend distribution is the Company's financial condition. These results strengthen the qualitative research by Brav et al. (2008) and Baker & Powell (2012) which shows that the role of tax policy is not too dominant in dividend payment.

In the Association category, informants agreed on the impact of the dividend tax exemption in stimulating investment by individual dividend recipients. However, the encouragement for increased investment by individuals receiving dividend income is not necessarily in line with increased investment by corporations. This result strengthens other empirical findings which show that the exemption of income tax on dividends does not necessarily encourage corporate investment (Chay et al., 2023; Yagan, 2015). This result doesn’t support the finding conclude that the dividend tax policy affect corporate investment such as the results of a study by Lee & Park (2023) in South Korea which showed an increase in corporate investment. This is also in line with the statement of the informant who stated that dividend payments are influenced by the financial conditions and needs of the company.

Other insights provided by informants from the Regulator, Operator, Association, and Academic categories will be further explored through coding analysis.

3.2. Coding Analysis

In this study, a Node system was developed based on the coding hierarchy to examine several aspects, including the impact of the dividend tax exemption policy on corporate dividend payments, its effect on corporate investment, and the analysis of its implementation in Indonesia. To achieve these objectives, a Node system named “Implementation” was established, with two sub-Nodes: “Impact” and “Others.” The “Impact” sub-Node refers to the effects of the dividend tax exemption policy, particularly on investment. Meanwhile, the “Others” sub-Node maps Nodes that fall outside the context of the policy’s impact. In aggregate, at least 20 Nodes were identified at the highest hierarchical level.

Conceptually, several excerpts indicate that the 10% final dividend tax incentive influences investment decisions by dividend-receiving taxpayers, including in the real sector and financial market deepening. Another dominant Node is “Data Integration,” which refers to inter-agency collaboration in supporting the Directorate General of Taxes (DGT) in implementing the tax incentive policy.

These Nodes further suggest that inter-ministerial and inter-agency coordination can affect the quality of data and information necessary to support policy implementation. Building on this, the “Digitalization > Administration” Node highlights operational efficiency, including data availability, which impacts administrative costs for both taxpayers and tax authorities. Additionally, another dominant Node underscores the importance of stakeholder synergy, particularly concerning data integration quality and information exchange.

Furthermore, several Nodes were mentioned by 33% of informants, including “Supplementary Guideline,” “Stakeholders Complexity,” “Compliance Rate Problem,” “Priority Program > Effectiveness,” “Conditional Release,” and “Government Revenue.” These Nodes reflect key issues:

The need for technical regulations or derivative rules, such as technical guidelines and specific regulations;

The challenges of achieving synergy at the operational level;

The low compliance rate with the implemented policy;

The impact of the dividend tax exemption policy in directing investment allocation toward national priority programs, affecting its overall effectiveness;

Concerns over the policy’s restrictive terms and conditions; and

The expectation that tax expenditure could accelerate investment and, ultimately, contribute to government revenue.

The following section presents a hierarchical mapping of the “Impact” sub-Node, which categorizes key aspects related to the effects of the dividend tax exemption policy. Based on figure 1, the impact on investment is most often mentioned compared to other Nodes. Furthermore, the Nodes “Tax Exemption > Investment” have a reference count of 8 or have a contribution value of 67%.

Figure 1: The Hierarchy of Sub Nodes “Impact”

Furthermore, the Nodes “Tax Exemption > Investment” have several sub-Nodes in them which are hierarchical in form, the following is an image that shows what is meant:

Figure 2: The Hierarchy of Sub Nodes “Tax Exemption”

Based on figure 2, several sub-Nodes have been mapped. “Obligatory” is the most frequently mentioned Node across all informants. This Node highlights the investment allocation resulting from the dividend tax exemption, which contains an obligatory element through the imposition of a 10% final tax.  Other mapped Nodes under the “Impact” sub-Node include “Uncertainty,” “Risk Profile,” “Policy Lag,” and “Multiplier Effect.” Each of these Nodes has a reference count of one, contributing 8.3% to the overall discussion. Data analysis indicates that “Tax Investment” is the Node with the highest number of references, totaling eight, with a contribution of 67%. This suggests that approximately 67% of informants mentioned the impact of the dividend tax exemption on the level of investment made by dividend recipients. Additionally, 42% of informants discussed its impact on corporate cash flow, while 33% addressed its effect on government revenue. Furthermore, the “Obligatory” and “Regulatory Arbitrage” Nodes were mentioned by 25% and 17% of informants, respectively.  The “Obligatory” Node also contains a child Node, “Criminal Act,” which refers to potential violations related to taxpayer non-compliance in allocating tax-exempt dividend proceeds. The following figure describes the project map of Nodes “Impact”.

Figure 3: Project Map Sub-Nodes “Impact”

Furthermore, the ‘Others’ sub-Nodes will be analyzed. These sub-nodes map out what if the things mentioned are related to the context of dividend tax exemption policy implementation, except for the impacts caused. Figure 4 show us that, ‘Data Integration’ has the largest number of references compared to other Nodes. The contents of these Nodes refer to the need for inter-agency cooperation in creating good quality data integration, especially for tax authorities, in supporting tax implementation. In addition, ‘Digitalisation > Administration’ is also the Node that has the largest number of references and at the same time the most mentioned by all informants. The contents of these Nodes refer to the importance of the role of digitalization that can have an impact on the level of operational efficiency, both in terms of taxpayers and tax authorities.

Figure 4: The Hierarchy of Sub Nodes “Others”

Meanwhile, several other Nodes such as: “Conditional Release”, “Priority Program > Effectiveness Rate”, “Compliance Rate Problem”, “Stakeholders Complexity”, and “Supplementary Guideline” are Nodes that are also dominantly mentioned after the digitalization aspect. Here are some of the notes: (i). Complaints about the dividend policy that is still bound by certain terms and conditions; (ii). Tax expenditure that is expected to have an impact on accelerating investment which ultimately leads to government revenue; (iii). The results of the low level of compliance with the implemented policies; (iv). Synergy that is considered difficult to do at the implementing level; and (v). The need for technical or derivative regulations such as Technical Instructions, Regulations, and so on. Furthermore, several issues are also mapped that can be categorized as obstacles/challenges in the implementation of the dividend tax-free policy, the following is a hierarchy that shows the dominance of each mapped Node, as follows:

Figure 5: The Hierarchy of Sub Nodes “Challenges”

Based on Figure 5, in the context of obstacles, "Compliance Rate Problem", "Stakeholder Complexity", and "Supplementary Guideline". The "Compliance Rate Problem" refers to the low policy output (compliance) as a result of the implementation of the dividend tax-free policy. The Nodes "Bank Deposits > Effectiveness Rate", and "Flexible Administration" refer to the response of taxpayers who invest in bank deposits which some informants consider to have no impact on investment. Meanwhile, "Flexible Administration" refers to tax administration which is still considered difficult for taxpayers. Furthermore, related to the supervision carried out, several child Nodes are also mapped in it, such as: "Data Integration", "Stakeholders Sinergy", "Intimidating", "Grace Period" and "Priority Pre-Audit Identification". The following is an image that shows what is meant:

Figure 6: The Hierarchy of Sub Nodes “Monitoring”

In terms of the “Others” sub-Nodes the data processing shows us that “Data Integration” is the Node with the highest number of references, namely 8 with a total contribution of 67%. This concludes that around 67% of informants mentioned the importance of data integration between institutions in supporting the implementation of the dividend tax-free policy. Meanwhile, 59% of informants in this study mentioned the impact of technology use on tax administration. The importance of synergy between stakeholders, one of which is related to the exchange of information/data integration, was mentioned by 50% of informants. Furthermore, 33% of informants in this study mentioned the Nodes “Compliance Rate Problem”, “Stakeholder Complexity”, and “Supplementary Guideline”. The following figure describes the project map of Nodes “Others”.

Figure 7: Project Map Sub-Nodes “Others”

The next stage is the comparative diagram analysis. This step known as second cycle coding is the second phase in the coding analysis. The nodes or coding that has been created previously at the first cycle coding serve as the foundation for the second cycle coding. The results of the analysis describe the similarities of things mentioned by each informant. At the Second Cycle Coding stage, causal coding that has been built in the previous stage that has the highest reference is also grouped. Futhermore, to draw a comprehensive pattern, a concept mapping was created based on the first and second coding analysis. The following is a picture that shows what is meant:

Figure 8: Concept Mapping

Based on Figure 8, in the process of implementing the dividend tax exemption policy, several obstacles are still found which are also strategies that can be used to support the implementation of the policy. The nodes "Stakeholders Complexity", and "Flexible Administrative" indicate that administrative complexity is a key consideration in the implementation of this policy. This is understandable, as the policy does not automatically grant a tax exemption on dividends but instead imposes administrative requirements for its utilization, such as periodic investment reporting. Administrative burdens, in turn, may weaken both domestic and foreign investment. Therefore, if referring to the policy framework for investment by the OECD (2015), a systematic program review is needed to ensure that regulations are cost-effective, consistent, and produce the desired policy impact.

Another concern raised pertains to how the implementation of this policy can be effectively monitored to achieve its intended objectives. This can be seen from the emergence of “Tax Avoidance” and "Compliance Rate Problem" nodes. In the context of Indonesian policy, individual taxpayers who benefit from this incentive are required to invest their dividend income in various investment instruments. Theoretically, the funds invested by these individuals can be utilized by corporations to finance their real investments. Therefore, it is crucial to monitor the extent to which individuals receive dividend income and how much of it is invested in Indonesia.

This concern over monitoring appears to have led to the emergence of related nodes from the informants. Nodes such as "Data Integration" and "Stakeholders Synergy" indicate concerns regarding this issue. These nodes suggest that Indonesia’s tax authorities must collaborate with other stakeholders to obtain the necessary data for policy monitoring. The tax exemption policy on dividends has the consequence of eliminating the withholding tax system on dividend income. As a result, tax authorities must work with other stakeholders to collect data on who receives dividend income, the amount received, and other income data. This data can then be utilized for pre-filling PIT returns and audit purposes (OECD, 2024). Consequently, information from various sources will help tax authorities identify tax avoidance opportunities, thereby increasing compliance, which can lead to higher state revenues (Jacobs, 2017).

4. Discussion

The coding analysis of the dividend tax exemption policy, especially for corporations, shows that it is not the main factor influencing the company's decision to distribute dividends. This is indicated by the existence of the Nodes "Financial Performance > Dividend". The nodes refer to one of the statements of the informant "Operator" which states that the decision to distribute dividends is more influenced by the condition of its financial performance, especially on cash flow. Furthermore, the informant also stated that tax is not the main and only factor for companies in determining dividend distribution. This opinion confirms previous qualitative research conducted by Brav et al. (2008) and Baker & Powell (2012)that tax policy on dividends is not the main factor driving dividend distribution by companies. Dividend distribution by the company can be influenced by the company's condition where most companies need additional capital or support operational activities through cash flow and company profits. The impact of the tax-free policy may have more impact on Individual Taxpayers.

The coding analysis shows us that the dividend tax exemption policy will conceptually have an impact on investment allocation at the individual level/Individual Taxpayers receiving dividends. This is indicated by the existence of the Nodes "Tax Exemption > Investment" which has the highest number of references, namely 8 (67%) compared to other Nodes.

However, in its implementation, several obstacles were still found. The coding analysis gives us information that the implementation of this policy still has several challenges, mainly related to the administrative burden and aspects of policy supervision related to compliance with the policy. Challenges regarding policy supervision require cooperation so that this policy can be implemented properly.

Author Contributions: Conception and design of study, All Authors; Acquisition of data, 1st Author; Interpretation of data, 3rd Author; Drafting the manuscript, 1st Author; Supervision, 2nd Author, 3rd Authors, 4th Author.

Funding: This research received no external funding

Conflicts of Interest: The authors declare no conflict of interest.

Informed Consent Statement/Ethics approval: Not Applicable

Declaration of Generative AI and AI-assisted Technologies: This study has not used any generative AI tools or technologies in the preparation of this manuscript.