Thin Capitalization in Indonesia: The Intersection of Investment, Compliance, and Tax Justice

• Andi Banua Adams
• ISBN 978-634-05-3878-6
• 2026
• Perpajakan

In practice, a company's capital structure is an entirely reasonable business decision. Debt financing is often chosen for its efficiency, flexibility, and ability to fund expansion. In the tax context, however, a disproportionate share of debt can open the door to base erosion through excessive interest deductions, particularly in affiliated-party transactions. This is where thin capitalization becomes a “sensitive” issue, sitting on the border between legitimate business strategy and schemes that may lead to aggressive tax avoidance. The approach it requires therefore cannot be purely normative; it must be grounded in an understanding of business logic, the arm's length principle, risk management, and the ever-evolving dynamics of tax policy.

This book aims to provide a comprehensive yet practical overview of thin capitalization in Indonesia. Broadly, the discussion is organized around three main pillars. First, investment: how interest-deduction limitation rules and related regulations can be designed and applied without creating uncertainty that hampers the business climate. Second, compliance: how taxpayers can put in place adequate financing structures, documentation, and supporting evidence, and how tax authorities can assess them proportionately and on a risk basis. Third, tax fairness: how the system ensures that tax contributions reflect economic capacity, creates a level playing field among businesses, and safeguards state revenue without sacrificing the principle of fairness.