Indonesia

Executive Summary

Indonesia’s population of 268 million, GDP over USD 1 trillion, growing middle class, and stable economy all serve as attractive features to U.S. investors; however, different entities have noted that investing in Indonesia remains challenging.  Since 2014, the Indonesian government under President Joko (“Jokowi”) Widodo, now in his second and final five-year term,  has prioritized boosting infrastructure investment and human capital development to support Indonesia’s economic growth goals.  As he began his second term in October 2019, President Jokowi announced sweeping plans to pass omnibus laws aimed at improving Indonesia’s economic competitiveness by lowering corporate taxes, reforming rigid labor laws, and reducing bureaucratic and regulatory barriers to investment.  However, with the fallout from the Covid-19 pandemic, the government shifted its focus to providing fiscal and monetary stimulus to support the economy.  Regardless of the outcome of further reforms, factors such as a decentralized decision-making process, legal and regulatory uncertainty, economic nationalism, and powerful domestic vested interests in both the private and public sectors, create a complex investment climate.  Other factors relevant to investors include: government requirements, both formal and informal, to partner with Indonesian companies, and to manufacture or purchase goods and services locally; restrictions on some imports and exports; and pressure to make substantial, long-term investment commitments.  Despite recent limits placed on its authority, the Indonesian Corruption Eradication Commission (KPK) continues to investigate and prosecute corruption cases.  However, investors still cite corruption as an obstacle to pursuing opportunities in Indonesia.

Other barriers to foreign investment that have been reported include difficulties in government coordination, the slow rate of land acquisition for infrastructure projects, weak enforcement of contracts, bureaucratic inefficiency, and ambiguous legislation in regards to tax enforcement. Businesses also face difficulty from changes to rules at government discretion with little or no notice and opportunity for comment, and lack of consultation with stakeholders in the development of laws and regulations.  Investors have noted that many new regulations are difficult to understand and often not properly communicated to those affected.  In addition, companies have complained about the complexity of inter-ministerial coordination that continues to delay some processes important to companies, such as securing business licenses and import permits.  In response, in July 2018 the government launched a “one stop shop” for licenses and permits via an online single submission (OSS) system at the Indonesia Investment Coordinating Board (BKPM).  Indonesia restricts foreign investment in some sectors through a Negative Investment List that Indonesian officials have indicated will be scrapped as part of omnibus legislation.  The latest version, issued in 2016, details the sectors in which foreign investment is restricted and outlines the foreign equity limits in a number of other sectors.  The 2016 Negative Investment List allows greater foreign investments in some sectors, including e-commerce, film, tourism, and logistics.  In health care, the 2016 list loosens restrictions on foreign investment in categories such as hospital management services and manufacturing of raw materials for medicines, but tightens restrictions in others such as mental rehabilitation, dental and specialty clinics, nursing services, and the manufacture and distribution of medical devices. Companies have reported that energy and mining still face significant foreign investment barriers.

Indonesia began to abrogate its more than 60 existing Bilateral Investment Treaties (BITs) in 2014, allowing some of the agreements to expire in order to be renegotiated.  The United States does not have a BIT with Indonesia.

Despite the challenges that industry has reported, Indonesia continues to attract significant foreign investment.  Singapore, Netherlands, United States, Japan and Hong Kong were among the top sources of foreign investment in the country in 2018 (latest available full-year data). Private consumption is the backbone of the largest economy in ASEAN, making Indonesia a promising destination for a wide range of companies, ranging from consumer products and financial services, to digital start-ups and franchisors.  Indonesia has ambitious plans to improve its infrastructure with a focus on expanding access to energy, strengthening its maritime transport corridors, which includes building roads, ports, railways and airports, as well as improving agricultural production, telecommunications, and broadband networks throughout the country. Indonesia continues to attract U.S. franchises and consumer product manufacturers.  UN agencies and the World Bank have recommended that Indonesia do more to grow financial and investor support for women-owned businesses, noting obstacles that women-owned business sometimes face in early-stage financing.

Table 1
Measure Year Index or Rank Website Address
TI Corruption Perceptions index 2019 85 of 180 https://www.transparency.org/cpi2019
World Bank’s Doing Business Report “Ease of Doing Business” 2020 73 of 190 http://www.doingbusiness.org/rankings
Global Innovation Index 2019 85 of 126 https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country ($M USD, stock positions) 2018 $11,140 M  https://apps.bea.gov/international/
factsheet/
World Bank GNI per capita 2018 $3,840 https://data.worldbank.org/indicator/
NY.GNP.PCAP.CD?locations=ID

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

With GDP growth of 5.02 percent in 2019, Indonesia is an attractive destination for foreign direct investment (FDI) due to its young population, strong domestic demand, stable political situation, and well-regarded macroeconomic policy.  Indonesian government officials often state that they welcome increased FDI, aiming to create jobs and spur economic growth, and court foreign investors, notably focusing on infrastructure development and export-oriented manufacturing.  Foreign investors, however, have complained about vague and conflicting regulations,  bureaucratic inefficiencies, ambiguous legislation in regards to  tax enforcement, poor existing infrastructure, rigid labor laws, sanctity of contract issues, and corruption.

The Indonesia Investment Coordinating Board, or BKPM, serves as an investment promotion agency, a regulatory body, and the agency in charge of approving planned investments in Indonesia.  As such, it is the first point of contact for foreign investors, particularly in manufacturing, industrial, and non-financial services sectors.  BKPM’s OSS system streamlines 492 licensing and permitting processes through the issuance of Government Regulation No.24/2018 on Electronic Integrated Business Licensing Services.  While the OSS system is operational, overlapping authority for permit issuance across ministries and government institutions, both at the national and subnational level, remains challenging.  Special expedited licensing services are available for investors meeting certain criteria, such as making investments in excess of approximately IDR100 billion (USD 6.6 million) or employing 1,000 local workers. The government has provided investment incentives particularly for “pioneer” sectors, (please see the section on Industrial Policies)

To further improve the investment climate, the government drafted an omnibus law on job creation to amend dozens of prevailing laws deemed to hamper investment.  In February 2020, the draft omnibus law was submitted to the legislature for deliberation.

Limits on Foreign Control and Right to Private Ownership and Establishment

Restrictions on FDI are, for the most part, outlined in Presidential Decree No.44/2016, commonly referred to as the Negative Investment List or the DNI. The DNI aims to consolidate FDI restrictions from numerous decrees and regulations, in order to create greater certainty for foreign and domestic investors.  The 2016 revision to the list eased restrictions in a number of previously closed or restricted fields.  Previously closed sectors, including the film industry (including filming, editing, captioning, production, showing, and distribution of films), on-line marketplaces with a value in excess of IDR 100 billion (USD 6.6 million), restaurants, cold chain storage, informal education, hospital management services, and manufacturing of raw materials for medicine, are now open for 100 percent foreign ownership.  The 2016 list also raises the foreign investment cap in the following sectors, though not fully to 100 percent:  online marketplaces under IDR 100 billion (USD 6.6 million), tourism sectors, distribution and warehouse facilities, logistics, and manufacturing and distribution of medical devices.  In certain sectors, restrictions are liberalized for foreign investors from other ASEAN countries.  Though the energy sector saw little change in the 2016 revision, foreign investment in construction of geothermal power plants up to 10 MW is permitted with an ownership cap of 67 percent, while the operation and maintenance of such plants is capped at 49 percent foreign ownership.  For investment in certain sectors, such as mining and higher education, the 2016 DNI is useful only as a starting point for due diligence, as additional licenses and permits are required by individual ministries.  A number of sensitive business areas, involving, for example, alcoholic beverages, ocean salvage, certain fisheries, and the production of some hazardous substances, remain closed to foreign investment or are otherwise restricted.

Foreign investment in small-scale and home industries (i.e. forestry, fisheries, small plantations, certain retail sectors) is reserved for micro, small and medium enterprises (MSMEs) or requires a partnership between a foreign investor and local entity.  Even where the 2016 DNI revisions lifted limits on foreign ownership, certain sectors remain subject to other restrictions imposed by separate laws and regulations.  As part of President Jokowi’s second-term economic reform agenda, Indonesian ministers have stated their interest in revising the 2016 DNI through a new presidential regulation that will be issued in 2020.  This new Investment Priorities List, or DPI, will incentivize investment into certain sectors, notably export-oriented manufacturing, digital technology projects, labor-intensive industries, and value-added processing, with the aim to spur innovation and reduce Indonesia’s current account deficit.  The government also intends to shorten the list of restricted sectors to six categories including cannabis, gambling, and chemical weapons..

In 2016, Bank Indonesia issued Regulation No.18/2016 on the implementation of payment transaction processing.  The regulation governs all companies providing the following services: principal, issuer, acquirer, clearing, final settlement operator, and operator of funds transfer.  The BI regulation capped foreign ownership of payments companies at 20 percent, though it contained a grandfathering provision.  BI’s 2017 Regulation No.19/2017 on the National Payment Gateway (NPG) subsequently imposed a 20 percent foreign equity cap on all companies engaging in domestic debit switching transactions.  Firms wishing to continue executing domestic debit transactions are obligated to sign partnership agreements with one of Indonesia’s four NPG switching companies.

Foreigners may purchase equity in state-owned firms through initial public offerings and the secondary market. Capital investments in publicly listed companies through the stock exchange are not subject to the DNI.

The government issued Trade Minister Regulation 71/2019 to revoke the requirement for eighty percent local content and limitation of outlet numbers in the franchise industry.  Nevertheless, the government encourages companies to utilize domestic goods and services that meet franchisor quality standards.

Other Investment Policy Reviews

The latest World Trade Organization (WTO) Investment Policy Review of Indonesia was conducted in April 2013 and can be found on the WTO website: http://www.wto.org/english/tratop_e/tpr_e/tp378_e.htm 

The last OECD Investment Policy Review of Indonesia, conducted in 2010, can be found on the OECD website:

http://www.oecd.org/daf/inv/investmentfordevelopment/indonesia-investmentpolicyreview-oecd.htm 

The 2019 UNCTAD Report on ASEAN Investment can be found here: https://unctad.org/en/pages/PublicationWebflyer.aspx?publicationid=2568 

Business Facilitation

In order to conduct business in Indonesia, foreign investors must be incorporated as a foreign-owned limited liability company (PMA) through the Ministry of Law and Human Rights.  Once incorporated, a PMA must register through the OSS system.  Upon registration, a company will receive a business identity number (NIB) along with proof of participation in the Workers Social Security Program (BPJS) and endorsement of any Foreign Worker Recruitment Plans (RPTKA).  An NIB remains valid as long as the business operates in compliance with Indonesian laws and regulations.  Existing businesses will eventually be required to register through the OSS system.  In general, the OSS system simplified processes for obtaining NIB from three days to one day upon the completion of prerequisites.

Once an investor has obtained a NIB, he/she may apply for a business license.  At this stage, investors must:  document their legal claim to the proposed project land/location; provide an environmental impact statement (AMDAL); show proof of submission of an investment realization report; and provide a recommendation from relevant ministries as necessary. Investors also need to apply for commercial and/or operational licenses prior to commencing commercial operations.  Special expedited licensing services are also available for investors meeting certain criteria, such as making investments in excess of approximately IDR 100 billion (USD 6.6 million) or employing 1,000 local workers.  After obtaining a NIB, investors in some designated industrial estates can immediately start project construction.

Foreign investors are generally prohibited from investing in MSMEs in Indonesia, although the 2016 Negative Investment List opened some opportunities for partnerships in farming and catalog and online retail.  In accordance with the Indonesian SMEs Law No. 20/2008, MSMEs are defined as enterprises with net assets less than IDR10 billion (USD 0.7 million) or with total annual sales under IDR50 billion (USD 3.3 million).  However, the Indonesian Central Bureau of Statistics defines MSMEs as enterprises with fewer than 99 employees.  The government provides assistance to MSMEs, including: expanded access to business credit for MSMEs in farming, fishery, manufacturing, creative business, trading and services sectors; a tax exemption for MSMEs with annual sales under IDR 200 million (USD 13,000); and assistance with international promotion.

The Ministry of Law and Human Rights’ implementation of an electronic business registration filing, and notification system has dramatically reduced the number of days needed to register a company.  Foreign firms are not required to disclose proprietary information to the government.

BKPM is responsible for issuing “investment licenses” (the term used to encompass both NIB and business licenses) to foreign entities and has taken steps to simplify the application process. The OSS serves as an online portal which allows foreign investors to apply for and track the status of licenses and other services online.  The OSS coordinates many of the permits issued by more than a dozen ministries and agencies required for investment approval.  In November 2019, the government through Presidential Instruction 7/2019 appointed BKPM as the main institution to issue business permits and to grant investment incentives which have been delegated from all ministries and government institutions. BKPM has also been tasked to review policies deemed unfavorable for investors.  In addition, BKPM now issues soft-copy investment and business licenses.  While the OSS’s goal is to help streamline investment approvals, investments in the mining, oil and gas, plantation, and most other sectors still require multiple licenses from related ministries and authorities.  Likewise, certain tax and land permits, among others, typically must be obtained from local government authorities.  Though Indonesian companies are only required to obtain one approval at the local level, businesses report that foreign companies often must seek additional approvals in order to establish a business.

The Ministry of Home Affairs, the Ministry of Administrative and Bureaucratic Reform, and BKPM issued a circular in 2010 to clarify which government offices are responsible for investment that crosses provincial and regional boundaries.  Investment in a regency (a sub-provincial level of government) is managed by the regency government; investment that lies in two or more regencies is managed by the provincial government; and investment that lies in two or more provinces is managed by the central government, or central BKPM.  BKPM has plans to roll out its one-stop-shop structure to the provincial and regency level to streamline local permitting processes at more than 500 sites around the country.

Outward Investment

Indonesia’s outward investment is limited, as domestic investors tend to focus on the domestic market.  BKPM has responsibility for promoting and facilitating outward investment, to include providing information about investment opportunities in and policies of other countries.  BKPM also uses their investment and trade promotion centers abroad to match Indonesian companies with potential investment opportunities.  The government neither restricts nor provides incentives for outward investment.

3. Legal Regime

Transparency of the Regulatory System

Indonesia continues to bring its legal, regulatory, and accounting systems into compliance with international norms and agreements, but progress is slow.  Notable developments included passage of a comprehensive anti-money laundering law in 2010 and a land acquisition law in 2012.  Although Indonesia continues to move forward with regulatory system reforms foreign investors have indicated they still encounter challenges in comparison to domestic investors and have criticized the current regulatory system for its failure to establish clear and transparent rules for all actors.  Certain laws and policies, including the DNI, establish sectors that are either fully off-limits to foreign investors or are subject to substantive conditions.

Decentralization has introduced another layer of bureaucracy for firms to navigate, resulting in what companies have identified as additional red tape.  Certain businesses claim that Indonesia encounters challenges in launching bureaucratic reforms due to ineffective management, resistance from vested interests, and corruption.  U.S. businesses cite regulatory uncertainty and a lack of transparency as two significant factors hindering operations.  Government ministries and agencies, including the Indonesian House of Representatives (DPR), continue to publish many proposed laws and regulations in draft form for public comment; however, not all draft laws and regulations are made available in public fora and it can take years for draft legislation to become law.  Laws and regulations are often vague and require substantial interpretation by the implementers, leading to business uncertainty and rent-seeking opportunities.

U.S. companies note that regulatory consultation in Indonesia is inconsistent, despite the existence of Law No. 12/2011 on the Development of Laws and Regulations and its implementing Government regulation 87/204, which states that the community is entitled to provide oral or written input into draft laws and regulations.  The law also sets out procedures for revoking regulations and introduces requirements for academic studies as a basis for formulating laws and regulations.  Nevertheless, the absence of a formal consultation mechanism has been reported to lead to different interpretations among policy makers of what is required.

In 2016, the Jokowi administration repealed 3,143 regional bylaws that overlapped with other regulations and impeded the ease of doing business.  However, a 2017 Constitutional Court ruling limited the Ministry of Home Affairs’ authority to revoke local regulations and allowed local governments to appeal the central government’s decision.  The Ministry continues to play a consultative function in the regulation drafting stage, providing input to standardize regional bylaws with national laws.

In 2017, the government issued Presidential Instruction No. 7/2017, which aims to improve the coordination among ministries in the policy-making process.  The new regulation requires lead ministries to coordinate with their respective coordinating ministry before issuing a regulation.  Presidential Instruction No. 7 also requires Ministries to conduct a regulatory impact analysis and provide an opportunity for public consultation.  The presidential instruction did not address the frequent lack of coordination between the central and local governments.  Pursuant to various Indonesian economy policy reform packages over the past several years, the government has eliminated 220 regulations as of September 2018.  Fifty-one of the eliminated regulations are at the Presidential level and 169 at the ministerial or institutional level.

In July 2018, President Jokowi issued Presidential Regulation No. 54/2018, updating and streamlining the National Anti-Corruption Strategy to synergize corruption prevention efforts across ministries, regional governments, and law enforcement agencies.  The regulation focuses on three areas: licenses, state finances (primarily government revenue and expenditures), and law enforcement reform.  An interagency team, including KPK, leads the national strategy’s implementation efforts.

In October 2018, the government issued Presidential Regulation No. 95/2018 on e-government that requires all levels of government (central, provincial, and municipal) to implement online governance tools (e-budgeting, e-procurement, e-planning) to improve budget efficiency, government transparency, and the provision of public services.

International Regulatory Considerations

As a member of ASEAN, Indonesia has successfully implemented regional initiatives, including real-time movement of electronic import documents through the ASEAN Single Window, which reduces shipping costs, speeds customs clearance, and reduces opportunities for corruption.   Indonesia has also committed to ratify the ASEAN Comprehensive Investment Agreement (ACIA), ASEAN Framework Agreement on Services (AFAS), and the ASEAN Mutual Recognition Arrangement.  Notwithstanding progress made in certain areas, the often-lengthy process of aligning national legislation has caused delays in implementation.  The complexity of interagency coordination and/or a shortage of technical capacity are among the challenges being reported.

Indonesia joined the WTO in 1995.  Indonesia’s National Standards Body (BSN) is the primary government agency to notify draft regulations to the WTO concerning technical barriers to trade (TBT) and sanitary and phytosanitary standards (SPS); however, in practice, notification is inconsistent.  In December 2017, Indonesia ratified the WTO Trade Facilitation Agreement (TFA).  At this point, Indonesia has met 88.7 percent of its commitments to the TFA provisions, including publication and availability information, consultations, advance ruling, review procedure, detention and test procedure, fee and charges discipline, goods clearance, border agency cooperation, import/export formalities, and goods transit.

Indonesia is a Contracting Party to the Aircraft Protocol to the Convention of International Interests in Mobile Equipment (Cape Town Convention).  However, foreign investors bringing aircraft to Indonesia to serve the aviation sector have faced difficulty in utilizing Cape Town Convention provisions to recover aircraft leased to Indonesian companies.  Foreign owners of leased aircraft that have become the subject of contractual lease disputes with Indonesian lessees have been unable to recover their aircraft in certain circumstances.

Legal System and Judicial Independence

Indonesia’s legal system is based on civil law.  The court system consists of District Courts (primary courts of original jurisdiction), High Courts (courts of appeal), and the Supreme Court (the court of last resort).  Indonesia also has a Constitutional Court.  The Constitutional Court has the same legal standing as the Supreme Court, and its role is to review the constitutionality of legislation.  Both the Supreme and Constitutional Courts have authority to conduct judicial review.

Corruption also continues to plague Indonesia’s judiciary, with graft investigations involving senior judges and court staffs.  Many businesses note that the judiciary is susceptible to influence from outside parties.  Certain companies have claimed that the court system often does not provide the necessary recourse for resolving property and contractual disputes and that cases that would be adjudicated in civil courts in other jurisdictions sometimes result in criminal charges in Indonesia.

Judges are not bound by precedent and many laws are open to various interpretations.  A lack of clear land titles has plagued Indonesia for decades, although the land acquisition law No.2/2012 enacted in 2012 included legal mechanisms designed to resolve some past land ownership issues.  In addition, companies find Indonesia to have a poor track record on the legal enforcement of contracts, and civil disputes are sometimes criminalized.  Government Regulation No. 79/2010 opened the door for the government to remove recoverable costs from production sharing contracts.  Indonesia has also required mining companies to renegotiate their contracts of work to include higher royalties, more divestment to local partners, more local content, and domestic processing of mineral ore.

Indonesia’s commercial code, grounded in colonial Dutch law, has been updated to include provisions on bankruptcy, intellectual property rights, incorporation and dissolution of businesses, banking, and capital markets.  Application of the commercial code, including the bankruptcy provisions, remains uneven, in large part due to corruption and training deficits for judges, prosecutors, and defense lawyers.

Laws and Regulations on Foreign Direct Investment

FDI in Indonesia is regulated by Law No. 25/2007 (the Investment Law). Under the law, any form of FDI in Indonesia must be in the form of a limited liability company, with the foreign investor holding shares in the company. In addition, the government outlines restrictions on FDI in Presidential Decree No. 44/2016, commonly referred to as the 2016 Negative Investment List or DNI. It aims to consolidate FDI restrictions in certain sectors from numerous decrees and regulations to provide greater certainty for foreign and domestic investors. The 2016 DNI enables greater foreign investment in some sectors like film, tourism, logistics, health care, and e-commerce. A number of sectors remain closed to investment or are otherwise restricted. The 2016 DNI contains a clause that clarifies that existing investments will not be affected by the 2016 revisions. The website of the Indonesia Investment Coordinating Board (BKPM) provides information on investment requirements and procedures: http://www2.bkpm.go.id/ .  Indonesia mandates reporting obligations for all foreign investors through BKPM Regulation No.7/2018.  See section two for Indonesia’s procedures for licensing foreign investment.

Competition and Anti-Trust Laws

The Indonesian Competition Authority (KPPU) implements and enforces the 1999 Indonesia Competition Law. The KPPU reviews agreements, business practices and mergers that may be deemed anti-competitive, advises the government on policies that may affect competition, and issues guidelines relating to the Competition Law. Strategic sectors such as food, finance, banking, energy, infrastructure, health, and education are KPPU’s priorities. In April 2017, the Indonesia DPR began deliberating a new draft of the Indonesian antitrust law, which would repeal the current Law No. 5/1999 and strengthen KPPU’s enforcement against monopolistic practices and unfair business competition.

Expropriation and Compensation

Indonesia’s political leadership has long championed economic nationalism, particularly in regard to mineral and oil and gas reserves. According to Law No. 25/2007 (the Investment Law), the Indonesian government is barred from nationalizing or expropriating an investors’ property rights, unless provided by law.  If the Indonesian government nationalizes or expropriates an investors’ property rights, it must provided market value compensation to the investor.

Dispute Settlement

ICSID Convention and New York Convention

Indonesia is a member of the International Center for Settlement of Investment Disputes (ICSID) and the United Nations Commission on International Trade Law (UNCITRAL) through the ratification of the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention). Thus, foreign arbitral awards are legally recognized and enforceable in the Indonesian courts; however, some investors note that these awards are not always enforced in practice.

Investor-State Dispute Settlement

Since 2004, Indonesia has faced seven known Investor-State Dispute Settlement (ISDS) arbitration cases, including those that have been settled, and discontinued cases. In 2016, an ICSID tribunal ruled in favor of Indonesia in the arbitration case of British firm Churchill Mining. In March 2019, the tribunal rejected an annulment request from the claimants. In addition, a Dutch arbitration court recently ruled in favor of the Indonesian government in USD 469 million arbitration case against Indian firm Indian Metals & Ferro Alloys. Two cases involved Newmont Nusa Tenggara under the BIT with Netherlands and Oleovest under the BIT with Singapore were discontinued.

Indonesia recognizes binding international arbitration of investment disputes in its bilateral investment treaties (BITs). All of Indonesia’s BITs include the arbitration under ICSID or UNCITRAL rules, except the BIT with Denmark. However, in response to an increase in the number of arbitration cases submitted to ICSID, BKPM formed an expert team to review the current generation of BITs and formulate a new model BIT that would seek to better protect perceived national interests. The Indonesian model BIT is under legal review.

In spite of the cancellation of many BITs, the 2007 Investment Law still provides protection to investors through a grandfather clause. In addition, Indonesia also has committed to ISDS provisions in regional or multilateral agreement signed by Indonesia (i.e. ASEAN Comprehensive Investment Agreement).

International Commercial Arbitration and Foreign Courts

Judicial handling of investment disputes remains mixed. Indonesia’s legal code recognizes the right of parties to apply agreed-upon rules of arbitration. Some arbitration, but not all, is handled by Indonesia’s domestic arbitration agency, the Indonesian National Arbitration Body.

Companies have resorted to ad hoc arbitrations in Indonesia using the UNCITRAL model law and ICSID arbitration rules. Though U.S. firms have reported that doing business in Indonesia remains challenging, there is not a clear pattern or significant record of investment disputes involving U.S. or other foreign investors. Companies complain that the court system in Indonesia works slowly as international arbitration awards, when enforced, may take years from original judgment to payment.

Bankruptcy Regulations

Indonesian Law No. 37/2004 on Bankruptcy and Suspension of Obligation for Payment of Debts is viewed as pro-creditor and the law makes no distinction between domestic and foreign creditors. As a result, foreign creditors have the same rights as all potential creditors in a bankruptcy case, as long as foreign claims are submitted in compliance with underlying regulations and procedures. Monetary judgments in Indonesia are made in local currency.

4. Industrial Policies

Investment Incentives

Indonesia seeks to facilitate investment through fiscal incentives, non-fiscal incentives, and other benefits. Fiscal incentives are in the form of tax holidays, tax allowances, and exemptions of import duties for capital goods and raw materials for investment. As part of the Economic Policy Package XVI, Indonesia issued a modified tax holiday scheme in November 2018 through Ministry of Finance (MOF) Regulation 150/2018, which revokes MOF Regulation 35/2018.  This regulation is intended to attract more direct investment in pioneer industries and simplify the application process through the OSS. The period of the tax holiday is extended up to 20 years; the minimum investment threshold is IDR 100 billion (USD 6.6 million), a significant reduction from the previous regulation at IDR 500 billion (USD 33 million). In addition to the tax holiday, depending on the investment amount, this regulation also provides either 25 or 50 percent income tax reduction for the two years after the end of the tax holiday. The following table explains the parameters of the new scheme:

Provision New Capital Investment IDR 100 billion to less than IDR 500 billion New Capital Investment IDR more  than IDR 500 billion
Reduction in Corporate Income Tax Rate 50% 100%
Concession Period 5 years 5-20 years
Transition Period 25% Corporate Income Tax Reduction for the next 2 years 50% Corporate Income Tax Reduction for the next 2 years

Based on BKPM Regulation 1/2019 as amended by BKPM Regulation 8/2019, the coverage of pioneer sectors was expanded to the digital economy, agricultural, plantation, and forestry, bringing the total to eighteen industries:

  1. Upstream basic metals;
  2. Oil and gas refineries;
  3. Petrochemicals derived from petroleum, natural gas, and coal;
  4. Inorganic basic chemicals;
  5. Organic basic chemicals;
  6. Pharmaceutical raw materials;
  7. Semi-conductors and other primary computer components;
  8. Primary medical device components;
  9. Primary industrial machinery components;
  10. Primary engine components for transport equipment;
  11. Robotic components for manufacturing machines;
  12. Primary ship components for the shipbuilding industry;
  13. Primary aircraft components;
  14. Primary train components;
  15. Power generation including waste-to-energy power plants;
  16. Economic infrastructure;
  17. Digital economy including data processing; and
  18. Agriculture, plantation, and forestry-based processing

Government Regulation No. 9/2016 expanded regional tax incentives for certain business categories in 2016. Apparel, leather goods, and footwear industries in all regions are now eligible for the tax incentives. In this regulation, existing tax facilities are maintained, including:

  • Deduction of 30 percent from taxable income over a six-year period
  • Accelerated depreciation and amortization
  • Ten percent of withholding tax on dividend paid by foreign taxpayer or a lower rate according to the avoidance of double taxation agreement
  • Compensation losses extended from 5 to 10 years with certain conditions for companies that are:
    1. Located in industrial or bonded zone;
    2. Developing infrastructure;
    3. Using at least 70 percent domestic raw material;
    4. Absorbing 500 to 1000 laborers;
    5. Doing research and development (R&D) worth at least 5 percent of the total investment over 5 years;
    6. Reinvesting capital; or,
    7. Exporting at least 30 percent of their product.

On March 31, 2020, Indonesia issued Government Regulation in Lieu of Law No. 1 of 2020 on State Financial Policy and the Stability of Financial Systems for the Handling of the Coronavirus Disease 2019 Pandemic (Perppu 1/2020). Among its provisions are plans to regulate electronic based trading activity (e-trading) and to charge value-added taxes (VAT) on taxable intangible goods and services from foreign e-commerce parties and other highly-digitalized businesses. Income tax will also be imposed upon foreign e-commerce parties that are judged to meet a “significant economic presence” threshhold, based on consolidated gross circulation of a business group, total sales value, or active Indonesian users. The regulation also introduces an electronic transaction tax (ETT) that will be imposed on foreign entities that are subject to income tax obligations under the aformentioned threshhold but would not otherwise be subject to corporate income tax in Indonesia in the absence of a permanent establishment, where taxing such transactions is prohibited by bilateral tax treaties.  Industry representatives have expressed concern that such provisions seek to circumvent bilateral tax treaties intended to avoid double taxation, including the tax treaty between Indonesia and the United States.  They have also noted a lack of clarity over the Perppu’s implementation and concerns over administrative sanctions and the high cost to comply with new measures.  The new regulation will also also cut the corporate income tax rate, lowering it to 22 percent for 2020 and 2021, and to 20 percent for 2022. In addition, a company can claim a further 3 percent reduction if it is publicly listed, with a total number of shares traded on an Indonesian stock exchange of at least 40 percent.

The government provides the facility of Government-Borne Import Duty (Bea Masuk Ditanggung Pemerintah /BMDTP) with zero percent import duty to improve industrial competitiveness and public goods procurement in high value added, labor intensive, and high growth sectors. MOF Regulation 12/2020 provides zero import duty for imported raw materials in 36 sectors including plastics, cosmetics, polyester, resins, other chemical materials, machinery for agriculture, electricity, toys, vehicle components including for electric vehicles, telecommunications, fertilizers, and pharmaceuticals until December 2020.

To cope with soaring demand and to improve domestic production of medical devices and supplies amid the COVID-19 pandemic, the government through BKPM Regulation 86/2020 streamlined licensing requirement for manufacturers of pharmaceuticals and medical devices. The Ministry of Health also accelerated product registration and certification for medical devices and household health supplies. Moreover, the Ministry of Trade issued Regulation 28/2020 to relax import requirements for certain medical-related products.

 At present, Indonesia does not have formal regulations granting national treatment to U.S. and other foreign firms participating in government-financed or subsidized research and development programs. The Ministry of Research and Technology handles applications on a case-by-case basis.

Indonesia’s vast natural resources have attracted significant foreign investment over the last century and continues to offer significant prospects. However, some companies report that a variety of government regulations have made doing business in the resources sector increasingly difficult, and Indonesia now ranks 64th of 76 jurisdictions in the Fraser Institute’s 2019 Mining Policy Perception Index. In 2012, Indonesia banned the export of raw minerals, dramatically increased the divestment requirements for foreign mining companies, and required major mining companies to renegotiate their contracts of work with the government. A ban on the export of raw minerals went into effect in January 2014. However, in July 2014, the government issued regulations that allowed, until January 2017, the temporary export of copper and several other mineral concentrates with export duties and other conditions imposed. When the full export ban came back into effect in January 2017, the government again issued new regulations that allowed exports of copper concentrate and other specified minerals, but imposed more onerous requirements. Of note for foreign investors, provisions of the regulations require that to be able to export non-smelted mineral ores, companies with contracts of work must convert to mining business licenses—and thus be subject to prevailing regulations—and must commit to build smelters within the next five years. Also, foreign-owned mining companies must gradually divest 51 percent of shares to Indonesian interests over ten years, with the price of divested shares determined based on a “fair market value” determination that does not take into account existing reserves. In January 2020, the government banned the export of  nickel ore for all mining companies, foreign and domestic, in the hopes of encouraging construction of domestic nickel smelters. The 2009 mining law devolved the authority to issue mining licenses to local governments, who have responded by issuing more than 10,000 licenses, many of which have been reported to overlap or be unclearly mapped. In the oil and gas sector, Indonesia’s Constitutional Court disbanded the upstream regulator in 2012, injecting confusion and more uncertainty into the natural resources sector. Until a new oil and gas law is enacted, upstream activities are supervised by the Special Working Unit on Upstream Oil and Gas (SKK Migas).

During President Jokowi’s first term, the Indonesian government invested more than  USD 350 billion in infrastructure to connect Indonesia’s more than 17,000 islands. The investments included toll roads, seaports, airports, power generation, telecommunications, and upgrades to Indonesia’s social infrastructure, such as, clean water and sanitation, and housing projects.  President Jokowi has emphasized that he will continue this infrastructure program during his second five-year term, aiming to increase Indonesia’s infrastructure stock from 43 percent of GDP in 2019 to 50 percent in 2024.

Despite high-level attention from Indonesian policymakers, many U.S. companies and investors report that the current institutional arrangement for infrastructure development still suffers from functional overlap, lack of capacity for public-private partnership (PPP) projects in regional governments, lack of solid value-for-money methodologies, crowding out of the private sector by state-owned enterprises (SOEs), legal uncertainty, lack of a solid land-acquisition framework, long-term operational risks for the private sector, unwillingness from stakeholders to be the first ones to test a new policy approach, corruption, and a relatively small Indonesian private sector. As a result of these challenges, the World Bank estimates that Indonesia faces a USD 1.5 trillion infrastructure gap in comparison to other emerging market economies.

Foreign Trade Zones/Free Trade/ Trade Facilitation

Indonesia offers numerous incentives to foreign and domestic companies that operate in special economic and trade zones throughout Indonesia. The largest zone is the free trade zone (FTZ) island of Batam, located just south of Singapore. Neighboring Bintan Island and Karimun Island also enjoy FTZ status. Investors in FTZs are exempted from import duty, income tax, VAT, and sales tax on imported capital goods, equipment, and raw materials. Fees are assessed on the portion of production destined for the domestic market which is “exported” to Indonesia, in which case fees are owed only on that portion.  Foreign companies are allowed up to 100 percent ownership of companies in FTZs. Companies operating in FTZs may lend machinery and equipment to subcontractors located outside of the zone for a maximum two-year period.

Indonesia also has numerous Special Economic Zones (SEZs), regulated under Law No. 39/2009, Government Regulation No. 1/2020 on SEZ management, and Government Regulation No. 12/2020 on SEZ facilities. These benefits include a reduction of corporate income taxes for a period of years (depending on the size of the investment), income tax allowances, luxury tax, customs duty and excise, and expedited or simplified administrative processes for import/export, expatriate employment, immigration, and licensing. As of  February 2020, Indonesia has identified fifteen SEZs in manufacturing and tourism centers that are operational or under construction. Eleven SEZs are operational (though development is sometimes limited) at: 1) Sei Mangkei, North Sumatera; 2) Tanjung Lesung, Banten; 3) Palu, Central Sulawesi; 4) Mandalika, West Nusa Tenggara; 5) Arun Lhokseumawe, Aceh; 6) Galang Batang, Bintan, Riau Islands; 7) Tanjung Kelayang, Pulau Bangka, Bangka Belitung Islands; 8) Bitung, North Sulawesi; 9) Morotai, North Maluku; 10) Maloy Batuta Trans Kalimantan, East Kalimantan; and 11) Sorong, Papua. Four more SEZs are under construction: Tanjung Api-Api, South Sumatera; Singhasari, East Java; Kendal, Central Java; and Likupang, North Sulawesi. In 2016, the government began the process of transitioning Batam from an FTZ to SEZ in order to provide further investment incentives. The Indonesian government announced in December 2018 that it plans to transition management of the Batam FTZ to the local government, creating a single regulatory authority on the island. The conversion to an SEZ is still ongoing  and will not affect the status of the neighboring FTZs on Bintan and Karimun islands.

Indonesian law also provides for several other types of zones that enjoy special tax and administrative treatment.  Among these are Industrial Zones/Industrial Estates (Kawasan  Industri), bonded stockpiling areas (Tempat Penimbunan Berikat), and Integrated Economic Development Zones (Kawasan Pengembangan Ekonomi Terpadu).  Indonesia is home to 103 industrial estates that host thousands of industrial and manufacturing companies.  Ministry of Finance Regulation No. 105/2016 provides several different tax and customs facilities available to companies operating out of an industrial estate, including corporate income tax reductions, tax allowances, VAT exemptions, and import duty exemptions depending on the type of industrial estate.  Bonded stockpile areas include bonded warehouses, bonded zones, bonded exhibition spaces, duty free shops, bonded auction places, bonded recycling areas, and bonded logistics centers. Companies operating in these areas enjoy concessions in the form of exemption from certain import taxes, luxury goods taxes, and value added taxes, based on a variety of criteria for each type of location. Most recently, bonded logistics centers (BLCs) were introduced to allow for larger stockpiles, longer temporary storage (up to three years), and a greater number of activities in a single area. The Ministry of Finance issued Regulation 28/2018, providing additional guidance on the types of BLCs and shortening approval for BLC applications. By October 2019, Indonesia had designated 106 BLCs in 159 locations, with plans to designate more in eastern Indonesia.  In 2018, Ministry of Finance and the Directorate General for Customs and Excise (DGCE) issued regulations (MOF Regulation No. 131/2018 and DGCE Regulation No. 19/2018) to streamline the licensing process for bonded zones.  Together the two regulations are intended to reduce processing times and the number of licenses required to open a bonded zone.

Shipments from FTZs and SEZs to other places in the Indonesia customs area are treated similarly to exports and are subject to taxes and duties.  Under MOF Regulation 120/2013, bonded zones have a domestic sales quota of 50 percent of the preceding realization amount on export, sales to other bonded zones, sales to free trade zones, and sales to other economic areas (unless otherwise authorized by the Indonesian government).  Sales to other special economic areas are only allowed for further processing to become capital goods, and to companies which have a license from the economic area organizer for the goods relevant to their business.

Performance and Data Localization Requirements

Indonesia expects foreign investors to contribute to the training and development of Indonesian nationals, allowing the transfer of skills and technology required for their effective participation in the management of foreign companies. Generally, a company can hire foreigners only for positions that the government has deemed open to non-Indonesians. Employers must have training programs aimed at replacing foreign workers with Indonesians. If a direct investment enterprise wants to employ foreigners, the enterprise should submit an Expatriate Placement Plan (RPTKA) to the Ministry of Manpower.

Indonesia recently made significant changes to its foreign worker regulations. Under Presidential Regulation No. 20/2018, issued in March 2018, the Ministry of Manpower now has two days to approve a complete RPTKA application, and an RPTKA is not required for commissioners or executives. An RPTKA’s validity is now based on the duration of a worker’s contract (previously it was valid for a maximum of five years). The new regulation no longer requires expatriate workers to go through the intermediate step of obtaining a Foreign Worker Permit (IMTA). Instead, expatriates can use an endorsed RPTKA to apply with the immigration office in their place of domicile for a Limited Stay Visa or Semi-Permanent Residence Visa (VITAS/VBS). Expatriates receive a Limited Stay Permit (KITAS) and a blue book, valid for up to two years and renewable for up to two extensions without leaving the country. Regulation No. 20/2018 also abolished the requirement for all expatriates to receive a technical recommendation from a relevant ministry. However, ministries may still establish technical competencies or qualifications for certain jobs, or prohibit the use of foreign worker for specific positions, by informing and obtaining approval from the Ministry of Manpower. Foreign workers who plan to work longer than six months in Indonesia must apply for employee social security and/or insurance.

Regulation No. 20/2018 provides for short-term working permits (maximum six months) for activities such as conducting audits, quality control, inspections, and installation of machinery and electrical equipment. Ministry of Manpower issued Regulation No.10/2018 to implement Regulation 20/2018, revoking its Regulation No. 16/2015 and No. 35/2015. Regulation 10/2018 provides additional details about the types of businesses that can employ foreign workers, sets requirements to obtain health insurance for expatriate employees, requires companies to appoint local “companion” employees for the transfer of technology and skill development, and requires employers to “facilitate” Indonesian language training for foreign workers. Any expatriate who holds a work and residence permit must contribute USD 1,200 per year to a fund for local manpower training at regional manpower offices. The Ministry of Manpower issued Decree 228/2019 to widen the number of jobs open for foreign workers across 18 sectors, ranging from construction, transportation, education, telecommunication, and professionals. Foreign workers  have to obtain approval from Manpower Minister or designated officials for applying positions not listed in the decree. Some U.S. firms report difficulty in renewing KITASs for their foreign executives. In February 2017, the Ministry of Energy and Natural resources abolished regulations specific to the oil and gas industry, bringing that sector in line with rules set by the Ministry of Manpower.

With the passage of a defense law in 2012 and subsequent implementing regulations in 2014, Indonesia established a policy that imposes offset requirements for procurements from foreign defense suppliers. Current laws authorize Indonesian end users to procure defense articles from foreign suppliers if those articles cannot be produced within Indonesia, subject to Indonesian local content and offset policy requirements. On that basis, U.S. defense equipment suppliers are competing for contracts with local partners. The 2014 implementing regulations still require substantial clarification regarding how offsets and local content are determined. According to the legislation and subsequent implementing regulations, an initial 35 percent of any foreign defense procurement or contract must include local content, and this 35 percent local content threshold will increase by 10 percent every five years following the 2014 release of the implementing regulations until a local content requirement of 85 percent is achieved. The law also requires a variety of offsets such as counter-trade agreements, transfer of technology agreements, or a variety of other mechanisms, all of which are negotiated on a per-transaction basis. The implementing regulations also refer to a “multiplier factor” that can be applied to increase a given offset valuation depending on “the impact on the development of the national economy.” Decisions regarding multiplier values, authorized local content, and other key aspects of the new law are in the hands of the Defense Industry Policy Committee (KKIP), an entity comprising Indonesian interagency representatives and defense industry leadership. KKIP leadership indicates that they still determine multiplier values on a case-by-case basis, but have said that once they conclude an industry-wide gap analysis study, they will publish a standardized multiplier value schedule. According to government officials, rules for offsets and local content apply to major new acquisitions only, and do not apply to routine or recurring procurements such as those required for maintenance and sustainment.

Indonesia notified the WTO of its compliance with Trade-Related Investment Measures (TRIMS) on August 26, 1998. The 2007 Investment Law states that Indonesia shall provide the same treatment to both domestic and foreign investors originating from any country. Nevertheless, the government pursues policies to promote local manufacturing that could be inconsistent with TRIMS requirements, such as linking import approvals to investment pledges or requiring local content targets in some sectors.

In October 10, 2019, Indonesia issued Government Regulation No. 71 (GR71) to replace Regulation No. 82/2012 which classifies electronic system operators (ESO) into two categories: public and private. Public ESOs are either a state institution or an institution assigned by a state institution but not a financial sector regulator or supervision authority. Private ESOs are individuals, businesses and communities that operate electronic system. Public ESOs are required to manage, process, and store their data in Indonesia, unless the storing technology is not available locally.  Private ESOs have the option to choose where they will manage, process, and store their data. However, if private ESOs choose to process data outside of Indonesia, they are required to provide access to their systems and data for government supervision and law enforcement purposes. For private financial sector ESOs, GR71 provides  that such firms are “further regulated” by Indonesia’s financial sector supervisory authorities with regards to the private sector’s ESO systems, data processing, and data storage.

In March 2020, the Ministry of Communication and Information Technology (MCIT) published a proposed draft implementing regulation of GR 71 for private ESOs. Article 6 of the draft requires private ESOs to obtain approval from MCIT before they can manage, process, and store their data outside of Indonesia. This provision has been widely criticized by foreign firms and is more restrictive than the original government regulation (GR71) which allows offshore data storage. Post continues to monitor this issue.

Additionally, pursuant to GR71, the Financial Services Authority (OJK) issued Regulation 13/2020, an amendment to Regulation 38/2016, which allows banks to operate their electronic data processing systems and disaster recovery centers outside of Indonesia, provided that the system receives approval from OJK.  Furthermore, OJK will evaluate whether the arrangement for offshore data could diminish its supervisory efficiency, negatively affect the bank’s performance, and if the data center complies with Indonesia’s laws and regulations. The regulation became effective March 31, 2020.

5. Protection of Property Rights

Real Property

The Basic Agrarian Law of 1960, the predominant body of law governing land rights, recognizes the right of private ownership and provides varying degrees of land rights for Indonesian citizens, foreign nationals, Indonesian corporations, foreign corporations, and other legal entities. Indonesia’s 1945 Constitution states that all natural resources are owned by the government for the benefit of the people. This principle was augmented by the passage of a land acquisition bill in 2011 that enshrined the concept of eminent domain and established mechanisms for fair market value compensation and appeals. The National Land Agency registers property under Regulation No. 24/1997, though the Ministry of Forestry administers all ”forest land.” Registration is sometimes complicated by local government requirements and claims, as a result of decentralization. Registration is also not conclusive evidence of ownership, but rather strong evidence of such. Government Regulation No.103/2015 on house ownership by foreigners domiciled in Indonesia allows foreigners to have a property in Indonesia with the status of a “right to use” for a maximum of 30 years, with extensions available for up to 20 additional years.

As part of President Jokowi’s second-term economic reform agenda, the Indonesian government has introduced an omnibus bill on job creation that aims to reduce uncertainty around the roles of the central and local governments, including around spatial planning and environmental and social impact assessments (AMDALs).

Intellectual Property Rights

In the U.S. Trade Representative’s (USTR) Special 301 Report released on April 29, 2020, Indonesia remains on the priority watch list due to the  lack of adequate and effective IP protection and enforcement. Indonesia’s patent law continues to raise serious concerns, including with respect to patentability criteria and compulsory licensing. Further, counterfeiting and piracy continue to be pervasive, IP enforcement remains weak, and there are continued market access restrictions for IP-intensive industries. According to U.S. stakeholders, Indonesia’s failure to effectively protect intellectual property and enforce IP rights laws has resulted in high levels of physical and online piracy. Local industry associations have reported large amounts of pirated films, music, and software in circulation in Indonesia in recent years, causing potentially billions of dollars in losses.  Indonesian physical markets, such as Mangga Dua Market, and online markets Tokopedia, Bukalapak, were included in USTR’s Notorious Markets List in 2019.

Indonesia improved market access by amending a troubling provision within the 2016 Patent Law related to compulsory licenses (CLs). Ministry of Law and Human Right (MLHR) Regulation 30/2019 aims to provide more clarity on the criteria for CLs, including provisions on the non-transferability of CLs to third parties, specific purposes, and duration. The provisions also clarify conditions where CLs can be granted based on determination of “detriment to society”, including insufficient supply and unfordable prices of patented products. The new regulation incorporates Regulation 15/2018’s renewable exemption for patent holders to delay local manufacturing requirements. While industry contacts viewed this regulation as an improvement, they still have concerns that this regulation may undermine the overall level of protection that patent holders receive by registering their patents in Indonesia.

MLHR’s Director General of Intellectual Property (DGIP)  said the GOI will further amend the 2016 Patent Law through the pending omnibus bill and a future Patent Law amendment. The job creation omnibus bill would remove a requirement under Article 20 to produce a patented product in Indonesia within 36 months of the grant of a patent. Previously, MLHR allowed a five-year exemption from local production requirements under Regulation 15/2018. The Patent Law amendment will contain revisions to Article 4 on second use and Article 82 on compulsory licensing. The 2016 Patent Law contains several other concerning provisions, including a restrictive definition of “invention” that potentially imposes an additional “meaningful benefit” requirement for patents on new forms of existing compounds, an expansive national interest test for proposed patent licenses, and disclosure of genetic information and traditional knowledge to promote access and benefit sharing.  Observers expect the omnibus bill to be passed in 2020.  Aside from the Article 20 revision in the omnibus bill, there is no concrete timeline for the Patent Law amendment. DGIP reports it is currently drafting guidelines for patent examiners on pharmacy, computer, and biotechnology patents that will be released in 2020.

DGIP has relaxed its more aggressive efforts to collect patent annuity fees by offering extensions to the deadline.  On August 16, 2018, DGIP issued a circular letter warning stakeholders that it may refuse to accept new patent applications from rights holders that have not paid patent annuity fee debts. The letter gave rights holders until February 16, 2019, to settle unpaid patent annuity payments. On February 17, 2019, DGIP issued another circular letter on its website extending the deadline to August 17, 2019. DGIP has since announced a further extension to settle any unpaid annuities to July 31, 2020. However, in order to benefit from the latest extension, companies were required to send a “commitment letter” to DGIP by January 31, 2020 indicating their intention to pay the outstanding annuities.  The U.S. government continues to monitor implementation of this policy with DGIP and industry stakeholders.

Indonesia deposited its instrument of accession to the Madrid Protocol with the World Intellectual Property Organization (WIPO) in October 2017 and issued implementing regulations in June 2018. Under the new rules, applicants desiring international mark protection under the Madrid Protocol are required to first register their application with DGIP , and must be Indonesian citizens, domiciled in Indonesia, or have clear industrial or commercial interests in Indonesia. Although the Trademark Law of 2016 expanded recognition of non-traditional marks, Indonesia still does not recognize certification marks. In response to stakeholder concerns over a lack of consistency in treatment of international well-known trademarks, the Supreme Court issued Circular Letter 1/2017, which advised Indonesian judges to recognize cancellation claims for well-known international trademarks with no time limit stipulation.

Following the issuance of Ministry of Finance (MOF) Regulation No.40/2018, on December 10, 2019, the Supreme Court ruled on MOF Regulation No. 6/2019, which further granted DGCE the legal authority to hold shipments believed to contain imitation goods for up to two days, pending inspection. Under Regulation No.6/2019, rights holders are notified by DGCE (through the recordation system) when an incoming shipment is suspected of containing infringing products. If the inspection reveals an infringement, the rights holder has four days to file a court injunction to request a suspension of the shipment. Rights holders are required to provide a refundable monetary guarantee of IDR 100 million (approximately USD 6,600) when they file a claim with the court. Rights holders can apply for a 10-day (extendable for an additional 10 days) temporary suspension of the shipment until the completion of a commercial court review.  Once the commercial court examines the evidence, the court can make a ruling that same day whether to maintain the temporary hold or to cancel the judgement.  If the court sides with the rights holder, then the guarantee money will be returned to the applicant. Despite  business stakeholder concerns, the GOI retained a requirement that only companies with offices domiciled in Indonesia may use the recordation system.

In 2015, DGIP and KOMINFO jointly released implementing regulations under the Copyright Law to provide for rights holders to report websites that offer IP-infringing products and sets forth procedures for blocking IP-infringing sites. Also in 2015, Indonesia’s Creative Economy Agency (BEKRAF) launched an anti-piracy task force with film and music industry stakeholders. BEKRAF reported that the task force remained focused on coordinating the review of complaints from industry about infringing websites in 2018.  MCIT reported that it blocked 1,946 infringing websites in 2019, a significant increase from the previous  year’s 442 cases. IndoXXI and LayarIndo21, two of the largest online pirated entertainment providers,  reportedly closed in early January. After the IndoXXI shutdown was announced, Video Coalition of Indonesia (VCI) found 200 new infringing websites with similar content. A YouGov survey published by the Asia Video Industry Association (AVIA) revealed that 63 percent of Indonesians access infringing websites for entertainment purposes. MCIT senior officials stated the Ministry is working with the Indonesia National Police Cybercrime Unit and industry groups, including AVIA, to determine and identify the source host, but admitted MCIT does not have the capability to track down the perpetrators and bring criminal charges,

DGIP reports that its directorate of investigation has increased staffing to 187 investigators, including 40 nationwide investigators and 147 staff certified to act as local investigators in 33 provinces when needed for a pending case, and saw the number of investigations double from 30 in 2018 to 47 in 2019. Trademark, Patent, and Copyright legislation requires a rights-holder complaint for investigations, and DGIP and BPOM investigators lack the authority to make arrests so must rely on police cooperation for any enforcement action.

Resources for Rights Holders

Additional information regarding treaty obligations and points of contact at local IP offices, can be found at the World Intellectual Property Organization (WIPO) country profile website http://www.wipo.int/directory/en/ .For a list of local lawyers, see: http://jakarta.usembassy.gov/us-service/attorneys.html.

6. Financial Sector

Capital Markets and Portfolio Investment

The Indonesia Stock Exchange (IDX) index has 668 listed companies as of December 2019 with a daily trading volume of USD 650 million and market capitalization of USD 521 billion. Over the past five years, there has been a 34 percent increase of the number listed companies, but the IDX is dominated by its top 20 listed companies, which represent 59.26 percent of the market cap. There were 50 initial public offerings in 2019 – seven fewer than 2018. As of January 2020, domestic entities conducted more than 67.97 percent  of total IDX stock trades.

In November 2018, IDX introduced T+2 settlement, with sellers now receiving proceeds within two days instead of the previous standard of three days (T+3). In 2011, the IDX launched the Indonesian Sharia Stock Index (ISSI), its first index of sharia-compliant companies, primarily to attract greater investment from Middle East companies and investors. This was followed in 2017 by the IDX’s introduction the first online sharia stock trading platform. As of December 2019, the ISSI is composed of 429 stocks that are a part of IDX’s Jakarta Composite Index (JCI), with a total market cap of USD 267 billion.

Government treasury bonds are the most liquid bonds offered by Indonesia. Corporate bonds are less liquid due to less public knowledge of the product. The government also issues sukuk (Islamic treasury notes) treasury bills as part of its effort to diversify Islamic debt instruments and increase their liquidity. Indonesia’s sovereign debt as of December 2019 was rated as BBB- by Standard and Poor, BBB by Fitch Ratings and Baa2 by Moody’s.

OJK began overseeing capital markets and non-banking institutions in 2013, replacing the Capital Market and Financial Institution Supervisory Board. In 2014, OJK also assumed BI’s supervisory role over commercial banks. Foreigners have access to the Indonesian capital markets and are a major source of portfolio investment (including 38.57 percent of government securities). Indonesia respects International Monetary Fund (IMF) Article VIII by refraining from restrictions on payments and transfers for current international transactions. Foreign ownership of Indonesian companies may be limited in certain industries or sectors, such as those outlined in the DNI.

Money and Banking System

Although there is some concern regarding the operations of the many small and medium sized family-owned banks, the banking system is generally considered sound, with banks enjoying some of the widest net interest margins in the region. As of August 2019, the 10 top banks had IDR 5,210 trillion (USD 372 billion) in total assets. Loans grew 6.08 percent in 2019 compared to 11.5 percent in2018. Gross non-performing loans in December 2019 remained at 2.53 percent from 2.4 percent the previous year. For 2020, the Financial Services Authority (OJK) project annual credit growth at 12-14 percent and deposit growth around 10-12 percent for Indonesia’s banking industry.

OJK Regulation No.56/03/2016 limits bank ownership to no more than 40 percent by any single shareholder, applicable to foreign and domestic shareholders. This does not apply to foreign bank branches in Indonesia. Foreign banks may establish branches if the foreign bank is ranked among the top 200 global banks by assets.  A special operating license is required from OJK in order to establish a foreign branch. The OJK granted an exception in 2015 for foreign banks buying two small banks and merging them. To establish a representative office, a foreign bank must be ranked in the top 300 global banks by assets. In 2017, HSBC, which previously registered as a foreign branch, changed its legal status to a Limited Liability Company and merged with a local bank subsidiary which it had purchased in 2008.

On March 16, OJK  issued OJK Regulation Number 12/POJK.03/2020 on commercial bank consolidation. The regulation aims to strengthen the structure, and competitiveness of the national banking industry by increasing bank capital and the encouraging consolidation of banks in Indonesia. This regulation generally consists of two main regulations concerning bank consolidation policies, as well as  increasing minimum core capital for commercial banks and increasing Capital Equivalency Maintained Assets for foreign banks with branch offices by least IDR 3 trillion, by December 31, 2022.

In 2015, OJK eased rules for foreigners to open a bank account in Indonesia. Foreigners can open a bank account with a balance between USD 2,000-50,000 with just their passport. For accounts greater than USD 50,000, foreigners must show a supporting document such as a reference letter from a bank in the foreigner’s country of origin, a local domicile address, a spousal identity document, copies of a contract for a local residence, and/or credit/debit statements.

Growing digitalization of banking services, spurred on by innovative payment technologies in the financial technology (fintech) sector, complements the conventional banking sector. Peer-to-peer (P2P) lending companies recorded a triple-digit increase in 2008 and e-payment services have grown more than six-fold since 2012. Indonesian policymakers are hopeful that these fintech services can reach underserved or unbanked populations and micro-, small-, and medium-sized enterprises (MSMEs), with estimates that in 2020, fintech lending will hit IDR 223 trillion (USD 13.61 billion) in loan disbursements.

Foreign Exchange and Remittances

Foreign Exchange

The rupiah (IDR), the local currency, is freely convertible. Currently, banks must report all foreign exchange transactions and foreign obligations to the central bank, Bank Indonesia (BI). With respect to the physical movement of currency, any person taking rupiah bank notes into or out of Indonesia in the amount of IDR 100 million (approximately USD 6,600) or more, or the equivalent in another currency, must report the amount to DGCE. The limit for any person or entity to bring foreign currency bank notes into or out of Indonesia is the equivalent of IDR 1 billion (USD 66,000).

Banks on their own behalf or for customers may conduct derivative transactions related to derivatives of foreign currency rates, interest rates, and/or a combination thereof. BI requires borrowers to conduct their foreign currency borrowing through domestic banks registered with BI. The regulations apply to borrowing in cash, non-revolving loan agreements, and debt securities.

Under the 2007 Investment Law, Indonesia gives assurance to investors relating to the transfer and repatriation of funds, in foreign currency, on:

  • capital, profit, interest, dividends and other income;
  • funds required for (i) purchasing raw material, intermediate goods or final goods, and (ii) replacing capital goods for continuation of business operations;
  • additional funds required for investment;
  • funds for debt payment;
  • royalties;
  • income of foreign individuals working on the investment;
  • earnings from the sale or liquidation of the invested company;
  • compensation for losses; and
  • compensation for expropriation.

U.S. firms report no difficulties in obtaining foreign exchange.

BI began in 2012 to require exporters to repatriate their export earnings through domestic banks within three months of the date of the export declaration form. Once repatriated, there are currently no restrictions on re-transferring export earnings abroad. Some companies report this requirement is not enforced.

In 2015, the government announced a regulation requiring the use of the rupiah in domestic transactions. While import and export transactions can still use foreign currency, importers’ transactions with their Indonesian distributors must now use rupiah, which has impacted some U.S. business operations. The central bank may grant a company permission to receive payment in foreign currency upon application, and where the company has invested in a strategic industry.

Remittance Policies

The government places no restrictions or time limitations on investment remittances. However, certain reporting requirements exist. Banks should adopt Know Your Customer (KYC) principles to carefully identify customers’ profile to match transactions. Carrying rupiah bank notes of more than IDR 100 million (approximately USD 6,600) in cash out of Indonesia requires prior approval from BI, as well as verifying the funds with Indonesian Customs upon arrival. Indonesia does not engage in currency manipulation.

As of 2015, Indonesia is no longer subject to the intergovernmental Financial Action Task Force (FATF) monitoring process under its on-going global Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) compliance process. It continues to work with the Asia/Pacific Group on Money Laundering (APG) to further strengthen its AML/CTF regime. In 2018, Indonesia was granted observer status by FATF, a necessary milestone toward becoming a full FATF member.

Sovereign Wealth Funds

As of mid-2020, Indonesia is still preparing to establish a sovereign wealth fund, despite macroeconomic and budgetary pressures from the pandemic response. When established, it is expected the fund will operate as a state-owned investment fund that will aim to attract foreign capital, including from foreign sovereign wealth funds, and invest that capital in long-term Indonesian assets. According to Indonesian government officials, the fund will consist of a master portfolio with sector-specific sub-funds, such as infrastructure, oil and gas, health, tourism, and digital technologies. The sovereign wealth fund will be authorized by the planned passage of the omnibus bill on job creation, which includes 14 articles to set up the fund and facilitate greater cooperation with foreign partners. This cooperation includes authorizing the fund to be set up in foreign jurisdictions and allowing foreigners as general partners of the fund.

In 2015, the Finance Ministry authorized one of those SOEs, PT Sarana Multi Infrastruktur (SMI) to manage the assets of the Pusat Investasi Pemerintah (PIP), or Government Investment Center (which had previously been seen as a potential sovereign wealth fund). Indonesia does not participate in the IMF’s Working Group on Sovereign Wealth Funds.

7. State-Owned Enterprises

Indonesia had 114 state-owned enterprises (SOEs) and 28 subsidiaries divided into 12 sectors as of December 2019, 10 of which contributed more than 85 percent of total SOE profit. Of the 114 SOEs, 17 are listed on the Indonesian stock exchange. In addition, 14 are special purpose entities under the SOE Ministry (BUMN), with one SOE, the Indonesian Infrastructure Guarantee Fund, under the Ministry of Finance. Since mid-2016, the Indonesian government has been publicizing plans to consolidate SOEs into six holding companies based on sector of operations. In November 2017, Indonesia announced the creation of a mining holding company, PT Inalum, the first of the six planned SOE-holding companies.

Since his appointment by President Jokowi in November 2019, Minister of SOEs Erick Thohir  has underscored the need to reform SOEs in line with President Jokowi’s second-term economic agenda. Thohir has noted the need to liquidate underperforming SOEs, ensure that SOEs improve their efficiency by focusing on core business operations, and introduce better corporate governance principles. Thohir has spoken publicly about his intent to push SOEs to undertake initial public offerings (IPOs) on the IDX.

Information regarding the SOEs can be found at the SOE Ministry website (http://www.bumn.go.id/ ) (Indonesian language only).

There are also an unknown number of SOEs owned by regional or local governments. SOEs are present in almost all sectors/industries including banking (finance), tourism (travel), agriculture, forestry, mining, construction, fishing, energy, and telecommunications (information and communications).

In the third quarter of 2019 (the most recent data available), SOEs have contributed USD 22 billion of tax payments, non-tax payments, and dividends to the Indonesian state. SOEs also contributed a profit of USD 131 billion, with total assets of 626 billion, liabilties of USD 429 billion, and equities of USD 196 billion.

Indonesia is not a party to the WTO’s Government Procurement Agreement. Private enterprises can compete with SOEs under the same terms and conditions with respect to access to markets, credit, and other business operations. However, in reality, many sectors report that SOEs receive strong preference for government projects. SOEs purchase some goods and services from private sector and foreign firms. SOEs publish an annual report and are audited by the Supreme Audit Agency (BPK), the Financial and Development Supervisory Agency (BPKP), and external and internal auditors.

Privatization Program

While some state-owned enterprises have offered shares on the stock market, Indonesia does not have an active privatization program.

8. Responsible Business Conduct

Indonesian businesses are required to undertake responsible business conduct (RBC) activities under Law 40/2007 concerning Limited Liability Companies. In addition, sectoral laws and regulations have further specific provisions on RBC. Indonesian companies tend to focus on corporate social responsibility (CSR) programs offering community and economic development, and educational projects and programs. This is at least in part caused by the fact that such projects are often required as part of the environmental impact permits (AMDAL) of resource extraction companies, which undergo a good deal of domestic and international scrutiny of their operations. Because a large proportion of resource extraction activity occurs in remote and rural areas where government services are reported to be limited or absent, these companies face very high community expectations to provide such services themselves. Despite significant investments – especially by large multinational firms – in CSR projects, businesses have noted that there is limited general awareness of those projects, even among government regulators and officials.

The government does not have an overarching strategy to encourage or enforce RBC, but regulates each area through the relevant laws (environment, labor, corruption, etc.). Some companies report that these laws  are not always enforced evenly. In 2017, the National Commission on Human Rights launched a National Action Plan on Business and Human Rights in Indonesia, based on the UN Guiding Principles on Business and Human Rights.

OJK regulates corporate governance issues, but the regulations and enforcement are not yet up to international standards for shareholder protection.

Indonesia does not adhere to the OECD Guidelines for Multinational Enterprises, and the government is not known to have encouraged adherence to those guidelines. Many companies claim that the government does not encourage adherence to the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas or any other supply chain management due diligence guidance. Indonesia does participate in the Extractive Industries Transparency Initiative (EITI). Indonesia was suspended by the EITI Board due to a missed deadline for its first EITI report, but the suspension was lifted following publication of its 2012-2013 EITI Report in 2015.

9. Corruption

President Jokowi was elected in 2014 on a strong good-governance platform. However, corruption remains a serious problem according to some U.S. companies. The Indonesian government has issued detailed directions on combating corruption in targeted ministries and agencies, and the 2018 release of the updated and streamlined National Anti-Corruption Strategy mandates corruption prevention efforts across the government in three focus areas (licenses, state finances, and law enforcement reform). The Corruption Eradication Commission (KPK) was established in 2002 as the lead government agency to investigate and prosecute corruption.  KPK is one of the most trusted and respected institutions in Indonesia. The KPK has taken steps to encourage companies to establish effective internal controls, ethics, and compliance programs to detect and prevent bribery of public officials. By law, the KPK is authorized to conduct investigations, file indictments, and prosecute corruption cases involving law enforcement officers, government executives, or other parties connected to corrupt acts committed by those entities; attracting the “attention and the dismay” of the general public; and/or involving a loss to the state of at least IDR 1 billion (approximately USD 66,000).  The government began prosecuting companies who engage in public corruption under new corporate criminal liability guidance issued in a 2016 Supreme Court regulation, with the first conviction of a corporate entity in January 2019.  Presidential decree No. 13/2018 issued in March 2018 clarifies the definition of beneficial ownership and outlines annual reporting requirements and sanctions for non-compliance.

Indonesia’s ranking in Transparency International’s Corruption Perceptions Index in 2019 improved to 85 out of 180 countries surveyed, compared to 89 out of 180 countries in 2018.  Indonesia’s score of public corruption in the country, according to Transparency International, improved to 40 in 2019 (scale of 0/very corrupt to 100/very clean).  At the beginning of President Jokowi’s term in 2014, Indonesia’s score was  34. Indonesia ranks 4th of the 10 ASEAN countries.

Nonetheless, according to certain reports, corruption remains pervasive despite laws to combat it. Some have noted that KPK leadership, along with the commission’s investigators and prosecutors, are sometimes harassed, intimidated, or attacked due to their anticorruption work. In early 2019, a Molotov cocktail and bomb components were placed outside the homes of two KPK commissioners, and in 2017 unidentified assailants committed an acid attack against a senior KPK investigator. Police have not identified the perpetrators of either attack. The Indonesian National Police and Attorney General’s Office also investigate and prosecute corruption cases; however, neither have the same organizational capacity or track-record of the KPK. Giving or accepting a bribe is a criminal act, with possible fines ranging from USD 3,850 to USD 77,000 and imprisonment up to a maximum of 20 years or life imprisonment, depending on the severity of the charge.

On September 2019, the Indonesia House of Representatives (DPR) passed Law No. 19/2019 on the Corruption Eradication Commission (KPK) which revised the KPK’s original charter. This revised law introduced several changes relating to the authority and supervision of the KPK, including KPK’s status as a state agency under the authority of the executive branch (it was previously an independent body outside of the judicial, legislative, or executive branches) and establishment of a Supervisory Council to oversee certain KPK activities.  The new law also changed the KPK’s status as a separate law enforcement authority and mandated the KPK to provide performance review reports to the President, the DPR RI, and the supervisory board.  Finally, the KPK’s previous independent authority to terminate corruption investigations and prosecutions, as well as authorize wiretaps, searches, arrests, and asset seizures, has now been transferred to the Supervisory Council.  Many observers view these changes as limiting KPK’s ability to pursue corruption investigations without political interference.

Indonesia ratified the UN Convention against Corruption in September 2006. Indonesia has not yet acceded to the OECD Anti-Bribery Convention, but attends meetings of the OECD Anti-Corruption Working Group. In 2014, Indonesia chaired the Open Government Partnership, a multilateral platform to promote transparency, empower citizens, fight corruption, and strengthen governance. Several civil society organizations function as vocal and competent corruption watchdogs, including Transparency International Indonesia and Indonesia Corruption Watch.

Resources to Report Corruption

Komisi Pemberantasan Korupsi (Anti-Corruption Commission)
Jln. Kuningan Persada Kav 4, Setiabudi
Jakarta Selatan 12950
Email: informasi@kpk.go.id

Indonesia Corruption Watch
Jl. Kalibata Timur IV/D No. 6 Jakarta Selatan 12740
Tel: +6221.7901885 or +6221.7994015
Email: info@antikorupsi.org

10. Political and Security Environment

As in other democracies, politically motivated demonstrations occasionally occur throughout Indonesia, but are not a major or ongoing concern for most foreign investors.

Since the large-scale Bali bombings in 2002 that killed over 200 people, Indonesian authorities have aggressively and successfully continued to pursue terrorist cells throughout the country, disrupting multiple aspirational plots. Despite these successes, violent extremist networks and terrorist cells remain intact and have the capacity to become operational and conduct attacks with little or no warning, as do lone wolf-style ISIS sympathizers.

According to the industry, foreign investors in Papua face certain unique challenges. Indonesian security forces occasionally conduct operations against the Free Papua Movement, a small armed separatist group that is most active in the central highlands region. Low-intensity communal, tribal, and political conflict also exists in Papua and has caused deaths and injuries. Anti-government protests have resulted in deaths and injuries, and violence has been committed against employees and contractors of a U.S. company there, including the death of a New Zealand citizen in an attack on March 30, 2020. Additionally, racially-motivated attacks against ethnic Papuans living in East Java province led to violence in Papua and West Papua in late 2019, including riots in Wamena, Papua that left dozens dead and thousands more displaced.

Travelers to Indonesia can visit the U.S. Department of State travel advisory website for the latest information and travel resources: https://travel.state.gov/content/travel/en/international-travel/International-Travel-Country-Information-Pages/Indonesia.html.

11. Labor Policies and Practices

Companies have reported that the Indonesian labor market faces a number of structural barriers, including skills shortages and lagging productivity, restrictions on the use of contract workers, and reduced gaps between minimum wages and average wages. Recent significant increases in the minimum wage for many provinces have made unskilled and semi-skilled labor more costly. In the bellwether Jakarta area, the minimum wage was raised again from IDR 3.6 million (USD 256.6) per month in 2018 to IDR 3.94 million (USD 260) per month in 2019. Unions staged largely peaceful protests across Indonesia in 2018 demanding the government increase the minimum wage, decrease the price for basic needs, and stop companies from outsourcing and employing foreign workers. Under the new wage setting policy adopted as part of the 2018 economic stimulus package, annual minimum wage increases will be indexed directly to inflation and GDP growth. Previously, minimum wage adjustments were subject to negotiations between local governments, industry, and unions, and the changes varied widely from year to year and from region to region.

As only about 7.6 percent of the workforce is unionized, the benefits of union advocacy (including increases in minimum wage) do not always filter down to the rest of the workforce. While restrictions on the use of contract workers remain in place, continued labor protests focusing on this issue suggest that government enforcement continues to be lax. Until the onset of the COVID-19 pandemic, unemployment has remained steady at 4.38 percent. Unemployment tends to be higher than the national average among young people.

Indonesian labor is relatively low-cost by world standards, but inadequate skills training and complicated labor laws combine to make Indonesia’s competitiveness lag behind other Asian competitors. Investors frequently cite high severance payments to dismissed employees, restrictions on outsourcing and contract workers, and limitations on expatriate workers as significant obstacles to new investment in Indonesia.

Employers also note that the skills provided by the education system is lower than that of neighboring countries, and successive Labor Ministers have listed improved vocational training as a top priority. Labor contracts are relatively straightforward to negotiate but are subject to renegotiation, despite the existence of written agreements. Local courts often side with citizens in labor disputes, contracts notwithstanding. On the other hand, some foreign investors view Indonesia’s labor regulatory framework, respect for freedom of association, and the right to unionize as an advantage to investing in the country. Expert local human resources advice is essential for U.S. companies doing business in Indonesia, even those only opening representative offices.

Minimum wages vary throughout the country as provincial governors set an annual minimum wage floor and district heads have the authority to set a higher rate. Indonesia’s highly fractured and historically weak labor movement has gained strength in recent years, evidenced by significant increases in the minimum wage. As noted above, recent changes to the minimum wage setting system may make the process less dependent on political factors and more aligned with actual changes in inflation and GDP growth. Labor unions are independent of the government. The law, with some restrictions, protects the rights of workers to join independent unions, conduct legal strikes, and bargain collectively. Indonesia has ratified all eight of the core ILO conventions underpinning internationally accepted labor norms. The Ministry of Manpower maintains an inspectorate to monitor labor norms, but enforcement is stronger in the formal than in the informal sector. A revised Social Security Law, which took effect in 2014, requires all formal sector workers to participate. Subject to a wage ceiling, employers must contribute an amount equal to 4 percent of workers’ salaries to this plan. In 2015, Indonesia established the Social Security Organizing Body of Employment (BPJS-Employment), a national agency to support workers in the event of work accident, death, retirement, or old age.

The government has proposed an omnibus bill on labor reforms intended to attract investors, boost economic growth and create jobs.  The bill covers foreign workers, wages, work hours, redundancy and social security.

A proposed revision to Indonesia’s 2003 labor law may establish more stringent restrictions on outsourcing, currently used by many firms to circumvent some formal-sector job benefits.

Additional information on child labor, trafficking in persons, and human rights in Indonesia can be found online through the following references:

12. U.S. International Development Finance Corporation (DFC) and Other Investment Insurance Programs

The U.S. International Development Finance Corporation (DFC) and its predecessor, the Overseas Private Investment Corporation (OPIC), have invested USD 2.35 billion across 116 projects in Indonesia since 1974, including in the power generation, financial services, and agricultural sectors. The DFC’s current portfolio is USD 123.8 million across five projects in Indonesia. The bulk of its exposure is in the DFC-financed UPC Renewables Sidrap Bayu wind power plant in South Sulawesi, where a USD 120 million investment supported the construction of Indonesia’s first commercial wind farm. The project demonstrates DFC’s commitment to help eliminate blackouts and diversify Indonesia’s energy supply. On March 12, 2020, DFC approved a USD 190 million loan to Trans Pacific Networks (TPN) to support the world’s longest telecommunications cable. The cable will directly connect Singapore, Indonesia, and the United States and have the capability to serve several markets in Southeast Asia and the Pacific.

Indonesia is one of the DFC’s priority markets and the DFC remains interested in projects in the transportation, energy, and digital economy sectors. In January 2020, DFC CEO Adam Boehler visited Indonesia as part of his first overseas visit since the DFC’s formal launch. His visit followed other senior visits by DFC officials to identify projects for DFC support, including the first-ever, DFC-led, U.S.-Australia-Japan trilateral infrastructure business development mission in August 2019.

Indonesia has joined the Multilateral Investment Guarantee Agency (MIGA). MIGA, a part of the World Bank Group, is an investment guarantee agency to insure investors and lenders against losses relating to currency transfer restrictions, expropriation, war and civil disturbance, and breach of contract. In 2018, MIGA provided a guarantee loan to Indonesian state-owned financial institutions and financed a hydroelectric power plant.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data:  BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount  
Host Country Gross Domestic Product (GDP) ($M USD) 2019 $1,118 2018 $1,042 https://data.worldbank.org/
country/Indonesia

*Indonesia Statistic Agency, GDP from the host country website is converted into USD with the exchange rate 14,156 for 2019

Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2019 $989.3 2018 $11,140 https://www.bea.gov/
international/di1usdbal
 
Host country’s FDI in the United States ($M USD, stock positions) N/A N/A 2018 $350 https://www.bea.gov/
international/di1fdibal
 
Total inbound stock of FDI as % host GDP 2019 2.5% 2018 22.1% https://unctad.org/en/Pages/DIAE/
World%20Investment%20Report/
Country-Fact-Sheets.aspx
 

*Indonesia Investment Coordinating Board (BKPM), January 2020

There is a discrepancy between U.S. FDI recorded by BKPM and BEA due to differing methodologies. While BEA recorded transactions in balance of payments, BKPM relies on company realization reports. BKPM also excludes investments in oil and gas, non-bank financial institutions, and insurance.

Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment 2018 Outward Direct Investment 2018
Total Inward 224,717 100% Total Outward 72,995 100%
Singapore 55,067 24.5% Singapore 29,823 40.8%
Netherlands 36,990 16.5% China (PR Mainland) 16,971 23.2%
United States 27,271 12.1% France 15,225 20.8%
Japan 23,930 10.6% Cayman Islands 3,399 4.6%
China (PR Hong Kong) 12,735 5.7% China (PR Hong Kong) 711 1%
“0” reflects amounts rounded to +/- USD 500,000.

Source:  IMF Coordinated Direct Investment Survey for inward and outward investment data.

Table 4: Sources of Portfolio Investment
Portfolio Investment Assets 2018
Top Five Partners (Millions, US Dollars)
Total Equity Securities Total Debt Securities
All Countries 22,094 100% All Countries 7,180 100% All Countries 14,914 100%
Netherlands 7,036 31.8% United States 2,760 38.4% Netherlands 7,032 47.1%
United States 3,669 16.6% India 1,847 25.7% Luxembourg 1,962 13.1%
Luxembourg 1,963 8.9% China (PR Mainland) 933 13.0% United States 909 6.1%
India 1,857 8.4% China (PR Hong Kong) 644 9.0% Singapore 641 4.3%
China (Mainland) 1,086 4.9% Australia 426 5.9% China (Mainland) 553 3.7%

Source: IMF Coordinated Portfolio Investment Survey, 2018. Sources of portfolio investment are not tax havens.
The Bank of Indonesia published comparable data.

14. Contact for More Information

Reggie Singh
Economic Section
U.S. Embassy Jakarta
+62-21-50831000
BusinessIndonesia@state.gov

Malaysia

Executive Summary

Since an unexpected political transition in March, Malaysia’s new government under Prime Minister Muhyiddin Yassin has focused its attention on the unprecedented set of challenges facing Malaysia in 2020, including the COVID-19 pandemic and a sharp drop in global oil prices.  In response to the economic damage wrought by COVID-19 restrictions, the Malaysian government has approved over USD 60 billion in stimulus measures designed to protect Malaysian citizens and businesses, and has laid out plans to prioritize the country’s economic recovery following the lockdown period for the remainder of 2020 and into 2021.

The Malaysian government has traditionally encouraged foreign direct investment (FDI), and the Prime Minister and many cabinet ministers have signaled their openness to foreign investment since taking office.  Government officials have called for investments in high technology and research and development, focusing on artificial intelligence, Internet of Things device design and manufacturing, smart cities, electric vehicles, automation of the manufacturing industry, telecommunications infrastructure, and other “catalytic sub-sectors,” such as aerospace.  The government also seeks to further develop traditional sectors such as oil and gas; palm oil and rubber; wholesale and retail operations, including e-commerce; financial services; tourism; electrical and electronics (E&E); business services; communications content and infrastructure; education; agriculture; and health care.

Under the previous administration, inbound FDI had been steady in nominal terms, though Malaysia’s performance in attracting FDI relative to both earlier decades and the rest of the Association of Southeast Asian Nations (ASEAN) had slowed.  According to the 2013 Organization for Economic Cooperation and Development (OECD) Investment Policy Review of Malaysia, FDI to Malaysia began to decline in 1992, and private investment overall started to slide in 1997 following the Asian financial crises.  In the intervening years, domestic demand has increasingly been the source of Malaysia’s economic performance, with foreign investment receding as a driver of GDP growth.  The OECD concluded in its Review that Malaysia’s FDI levels in recent years had reached record high levels in absolute terms but were at low levels as a percentage of GDP.  The current government estimates that GDP will shrink 0.5 percent in 2020.

The business climate in Malaysia is generally conducive to U.S. investment.  Increased transparency and structural reforms that will prevent future corrupt practices could make Malaysia a more attractive destination for FDI in the long run.  The largest U.S. investments are in the oil and gas sector, manufacturing, and financial services.  Firms with significant investment in Malaysia’s oil and gas and petrochemical sectors include ExxonMobil, Caltex, ConocoPhillips, Hess Oil, Halliburton, Dow Chemical and Eastman Chemicals.  Major semiconductor manufacturers, including ON Semiconductor, Texas Instruments, Intel, and others have substantial operations in Malaysia, as do electronics manufacturers Western Digital, Honeywell, St. Jude Medical Operations (medical devices), and Motorola.  In recent years Malaysia has attracted significant investment in the production of solar panels, including from U.S. firms.  Many of the major Japanese consumer electronics firms (Sony, Fuji, Panasonic, Matsushita, etc.) have facilities in Malaysia.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 51 of 183 http://www.transparency.org/
research/cpi/overview
World Bank’s Doing Business Report 2019 12 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2019 35 of 129 https://www.globalinnovationindex.org/
analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2018 $13,581 https://www.bea.gov/system/
files/2019-07/fdici0719.pdf
World Bank GNI per capita 2018 $10,591 http://data.worldbank.org/
indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Historically, the Malaysian government has welcomed FDI as an integral component of its economic development. Over the last decade, the gradual liberalization of the economy and influx of FDI has led to the creation of new jobs and businesses and fueled Malaysia’s export-oriented growth strategy.  The Malaysian economy is highly dependent on trade.  According to World Bank data, the value of Malaysia’s imports and exports of goods and services as a share of GDP held steady at roughly 130 percent in 2018, more than double the global average.

In October 2019, the government introduced measures in its 2020 budget designed to streamline and further incentivize foreign investment, with special emphasis on investments being redirected from China as a result of shifting global supply chains.  The Malaysian government established the China Special Channel for the purpose of attracting these investments, an initiative being managed by InvestKL, an investment promotion agency under the Ministry of International Trade and Industry.  The government also established the National Committee on Investment, an investment approval body jointly chaired by the Minister of Finance and the Minister of International Trade and Industry, to expedite the regulatory process with respect to approving new investments.

Prior to the government transition in March, the previous government had announced plans to overhaul its existing incentive framework, including a revamp of the Promotion of Investments

Act of 1986 and incentives under the Income Tax Act of 1967.  It is unclear whether the new government will continue with this plan.

Malaysia has various national, regional, and municipal investment promotion agencies, including the Malaysian Investment Development Authority (MIDA) and InvestKL.  These agencies can assist with business strategy consultations, area familiarization, talent management programs, networking, and other post-investment services.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign and domestic private entities can establish and own business enterprises and engage in all forms of remunerative activity, with some exceptions.  Although Malaysia has taken steps to liberalize policies concerning foreign investment, there continue to exist requirements for local equity participation within specific sectors.  In 2009, Malaysia repealed Foreign Investment Committee (FIC) guidelines that limited transactions for acquisitions of interests, mergers, and takeovers of local companies by foreign parties.  However, certain business sectors, including logistics, industrial training, and distributive trade, are required to limit foreign equity participation when applying for operating licenses, permits and approvals.  Due to residual economic policies, this limitation most commonly manifests as a 70-30 equity split between foreign investors (maximum 70 percent) and Bumiputera (i.e., ethnic Malays and indigenous peoples) entities (minimum 30 percent).

Foreign investment in services, whether in sectors with no foreign equity caps or controlled sub-sectors, remain subject to review and approval by ministries and agencies with jurisdiction over the relevant sectors.  A key function of this review and approval process is to determine whether proposed investments meet the government’s qualifications for the various incentives in place to promote economic development goals.  The Ministerial Functions Act grants relevant ministries broad discretionary powers over the approval of investment projects.  Investors in industries targeted by the Malaysian government can often negotiate favorable terms with the ministries or agencies responsible for regulating that industry.  This can include assistance in navigating a complex web of regulations and policies, some of which can be waived on a case-by-case basis.  Foreign investors in non-targeted industries tend to receive less government assistance in obtaining the necessary approvals from various regulatory bodies and therefore can face greater bureaucratic obstacles.

Finance

Malaysia’s 2011-2020 Financial Sector Blueprint has produced partial liberalization within the financial services sector; however, it does not contain specific market-opening commitments or timelines.  For example, the services liberalization program that started in 2009 raised the limit of foreign ownership in insurance companies to 70 percent.  However, Bank Negara Malaysia, Malaysia’s central bank, would allow a greater foreign ownership stake if the investment is determined to facilitate the consolidation of the industry.  The latest Blueprint helped to codify the case-by-case approach.  Under the Financial Services Act passed in late 2012, issuance of new licenses will be guided by prudential criteria and the “best interests of Malaysia,” which may include consideration of the financial strength, business record, experience, character and integrity of the prospective foreign investor, soundness and feasibility of the business plan for the institution in Malaysia, transparency and complexity of the group structure, and the extent of supervision of the foreign investor in its home country.  In determining the “best interests of Malaysia,” BNM may consider the contribution of the investment in promoting new high value-added economic activities, addressing demand for financial services where there are gaps, enhancing trade and investment linkages, and providing high-skilled employment opportunities.  BNM, however, has never defined criteria for the “best interests of Malaysia” test, and no firms have qualified.

While there has been no policy change in terms of the 70 percent foreign ownership cap for insurance companies, the government did agree to let one foreign owned insurer maintain a 100 percent equity stake after that firm made a contribution to a health insurance scheme aimed at providing health coverage to lower income Malaysians.

BNM currently allows foreign banks to open four additional branches throughout Malaysia, subject to restrictions, which include designating where the branches can be set up (i.e., in market centers, semi-urban areas and non-urban areas).  The policies do not allow foreign banks to set up new branches within 1.5 km of an existing local bank.  BNM also has conditioned foreign banks’ ability to offer certain services on commitments to undertake certain back office activities in Malaysia.

Information & Communication

In 2012, Malaysia authorized up to 100 percent foreign equity participation among application service providers, network service providers, and network facilities providers.  An exception to this is national telecommunications firm Telekom Malaysia, which has an aggregate foreign share cap of 30 percent, or five percent for individual investors.

Manufacturing Industries

Malaysia permits up to 100 percent foreign equity participation for new manufacturing investments by licensed manufacturers.  However, foreign companies can face difficulties obtaining a manufacturing license and often resort to incorporating a local subsidiary for this purpose.

Oil and Gas

Under the terms of the Petroleum Development Act of 1974, the upstream oil and gas industry is controlled by Petroleum Nasional Berhad (PETRONAS), a wholly state-owned company and the sole entity with legal title to Malaysian crude oil and gas deposits.  Foreign participation tends to take the form of production sharing contracts (PSCs).  PETRONAS regularly requires its PSC partners to work with Malaysian firms for many tenders.  Non-Malaysian firms are permitted to participate in oil services in partnership with local firms and are restricted to a 49 percent equity stake if the foreign party is the principal shareholder.  PETRONAS sets the terms of upstream projects with foreign participation on a case-by-case basis.

Other Investment Policy Reviews

Malaysia’s most recent Organization for Economic Cooperation and Development (OECD) investment review occurred in 2013.  Although the review underscored the generally positive direction of economic reforms and efforts at liberalization, the recommendations emphasized the need for greater service sector liberalization, stronger intellectual property protections, enhanced guidance and support from Malaysia’s Investment Development Authority (MIDA), and continued corporate governance reforms.

Malaysia also conducted a WTO Trade Policy Review in February 2018, which incorporated a general overview of the country’s investment policies.  The WTO’s review noted the Malaysian government’s action to institute incentives to encourage investment as well as a number of agencies to guide prospective investors.  Beyond attracting investment, Malaysia had made measurable progress on reforms to facilitate increased commercial activity. Among the new trade and investment-related laws that entered into force during the review period were: the Companies Act, which introduced provisions to simplify the procedures to start a company, to reduce the cost of doing business, as well as to reform corporate insolvency mechanisms; the introduction of the goods and services tax (GST) to replace the sales tax; the Malaysian Aviation Commission Act, pursuant to which the Malaysian Aviation Commission was established; and various amendments to the Food Regulations.  Since the WTO Trade Policy Review, however, the new government has already eliminated the GST, and has revived the Sales and Services Tax, which was implemented on September 1, 2018.

http://www.oecd.org/investment/countryreviews.htm 

https://www.wto.org/english/tratop_e/tpr_e/tp466_e.htm 

Business Facilitation

The principal law governing foreign investors’ entry and practice in the Malaysian economy is the Companies Act of 2016 (CA), which entered into force on January 31, 2017 and replaced the Companies Act of 1965.  Incorporation requirements under the new CA have been further simplified and are the same for domestic and foreign sole proprietorships, partnerships, as well as privately held and publicly traded corporations. According to the World Bank’s Doing Business Report 2019, Malaysia streamlined the process of obtaining a building permit and made it faster to obtain construction permits; eliminated the site visit requirement for new commercial electricity connections, making getting electricity easier for businesses; implemented an online single window platform to carry out property searches and simplified the property transfer process; and introduced electronic forms and enhanced risk-based inspection system for cross-border trade and improved the infrastructure and port operation system at Port Klang, the largest port in Malaysia, thereby facilitating international trade; and made resolving insolvency easier by introducing the reorganization procedure.  These changes led to a significant improvement of Malaysia’s ranking per the Doing Business Report, from 24 to 15 in one year.

In addition to registering with the Companies Commission of Malaysia, business entities must file: 1) Memorandum and Articles of Association (i.e., company charter); 2) a Declaration of Compliance (i.e., compliance with provisions of the Companies Act); and 3) a Statutory Declaration (i.e., no bankruptcies, no convictions).  The registration and business establishment process takes two weeks to complete, on average. The new government repealed GST and installed a new sales and services tax (SST), which began implementation on September 1, 2018.

Beyond these requirements, foreign investors must obtain licenses.  Under the Industrial Coordination Act of 1975, an investor seeking to engage in manufacturing will need a license if the business claims capital of RM2.5 million (approximately USD 641,000) or employs at least 75 full-time staff.  The Malaysian Government’s guidelines for approving manufacturing investments, and by extension, manufacturing licenses, are generally based on capital-to-employee ratios. Projects below a threshold of RM55,000 (approximately USD 14,100) of capital per employee are deemed labor-intensive and will generally not qualify.  Manufacturing investors seeking to expand or diversify their operations need to apply through MIDA.

Manufacturing investors whose companies have annual revenue below RM50 million (approximately USD12.8 million) or with fewer than 200 full-time employees meet the definition of small and medium size enterprises (SMEs) and will generally be eligible for government SME incentives.  Companies in the services or other sectors that have revenue below RM20 million (approximately USD5.1 million) or fewer than 75 full-time employees also meet the SME definition.

[Reference]

Outward Investment

While the Malaysian government does not promote or incentivize outward investment, a number of Government-Linked companies, pension funds, and investment companies do have investments overseas.  These companies include the sovereign wealth fund of the Government of Malaysia, Khazanah Nasional Berhad; KWAP, Malaysia’s largest public services pension fund; and the Employees’ Provident Fund of Malaysia.  Government owned oil and gas firm Petronas also has investments in several regions outside Asia.

2. Bilateral Investment Agreements and Taxation Treaties

As a member of ASEAN, Malaysia is a party to trade agreements with Australia and New Zealand; China; India; Japan; and the Republic of Korea. During the review period, the ASEAN-India Agreement was expanded to cover trade in services. Malaysia also has bilateral FTAs with Australia; Chile; India; Japan; New Zealand; Pakistan; and Turkey.

Reference: https://www.wto.org/english/tratop_e/tpr_e/s366_sum_e.pdf 

Malaysia has bilateral investment treaties with 36 countries, but not yet with the United States.  Malaysia does have bilateral “investment guarantee agreements” with over 70 economies, including the United States. The Government reports that 65 of Malaysia’s existing investment agreements contain Investor State Dispute Settlement (ISDS) provisions.  Malaysia has double taxation treaties with over 70 countries, though the double taxation agreement with the U.S. currently is limited to air and sea transportation.

3. Legal Regime

Transparency of the Regulatory System

In July 2013, the Malaysian government accelerated its efforts to modernize the regulatory processes in the country by releasing the National Policy on Development and Implementation of Regulations (NPDIR), a roadmap to achieving Good Regulatory Practice (GRP).  Under the NPDIR, the federal government formalized a comprehensive approach to improve the efficiency and transparency of the country’s regulatory framework.  The benefits to the private sector thus far have included a streamlining of project approval requirements and fees (to the point that Malaysia ranked 2nd in the World Bank’s 2020 Doing Business report on ease of “dealing with construction permits”), a greater role in the lawmaking process, and improved standardization and transparency in all phases of regulatory proceedings.  The main components of the policy are: 1) the requirement of a Regulatory Impact Assessment (RIA) (a cost-benefit analysis of all newly proposed regulations) with each new piece of regulation; and 2) the formalization of a public consultation process to take the views of stakeholders into account while formulating new legislation.  Under the NPDIR, the government has committed to reviewing all new regulations every five years to determine which ones need to be adjusted or eliminated.

In furtherance of the NPDIR, the Malaysian government published four circulars in 2013 and 2014 to explain the methodology and implementation of their new strategy.  These four documents laid out a clear framework toward increasing accountability, standardization, and transparency, as well as explaining enforcement and compliance mechanisms to be established.  Throughout its various agencies, the government of Malaysia has taken steps to actualize these circulars.  Ministries and agencies use their respective websites to publish the text and or summaries of proposed regulations prior to enactment, albeit with varying levels of consistency.  Further, Malaysia’s procurement principles include adherence to open and fair competition, public accountability, transparency, and value for money.

Despite these efforts to foster inclusion, fairness, and transparency, considerable room for improvement exists.  The Malaysian government’s 2018 Report on Modernization (sic) of Regulations emphasized the need to “Establish an accountability mechanism for the implementation of regulatory reviews by the government.”  Many foreign investors echo this lack of accountability and criticize the opacity in the government decision-making process.  One major area of concern for foreign investors remains government procurement policy, as non-Malaysian companies claim to have lost bids against Bumiputera-owned (ethnic Malay) companies despite offering better products at lower costs.  Such results are due to the government’s preference policy to facilitate greater Bumiputera participation in the private sector.  This preference policy is manifested through set-aside contracts for Bumiputera suppliers and contractors, and through the use of preferential price margins to increase the competitiveness of Bumiputera bidders.

Malaysia has a three-tiered system of legislation: federal-level (Parliament), State-level, and local-level.   Federal and state-level legislation derive their authority from the Malaysian Constitution, specifically Articles 73-79.  Parliament has the exclusive power to make laws over matters including trade, commerce and industry, and financial matters.  Parliament can delegate its authority to administrative agencies, states, and local bodies through Acts.  States have the power to make laws concerning land, local government, and Islamic courts.  Local legislative bodies derive their authority from Acts promulgated by Parliament, most notably the Local Government Act of 1976.  Local authorities have the ability to issue by-laws concerning local taxation and land use.  For foreign investors, the Parliament is the most relevant legislating body, as it governs issues related to trade, and because Article 75 of the Constitution states that in a conflict of laws between state and federal-level legislatures, the federal laws win out.

It is also important to note the role of the administrative state in the promulgation of new laws and regulations in Malaysia.  Pursuant to the Interpretation Act of 1948 and 1967,

“Any proclamation, rule, regulation, order, notification, bye-law, or other instrument made under any Act, Enactment, Ordinance or other lawful authority and having legislative effect.”  Thus, the various ministries and agencies can be delegated lawmaking authority by an Act of a legislature with the legal right to make laws.

The Malaysian government’s strides toward improving transparency are evident in its embrace of internationally accepted standards in various highly regulated fields, including auditing, accounting, and law.  In that vein, the Malaysian Accounting Standards Board (MASB) introduced the Malaysian Financial Reporting Standards (MFRS) framework, which came into effect on January 1, 2012.  The MFRS framework is fully compliant with the International Financial Reporting Standards (IFRS) framework; this compliance serves to enhance the credibility and transparency of financial reporting in Malaysia.  According to the World Economic Forum’s 2019 Global Competitiveness Report (the “WEF 2019 Report”), Malaysia ranks 29th out of 141 countries in terms of its strength of auditing and accounting standards.

Specifically regarding auditing, the Malaysian Institute of Accountants (MIA) has the authority to set standards.  The MIA’s Auditing and Assurance Standards Board (AASB) reviews standards and technical pronouncements issued by the International Auditing and Assurance Standards Board (IAASB), which sets International Standards on Auditing (ISAs) that have been adopted in more than 110 jurisdictions.

Publicly listed companies in Malaysia must comply with standard international reporting requirements.  The IFRS framework converged with the Malaysian auditing framework in 2012, compelling compliance by Malaysian publicly listed companies.  The IFRS framework has obtained force of law through Section 7 of the Financial Reporting Act (FRA) of 1997, which allows the MASB to issue approved accounting standards for application in Malaysia.  The FRA requires that financial statements prepared or lodged with the Central Bank, Securities Commission, or Registrar of Companies are required to comply with the standards issued by MASB.  Thus, the MASB’s adoption of the IFRS framework is legally binding.

In theory, pieces of legislation are to be made available for public comment through a multi-stage system of rulemaking.  The Malaysia Productivity Corporation (MPC) published the Guideline on Public Consultation Procedures in 2014 (the “Guideline”), which expanded upon information contained in the Best Practice Regulation Handbook of 2013 in furtherance of GRP.  The Guideline clarifies the roles of government and stakeholders in the consultation process and provides the guiding principles for Malaysia’s public consultation approach.  Additionally, the Guideline provides robust examples of the information that should be included in consultation papers, furnishes information on enforcement, and details the timeline of the consultation process.  As it pertains to foreign investment, the consultation procedures apply to investment laws and regulations, which usually fall under the purview of the Malaysian Securities Commission (SC), the Bursa Malaysia, or the Malaysian Central Bank.  The SC, for example, keeps public consultation papers on its website, easily accessible by stakeholders.  These papers generally contain the rationale for the proposed regulations, as well as potential impacts, and provide a list of questions for stakeholders to explain their views to regulators.

The public is also engaged in the public consultation process through the increased role of PEMUDAH (the Special Task Force to Facilitate Business), which was founded in 2007 to serve as a bridge between government, businesses, and civil society organizations.  PEMUDAH promotes the understanding of regulatory requirements that impact economic activities, by addressing unfair treatment resulting from inconsistencies in enforcement and implementation.  PEMUDAH plays an advocacy role in various points in the regulatory implementation process; it provides recommendations from the private sector to regulators before new regulations are implemented, and monitors enactment of existing pieces of regulation.

Despite the relative robustness of the Guideline, and despite the significant steps forward Malaysia has taken to reduce the regulatory burden on industry, obstacles remain.  There are frequent inconsistencies between different ministries in their implementation of the public consultation procedures, as well as in their respective interpretations of how regulations are to be applied.  Adding to the difficulty is the complicated relationship between state-level and federal-level legislation, which can overlap on a range of issues and lead to inefficiencies for investors.

There is a non-governmental website that publishes Malaysian bills and amendments from 2013 onward: https://www.cljlaw.com/?page=latestmybill&year=2019.  The site publishes the full text of the documents.  However, to the best of our knowledge, no such government-run clearinghouse of historical regulatory action exists.  However, Malaysia took a large step forward on this front in 2019, as in association with the World Bank, the MPC created a website that contains all ongoing pieces of legislation and allows public comment thereon.  The website, called the Uniform Public Consultation Portal (http://upc.mpc.gov.my/csp/sys/bi/%25cspapp.bi.index.cls?home=1), does not appear to contain legislation that was completed or implemented before 2019, but is a positive move toward standardizing and emphasizing the public consultation process.  The website is user-friendly and allows searching by due date, implementing agency, and phase of consultation.

Malaysia has a multi-faceted approach to ensuring governmental compliance with regulatory requirements.  The most important enforcement mechanism is access to judicial review.  The WEF 2019 Report lists Malaysia as the 12th ranked country in efficiency of the legal framework in challenging regulations.  Through ease in accessing administrative and judicial courts, aggrieved parties in Malaysia are able to compel action by the regulator.  Additionally, PEMUDAH (the Malaysian government’s Special Task Force to Facilitate Business) serves as an advocacy role during the various phases of the consultation process to ensure that the private sector’s voice is being heard.

Throughout the administrative state, various avenues exist through which aggrieved parties may seek recourse.  Different governmental organisms have their own enforcement mechanisms to handle specific issues they face.  For instance, the Central Bank has a dedicated “Complaints Unit,” which deals with consumer complaints against banking institutions.  The Bank lists enforcement options as “a public or private reprimand; an order to comply; an administrative and civic penalty; restitution to customer; or prosecution.  By contrast, the Inland Revenue Board of Malaysia (tax agency) has a an organism called the Special Commissioners of Income Tax, to which taxpayers may file appeals concerning judgments and new regulations.  The Malaysian Companies Commission (which regulates laws relating to companies registered in Malaysia) is also engaged in enforcement proceedings, as is the Malaysian Securities Commission.  On matters of procurement, aggrieved bidders may complain to the Public Complaints Bureau, the Malaysian Anti-Corruption Commission, the Malaysian Competition Commission, or the National Audit Department.

In addition to the various agency-led enforcement mechanisms, aggrieved parties may also go through administrative courts.  The rulings of these courts have force of law pursuant to various Acts of Parliament, and Malaysia has taken measures to increase their efficacy in order to improve its reputation as an international business hub.  The decisions of these administrative courts are subject to judicial review on grounds of illegality, irrationality, and procedural impropriety.

Reference:

International Regulatory Considerations

Malaysia is one of 10 Member States that constitute the Association of Southeast Asian Nations (ASEAN).  On December 31, 2015, the ASEAN Economic Community formally came into existence. ASEAN’s economic policy leaders meet regularly to discuss promoting greater economic integration within the 10-country bloc.  Although already robust, Member States have prioritized steps to facilitate a greater flow of goods, services, and capital.  No regional regulatory system is in place.  As a member of the WTO, Malaysia provides notification of all draft technical regulations to the Committee on Technical Barriers to Trade.

Legal System and Judicial Independence

Malaysia’s legal system consists of written laws, such as the federal and state constitutions and laws passed by Parliament and state legislatures, and unwritten laws derived from court cases and local customs. The Contract Law of 1950 still guides the enforcement of contracts and resolution of disputes.  States generally control property laws for residences, although the Malaysian government has recently adopted measures, including high capital gains taxes, to prevent the real estate market from overheating.  Nevertheless, through such programs as the Multimedia Super Corridor, Free Commercial Zones, and Free Industrial Zones, the federal government has substantial reach into a range of geographic areas as a means of encouraging foreign investment and facilitating ownership of commercial and industrial property.

In 2007 the judiciary introduced dedicated intellectual property (IP) courts that consist of 15 “Sessions Courts” that sit in each state, and six ‘High Courts’ that sit in certain states (i.e. Kuala Lumpur, Johor, Perak, Selangor, Sabah and Sarawak).  Malaysia launched the IP courts to deter the use of IP-infringing activity to fund criminal activity and to demonstrate a commitment to IP development in support of the country’s goal to achieve high-income status. These lower courts hear criminal cases, and have the jurisdiction to impose fines for IP infringing acts.  There is no limit to the fines that they can impose. The higher courts are designated for civil cases to provide damages incurred by rights holders once the damages have been quantified post-trial. High courts have the authority to issue injunctions (i.e., to order an immediate cessation of infringing activity) and to award monetary damages.

Labor Courts, which the Ministry of Human Resources describes as “a quasi-judicial system that serves as an alternative to civil claims,” provide a means for workers to seek payment of wages and other financial benefits in arrears.  Proceedings are generally informal but conducted in accordance with civil court principles. The High Court has upheld decisions which Labor Courts have rendered.

Certain foreign judgments are enforceable in Malaysia by virtue of the Reciprocal Enforcement of Judgments Act 1958 (REJA).  However, before a foreign judgment can be enforceable, it has to be registered. The registration of foreign judgments is only possible if the judgment was given by a Superior Court from a country listed in the First Schedule of the REJA: the United Kingdom, Hong Kong Special Administrative Region of the People’s Republic of China, Singapore, New Zealand, Republic of Sri Lanka, India, and Brunei.  If the judgment is not from a country listed in the First Schedule to the REJA, the only method of enforcement at common law is by securing a Malaysian judgment. This involves suing on the judgment in the local Courts as an action in debt.

To register a foreign judgment under the REJA, the judgment creditor has to apply for the same within six years after the date of the foreign judgment. Any foreign judgment coming under the REJA shall be registered unless it has been wholly satisfied, or it could not be enforced by execution in the country of the original Court.

Post is not aware of instances in which political figures or government authorities have interfered in judiciary proceedings involving commercial matters.

Laws and Regulations on Foreign Direct Investment

The Government of Malaysia established the Malaysia Investment Development Authority (MIDA) to attract foreign investment and to serve as a focal point for legal and regulatory questions.  Organized as part of the Ministry of International Trade and Industry (MITI), MIDA serves as a guide to foreign investors interested in the manufacturing sector and in many services sectors.  Regional bodies providing support to investors include: Invest Kuala Lumpur, Invest Penang, Invest Selangor, the Sabah Economic Development and Investment Authority (SEDIA), and the Sarawak Economic Development Corporation, among others.

As noted, the Ministerial Functions Act authorizes government ministries to oversee investments under their jurisdiction.  Prospective investors in the services sector will need to follow requirements set by the relevant Malaysian Government ministry or agency over the sector in question.

Competition and Anti-Trust Laws

On April 21, 2010, the Parliament of Malaysia approved two bills, the Competition Commission Act 2010 and the Competition Act 2010.  The Acts took effect January 1, 2012. The Competition Act prohibits cartels and abuses of a dominant market position but does not create any pre-transaction review of mergers or acquisitions.  Violations are punishable by fines, as well as imprisonment for individual violations. Malaysia’s Competition Commission has responsibility for determining whether a company’s “conduct” constitutes an abuse of dominant market position or otherwise distorts or restricts competition.  As a matter of law, the Competition Commission does not have separate standards for foreign and domestic companies. Commission membership consists of senior officials from the Ministry of International Trade and Industry (MITI), the Ministry of Domestic Trade, Cooperatives, and Consumerism (MDTCC), the Ministry of Finance, and, on a rotating basis, representatives from academia and the private sector.

In addition to the Competition Commission, the Acts established a Competition Appeals Tribunal (CAT) to hear all appeals of Commission decisions.  In the largest case to date, the Commission imposed a fine of RM10 million on Malaysia Airlines and Air Asia in September 2013 for colluding to divide shares of the air transport services market.  The airlines filed an appeal in March 2014. In February 2016, the CAT ruled in favor of the airlines in its first-ever decision and ordered the penalty to be set aside and refunded to both airlines.

Expropriation and Compensation

The Embassy is not aware of any cases of uncompensated expropriation of U.S.-held assets, or confiscatory tax collection practices, by the Malaysian government. The government’s stated policy is that all investors, both foreign and domestic, are entitled to fair compensation in the event that their private property is required for public purposes. Should the investor and the government disagree on the amount of compensation, the issue is then referred to the Malaysian judicial system.

Dispute Settlement

ICSID Convention and New York Convention

Malaysia signed the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID) on October 22, 1965, coming into force on October 14, 1966.  In addition, it is a contracting state of the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards since November 5, 1985.

Malaysia adopted the following measures to make the two conventions effective in its territory:

The Convention on the Settlement of Investment Disputes Act, 1966. (Act of Parliament 14 of 1966); the Notification on entry into force of the Convention on the Settlement of Investment Disputes Act, 1966. (Notification No. 96 of March 10, 1966); and the Arbitration (Amendment) Act, 1980. (Act A 478 of 1980).

Although the domestic legal system is accessible to foreign investors, filing a case generally requires any non-Malaysian citizen to make a large deposit before pursuing a case in the Malaysian courts.  Post is unaware of any U.S. investors’ recent complaints of political interference in any judicial proceedings.

References:

Investor-State Dispute Settlement

Malaysia’s investment agreements contain provisions allowing for international arbitration of investment disputes.  Malaysia does not have a Bilateral Investment Treaty with the United States.

Post has little data concerning the Malaysian Government’s general handling of investment disputes.  In 2004, a U.S. investor filed a case against the directors of the firm, who constituted the majority shareholders.  The case involves allegations by the U.S. investor of embezzlement by the other directors, and its resolution is unknown.

The Malaysian government has been involved in three ICSID cases — in 1994, 1999, and 2005.  The first case was settled out of court. The second, filed under the Malaysia-Belgo-Luxembourg Investment Guarantee Agreement (IGA), was concluded in 2000 in Malaysia’s favor.  The 2005 case, filed under the Malaysia-UK Bilateral Investment Treaty, was concluded in 2007 in favor of the investor. However, the judgment against Malaysia was ultimately dismissed on jurisdictional grounds, namely that ICSID was not the appropriate forum to settle the dispute because the transaction in question was not deemed an investment since it did not materially contribute to Malaysia’s development.  Nevertheless, Malaysian courts recognize arbitral awards issued against the government. There is no history of extrajudicial action against foreign investors.

International Commercial Arbitration and Foreign Courts

Malaysia’s Arbitration Act of 2005 applies to both international and domestic arbitration. Although its provisions largely reflect those of the UN Commission on International Trade Law (UNCITRAL) Model Law, there are some notable differences, including the requirement that parties in domestic arbitration must choose Malaysian law as the applicable law.  Although an arbitration agreement may be concluded by email or fax, it must be in writing: Malaysia does not recognize oral agreements or conduct as constituting binding arbitration agreements.

Many firms choose to include mandatory arbitration clauses in their contracts.  The government actively promotes use of the Kuala Lumpur Regional Center for Arbitration (http://www.rcakl.org.my), established under the auspices of the Asian-African Legal Consultative Committee to offer international arbitration, mediation, and conciliation for trade disputes.  The KLRCA is the only recognized center for arbitration in Malaysia. Arbitration held in a foreign jurisdiction under the rules of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States 1965 or under the United Nations Commission on International trade Law Arbitration Rules 1976 and the Rules of the Regional Centre for Arbitration at Kuala Lumpur can be enforceable in Malaysia.

Bankruptcy Regulations

Malaysia’s Department of Insolvency (MDI) is the lead agency implementing the Insolvency Act of 1967, previously known as the Bankruptcy Act of 1967.  On October 6, 2017, the Bankruptcy Bill 2016 came into force, changing the name of the previous Act, and amending certain terms and conditions. The most significant changes in the amendment include — (1) a social guarantor can no longer be made bankrupt; (2) there is now a stricter requirement for personal service for bankruptcy notice and petition; (3) introduction of the voluntary arrangement as an alternative to bankruptcy; (4) a higher bankruptcy threshold from RM30,000 to RM50,000; (5) introduction of the automatic discharge of bankruptcy; (6) no objection to four categories of bankruptcy for applying a discharge under section 33A (discharge of bankrupt by Certificate of Director General of Insolvency); (7) introduction of single bankruptcy order as a result of the abolishment of the current two-tier order system, i.e. receiving and adjudication orders; (8) creation of the Insolvency Assistance fund.

The distribution of proceeds from the liquidation of a bankrupt company’s assets generally adheres to the “priority matters and persons” identified by the Companies Act of 2016.  After the bankruptcy process legal costs are covered, recipients of proceeds are: employees, secured creditors (i.e., creditors of real assets), unsecured creditors (i.e., creditors of financial instruments), and shareholders.  Bankruptcy is not criminalized in Malaysia. The country ranks 46th on the World Bank Group’s Doing Business Rankings for Ease of Resolving Insolvency.

4. Industrial Policies

Investment Incentives

The Malaysian Government has codified the incentives available for investments in qualifying projects in target sectors and regions.  Tax holidays, financing, and special deductions are among the measures generally available for domestic as well as foreign investors in the following sectors and geographic areas: information and communications technologies (ICT); biotechnology; halal products (e.g., food, cosmetics, pharmaceuticals); oil and gas storage and trading; Islamic finance; Kuala Lumpur; Labuan Island (off Eastern Malaysia); East Coast of Peninsular Malaysia; Sabah and Sarawak (Eastern Malaysia); Northern Corridor.

The lists of application procedures and incentives available to investors in these sectors and regions can be found at: http://www.mida.gov.my/home/invest-in-malaysia/posts/ .

Foreign Trade Zones/Free Ports/Trade Facilitation

The Free Zone Act of 1990 authorized the Minister of Finance to designate any suitable area as either a Free Industrial Zone (FIZ), where manufacturing and assembly takes place, or a Free Commercial Zone (FCZ), generally for warehousing commercial stock.  The Minister of Finance may appoint any federal, state, or local government agency or entity as an authority to administer, maintain and operate any free trade zone.  Currently there are 13 FIZs and 12 FCZs in Malaysia.  In June 2006, the Port Klang Free Zone opened as the nation’s first fully integrated FIZ and FCZ, although the project has been dogged by corruption allegations related to the land acquisition for the site.  The government launched a prosecution in 2009 of the former Transport Minister involved in the land purchase process, though he was later acquitted in October 2013.

The Digital Free Trade Zone (DFTZ) is an initiative by the Malaysian Government, implemented through MDEC, launched in November 2017 with the participation of China’s Alibaba.  DFTZ aims to facilitate seamless cross-border trading and eCommerce and enable Malaysian SMEs to export their goods internationally. According to the Malaysian government, the DFTZ consists of an eFulfilment Hub to help Malaysian SMEs export their goods with the help of leading fulfilment service providers; and an eServices Platform to efficiently manage cargo clearance and other processes needed for cross-border trade.

For more information, please visit https://mydftz.com 

Raw materials, products and equipment may be imported duty-free into these zones with minimum customs formalities. Companies that export not less than 80 percent of their output and depend on imported goods, raw materials, and components may be located in these FZs.  Ports, shipping and maritime-related services play an important role in Malaysia since 90 percent of its international trade by volume is seaborne.  Malaysia is also a major transshipment center.

Goods sold into the Malaysian economy by companies within the FZs must pay import duties.  If a company wants to enjoy Common External Preferential Tariff (CEPT) rates within the ASEAN Free Trade Area, 40 percent of a product’s content must be ASEAN-sourced.  In addition to the FZs, Malaysia permits the establishment of licensed manufacturing warehouses outside of free zones, which give companies greater freedom of location while allowing them to enjoy privileges similar to firms operating in an FZ. Companies operating in these zones require approval/license for each activity. The time needed to obtain licenses depends on the type of approval and ranges from two to eight weeks.

Performance and Data Localization Requirements

Fiscal incentives granted to both foreign and domestic investors historically have been subject to performance requirements, usually in the form of export targets, local content requirements and technology transfer requirements.  Performance requirements are usually written into the individual manufacturing licenses of local and foreign investors.

The Malaysian government extends a full tax exemption incentive of fifteen years for firms with “Pioneer Status” (companies promoting products or activities in industries or parts of Malaysia to which the government places a high priority), and ten years for companies with “Investment Tax Allowance” status (those on which the government places a priority, but not as high as Pioneer Status).  However, the government appears to have some flexibility with respect to the expiry of these periods, and some firms reportedly have had their pioneer status renewed. Government priorities generally include the levels of value-added, technology used, and industrial linkages.  If a firm (foreign or domestic) fails to meet the terms of its license, it risks losing any tax benefits it may have been awarded.  Potentially, a firm could lose its manufacturing license.  The New Economic Model stated that in the long term, the government intends gradually to eliminate most of the fiscal incentives now offered to foreign and domestic manufacturing investors.  More information on specific incentives for various sectors can be found at www.mida.gov.my.

Malaysia also seeks to attract foreign investment in the information technology industry, particularly in the Multimedia Super Corridor (MSC), a government scheme to foster the growth of research, development, and other high technology activities in Malaysia.  However, since July 1, 2018, the Government decided to put on hold the granting of MSC Malaysia Status and its incentives, including extension of income tax exemption period, or adding new MSC Malaysia Qualifying Activities in order to review and amend Malaysia’s tax incentives.  While the MSC Malaysia Status Services Incentive was published on December 31, 2018, the MSC Malaysia Status IP Incentive policy is still under review.  For further details on incentives, see www.mdec.my.  The Malaysia Digital Economy Corporation (MDEC) approves all applications for MSC status.  For more information please visit: https://www.mdec.my/msc-malaysia .

In the services sector, the government’s stated goal is to attract foreign investment in regional distribution centers, international procurement centers, operational headquarter research and development, university and graduate education, integrated market and logistics support services, cold chain facilities, central utility facilities, industrial training, and environmental management.  To date, Malaysia has had some success in attracting regional distribution centers, global shared services offices, and local campuses of foreign universities.  For example, GE and Honeywell maintain regional offices for ASEAN in Malaysia.  In 2016, McDermott moved its regional headquarters to Malaysia and Boston Scientific broke ground on a medical device manufacturing facility.

Malaysia seeks to attract foreign investment in biotechnology but sends a mixed message on agricultural and food biotechnology.  On July 8, 2010, the Malaysian Ministry of Health posted amendments to the Food Regulations 1985 [P.U. (A) 437/1985] that require strict mandatory labeling of food and food ingredients obtained through modern biotechnology.  The amendments also included a requirement that no person shall import, prepare, or advertise for sale, or sell any food or food ingredients obtained through modern biotechnology without the prior written approval of the Director.  There is no ‘threshold’ level on the labeling requirement.  Labeling of “GMO Free” or “Non-GMO” is not permitted.  The labeling requirements only apply to foods and food ingredients obtained through modern biotechnology but not to food produced with GMO feed.  The labeling regulation was supposed to go into force in 2014, but remains to date with no date announced.  A copy of the law and regulations respectively can be found at: http://www.biosafety.nre.gov.my/BiosafetyAct2007.html , and http://www.biosafety.nre.gov.my/BIOSAFETY percent20REGULATIONS percent202010.pdf .

Malaysia has not implemented measures amounting to “forced localization” for data storage.  Bank Negara Malaysia has amended its recent Outsourcing Guidelines to remove the original data localization requirement and shared that it will similarly remove the data localization elements in its upcoming Risk Management in Technology framework.  The government has provided inducements to attract foreign and domestic investors to the Multimedia Super Corridor but does not mandate use of onshore providers.  Companies in the information and communications technology sector are not required to hand over source code.

5. Protection of Property Rights

Real Property

Land administration is shared among federal, state, and local government.  State governments have their own rules about land ownership, including foreign ownership.  Malaysian law affords strong protections to real property owners. Real property titles are recorded in public records and attorneys review transfer documentation to ensure efficacy of a title transfer.  There is no title insurance available in Malaysia. Malaysian courts protect property ownership rights.  Foreign investors are allowed to borrow using real property as collateral.  Foreign and domestic lenders are able to record mortgages with competent authorities and execute foreclosure in the event of loan default.  Malaysia ranks 29th (ranked 42nd in 2018) in ease of registering property according to the Doing Business 2019 report, right behind Finland and ahead of Hungary, thanks to changes it made to its registration procedures.

[Reference]

http://www.doingbusiness.org/rankings 

Intellectual Property Rights

In December 2011, the Malaysian Parliament passed amendments to the copyright law designed to bring the country into compliance with the WIPO Copyright Treaty and the WIPO Performance and Phonogram Treaty, define Internet Service Provider (ISP) liabilities, and prohibit unauthorized recording of motion pictures in theaters.  Malaysia subsequently acceded to the WIPO Copyright Treaty and the WIPO Performance and Phonogram Treaty in September 2012.  In addition, the Ministry of Domestic Trade, Cooperatives, and Consumerism (MDTCC) took steps to enhance Malaysia’s enforcement regime, including active cooperation with rights holders on matters pertaining to IPR enforcement, ongoing training of prosecutors for specialized IPR courts, and the 2013 reestablishment of a Special Anti-Piracy Taskforce.  On December 27, 2019, Malaysia’s new Trademarks Act came into force bringing Malaysia’s trademark protections in line with the Madrid Protocol for international registration of trademarks, allowing U.S. trademark holders to more easily register their trademarks within Malaysia.

The government, acting through the Property Association of Malaysia (MyIPO), is currently preparing an overhaul of the 1976 Trade Marks Act and revisions to the 1983 Patents Act and 1987 Copyright Act in an effort to bring the country’s IP rules in line with its adoption of the Doha Declaration on Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement. While some amendments are expected to bring it in closer adherence to global standards under proposed compulsory license provisions, Malaysian private enterprises would be able to export products produced under a compulsory license to foreign markets that also have compulsory licenses in place.

In response to trends of rising internet piracy, the interagency Special Anti-Piracy Task Force established a Special Internet Forensics Unit (SIFU) within MDTCC. The SIFU team’s responsibilities include monitoring for sites suspected of being, or known as, purveyors of infringing content.  This organization follows MDTCC’s practice of launching investigations based on information and complaints from legitimate host sites and content providers. Capacity building remains a priority for the SIFU.  Coordination with the Malaysian Communications and Multimedia Commission (MCMC), which has responsibility for overall regulation of internet content, has been improving according to many rights holders in Malaysia.  The Malaysian Communications and Multimedia Commission (MCMC) is proactively combatting illegal streaming sites which provide content that breaches copyrights and is taking action against owners of non-certified Android TV boxes that are used to stream illegal content.

Despite Malaysia’s success in improving IPR enforcement, key issues remain. There is relatively widespread availability of pirated and counterfeit products in Malaysia and there are concerns that the Royal Malaysian Customs Department (RMC) is not always effectively identifying counterfeit goods in transit.  According to U.S. Customs and Border Protection (CBP)’s statistics, Malaysia ranked as the ninth largest source country for IPR seizures. Although the $4,647,447 USD worth of items seized during fiscal year 2018 was a significant increase from the previous reporting year, it still only represents a small fraction of total seized counterfeit goods.  Limited interagency cooperation and a lack a knowledge of IPR laws among RMC officers remain impediments to effective enforcement.  The MTDCC’s Enforcement Division effectively targeted counterfeit alcohol, tobacco, and other products sold domestically; however, cases are not always brought to prosecution effectively.

The September 2017 authorization of a compulsory license for U.S. pharmaceutical Gilead Sciences’ sofosbuvir, a medicine used to treat the hepatitis C virus infection, has raised serious concerns among rights holders due to the lack of transparency and due process. While the compulsory license is set to expire in October 2020, the government has not taken proactive steps to end the compulsory license following the expiration of its tender with the foreign company producing Malaysia’s sofosbuvir medication.

USTR conducted an Out-of-Cycle Review of Malaysia in 2019 to consider the extent to which Malaysia is providing adequate and effective IP protection and enforcement, including with respect to patents. During this review, the United States and Malaysia have held numerous consultations to resolve outstanding issues. In 2020, USTR extended the out of cycle review until November 2020.

The United States continues to encourage Malaysia to accede to the WIPO Budapest Treaty on the International Recognition of the Deposit of Microorganisms for the Purposes of Patent Procedure.  Additionally, the United States urges Malaysia to provide effective protection against unfair commercial use and unauthorized disclosure of test or other data generated to obtain marketing approval for pharmaceutical products, and an effective system to address patent issues expeditiously in connection with applications to market pharmaceutical products.

For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/ .

6. Financial Sector

Capital Markets and Portfolio Investment

Foreigners may trade in securities and derivatives.  Malaysia houses one of Asia’s largest corporate bond markets and is the largest sukuk (Islamic bond) market in East Asia.  Both domestic and foreign companies regularly access capital in Malaysia’s bond market.  Malaysia provides tax incentives for foreign companies issuing Islamic bonds and financial instruments in Malaysia.

Malaysia’s stock market (Bursa Malaysia) is open to foreign investment and foreign corporation issuing shares.  However, foreign issuers remain subject to Bumiputera ownership requirements of 12.5 percent if the majority of their operations are in Malaysia.  Listing requirements for foreign companies are similar to that of local companies, although foreign companies must also obtain approval of regulatory authorities of foreign jurisdiction where the company was incorporated and valuation of assets that are standards applied in Malaysia or International Valuation Standards and register with the Registrar of Companies under the Companies Act 1965 or 2016.

Malaysia has taken steps to promote good corporate governance by listed companies.  Publicly listed companies must submit quarterly reports that include a balance sheet and income statement within two months of each financial quarter’s end and audited annual accounts for public scrutiny within four months of each year’s end.  An individual may hold up to 25 corporate directorships.  All public and private company directors are required to attend classes on corporate rules and regulations.

Legislation also regulates equity buybacks, mandates book entry of all securities transfers, and requires that all owners of securities accounts be identified.  A Central Depository System (CDS) for stocks and bonds established in 1991 makes physical possession of certificates unnecessary. All shares traded on the Bursa Malaysia must be deposited in the CDS.  Short selling of stocks is prohibited.

Money and Banking System

International investors generally regard Malaysia’s banking sector as dynamic and well regulated.  Although privately owned banks are competitive with state-owned banks, the state-owned banks dominate the market.  The five largest banks – Maybank, CIMB, Public Bank, RHB, and AmBank – account for an estimated 75 percent of banking sector loans.  According to the World Bank, total banking sector lending for 2017 was 140.27 percent of GDP, and 1.5 percent of the Malaysian banking sector’s loans were non-performing for 2017.

Bank Negara prohibits hostile takeovers of banks, but the Securities Commission has established non-discriminatory rules and disclosure requirements for hostile takeovers of publicly traded companies.

Foreign Exchange and Remittances

Foreign Exchange

In December 2016, the central bank, began implementing new foreign exchange management requirements.  Under the policy, exporters are required to convert 75 percent of their export earnings into Malaysian ringgit.  The goal of this policy was to deepen the market for the currency, with the goal of reducing exchange rate volatility.  The policy remains in place, with the Central Bank giving case-by-case exceptions.  All domestic trade in goods and services must be transacted in ringgit only, with no optional settlement in foreign currency.  The Central Bank has demonstrated little flexibility with respect to the ratio of earnings that exporters hold in ringgit.  Post is unaware of any instances where the requirement for exporters to hold their earnings in ringgit has impeded their ability to remit profits to headquarters.

Remittance Policies

Malaysia imposes few investment remittances rules on resident companies.  Incorporated and individual U.S. investors have not raised concerns about their ability to transfer dividend payments, loan payments, royalties or other fees to home offices or U.S.-based accounts.  Tax advisory firms and consultancies have not flagged payments as a significant concern among U.S. or foreign investors in Malaysia.  Foreign exchange administration policies place no foreign currency asset limits on firms that have no ringgit-denominated debt.  Companies that fund their purchases of foreign exchange assets with either onshore or offshore foreign exchange holdings, whether or not such companies have ringgit-denominated debt, face no limits in making remittances.  However, a company with ringgit-denominated debt will need approval from the Central Bank for conversions of RM50 million or more into foreign exchange assets in a calendar year.

The Treasury Department has not identified Malaysia as a currency manipulator.

Sovereign Wealth Funds

The Malaysian Government established government-linked investment companies (GLICs) as vehicles to harness revenue from commodity-based industries and promote growth in strategic development areas.  Khazanah is the largest of the GLICs, and the company holds equity in a range of domestic firms as well as investments outside Malaysia.  The other GLICs – Armed Forces Retirement Fund (LTAT), National Capital (PNB), Employees Provident Fund (EPF), Pilgrimage Fund (Tabung Haji), Public Employees Retirement Fund (KWAP) – execute similar investments but are structured as savings vehicles for Malaysians.  Khazanah follows the Santiago Principles and participates in the International Forum on Sovereign Wealth Funds.

Khazanah was incorporated in 1993 under the Companies Act of 1965 as a public limited company with a charter to promote growth in strategic industries and national initiatives.  As of December 31, 2018, Khazanah reported a 21 percent drop in its net worth and a decline in its “realizable” assets to RM136 billion (from USUSD 39.3 billion to USUSD 32.9 billion).  Khazanah also recorded a pre-tax loss of RM6.27 billion (USUSD 1.52 billion) compared to a pre-tax profit of RM2.89 billion (USUSD 723 million) the previous year.  The sectors comprising its major holdings include telecommunications and media, airports, banking, real estate, health care, and the national energy utility.  According to its Annual Review 2019 presentation, in 2018, Khazanah’s mandate and objectives were refreshed, and the company will now pursue its two distinct objectives (commercial vs. strategic) through a dual-fund investment structure: (1) an intergenerational wealth fund to meet its commercial objectives (which will include public and private assets); and (2) a strategic fund to meet its strategic objective (which will include strategic assets and developmental ones).

7. State-Owned Enterprises

State-owned enterprises which in Malaysia are called government-linked companies (GLCs), play a very significant role in the Malaysian economy.  Such enterprises have been used to spearhead infrastructure and industrial projects.  A 2017 analysis by the University of Malaya estimated that the government owns approximately 42 percent of the value of firms listed on the Bursa Malaysia through its seven Government-Linked Investment Corporations (GLICs), including a majority stake in a number of companies.  Only a minority portion of stock is available for trading for some of the largest publicly listed local companies.  Khazanah, often considered the government’s sovereign wealth fund, owns stakes in companies competing in many of the country’s major industries including aerospace, construction, energy, finance, information & communication, and marine technologies.  The Prime Minister  chairs Khazanah’s Board of Directors.  PETRONAS, the state-owned oil and gas company, is Malaysia’s only Fortune Global 500 firm.

As part of its Government Linked Companies (GLC) Transformation Program, the Malaysian Government embarked on a two-pronged strategy to reduce its shares across a range of companies and to make those companies more competitive through improved corporate governance.  The Transformation Program pushes for more independent and professionalized board membership, but the OECD noted in 2018 that in practice shareholder oversight is lax an government officials exert influence over corporate boards.

Among the notable divestments of recent years, Khazanah offloaded its stake in the national car company Proton to DRB-Hicom Bhd in 2012.  In 2013, Khazanah divested its holdings in telecommunications services giant Time Engineering Bhd.  Khazanah’s annual report for 2017 noted only that the fund had completed 12 divestments that produced a gain of RM 2.5 billion (USD 625 million).  In 2018, Khazanah partially divested its shares in IHH Healthcare Berhad, saw two successful IPOs, and issued USUSD 321 million in exchangeable sukuk.  However, significant losses at domestic companies including at Axiata, Telekom Malaysia, Tenaga Nasional, IHH Healthcare Berhad, CIMB Bank, and Malaysia Airports led to the pre-tax loss of USD  1.52 billion the company experienced in 2018.  In April 2019, Khazanah sold 1.5 percent of its stake in Tenaga Nasional on Bursa Malaysia, after which Khazanah still owned 27.27 percent of the national electric company.  In its most recent annual review, Khazanah noted a 607% increase in divestment revenue from the prior year with total divestments for 2019 of RM 9.9 billion (USD 2.25 billion).

Reference: https://www.khazanah.com.my/Media-Downloads/Downloads 

GLCs with publicly traded shares must produce audited financial statements every year.  These SOEs must also submit filings related to changes in the organization’s management.  The SOEs that do not offer publicly traded shares are required to submit annual reports to the Companies Commission.  The requirement for publicly reporting the financial standing and scope of activities of SOEs has increased their transparency.  It is also consistent with the OECD’s guideline for Transparency and Disclosure.  Moreover, many SOEs prioritize operations that maximize their earnings.

The close relationships SOEs have with senior government officials, however, blur the line between strictly commercial activity pursued for its own sake and activity that has been directed to advance a policy interest.  For example, Petroliam Nasional Berhad (PETRONAS) is both an SOE in the oil and gas sector and the regulator of the industry.  Malaysia Airlines (MAS), in which the government previously held 70 percent but now holds 100 percent, required periodic infusions of resources from the government to maintain the large numbers of company’s staff and senior executives.  As of April, 2020, the government’s sovereign wealth fund, Khazanah, has shortlisted 4 of 9 bids to acquire the airline.

The Ministry of Finance holds significant minority stakes in five companies including a 50% stake in the financial guarantee insurer Danajamin Nasional Berhad.  The government also holds a golden share in 32 companies from key industries such as aerospace, marine technology, energy industries and ports.  The Ministry of Finance maintains a list of 70 companies directly controlled by the Minister of Finance Incorporated, known as MOF Inc, the largest Government Linked Investment Company (GLIC).  The seven GLICs in Malaysia are also listed.  However, a comprehensive list of the more than 200 GLCs that are controlled by these seven investment companies is not readily available.

https://www1.treasury.gov.my/index.php/en/contactus/faqs/gic.html 

With formal and informal ties between board members and government, Malaysian SOEs (GLCs) may have access to capital and financial protection from bankruptcy as well as reduced pressure to deliver profits to government shareholders.  The legal framework establishing GLCs under Malaysian law specifically seeks economic opportunity for Bumiputera entrepreneurs. There is some empirical evidence, published by the Asian Development Bank, that SOEs crowd out private investment in Malaysia.

Malaysia participates in OECD corporate governance engagements and continues to work on full adherence to the OECD Guidelines on Corporate Governance for SOEs through its Government Linked Companies (GLC) Transformation Program.  The National Resource Governance Institute’s Resource Governance Index rates Malaysia as weak on governance of its oil and gas sector; however, Malaysia also ranks as 27th among 89 rated countries, in the top third.

Privatization Program

In several key sectors, including transportation, agriculture, utilities, financial services, manufacturing, and construction, Government Linked Corporations (GLCs) continue to dominate the market.  However, the Malaysian Government remains publicly committed to the continued, eventual privatization, though it has not set a timeline for the process and faces substantial political pressure to preserve the roles of the GLCs.  The Malaysian Government established the Public-Private Partnership Unit (UKAS) in 2009 to provide guidance and administrative support to businesses interested in privatization projects as well as large-scale government procurement projects.  UKAS, which used to be a part of the Office of the Prime Minister, is now under the Ministry of Finance.  UKAS oversees transactions ranging from contracts and concessions to sales and transfers of ownership from the public sector to the private sector.

Foreign investors may participate in privatization programs, but foreign ownership is limited to 25 percent of the privatized entity’s equity.  The National Development Policy confers preferential treatment to the Bumiputera, which are entitled to at least 30 percent of the privatized entity’s equity.

The privatization process is formally subject to public bidding.  However, the lack of transparency has led to criticism that the government’s decisions tend to favor individuals and businesses with close ties to high-ranking officials.

8. Responsible Business Conduct

The development of RBC programs in Malaysia has transformed from a government-led initiative into a concept embraced by the private sector.  Through the efforts of the Bursa Malaysia and other governmental bodies, awareness of corporate responsibility now exists across wide swathes of the private sector in Malaysia.

The government initially viewed RBC through the lens of Corporate Social Responsibility (CSR) and philanthropic activities.  In 2006, the Malaysian Securities Commission published a CSR framework for all publicly listed companies (PLCs), which are required to disclose their CSR programs in their annual financial reports.  In 2007, the Women, Family and Community Ministry launched the Prime Minister’s CSR Awards to encourage the spread of CSR programs, and to honor those companies whose commitment to CSR had made a difference in their respective communities.

In 2011, the Malaysian government began to take a more holistic approach to RBC, using it as a way to facilitate change in Malaysian society.  That year the government launched the 1Malaysia Training Plan (SL1M), an employment incentive program that allows businesses to double the permitted tax deduction for expenses incurred in hiring and training graduates from rural areas and low-income families.  The Business Council for Sustainable Development Malaysia (BCSDM) (formerly known as the Board for Corporate Sustainability and Responsibility Malaysia) also supplanted the Institute for Corporate Responsibility Malaysia as the focal point for the country’s RBC programs.  This was an important development on the road to meeting international norms, as BCSDM is the local affiliate of the World Business Council for Sustainable Development, and aims to meet the World Bank’s Sustainable Development Goals.  Additionally, BCSDM has laid out its own Vision 2050 plan, which aims to facilitate an improvement in global living standards through the implementation of a series of environmentally responsible steps.

In the arena of Environmental, Social, and Governance (ESG) issues related to RBC, Bursa Malaysia has been the main catalyst in the drive to enhance corporate accountability.  In 2014, Bursa Malaysia launched the FTSE4Good Bursa Malaysia Index, which is composed of companies selected from the top 200 Malaysian stocks in the FTSE Bursa Malaysia EMAS Index.  These companies are screened in accordance with transparent and defined ESG criteria, and the index provides an avenue for investors to make ESG-focused investments and increase ESG exposure in their investment portfolios, thereby putting indirect pressure on companies to behave more responsibly.

In a subsequent step in 2015, Bursa Malaysia launched a Sustainability Framework, which was comprised of amendments to the Listing Requirement (which all PLCs must meet), and the publication of a Sustainability Reporting Guide Toolkit.  As part of their new responsibilities, PLCs were required to disclose sustainability statements in their annual reports, incorporating ESG issues related to their respective businesses.  In 2018 Bursa Malaysia launched a 2nd edition of the Sustainability Reporting Guidelines, which include recommendations for PLCs regarding how to integrate sustainability into their businesses, and how to conduct more extensive reporting on material Economic, Environmental, and Social (EES) risks and opportunities.

Various governmental entities have enacted measures to encourage RBC.  In 2015, SUHAKAM, the Malaysian Human Rights Commission, published a framework for a national plan of action on business and human rights (BHR Framework).  The goal of the BHR Framework was to facilitate the adoption and implementation of the UN Guiding Principles on Business and Human Rights by both state and non-state actors in Malaysia.  Subsequent to the creation of the BHR Framework, Parliament passed an amended Companies Act in 2016, which included the optional disclosure of a business review, containing information about: (i) environmental matters, including the impact of the company’s business on the environment; (ii) the company’s employees; and (iii) social and community issues.   In the wake of the Companies Act 2016, The Companies Commission of Malaysia similarly sought to push RBC, by developing a best practices circular that promotes adherence to international sustainability reporting standards.  This circular endorses specific international standards such as the Global Reporting Initiative (GRI) framework and the UN Guiding Principles on Business and Human Rights.

The push toward effectuating RBC by the government has not only involved human rights, but has also addressed environmental concerns.  The Ministry of Energy, Science, Technology, Environment & Climate Change (MESTECC) has published multiple roadmaps to that end, including: Green Technology Master Plan Malaysia 2017-2030; Malaysia’s Roadmap towards Zero Single-use Plastics 2018-2030; and National Energy Efficiency Master Plan.  Despite the efforts across multiple ministries to emphasize RBC, there is nothing in Malaysia’s official procurement policy that mentions it as a factor in government contracting.

In September 2019, U.S. Customs and Border Protection (CBP) issued a Withhold Release Order (WRO), thereby suspending imports of medical gloves from WRP Asia Pacific, a Malaysian manufacturer, citing widespread reports of the company’s use of forced labor to produce the gloves.  This came on the heels of a December 2018 report by The Guardian accusing WRP and another Malaysian glove manufacturer, Top Glove, of “forced labor, forced overtime, debt bondage, withheld wages and passport confiscation.”  Malaysia is the world’s largest exporter of medical gloves, and the U.S. is its largest export market, so the response from the Malaysian government to the WRO was prompt.   Soon after the WRO, then-Human Resources Minister M. Kulasegaran vowed to include a chapter on forced labor in the amended  Employment Act  to protect workers’ rights; however, the amendment to the Employment Act has not come before parliament.  Irrespective of the internal steps that the Malaysian government may have taken to codify protection of workers, CBP provided feedback to WRP to adjust its manufacturing and labor practices to ensure they are compliant with U.S. and international labor standards.  In March 2020, CBP revoked the WRO on WRP-produced rubber gloves, citing information “showing the company is no longer producing the rubber gloves under forced labor conditions.”

A 2019 chemical dumping incident paints a blurry picture regarding Malaysia’s ability to effectively and fairly enforce domestic laws on environmental protection.  In the state of Johor in March 2019, a lorry dumped a mixture of toxic chemicals into the Kim Kim River, causing the hospitalization of almost 3,000 individuals.  The overwhelming majority of those hospitalized did not get sick after the initial dumping, but rather days later aided by strong winds.  The authorities did not immediately remove the chemicals from the river due to the costliness of the procedure, leading to a political backlash.  The state government took straightforward legal steps against the responsible parties, and completed its investigation in a thorough and impartial manner.  The Johor government charged the driver of the lorry under the Environmental Quality Act 1974, and charged the owners of the factory responsible for the dumping pursuant to the Environment Quality Regulations (Scheduled Wastes) 2005 and Environmental Quality Regulations (Clean Air) Regulations 2014.

The Malaysian Securities Commission leads issues regarding corporate governance and shareholder protection.  In furtherance of its goal of safeguarding investors, in 2017 the SC released an updated version of the Malaysian Code of Corporate Governance (MCCG).  This -document includes principles on board leadership and effectiveness, audit and risk management, integrity in corporate reporting, and meaningful relationships with stakeholders.  The SC publishes an annual report called the CG Monitor to ascertain which of their suggested best practices in the MCCG are being implemented.  The CG Monitor evaluates issues ranging from executive compensation standards to the quality of disclosures made by PLCs.  The SC also issues policy papers on a range of related issues, including rules on takeovers, mergers, and acquisitions, with an eye on protecting shareholders.

Bursa Malaysia is similarly interested in ensuring shareholder protection, and has a dedicated chapter in its Listing Requirements to corporate governance.  This chapter lays out in detail the requirements for listed companies concerning board composition, rights of directors, and auditing practices.  The Listing Requirements circle back to the MCCG, and require that the board of PLCs disclose which of the best practices annunciated in the MCCG the company is following.

Promotion of RBC in Malaysia has been increasing due to pressure from institutional investors and government-linked investment funds.  In 2014, the Minority Shareholders Watch Group (an independent research organization on corporate governance matters, originally funded by four state-owned investment funds) (MSWG) and the SC worked together to draft the Malaysian Code for Institutional Investors (MCII).  The MCII includes six principles of effective stewardship by institutional investors, as well as guidance to facilitate implementation.   Furthermore, the MCII encourages institutional investors to invest responsibly by taking stock of the RBC and corporate governance standards of the company.  As a response to the MCII, the Institutional Investor Council (IIC) was formed in 2015.  The IIC is an industry-led initiative that represents the common interests of institutional investors in Malaysia, and promotes good governance (including ESG considerations) to PLCs.

The interest in RBC and good governance has taken hold not only in industry, but in governmental funds as well.  The government of Malaysia’s strategic investment fund (Khazanah Nasional Berhad), the government pension fund (KWAP), and the Employees Provident Fund (EPF) are signatories to the UN-supported Principles for Responsible Investment (PRI).  As signatories, they are required to carry out PRI principles, including taking ESG into consideration during the due diligence phase before making a potential investment, and ensuring that ESG best practices are met in companies in which they invest.

Post is not aware of any governmental interference in the efforts of regulators, business associations, and investors to improve responsible business practices amongst Malaysian corporations.

9. Corruption

The Malaysian government established the Malaysian Anti-Corruption Commission (MACC) in 2008 and the Whistleblower Protection Act in 2010 and considers bribery a criminal act.  Malaysia’s anti-corruption law prohibits bribery of foreign public officials, permits the prosecution of Malaysians for offense committed overseas, prohibits bribes from being deducted from taxes, and provides for the seizure of property.

The MACC conducts investigations, but prosecutorial discretion remains with the Attorney General’s Chambers (AGC).  There is no systematic requirement for public officials to disclose their assets and the Whistleblower Protection Act does not provide protection for those who disclose allegations to the media.

The former Pakatan Harapan government prioritized anti-corruption efforts in its campaign manifesto.  After taking office in May 2018, it established Royal Commissions of Inquiry into alleged corruption at the Federal Land Development Authority (FELDA), the Council of Trust for the People (MARA), and the Hajj Pilgrims Fund (Tabung Haji), all government or government-linked agencies.  On May 21, 2018 the MACC established a 1MDB taskforce, including the police and central bank.  The government subsequently charged former Prime Minister Najib with 42 counts of money laundering, criminal breach of trust, and abuse of power for his alleged involvement in the 1MDB corruption scandal.  The current Prime Minister Muhyiddin has said to the media that his Perikatan Nasional (PN) government will continue to implement the National Anti-Corruption Plan (NACP) put in place by the previous Pakatan Harapan (PH) coalition government.  It remains to be seen how robustly this plan will be implemented.

Resources to Report Corruption

Contact at government agency or agencies are responsible for combating corruption:

Datuk Seri Azam Baki -Chief Commissioner
Malaysia Anti-Corruption Commission
Block D6, Complex D, Pusat Pentadbiran
Kerajaan Persekutuan, Peti Surat 6000
62007 Putrajaya
+6-1800-88-6000
Email: info@sprm.gov.my

Contact at a “watchdog” organization:

Cynthia Gabriel, Director
The Center to Combat Corruption and Cronyism (C4)
C Four Consultancies Sdn Bhd
A-2-10, 8 Avenue
Jalan Sg Jernih 8/1, Seksyen 8, 46050 Petaling Jaya
Selangor, Malaysia
Email: info@c4center.org

10. Political and Security Environment

There have been no significant incidents of political violence since the 1969 national elections.  The May 9, 2018 national election led to the first transition of power between coalitions since independence and was peaceful.  The Pakatan Harapan administration collapsed on February 24, 2020 and was replaced by the Perikatan Nasional coalition led by Muhyiddin Yassin.  In April 2012, the Peaceful Assembly Act took effect, which outlaws street protests and places other significant restrictions on public assemblies.  Following the July 2014 Israeli incursion into Gaza, several Malaysian non-governmental entities organized a boycott of McDonald’s.  Over a several week period, protestors picketed at several McDonalds restaurants, at times taunting and harassing employees.  Periodically, Malaysian groups will organize modest protests against U.S. government policies, usually involving demonstrations outside the U.S. embassy.  To date, these have remained peaceful and localized, with a strong police presence.  Likewise, several non-governmental organizations have organized mass rallies in major cities in peninsular and East Malaysia related to domestic policies that have been peaceful.

11. Labor Policies and Practices

Malaysia’s two million documented and 3.9 to 5.5 million undocumented foreign workers make up over 30 percent of the country’s workforce.  The previous government pledged to reduce Malaysia’s reliance on foreign labor while bringing the nation’s laws up to international standards, and had taken steps toward reforming a foreign worker recruitment process plagued by allegations of corruption and debt bondage before being replaced by Prime Minister Muhyiddin’s government in March.

Malaysia’s shortage of skilled labor is the most frequently mentioned impediment to economic growth cited in numerous studies.  Malaysia has an acute shortage of highly qualified professionals, scientists, and academics.  U.S. firms operating in Malaysia have echoed this sentiment, noting that the shortage of skilled labor has resulted in more on-the-job training for new hires.

The Malaysian labor market, traditionally accustomed to operating at or near full employment, has been heavily impacted by the prolonged shutdown as part of the government’s response to the global pandemic.  The unemployment rate reached five percent in April 2020, Malaysia’s highest in over 30 years, with economic observers predicting it will climb higher during the year.

Malaysia is a member of the International Labor Organization (ILO).  Labor relations in Malaysia are generally non-confrontational.  While  a system of government controls strongly discourages strikes and restricts the formation of unions, the new government has created a National Labor Advisory Council – comprised of the Malaysian Trade Unions Congress and Malaysian Employer’s Federation – to increase labor participation in unions.  The government amended its Trade Unions Act and Industrial Relations Act in July 2019 to increase freedom of association in Malaysia.  Some labor disputes are settled through negotiation or arbitration by an industrial court.  Malaysian authorities have pledged to move forward with amendments to the country’s labor laws as a means of boosting the economy’s overall competitiveness and combatting forced labor conditions.  The previous government prohibited outsourcing companies, improved oversight of employment agencies, and brought the Employment Act, Children and Young Persons Act, and Occupational Safety and Health Act in line with ILO principles.

Although national unions are currently proscribed due to sovereignty issues within Malaysia, there are a number of territorial federations of unions (the three territories being Peninsular Malaysia, Sabah and Sarawak).  The government has prevented some trade unions, such as those in the electronics and textile sectors, from forming territorial federations.  Instead of allowing a federation for all of Peninsular Malaysia, the electronics sector is limited to forming four regional federations of unions, while the textile sector is limited to state-based federations of unions, for those states which have a textile industry.  Proposed changes to the Trade Unions Act should address this issue and allow unions to form.  Employers and employees share the costs of the Social Security Organization (SOSCO), which covers an estimated 12.9 million workers and has been expanded to cover foreign workers.  No systematic welfare programs or government unemployment benefits exist; however, the Employee Provident Fund, which employers and employees are required to contribute to, provides retirement benefits for workers in the private sector.  Civil servants receive pensions upon retirement.

The regulation of employment in Malaysia, specifically as it affects the hiring and redundancy of workers, remains a notable impediment to employing workers in Malaysia.  The high cost of terminating employees, even in cases of wrongdoing, is a source of complaint for domestic and foreign employers.  The former prime minister formed an Independent Committee on Foreign Workers to study foreign worker policies.  The Committee submitted 40 recommendations for streamlining the hiring of foreign workers and protecting employees from debt bondage and forced labor conditions.  It is unclear whether or how the new government will act on these recommendations.

Executives at U.S. companies operating in Malaysia have reported that the government monitors the ethnic balance among employees and enforces an ethnic quota system for hiring in certain areas.  Race-based preferences in hiring and promotion are widespread in government, government-owned universities, and government-linked corporations.

The former government increased and standardized the minimum wage across the country to RM 1100 (USD 275), a raise from RM 1,000 (USD 250) in Peninsular Malaysia and RM 920 (USD 230) in East Malaysia.

In 2018, the Department of Labor’s Trafficking Victims Protection Reauthorization Act (TVPRA) listing of goods produced with child labor and forced labor included Malaysian palm oil (forced and child labor), electronics (forced labor), and garments (forced labor).  Senior officials across the Malaysian interagency have taken this listing seriously and have been working with the private sector and civil society to address concerns relating to the recruitment, hiring, and management of foreign workers in all sectors of the Malaysian economy, including palm oil and electronics.

12. U.S. International Development Finance Corporation (DFC) and Other Investment Insurance Programs

Malaysia has a limited investment guarantee agreement with the United States under the U.S. Overseas Private Investment Corporation (OPIC), the predecessor agency to the U.S. International Development Finance Corporation (DFC), for which it has qualified since 1959.  Few investors have sought OPIC insurance in Malaysia.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source USG or international statistical source USG or International Source of Data:  BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) N/A N/A 2019 $364,700 www.worldbank.org/en/country 
Foreign Direct Investment Host Country Statistical source USG or international statistical source USG or international Source of data:  BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) N/A N/A 2019 $10,849 BEA data available at
https://www.bea.gov/international/
direct-investment-and-multinational-
enterprises-comprehensive-data
 
Host country’s FDI in the United States ($M USD, stock positions) N/A N/A 2019 $981 BEA data available at
https://www.bea.gov/international/
direct-investment-and-multinational-
enterprises-comprehensive-data
 
Total inbound stock of FDI as % host GDP N/A N/A 2019 46.3% UNCTAD data available at
https://unctad.org/en/Pages/DIAE/
World%20Investment%20Report/
Country-Fact-Sheets.aspx
 
Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 152,510 100% Total Outward 118,886 100%
Singapore 29,038 19% Singapore 23,388 20%
Japan 18,202 12% Indonesia 11,273 9%
China, P.R.: Hong Kong 17,954 12% Cayman Islands 7,244 6%
The Netherlands 10,345 7% United Kingdom 5,925 5%
United States 9,876 6% Australia 5,731 5%
“0” reflects amounts rounded to +/- USD 500,000.
Table 4: Sources of Portfolio Investment
Portfolio Investment Assets
Top Five Partners (Millions, current US Dollars)
Total Equity Securities Total Debt Securities
All Countries 95,283 100% All Countries 72,518 100% All Countries 22,765 100%
United States 19,567 21% United States 14,688 20% United States 4,879 21%
Singapore 10,746 11% Singapore 8,768 12% Singapore 1,978 9%
China P.R.: Hong Kong 6,541 7% China, P.R.: Hong Kong 5,679 8% Cayman Islands 1,971 9%
United Kingdom 5,592 6% China, P.R.: Mainland 4,545 6% Australia 1,788 8%
China, P.R. Mainland 5,123 5% United Kingdom 4,485 6% Indonesia 1,425 6%

14. Contact for More Information

Embassy Kuala Lumpur Economic Section
376 Jalan Tun Razak / 50400 Kuala Lumpur Malaysia
+6-03-2168-5153
Email: KualaLumpurEcon@state.gov

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