The GOI offers a tax holiday scheme that exempts certain businesses from paying corporate income taxes for up to ten years under Ministry of Finance Decree No. 130/PMK.011/2011. Businesses must have operated as a legal entity in Indonesia for at least 12 months prior to the issuance of the tax holiday regulation, among other requirements. Priority is given to investment in resource extraction, resource refinement, industrial machinery, renewable resources, telecommunications equipment, or pioneer sectors. Government Regulation No. 62 of 2008 provides a tax incentive program for projects conducted in national high-priority sectors, which encompass 128 different fields. Businesses may only apply for one tax incentive: either the tax holiday or the tax incentive program. On August 27, 2015, the GOI released an updated tax holiday incentive under Ministry of Finance Decree No. 159/PMK.010/2015 in order to increase investment, especially in pioneer industries. The GOI still retains the majority of the existing tax holiday policy, with changes aimed at relaxing and simplifying the provision of facilities. The coverage of pioneer sectors was expanded to include the following industries:
- upstream metal;
- petroleum refining;
- organic basic chemicals derived from petroleum and natural gas;
- industrial machinery production;
- marine transportation;
- the processing industry when it is the major industry in a Special Economic Zone (SEZ);
- telecommunications information and communication; and
- processing based on agricultural, forestry, and fisheries products.
The updated regulation also extended the time frame for the tax holiday facility to 5 to 15 years, or up to 20 years at the discretion of the Minister of Finance. In addition, the GOI issued Government Regulation No. 9/2016 expanding regional tax incentives for certain business categories in May 2016. Apparel, leather goods, 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 6 year period
- Accelerated depreciation and amortization
- 10 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 to10 years with certain condition for companies that are:
- Located in industrial or bonded zone
- Developing infrastructure
- Using at least 70 percent domestic raw material
- Absorbing 500 to 1000 laborers
- Doing research and development (R&D)
- Reinvesting capital
- Exporting at least 30 percent of their product
In October 2016, the GOI offered a new incentive to entrepreneurs in Indonesia’s footwear and textiles sectors that employ at least 2,000 workers and export 50 percent of their total sales. The authorities also give a 50 percent discount on income tax from 5 percent to 2.5 percent to those workers who earn a maximum of IDR 50 million (USD $3,850) per year, who participate in Indonesia’s national healthcare and social security (BPJS) program.
Research and Development
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 State Ministry for Research and Technology, and Higher Education handles applications on a case-by-case basis.
Indonesia’s vast natural resource wealth has attracted significant foreign investment over the last century and continues to offer significant prospects. But a variety of government regulations have made doing business in the resources sector increasingly difficult, and Indonesia now ranks near the bottom, 88th of 96 jurisdictions in the Fraser Institute’s Mining Policy Perception Index. In 2012, the GOI 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. The ban on the export of raw minerals went into effect in January 2014. In July 2014, the government issued regulations that allowed, until January 2017, the export of copper and several other mineral concentrates with export duties and other conditions imposed. When the full ban came back into effect in January 2017, the GOI issued new regulations that again allowed exports of copper concentrate and other specified minerals but imposing even 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 over ten years 51 percent of shares to Indonesian interests, with the price of divested shares determined based on fair market value and not taking into account existing reserves. 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 overlap or are 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).
Since taking office in October 2014, President Jokowi and his administration have made infrastructure development a top priority. The government announced plans to add 35,000 megawatts of electricity capacity and create a maritime nexus, to include the development and/or expansion of 24 ports and other transportation infrastructure. The current institutional arrangement for infrastructure development still suffers from overlap of functions, 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 from state-owned enterprises (SOE), 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 step in the new and fragile system, and especially, lack of an institutional champion. Currently infrastructure development is largely taking place through SOEs, with PPPs having only a marginal share of infrastructure projects.
Foreign Trade Zones/Free Trade/ Trade Facilitation
The GOI offers incentives to over 1,500 foreign and domestic industrial companies that operate in bonded, or special trade, zones throughout Indonesia. The largest bonded 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 not required to apply for additional implementation licenses (location, construction, and nuisance act permits and land titles), and foreign companies are allowed 100 percent ownership. These companies are also exempt from import duty, income tax, VAT, and sales tax on imported capital goods, equipment, and raw materials until the portion of production destined for the domestic market is “exported” to Indonesia, in which case fees are owed only on that portion. Companies operating in FTZ may lend machinery and equipment to subcontractors located outside of the zone for a maximum two-year period.
Ministry of Finance Regulation No. 147/2011 stipulates that the delivery of products outside of bonded zones into the domestic market is set at a maximum of 25 percent (down from 50 percent) of export realization value of the previous year. If a bonded zone company exceeds the 25 percent limitation, its domestic quota for the next year will be reduced. The new regulation also restricts subcontract work and requires bonded zones less than 10,000 square meters in size to relocate to industrial estates.
As stipulated by the 2007 Investment Law, the Indonesian Legislature (DPR) passed regulations on special economic zones (SEZ) in 2009. The government has created ten special economic zones so far, although development at the SEZ sites remains limited. The SEZs are in Tanjung Lesung, Banten, Sei Manke, North Sumatera, Palu, Central Sulawesi, Bitung, North Sulawesi, Mandalika, West Nusa Tenggara, Morotai, North Maluku, Tanjung Api Api, South Sumatera, Maloy Batuta in Kalimantan, Sorong in West Papua, and Tanjung Kelayang in Bangka Belitung. In March 2016, the government released Presidential Regulation 8/2016 that will change the status of Batam FTZ to an SEZ during 2016 in an effort to boost foreign and domestic investment. The government contends that the change will provide further investment incentives in Batam, including tax holidays and deductions, accelerated amortization, and other benefits in addition to the incentives currently offered in the FTZ. The Batam SEZ will continue to be operated by the Batam Industrial Free Trade Zone Authority, the agency that operates the existing free trade zone. Presidential Regulation 8/2016 does not affect the status of the neighboring FTZs on Bintan and Karimun islands.
In an effort to improve logistics and reduce costs, the government designated 11 companies bonded logistics centers in March 2016. Companies that utilize these multifunctional logistics warehouses will enjoy tax incentives such as deferred import duties and taxes, VAT exemptions, and other benefits. The government intends to designate up to 50 bonded logistics centers throughout Indonesia by the end of 2017.
Performance and Data Localization Requirements
The GOI 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. As a general rule, 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 to BKPM to get a Limited Stay Visa or Semi-Permanent Residence Visa (VITAS/VBS). Expatriates are issued a Limited Stay Permit (KITAS) and a blue book, valid for two years and renewable for up to two extensions without leaving the country. The foreign worker must meet education, work experience, and Indonesian language requirements and commit to transfer knowledge to an Indonesian counterpart. Under Ministry of Manpower regulations, 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. Some U.S. firms report difficulty in renewing KITASs for their foreign executives. In 2013, the government issued new regulations on the employment of foreigners, including a regulation specific to the oil and gas sector that limits the types of positions expatriates can hold and imposes an age cap of 55 years on foreign executives. In December 2013, the Ministry of Manpower issued Regulation 12 on Procedures for Employing Foreign Manpower. The new regulation made some changes to the previous 2008 regulation, including the introduction of a new mechanism to hire temporary foreign workers and simplification of the permit process for foreigners married to Indonesians.
In October, 2015 the Minister of Manpower issued a regulation abolishing a previously-required ratio of foreign to local workers of 10:1 and abolishing the need for a short-term work permit for most business travelers. However, a short-term work permit (max 6 months) is still required for activities such as making a commercial movie, conducting audits, quality control, or inspections for periods exceeding 30 days. The GOI has repeatedly discussed establishing an Indonesian language proficiency requirement for long-term expatriates in Indonesia, and some local governments have language requirements in place, though they do not appear to be enforced.
With the passage of the defense law in October 2012 and subsequent implementing regulations in October 2014, the GOI 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 still competing for contracts with local partners. The 2014 implementing regulations still require substantial clarification regarding how offsets and local content are determined, and the GOI has not yet completed production of an official English-language translation. 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 GOI 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 GOI 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.
The GOI notified the WTO of its compliance with Trade-Related Investment Measures (TRIMS) on August 26, 1998. The 2007 Investment Law states that the GOI shall provide the same treatment to both domestic and foreign investors originating from any country. 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 to be met some sectors.
Data Localization Requirements
In 2012, the government issued Government Regulation 82 requiring certain “public service providers” to establish data storage and disaster recovery centers on Indonesian soil. Regulation 82/2012 calls for “public service providers” to localize data domestically by October 2017, and ministries are moving ahead with data localization requirements in new regulations, including data privacy and peer-to-peer lending regulations issued in late 2016. The government continues to evaluate how to implement data localization requirements, including how to define “public service providers” under Regulation 82/2012, but it appears likely that data localization rules will affect financial and other service delivery companies. Despite prior public statements that the government will amend Regulation 82/2012 or otherwise ease data localization requirements, the GOI has yet to take definitive steps in this direction. Over the protests of foreign private-sector insurance companies, the OJK’s Regulation 69/2016 mandates insurance and sharia insurance companies to onshore their data by October 12, 2017.