Indonesia provides incentive facilities 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. On April 9, 2018 Indonesia issued an updated tax holiday scheme that exempts certain businesses from paying corporate income taxes under Ministry of Finance Regulation No. 35/2018 and Ministry of Finance Regulation No. 103/2016. The new regulation expands the categories of eligible firms by allowing existing companies to apply for tax holidays for new investments. Previously, only new firms or market entrants could apply. The regulation grants a 100 percent tax holiday reduction, whereas the old regime provided tax holidays on a sliding scale. The period of tax holiday is extended up to 20 years; the minimum investment threshold is IDR 500 billion (36.8 million – five year holiday), while the largest tranche is reserved for investments above IDR 30 trillion (2.21 billion – 20-year holiday). In addition to the tax holiday, the Regulation No. 35/2018 also provide a 50 percent income-tax reduction for the following two years once the period of tax holiday has elapsed. The coverage of pioneer sectors was expanded to include the following seventeen industries:
- Downstream basic metal;
- Oil and gas refinery;
- Petrochemical derived from petroleum, natural gas, and coal;
- Inorganic basic chemical;
- Organic basic chemical sourced from agriculture or forestry products;
- Pharmaceutical raw materials;
- Semi-conductors and other primary computer components;
- Primary communication device components;
- Primary medical device component;
- Primary industrial machinery component;
- Primary engine component for transport equipment;
- Robotic components for manufacturing machine;
- Primary ship component for shipbuilding industry;
- Primary aircraft component;
- Primary train component;
- Power generation including waste-to-energy power plant; and
- Economic infrastructures.
Government Regulation No. 9/2016 expanded regional tax incentives for certain business categories in May 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 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) worth at least 5 percent of the total investment over 5 years;
- Reinvesting capital; or,
- Exporting at least 30 percent of their product.
The government also provides the facility of Import Duty Borne by the Government (Bea Masuk Ditanggung Pemerintah /BMDTP) with 0 percent import duty for certain industries to improve industrial competitiveness and public goods procurement. Through the issuance of Ministry of Finance Regulation No.12/2018, 28 imported raw materials for manufacturing plastics, cosmetics, polyester, resins, other chemical materials, machinery for agriculture, electricity, and pharmaceuticals received the facilities up to December 2018.
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 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, 84th of 91 jurisdictions in the Fraser Institute’s 2017 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. 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 government issued new regulations that again allowed exports of copper concentrate and other specified minerals but imposed 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 by 2019; in 2017 the government revised this target downward to 19,000 megawatts. The Jokowi administration also announced plans to create a maritime nexus, to include the development or expansion of 24 ports and other transportation infrastructure. The Indonesian government is also implementing a PPP scheme to develop broadband internet access throughout the country as part of its “Palapa Ring” initiative. The initiative, which will install over 12,000 kilometers of fiber optic cable, is divided into three segments. The western segment is nearing completion, the middle and eastern segments are expected to be complete by the end of 2019. Following completion of the Palapa Ring, Indonesia plans to deploy HTS (high throughput satellites) to connect remote and frontier areas for internet access, with a predicted value of IDR 7.7 trillion (approximately USD 570 million). 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
Indonesia offers numerous incentives to foreign and domestic companies that operate in special 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 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. 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. 39/2000, Government Regulation No. 2/2011 on SEZ management, and Government Regulation No. 96/2015. These benefits include a reduction of corporate income taxes for a period of years (depending on the size of the investment), income tax allowances, and expedited or simplified administrative processes for import/export, expatriate employment, immigration, and licensing. As of mid-2017, Indonesia has identified twelve SEZs in manufacturing and tourism centers, with plans for 25 by 2019. Six 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) Lhokseumawe, Aceh and 6) Galang Batang, Bintan, Riau Islands. Six more SEZs are expected to operate in 2018: 1) Kuala Tanjung, North Sumatera; 2) Pulau Asam Karimun, Riau Islands; 3) Merauke, Papua; 4) Melolo, East Nusa Tenggara (NTT); 5) Nongsa, Batam, Riau Islands; and 6) Tanjung Kelayang, Pulau Bangka, Bangka Belitung Islands. In March 2016, the government began the process of transitioning Batam from an FTZ to SEZ in order to provide further investment incentives in Batam. This process is expected to be finished in 2019 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 more than 70 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 auctions 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 were introduced in 2016 to allow for larger stockpiles, longer temporary storage (up to three years), and a greater number of activities in a single area. By early November 2017, Indonesia had designated 76 bonded logistics centers, with plans to designate more in eastern part of Indonesia. KAPET zones, first announced in a 1996 presidential decree, are eligible for partial tax holidays, certain income tax exemptions and deductions, flexible treatment of amortization of capital and losses, and fiscal loss compensation.
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 Ministry of Finance 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 good relevant to their business.
In September 2017, the government issued Presidential Regulation 91 on the Acceleration of Business Operations, aiming to reduce and simplify the Indonesian business licensing regime, including in special economic zones. Under this regulation, Indonesia has established national, ministerial, provincial and regional task forces to examine inefficiencies in the process of starting a business, including business licensing practices, the availability of one-stop business registration in SEZs and FTZs, and data sharing between different jurisdictions. The Coordinating Ministry for Economic Affairs, which is leading implementation of the regulation, reports that all Indonesian provinces, FTZs, and SEZs, and more than 90% of regencies (kabupaten) had established one-stop business licensing services by February 2018. Under the new rules, businesses that apply for a license under a one-stop system must begin setting up within 90 days unless given an extension. The regulation also provides that the central government may take control of business licensing if a local government unduly delays business license issuance.
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 on March 29, 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 6 months) for activities such as conducting audits, quality control, inspections, and installation of machinery and electrical equipment. Provisions of existing regulations such as Ministry of Manpower Regulations No. 16/2015 and No. 35/2015, remain in effect so long as they do not contradict Presidential Regulation No. 20/2018. 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. Ministry of Manpower Regulation No. 35/2015 abolished a requirement that enterprises meet a 10:1 ratio of domestic to foreign workers and eliminated the need for work permits for most business travelers. Ministry of Manpower No. 16/2015 abolished the local language proficiency requirement for foreign employees, though foreign employers are required to facilitate language education and practice for expatriate workers. 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 the defense law in October 2012 and subsequent implementing regulations in October 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, and Indonesia 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 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. 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.
Data Localization Requirements
In 2012, Indonesia issued Government Regulation No. 82/2012 requiring certain “public service providers” to establish data storage and disaster recovery centers on Indonesian soil. The regulation went into effect in October 2017 and several ministries have issued data localization regulations, including regulations related to data privacy, peer-to-peer lending, and insurance. As of January 2018, the Indonesian government has prepared a draft amendment to Government Regulation No. 82/2012 that would classify data into three categories: strategic, high-level, and low-level. The draft amendment offers vague definitions of these categories, defining strategic data as data potentially disruptive to the national economy, defense, security, governance, transportation and communication, and/or data that can contribute to humanitarian disaster. The proposed amendment would require that “strategic” data be managed, stored, and processed only in Indonesia. The draft regulation would allow high- and low-level data to be managed, stored, and processed overseas so long as it does not reduce the effective implementation of Indonesian legal jurisdiction. It remains unclear how the proposed regulation would affect existing data localization requirements and what additional requirements may be imposed if the revised regulation is issued.