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:
||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
||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:
- Upstream basic metals;
- Oil and gas refineries;
- Petrochemicals derived from petroleum, natural gas, and coal;
- Inorganic basic chemicals;
- Organic basic chemicals;
- Pharmaceutical raw materials;
- Semi-conductors and other primary computer components;
- Primary medical device components;
- Primary industrial machinery components;
- Primary engine components for transport equipment;
- Robotic components for manufacturing machines;
- Primary ship components for the shipbuilding industry;
- Primary aircraft components;
- Primary train components;
- Power generation including waste-to-energy power plants;
- Economic infrastructure;
- Digital economy including data processing; and
- 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:
- 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.
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.