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Indonesia

Executive Summary

Indonesia’s 274 million population, USD 1 trillion economy, growing middle class, abundant natural resources, and stable economy are attractive features to U.S. investors; however, investing in Indonesia remains challenging. President Joko (“Jokowi”) Widodo, now in his second five-year term, has prioritized pandemic recovery, infrastructure investment, and human capital development. The government’s marquee reform effort — the 2020 Omnibus Law on Job Creation (Omnibus Law) — was temporarily suspended by a constitutional court ruling, but if fully implemented, is touted by business to improve competitiveness by lowering corporate taxes, reforming labor laws, and reducing bureaucratic and regulatory barriers. The United States does not have a bilateral investment treaty (BIT) with Indonesia.

In February 2021, Indonesia replaced its 2016 Negative Investment List, liberalizing nearly all sectors to foreign investment, except for seven “strategic” sectors reserved for central government oversight. In 2021, the government established the Risk-Based Online Single Submission System (OSS), to streamline the business license and import permit process. Indonesia established a sovereign wealth fund (Indonesian Investment Authority, i.e., INA) in 2021 that has a goal to attract foreign investment for government infrastructure projects in sectors such as transportation, oil and gas, health, tourism, and digital technologies.

Yet, restrictive regulations, legal and regulatory uncertainty, economic nationalism, trade protectionism, and vested interests complicate the investment climate. Foreign investors may be expected to partner with Indonesian companies and to manufacture or purchase goods and services locally. Labor unions have protested new labor policies under the Omnibus Law that they note have weakened labor rights. Restrictions imposed on the authority of the Indonesian Corruption Eradication Commission (KPK) led to a significant decline in investigations and prosecutions. Investors cite corruption as an obstacle to pursuing opportunities in Indonesia.

Other barriers include bureaucratic inefficiency, delays in land acquisition for infrastructure projects, weak enforcement of contracts, and delays in receiving refunds for advance corporate tax overpayments. Investors worry that new regulations are sometimes imprecise and lack stakeholder consultation. Companies report that the energy and mining sectors still face significant foreign investment barriers, and all sectors have a lack of adequate and effective IP protection and enforcement, and restrictions on cross border data flows.

Nonetheless, Indonesia continues to attract significant foreign investment. According to the 2020 IMF Coordinated Direct Investment Survey, Singapore, the United States, the Netherlands, Japan, and China were among the top foreign investment sources (latest available full-year data). Private consumption drives the Indonesian economy that is the largest in ASEAN, making it a promising destination for a wide range of companies, ranging from consumer products and financial services to digital start-ups and e-commerce. Indonesia has ambitious plans to expand access to renewable energy, build mining and mineral downstream industries, improve agriculture production, and enhance infrastructure, including building roads, ports, railways, and airports, as well as telecommunications and broadband networks. Indonesia continues to attract American digital technology companies, financial technology start-ups, franchises, health services producers and consumer product manufacturers.

Indonesia launched the National Women’s Financial Inclusion Strategy in 2020, which aims to empower women through greater access to financial resources and digital skills and to increase financial and investor support for women-owned businesses.

Table 1 
Measure Year Index or Rank Website Address
TI Corruption Perceptions index 2021 96 of 180 https://www.transparency.org/en/cpi/2021/index/idn 
Global Innovation Index 2021 87 of 132 https://www.globalinnovationindex.org/analysis-indicator
U.S.  FDI in partner country ($M USD, stock positions) 2020 $18,715 M https://apps.bea.gov/iTable/iTable.cfm?ReqID=2&step=1 
World Bank GNI per capita 2020 $3,870 https://data.worldbank.org/indicator/NY.GNP.PCAP.CD?locations=ID

2. Bilateral Investment Agreements and Taxation Treaties

Indonesia currently has 26 bilateral investment agreements in force. In 2014, Indonesia began to abrogate its existing BITs by allowing the agreements to expire. However, Indonesia ratified a new BIT with Singapore in March 2021, marking the first investment treaty signed and entered into force after years of review. Indonesia reportedly developed a new model BIT which is currently reflected in the investment chapter of newly signed trade agreements. A detailed list of Indonesia’s investment agreements can be found at https://investmentpolicy.unctad.org/international-investment-agreements/countries/97/indonesia .

Indonesia is a member of the Association of Southeast Asian Nations (ASEAN). In November 2020, 10 ASEAN Member States and five additional countries (Australia, China, Japan, Korea and New Zealand) signed the Regional Comprehensive Economic Partnership (RCEP), representing around 30 percent of the world’s gross domestic product and population. RCEP encompasses trade in goods, services, investment, economic and technical cooperation, intellectual property rights, competition, dispute settlement, e-commerce, SMEs, and government procurement.

Indonesia is actively engaged in bilateral FTA negotiations. Indonesia recently signed trade agreements with Australia, Chile, Mozambique, the European Free Trade Association (Iceland, Liechtenstein, Norway, and Switzerland), and South Korea. Indonesia is currently negotiating Bilateral Trade Agreements with the European Union, United Arab Emirates, Canada, and other countries.

The United States and Indonesia signed a Trade and Investment Framework Agreement (TIFA) on July 16, 1996. This Agreement is the primary mechanism for discussions of trade and investment issues between the United States and Indonesia. The two countries also signed the Convention between the Government of the Republic of Indonesia and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income in Jakarta on July 11, 1988.  This was amended with a Protocol, signed on July 24, 1996. There is no double taxation of personal income.

Indonesia is a member of the OECD Inclusive Framework on Based Erosion and Profit Shifting. The government is party to the Inclusive Framework’s October 2021 deal on the two-pillar solution to global tax challenges, including a global minimum corporate tax.

3. Legal Regime

4. Industrial Policies

14. Contact for More Information

Marc CookEconomic Section
U.S. Embassy Jakarta
+62-21-50831000
BusinessIndonesia@state.gov

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