While Indonesia’s population of 260 million, growing middle class, and stable economy are attractive to U.S. investors, investing in Indonesia remains challenging. Since October 2014, the Indonesian government under President Joko Widodo, widely referred to as ‘Jokowi,’ has prioritized boosting investment, including foreign investment, to support Indonesia’s economic growth goals, and has committed to reducing bureaucratic barriers to investment, including announcing the creation of a “one-stop-shop” for permits and licenses at the Investment Coordination Board. However, factors such as a decentralized decision-making process, legal uncertainty, economic nationalism, and powerful domestic vested interests, create a complex investment climate. Other factors relevant to investors include: government requirements, both formal and informal, to partner with Indonesian companies, and to purchase goods and services locally; restrictions on some imports and exports; and, pressure to make substantial, long-term investment commitments. While the Indonesian Corruption Eradication Commission continues to investigate and prosecute high-profile corruption cases, investors still cite corruption as an obstacle to pursuing opportunities in Indonesia.
Other barriers to foreign investment include poor government coordination, the slow rate of land acquisition for infrastructure projects, poor enforcement of contracts, inefficient bureaucracy, inconsistent tax enforcement, an uncertain regulatory environment, and lack of transparency in the development of laws and regulations. New regulations are at times difficult to decipher and often lack sufficient notice and socialization for those impacted. In 2017, Indonesia made efforts to improve coordination among ministries, however, continued poor coordination continues creating redundant and slow processes, such as for securing business licenses and import permits.
Indonesia restricts foreign investment in some sectors through a Negative Investment List. 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. Energy and mining still face significant foreign investment barriers.
Indonesia began to abrogate its more than 60 existing Bilateral Investment Treaties (BITs) in February 2014, allowing the agreements to expire. While the U.S. does not have a BIT with Indonesia, the Indonesian government’s action reminds foreign investors of the unpredictability of the country’s investment climate.
Despite these challenges, Indonesia continues to attract foreign investment. Singapore, The Netherlands, United Kingdom, United States, and Japan were the top sources of foreign investment in the country in 2016 (latest available full-year data), according to the International Monetary Fund. Private consumption is the backbone of the economy and the middle class is growing, making Indonesia a promising place for consumer product companies, and the fastest growing economy within the 10-member Association of Southeast Asian Nations (ASEAN). 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.
|Measure||Year||Index or Rank||Website Address|
|TI Corruption Perceptions index||2017||96 of 180||http://www.transparency.org/news/feature/
|World Bank’s Doing Business Report “Ease of Doing Business”||2018||72 of 190||http://www.doingbusiness.org/rankings|
|Global Innovation Index||2017||87 of 127||https://www.globalinnovationindex.org/
|World Bank GNI per capita||2016||USD 3,400||https://data.worldbank.org/indicator/
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
With GDP growth registering 5.07 percent in 2017, Indonesia’s young population, growing middle class, strong domestic demand, stable political situation, and conservative macroeconomic policy make it an attractive destination for foreign direct investment (FDI). Indonesia is also the largest economy in ASEAN. Indonesian government officials welcome increased FDI, aiming to create jobs and spur economic growth, and court foreign investors, notably focusing on infrastructure development and export-oriented manufacturing. However, vague and conflicting regulations, inefficient bureaucracy, inconsistent tax enforcement, poor existing infrastructure, rigid labor laws, sanctity of contract issues, and corruption remain significant concerns for foreign investors. U.S. firms have expressed hope that better coordination under Indonesia’s current administration will help to improve the investment climate.
The Investment Coordination 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. Through its One Stop Service Center, BKPM facilitates licensing and permitting processes of 21 ministries and agencies. Special expedited licensing services are available for investors meeting certain criteria, such as making investments in excess of approximately IDR 100 billion (USD 7.4 million) or employing 1,000 local workers.
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 Negative Investment List 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 7.4 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 7.4 million), tourism sectors, distribution and warehouse facilities, logistics, and manufacturing and distribution of medical devices. In certain sectors, restrictions are looser 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% while the operation and maintenance of such plants is capped at 49% foreign ownership. For investment in certain sectors, such as mining and higher education, the 2016 Negative Investment List is useful only as a starting point, as additional licenses and permits are required by individual ministries. A number of sensitive business areas, involving, for example, alcoholic beverages, ocean savage, certain fisheries, and the production of some hazardous substances, remain closed to foreign investment or are otherwise restricted.
Notably, the 2016 revision added construction services up to IDR 50 billion (USD 3.7 million) and construction consulting services with a value up to IDR 10 billion (USD 0.8 million) to the list of enterprises reserved for micro, small and medium enterprises (MSMEs). In addition, foreign investment in small-scale and home industries (i.e. forestry, fisheries, small plantations, certain retail sectors) is reserved for MSMEs or require 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.
In November 2016, Bank Indonesia issued regulation 18/40/PBI/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%, though it contained a grandfathering provision. BI’s July 2017 regulation 19/8/PBI/2017 on the National Payment Gateway (NPG) subsequently imposed a 20% foreign equity cap on all companies engaging in domestic debit switching transactions. Firms wishing to continue executing domestic debit transactions are obligated to form partnership agreements with a NPG switching company.
Foreigners may purchase equity in state-owned firms through initial public offerings. Capital investments in publicly listed companies through the stock exchange are not subject to Indonesia’s Negative Investment List unless an investor is buying a controlling interest.
Other Investment Policy Reviews
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 then receive an investment registration from BKPM. In 2017, BKPM simplified the process for obtaining an investment registration from three days to one and changed the name of the permit from principle license to investment registration. To apply for an investment registration, investors must provide: a company deed legalized by a notary; clearance for the Indonesian company’s name from the Ministry of Law and Human Rights; the company’s certificate of domicile; a tax identification number; and proof of registration with either the Ministry of Industry or Ministry of Trade. Investors are also required to participate in the Workers Social Security Program or BPJS.
Once an investor has obtained an investment registration, 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. BKPM Regulation No.13/2017 provides an exemption for investors in certain criteria (i.e. sectors that do not involve construction activities or that are eligible for investment incentives), who can directly obtain a business license simultaneously with the investment registration. Previously the business license process averaged 260 days. Following the 2015 establishment of a BKPM One Stop Service Center, which includes representatives of 21 ministries/agencies, the process has been reduced to 23.1 days according to the World Bank’s 2018 Ease of Doing Business report, which placed Indonesia 72nd out of the 190 countries in the report. Special expedited licensing services are also available for investors meeting certain criteria, such as making investments in excess of approximately IDR 100 billion (USD 7.2 million) or employing 1,000 local workers, among other criteria. After obtaining an investment registration, investors in some designated industrial estates can directly start construction on projects. Companies can apply for other licenses, such as construction environment permits, after starting construction, though the permits must still be obtained before commercial production commences.
In August 2017, the government issued Presidential Regulation No. 91/2017, which created an investment task force and a nationwide “single submission system” for business licenses, designed to build on BKPM’s one-stop shop and further grow foreign investment. The task force will monitor and reduce investment impediments at both national and regional levels. It will also oversee the creation of a licensing “checklist” for special economic zones, industrial estates, free trade zones, and designated tourism zones to simplify the process of applying for licenses. The Online Single Submission (OSS) system is designed to share company application documents electronically between government ministries and agencies.
Foreign investors are generally prohibited from investing in micro, small, and medium enterprises 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 IDR 10 billion (USD 0.8 million) or with total annual sales under IDR 50 billion (USD 3.7 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 14.8 million); 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 before investing.
Screening of FDI
BKPM is responsible for issuing “investment licenses” (the term used to encompass both investment registration and business licenses) to foreign entities and has taken steps to simplify the application process through better coordination between various government institutions. BKPM has launched an online portal for its National Single Window for Investment, which allows foreign investors to apply for and track the status of licenses and other services online. In an effort to streamline the investment licensing and permitting process, BKPM launched a national One-Stop-Service Center to coordinate many of the permits issued by more than a dozen ministries and agencies required for investment approval. In addition, BKPM now issues soft-copy investment and business licenses. While BKPM One Stop Service Center’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 require to obtain one approval at the local level, businesses report that foreign companies often must 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.
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.
2. Bilateral Investment Agreements and Taxation Treaties
Indonesia has investment agreements with 44 countries, including: Algeria, Australia, Bangladesh, Chile, Croatia, Cuba, Czech Republic, Denmark, Finland, Guyana, Iran, Jamaica, Jordan, Kyrgyzstan, Libya, Mauritius, Mongolia, Morocco, Mozambique, Norway, Pakistan, Philippines, Poland, Qatar, Russia, Saudi Arabia, Serbia, Slovak Republic, South Korea, Sri Lanka, Sudan, Suriname, Syria, Sweden, Tajikistan, Thailand, Tunisia, Turkmenistan, Ukraine, United Kingdom, Uzbekistan, Venezuela, Yemen, and Zimbabwe. Indonesia does not have a bilateral investment treaty (BIT) with the United States.
In 2014, Indonesia began to abrogate its existing BITs by allowing the agreements to expire. By 2017, 23 BITs had expired, including those with Argentina, Belgium, Bulgaria, Cambodia, China, Egypt, France, Germany, Hungary, India, Italy, Laos, Malaysia, Netherlands, Norway, Pakistan, Romania, Singapore, Spain, Slovakia, Switzerland, Turkey, and Vietnam. Indonesia is currently developing a new model BIT.
Under the ASEAN Free Trade Agreement, duties on imports from ASEAN countries generally range from zero to five percent, except for products specified on exclusion lists. Indonesia also provides preferential market access to Australia, China, Japan, Korea, India, Pakistan, and New Zealand under regional ASEAN agreements and to Japan under a bilateral agreement. In accordance with the ASEAN-China FTA, in August 2012 Indonesia increased the number of goods from China receiving duty-free access to 10,012 tariff lines.
Indonesia is currently negotiating bilateral agreements with Bangladesh, Iran, India, Australia, Malaysia, New Zealand, Pakistan, Sri Lanka, South Korea, Turkey, the EU and the European Free Trade Association. In December 2017, Indonesia and Chile signed the Indonesia-Chile Comprehensive Economic Partnership Agreement (CEPA). Indonesia has expressed its desire to conclude the negotiation of the Indonesia-Australia CEPA, Indonesia-EU CEPA, Indonesia-European FTA (Switzerland, Norway, Iceland, and Liechtenstein), Indonesia-Turkey CEPA, Indonesia- Iran Preferential Trade Agreement (PTA), and Indonesia-Malaysia Bilateral Trade Agreement (BTA) by end of 2018.
The ASEAN Economic Community (AEC) arrangement came into effect on January 1, 2016, and was expected to reduce barriers for goods, services and some skilled employees across ASEAN. Indonesia is also participating in negotiations for the Regional Comprehensive Economic Partnership (RCEP), which includes the 10 ASEAN Member States and 6 additional countries (Australia, China, India, Japan, Korea and New Zealand). In February 2018, RCEP entered the 21st round of negotiations, which included discussion on trade in goods, trade in services, investment, economic and technical cooperation, intellectual property, competition, dispute settlement, e-commerce, SMEs and other issues.
The United States and Indonesia 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 the 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.
3. Legal Regime
Transparency of the Regulatory System
Indonesia continues to bring its legal, regulatory, and accounting systems into compliance with international norms, but progress is slow. Notable successes include passage of a comprehensive anti-money laundering law in late 2010 and a land acquisition law in January 2012, with revised implementing regulations issued in 2015. Although Indonesia continues to move forward with regulatory system reforms, these efforts have not yet created a level playing field for foreign investors, nor does the current regulatory system establish clear and transparent rules for all actors. Certain laws and policies, including the Negative Investment List, 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 costly red tape. Ineffective management, resistance from vested interests, and corruption are among the challenges faced by Indonesia in launching bureaucratic reform. U.S. businesses cite regulatory uncertainty and a lack of transparency as two significant factors hindering operations. Government ministries and agencies, including the Indonesian Parliament, 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.
Regulatory consultation in Indonesia is inconsistent, at best, despite the existence of Law No. 10/2004 on the Formulation of Regulations, article 53 of which states that the community is entitled to provide oral or written input into draft laws and regulations, and Law No. 12/2010 which further expands this right.
In June 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 November 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.
International Regulatory Considerations
As a member of ASEAN, Indonesia has successfully implemented regional initiatives, including ratification of the legal protocol and becoming one of the first five ASEAN Member States to implement live trading 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) 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. A lack of interagency coordination and/or insufficient technical capacity are among the challenges.
Indonesia joined the WTO in 1995. The government requires that all draft regulations concerning technical barriers to trade (TBT) and sanitary and phytosanitary standards (SPS) be submitted to the National Standards Body of Indonesia (BSN) to be included in Indonesia’s National Program for Technical Regulation. BSN has primary responsibility to notify draft regulations to the WTO; however, in practice, notification is inconsistent.
In December 2017, Indonesia ratified the WTO Trade Facilitation Agreement (TFA). At this point, Indonesia’s commitment only applies to a limited number of the TFA provisions, including use of customs brokers, penalty discipline, and pre-arrival processing.
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 reviews. The judiciary is susceptible to corruption and influence from outside parties.
The court system often does not provide effective recourse for resolving property and contractual disputes. 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 enacted in December 2011 included legal mechanisms designed to resolve some past land ownership issues. Indonesia also has 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 is also requiring mining companies to renegotiate their contracts of work to require higher royalties, more divestment, 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, issued in May 2016, commonly referred to as the 2016 Negative Investment List. It aims to consolidate FDI restrictions in certain sectors from numerous decrees and regulations to create greater certainty for foreign and domestic investors. The 2016 Negative Investment List enables greater foreign investments 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 Negative List contains a clause that clarifies that existing investments will not be affected by the 2016 revisions. The website of the Investment Coordination Board (BKPM) provides information on investment requirements and procedures: . Indonesia mandates reporting obligations for all foreign investors through BKPM Regulation No.14/2017. 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. In April 2017, the Indonesia Parliament 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
The Indonesian government generally recognizes and upholds the property rights of foreign and domestic investors. The 2007 Investment Law opened major sectors of the economy to foreign investment, while assuring investors’ protection from nationalization, except where corporate crime is involved. However, Indonesia’s economic nationalism continues to manifest itself through negotiations, policies, regulations, and laws that erode investor value. These include local content requirements, requirements to divest equity shares to Indonesian stakeholders, and requirements to establish manufacturing or processing facilities in Indonesia.
In 2012, the government issued a regulation requiring foreign-owned mining operations to divest majority equity to Indonesian shareholders within 10 years of operational startup using cost of investment incurred, rather than market value, for purposes of divestment valuation. In October 2014, with Regulation No. 77/2014, the government eased the foreign ownership restrictions to 60 percent for companies that smelt domestically (40 percent divestment) and 70 percent for companies that operate underground mines (30 percent divestment). However, regulations enacted in January 2017 again require foreign-owned miners to 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 government has indicated it intends the majority-share divestment requirement to supersede Regulation No. 77/2014 and apply to all foreign investors in the sector. Based on the 2009 Mining Law, all mining contracts of work must be renegotiated to alter the terms to more favor the government , including royalty and tax rates, local content levels, domestic processing of minerals, and reduced mine areas. Some mining companies had to reduce the size of their original mining work area without compensation.
In general, Indonesia’s rising resource nationalism supports the idea that domestic interests should not have to pay prevailing market prices for domestic resources. In the oil and gas sector, the government is increasingly explicit in its policy that expiring production sharing contracts operated by foreign companies be transferred to domestic interests rather than extended. While there is no obligation of compensation under the production sharing contract, this policy has begun to affect the Indonesian business interests of foreign companies.
The Law on Land Acquisition Procedures for Public Interest Development passed in December 2011 sought to streamline government acquisition of land for much-needed infrastructure projects. The law seeks to clarify roles, reduce the time frame for each phase of the land acquisition process, deter land speculation, and curtail obstructionist litigation, while still ensuring safeguards for land-right holders. The implementing regulations, first approved in 2012, went into effect on January 1, 2015; further revisions in 2015 expanded the scope of the new provisions. Some reports indicate that the law has reduced land acquisition timelines; with no accusations of illegal government expropriation of land.
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, but, in practice, are not always enforced.
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 ongoing cases. In December 2016, an International Centre for Settlement of Investment Disputes (ICSID) tribunal ruled in favor of Indonesia in the 2012 arbitration case of British firm Churchill Mining vs Indonesia. Currently, there are two on-going arbitration cases involving Indonesia, with Indian firm Indian Metals & Ferro Alloys, and Singaporean firm Oleovest.
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 a perceived increase in the number of arbitration cases submitted to ICSID, in February 2014 Indonesia began to allow its existing BITs, numbering more than 60, to expire as soon as the agreement allowed. BKPM formed an expert team to review the current generation of BITs and formulate a new model BIT that would more effectively protect national interests. The Indonesian model BIT is currently under legal review for finalization.
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 any 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 UN Commission on International Trade Law (UNCITRAL model law) and ICSID arbitration rules. Though 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. The court system in Indonesia works slowly. International arbitration awards, when enforced, may take years from original judgment to payment.
Indonesian Law No. 37/2004 on Bankruptcy and Suspension of Obligation for Payment of Debts is decidedly 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
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.
5. Protection of Property Rights
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 December 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 50 additional years. Indonesia ranks 106 on the World Bank’s Ease of Registering Property ranking in the 2018 Doing Business Report.
Intellectual Property Rights
Indonesia is currently on the U.S. Trade Representative’s (USTR) Special 301 priority watch list for intellectual property rights (IPR) protection. Indonesia’s failure to effectively protect intellectual property and enforce IPR laws has resulted in high levels of physical and online piracy. Local industry associations have reported tens of millions 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 Pasar Mangga Dua, were included in USTR’s Notorious Markets list in 2018.
Indonesian efforts to enhance IP protection policy were mixed this year. The 2016 Patent Law, continues to threaten fundamental IP protections. Among these concerns are a requirement to manufacture products or use processes covered by patents in Indonesia under Article 20 of the law as well as apparent restrictions on the patentability of computer programs and new uses and forms of existing drugs, disclosure requirements related to traditional knowledge and genetic resources, and unclear grounds and processes for issuing compulsory licenses. Indonesia has stated its intention to revise Article 20, but has yet to take concrete steps to do so. Indonesia continued implementation of the 2016 Law on Trademarks, which shortened and simplified examination periods, broadened protection for non-traditional marks, and increased criminal penalties and maximum fines (up to 10 years and approximately USD 155,000 in some cases). Indonesia acceded to the Madrid Protocol on Trademarks in January 2018, which will simplify the process for obtaining recognition of international trademarks. Indonesia also passed a long-awaited Presidential Regulation establishing a system of recordation and authorizing customs officials to conduct ex officio investigations, but it remained unclear whether the system will effectively protect IP rights-holders because the regulation does not provide for rights holders not domiciled in Indonesia from participating in the recordation system. Such a restriction could have a serious negative effect on the utility of the system and the rights of non-Indonesian owners of intellectual property.
In July 2015, the Directorate General for Intellectual Property (DGIP) and Ministry of Communications and Information Technology (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. In August 2015, Indonesia’s Creative Economy Agency (BEKRAF) launched an anti-piracy task force with film and music industry stakeholders. In late 2017, BEKRAF reported that it had received 739 complaints about IP infringing websites, and that the Indonesian government had blocked 186 IP infringing sites.
The Directorate General for Intellectual Property (DGIP) continued to employ approximately 20 investigators, but saw the number of investigations drop from 58 in 2016 to 16 in 2017. BPOM, Indonesia’s food and drug administration, reported the seizure of more than USD 3.5 million in counterfeit drugs and cosmetics during the year. 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. In 2012, the Supreme Court ruled that Customs may obtain rights for temporary injunctions to suspected counterfeit shipments at the border.
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 . For a list of local lawyers, see: https://id.usembassy.gov/u-s-citizen-services/attorneys.
6. Financial Sector
Capital Markets and Portfolio Investment
The Indonesia Stock Exchange (IDX) index has 535 listed companies as of December 2017 and reached a capitalization of 523 billion for the whole of 2017. There were 35 initial public offerings in 2017 – the most in 20 years. As of March 2017, domestic entities conducted more than half of total IDX stock trades (61 percent). 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. In 2017, the IDX introduced the first online sharia stock trading platform. As of December 2017, the ISSI is composed of 366 stocks listed on IDX’s Jakarta Composite Index.
Government treasury bonds are the most liquid bonds offered by Indonesia. Treasury bills are less liquid due to their small issue size. Liquidity in BI-issued Sertifikat Bank Indonesia (SBI) is also limited due to the three-month required holding period. The government also issues sukuk (Islamic treasury notes) treasury bills as part of efforts to diversify Islamic debt instruments and increase their liquidity. Indonesia’s sovereign debt as of April 2018 was rated as BBB- by Standard and Poor, BBB by Fitch Ratings and Baa2 by Moody’s.
The Financial Services Supervisory Authority (OJK) assumed BI’s supervisory role over commercial banks as of January 1, 2014 and began overseeing the capital markets and non-banking institutions on January 1, 2013, replacing the Capital Market and Financial Institution Supervisory Board.
Foreigners have good access to the Indonesian securities market and are a major source (38 percent of government securities) of portfolio investment. 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 as determined by the Negative Investment List.
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 interest rate margins in the region. As of November 2017, the 10 largest banks had IDR 4,407 trillion (USD 326.4 billion) in total assets. Loans grew 8.1 percent year-on-year in December 2017 (7.9 percent in 2016). Gross non-performing loans in December 2017 stood at 2.6 percent y-o-y.
OJK Regulation No.56/03/2016 has limited 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 in 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 together. To establish a representative office, a foreign bank must be ranked in the top 300 global banks by assets.
On September 8, 2015, OJK eased rules for foreigners opening 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.
Foreign Exchange and Remittances
The rupiah (IDR), the local currency, is freely convertible. Currently, banks must report all foreign exchange transactions and foreign obligations to the Bank of Indonesia (BI). With respect to the physical movement of currency, any person taking cash into or out of Indonesia in the amount of IDR 100 million (approximately USD 7,377) or more, or the equivalent in another currency, must report the amount to the Director General of Customs and Excise.
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;
- 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 March 2015, the government announced a regulation requiring the use of 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 application of these rules to various financial transactions remains vague and uneven.
The government places no restrictions or time limitations on investment remittances. However, certain reporting requirements exist. Any transfer of funds in excess of USD 10,000, whether incoming or outgoing, must be reported to Bank Indonesia (BI) along with the reason for the transfer.
Carrying more than IDR 100 million (approximately USD 7,377) 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 June 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.
Sovereign Wealth Funds
Indonesia does not operate a traditional sovereign wealth fund, but several SOEs invest in the domestic market. On December 21, 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). SMI can use the funds for direct investment in infrastructure financing, the placement of funds in the form of government securities, Bank Indonesia Certificates, and/or other financial instruments in accordance with the provisions of laws. Indonesia does not participate in the IMF’s Working Group on Sovereign Wealth Funds.
7. State-Owned Enterprises
Indonesia had 118 state-owned enterprises (SOEs) and 25 subsidiaries divided into 13 sectors as of April 2018, 10 of which contributed more than 85 percent of total SOE profit. Twenty are listed on the Indonesian stock exchange and 14 are special purpose entities under the SOE ministry with one under the Ministry of Finance (the Indonesian Infrastructure Guarantee Fund). 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 six planned SOE-holding companies intended to streamline the SOE sector. Information regarding the SOEs can be found at the SOE Ministry website (http://www.bumn.go.id/) (Indonesian 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 2017 (the most recent data available), SOE profits increased by 0.2 percent year-on-year to IDR 175 trillion (USD 12.9 billion) compared to 2016 which was IDR 164 trillion (USD 12.1 billion). As of the end of 2017, SOEs employ around 800,588 people, compared to 667,759 people in 2016. As of December 29, 2017, the 20 listed state-owned companies had a market capitalization amounting to IDR 1,833 trillion (USD 135.2 billion) or 25.98 percent of the total capitalization of shares listed on the Stock Exchange. Spending by SOEs on research and development varies by sector.
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, many sectors report that, in reality, 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.
While some state-owned enterprises have offered shares on the stock market, Indonesia does not have an active privatization program.
8. Responsible Business Conduct
Generally, Indonesian businesses do not have awareness of the broad concept of responsible business conduct (RBC) as a comprehensive management paradigm. 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 in 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 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, 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.). These laws, as with all laws in Indonesia, are not always enforced evenly. In May 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.
The Financial Services Authority (OJK) regulates corporate governance issues, but the regulations and enforcement are not yet up to international standards for shareholder protection.
OECD Guidelines On Corporate Governance Of SOEs
Indonesia does not adhere to the OECD Guidelines for Multinational Enterprises, nor does the government make efforts to encourage adherence to those guidelines. 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 in February 2015 due to a missed deadline for its first EITI report, but the suspension was lifted following publication of its 2012-2013 EITI Report in November 2015.
President Jokowi was elected in 2014 on a strong good-governance platform. However, corruption remains a serious problem according to some U.S. companies, preventing increased FDI. Although the government has issued detailed directions on combating corruption in targeted ministries and agencies, there has not been a concerted government-led effort to encourage or require companies to establish internal codes of conduct, or effective internal controls, ethics, and compliance programs to detect and prevent bribery of public officials. The government began prosecuting companies who engage in public corruption under new corporate criminal liability guidance issued in a 2016 Supreme Court regulation. 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 2017 dropped to 96 out of 180 countries, compared to 90 out of 176 countries in 2016. Indonesia’s score of public corruption in the country, according to Transparency International, remained steady at 37 in 2017 (scale of 0/very corrupt to 100/very clean). Indonesian ranks 4th of the 10 ASEAN countries.
Corruption remains pervasive despite laws to combat it. The Corruption Eradication Commission (KPK) is one of the most trusted and respected institutions in Indonesia, and President Jokowi has continually expressed support for a strong and independent KPK, opposing proposals by legislators to weaken the anti-graft body’s authorities. 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 74,500). KPK investigators are sometimes harassed, intimidated, or attacked due to their anticorruption work. In April 2017, unidentified assailants committed an acid attack against a senior KPK investigator; police have not identified the perpetrators of the attack and the case remains under investigation. 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.
UN Anticorruption Convention, OECD Convention on Combatting Bribery
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. HR Rasuna Said Kav. C1 Kuningan
Jakarta Selatan 12920
Indonesia Corruption Watch
Jl. Kalibata Timur IV/D No. 6 Jakarta Selatan 12740
+6221.7901885 or +6221.7994015
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.
Fighting terrorism remains a top priority for the Indonesian government, and President Jokowi has demonstrated a continued strong commitment to combating terrorism. Since the 2002 Bali bombings, which killed over 200 Indonesians and foreigners, Indonesian police have applied sustained pressure to successfully degrade the capabilities of terrorists and their networks operating within Indonesia’s borders. Nonetheless, U.S. designated terrorist organizations Jemaah Islamiyah (JI) and Jemaah Anshourt Daulah (JAD), as well as other violent extremist groups continue to plot attacks. Indonesia has successfully used a civilian-led law enforcement approach to counterterrorism. On January 14, 2016, a terrorist attack in central Jakarta and subsequent small-scale attack linked to JAD demonstrated that these groups continue to demonstrate a willingness and ability to carry out attacks with little or no warning (though operational capabilities remain weak). Returning foreign fighters from conflict zones with new operational training, skills, experience, networks, and access to funding could help launch more sophisticated attacks against Indonesian government personnel or facilities, Western targets, and other soft targets. However, at present, the primary target of terrorists remains local government and law enforcement entities.
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.
11. Labor Policies and Practices
The Indonesian labor market is generally open and flexible, although there are significant restrictions on the use of contract workers. 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 3.3 million (USD 243.4) per month in 2016 to IDR 3.6 million (USD 265.6) per month in 2017. Unions staged largely peaceful protests across Indonesia in 2017 demanding increases in the minimum wage, the repeal of the new formulation used to set up the minimum wage, and government efforts to address poor worker safety records and lax enforcement of health and safety regulations. Under the new wage setting policy adopted as part of the 2017 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. Unemployment has remained steady at 5.5 percent. Unemployment tends to be higher than the national average among young people.
Indonesian labor is relatively low-cost by world standards, but lack of adequate 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. The Ministry of Manpower Regulation No. 35/2015 on the Procedures of Hiring Foreign Workers was issued to lighten requirements for companies to bring in foreign employees. The regulation eliminates the provision that required companies to hire 10 local staff for every foreign worker hired, and dropped the requirement of work permits for foreigners who participate in seminars, speeches, workshops, board meetings, and trainings. However, the regulation still prohibits local companies from hiring foreign employees as commissioners. On March 29, 2018, the government issued Presidential Regulation No.20/2018 to further ease foreign worker regulations. The new regulation simplify the application process for RPTKA and does not require an IMTA for VITAS/KITAS. Presidential Regulation No.20/2018 also abolished the requirement of technical recommendation from the relevant ministry. Employers also note that the skill base 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 Labor maintains an inspectorate to monitor labor norms, but enforcement is stronger in the formal than in the informal sector. In January 2014, Indonesia launched a national insurance plan. In October 2011, the Indonesian government passed a revised Social Security Law, which took effect in January 2014, in which all formal sector workers must participate. Subject to a wage ceiling, employers must contribute an amount equal to 4 percent of workers’ salaries to this plan. In July 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.
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:
Trafficking in Persons Report: https://www.state.gov/j/tip/rls/tiprpt/countries/2017/271206.htm
Human Rights Report: http://www.state.gov/j/drl/rls/hrrpt/humanrightsreport/index.htm#wrapper
12. OPIC and Other Investment Insurance Programs
In 2010, the Overseas Private Investment Corporation (OPIC) updated its 1967 Investment Support Agreement between the U.S. and Indonesia by adding OPIC products such as direct loans, coinsurance, and reinsurance to the means of OPIC support which U.S. companies may use to invest in Indonesia. OPIC projects in Indonesia cover various sectors, including but not limited to banking, renewable energy, agribusiness, extractive industries, science, health care, and social assistance. Currently, OPIC has seven active projects in Indonesia with total commitment of USD 131.2 million. OPIC’s latest project was financing for Indonesia’s first utility-scale wind power project in 2016.
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.
13. Foreign Direct Investment and Foreign Portfolio Investment Statistics
Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
*Bank of Indonesia, GDP from the host country website is converted into USD with the exchange rate 13.300 for 2017.
**Indonesia Investment Coordinating Board (BKPM), January 2018
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 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 2016||Outward Direct Investment 2016|
|Total Inward||250,073||100%||Total Outward||58,890||100%|
|“0” reflects amounts rounded to +/- USD 500,000.|
Source: IMF Coordinated Direct Investment Survey for inward investment data. World Investment Report 2017 UNTCAD for outward investment data, country specific data for outward investment is unavailable.
Table 4: Sources of Portfolio Investment
|Portfolio Investment Assets 2016|
|Top Five Partners (Millions, US Dollars)|
|Total||Equity Securities||Total Debt Securities|
|All Countries||13,215||100%||All Countries||4,005||100%||All Countries||9,210||100%|
(PR Hong Kong)
Source: IMF Coordinated Portfolio Investment Survey, 2017. Sources of portfolio investment are not tax havens.
The Bank of Indonesia published comparable data.
14. Contact for More Information
U.S. Embassy Jakarta