2019 INVESTMENT POLICY AND REGULATORY REVIEW Indonesia © 2020 The World Bank Group 1818 H Street NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org All rights reserved. This volume is a product of the staff of the World Bank Group. The World Bank Group refers to the member institutions of the World Bank Group: The World Bank (International Bank for Reconstruction and Development); International Finance Corporation (IFC); and Multilateral Investment Guarantee Agency (MIGA), which are separate and distinct legal entities each organized under its respective Articles of Agreement. We encourage use for educational and non-commercial purposes. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Directors or Executive Directors of the respective institutions of the World Bank Group or the governments they represent. The World Bank Group does not guarantee the accuracy of the data included in this work. 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Photo Credits: Shutterstock.com TABLE OF CONTENTS ACKNOWLEDGEMENTS 2 GLOSSARY 3 1. INTRODUCTION 5 2. OVERVIEW OF INVESTMENT POLICY FRAMEWORK 7 A. Domestic Legal Instruments Regulating Foreign Investment 7 B. International Legal Instruments Regulating Foreign Investment 8 C. Key Institutions for Investment Promotion 11 D. Foreign Investment Promotion Strategy 13 3. INVESTMENT ENTRY AND ESTABLISHMENT 15 4. INVESTMENT PROTECTION 21 5. INVESTMENT INCENTIVES 26 6. INVESTMENT LINKAGES 29 7. OUTWARD FOREIGN DIRECT INVESTMENT 29 8. RESPONSIBLE INVESTMENT 29 9. RECENT POLICIES ON NEW TECHNOLOGIES 31 10. CITY SPECIFIC REVIEW—JAKARTA 32 11. COMPETITION LAW & POLICY 33 A. Merger Control 33 B. Leniency Program 35 ENDNOTES 36 LIST OF REFERENCE MATERIALS 38 2019 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA |1 ACKNOWLEDGEMENTS A team led by Priyanka Kher and Peter Kusek The report benefited from the comments of these prepared this report. The team core members were World Bank colleagues: Rolande Simone Pryce, Maximilian Philip Eltgen and Azza Raslan. The Massimiliano Cali, Bertine Kamphuis, Tanja K. team would like to thank Caroline Freund (Global Goodwin, Sara Nyman, Mariana Iootty De Paiva Director, Trade, Investment and Competitiveness), Dias, Guilherme De Aguiar Falco, Emma Verghese Christine Zhenwei Qiang (Practice Manager, and Abhishek Saurav.The team would like to thank Investment Climate), Ivan Nimac (Global Lead, Nick Younes for editing, and Aichin Jones and Investment Policy and Promotion), Georgiana Pop Brew Creative Pte Ltd for providing design, layout, (Global Lead, Competition Policy) and Graciela and production services. Miralles Murciego (Senior Economist, Competition Policy) for their guidance. The report was prepared under the Analyzing Barriers to Investment Competitiveness Project, Legal research for the preparation of this report supported with funding from the Prosperity Fund was carried out by the international law firm Baker of the United Kingdom. McKenzie. | 2 2019 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA GLOSSARY ACIA ASEAN Comprehensive Investment Agreement ASEAN Association of Southeast Asian Nations BI Bank Indonesia BKPM Investment Coordinating Board BSI Indonesia National Bureau of Standards CA Competition Authority CPC Central Product Classification CPTPP Comprehensive and Progressive Agreement for Trans-Pacific Partnership CSR Corporate Social Responsibility DKI Special Capital Region (of Jakarta) DTAA Double Taxation Avoidance Agreements FDI Foreign Direct Investment FET Fair and Equitable Treatment FIE Foreign-Invested Enterprise GATS General Agreement on Trade in Services GPGG General Principle of Good Governance ICSID International Centre for Settlement of Investment Disputes IIA International Investment Agreement IIPC Indonesia Investment Promotion Centre IPR Intellectual Property Rights IPRR Investment Policy and Regulatory Review ISDS Investor-State Dispute Settlement JDIH National Documentation Network and Legal Information KBLI Indonesian Business Classification Codes L/C Letter(s) of Credit MFN Most-Favored-Nation 2019 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA |3 MOE Ministry of Employment MOF Ministry of Finance MoHA Ministry of Home Affairs MP3EI Masterplan for Acceleration and Expansion of Indonesia’s Economic Development NIB Business Identity Number OFDI Outward Foreign Direct Investment OSS Online Single Submission PKLN Offshore Commercial Loan Coordinating Team PMA Foreign Capital Cultivation Company PPIR Prudential Principles Implementation Reports RCEP Regional Comprehensive Economic Partnership Agreement Rp Rupiah (currency) RPJMN National Medium Term Development Plan RPJPN National Long Term Development Plan RPTKA Expatriate Manpower Utilization Plan SCM Agreement on Subsidies and Countervailing Measures SNI Indonesian National Standard SOE State-Owned Enterprises TRIMs Agreement on Trade-Related Investment Measures TRIPS Agreement on Trade-Related Aspects of Intellectual Property Rights UNCTAD United Nations Conference on Trade and Development VAT Value-Added Tax WTO World Trade Organization | 4 2019 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA 1. INTRODUCTION This Investment Policy and Regulatory Review Bank Group. The research was primarily based (IPRR) presents information on the legal and on a review of currently applicable policies, laws regulatory frameworks governing foreign and regulations. In some cases, consultations with direct investment (FDI) and competition that regulators were conducted to collect up to date affect businesses and foreign investors in information. Indonesia. Since legal and regulatory frameworks are constantly evolving, a cut-off date was set The research was guided by a standardized for the research. This country review therefore questionnaire, covering a limited set of covers information available as of May 31, 2019, topics, including foreign investment entry, unless otherwise indicated in the review. IPRRs establishment, protection and select competition are available for the following middle-income related aspects. The questionnaire focused on countries (MICs): Brazil, China, India, Indonesia, de jure frameworks as generally applicable to a Malaysia, Mexico, Nigeria, Thailand, Turkey, and foreign investor, not located in any specialized Vietnam. or preferential regime (such as special economic zones). It primarily focused on national, economy- The research for preparing this IPRR was wide (rather than sector-specific) laws and undertaken by the international law firm Baker regulations. For the purpose of the research, it McKenzie, under the supervision of the World was assumed that the foreign investor is a private Figure 1. Overview of Topics Covered in IPRR Merger control Leniency ■ Key institutions for investment policy/rule ■ Remedies to limit ■ Extent of immunity on making, implemention and FDI promotion anticompetitive fines and damages ■ Key legal instruments effects of merger ■ Ease of admin ■ Transparency/consultation in laws and Main Policy & ■ Ease of admin in leniency regulations Legal Instruments procedures application and Institutions ■ Prohibited and Restricted Select Investment Entry Sectors ■ Equity ceiling Competition and ■ Minimum investment Policy Aspects Establishment requiremeent ■ FDI approval IPRR ■ R&D, local sourcing, ■ Schemes to increase Questionnaire employment, quantitative, local sourcing and geographic, export build capacity of local Other Areas suppliers (Linkages, OFDI, ■ Restrictions on OFDI Investment Responsible Protection ■ Measures on technology Investment, New Tech) ■ Expropriation ■ Transfer of currency Investment ■ Dispute Settlement Incentives ■ Fair administrative conduct ■ Source of Tax and financial incentives ■ Accessibility of tax and financial incentives 2019 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA |5 multinational company with no equity interest or promotion, as well as the country’s foreign management control by the government of its home investment promotion strategy; it also delineates country (that is, not state-owned enterprise). the country’s international investment legal framework, including the country’s commitments There are aspects that this IPRR does not under the World Trade Organization (WTO) cover. It is not a comprehensive review of and select international investment agreements the entire legal and regulatory framework (IIAs); affecting investment. Information presented is not exhaustive, but illustrative of the main topics and n Sections 3-6 cover the country’s policies and issues covered (for example, it does not exhaustively domestic legal framework concerning different list all available tax and financial incentives in the dimensions of the lifecycle of an investment: country). It does not present recommendations entry and establishment (Section 3), protection on reform areas. Notably, it does not capture de (4), incentives (5) and linkages (6); facto implementation of laws and regulations in the country. Given these limitations, information n Sections 7-9 explore emerging investment policy presented in this IPRR should be interpreted and and regulatory areas—Section 7 considers used keeping in view the overall country context outward FDI, Section 8 responsible investment, and realities. Further, it contains information in and Section 9 considers recent policies on new summary form and is therefore intended for general technologies; guidance only. It is not intended to be a substitute n Section 10 focuses on city-specific investment for detailed legal research. policy and regulatory measures in the largest This IPRR is organized as follows: commercial center; and n Section 2 provides an overview of the country’s n Section 11 covers select aspects of competition investment policy framework, including the law and policy, specifically merger control and legal instruments regulating foreign investment, leniency frameworks. key institutions involved in investment | 6 2019 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA 2. OVERVIEW OF INVESTMENT POLICY FRAMEWORK A. Domestic Legal Instruments main regulatory body for FDI is the BKPM, but Regulating Foreign Investment depending on the business activity, approvals may be required from specific industry regulators. FDI Law and Regulation Public Access to Foreign Investment The primary law regulating foreign investment Laws and Policies and the inflow and outflow of foreign capital in Indonesia is Law No. 25 of 2007 on Capital There is an obligation for the government to Investment (Law on Capital Investment or ensure public access to all laws and regulations, Law No. 25 of 2007). The primary regulations including on foreign investment, through the are the Investment Coordinating Board (BKPM) requirement to publish all laws and regulations. Regulation No. 6 of 2018 on Guidelines and Law No. 12 of 2011 on Formation of Laws and Procedures for Capital Investment Licensing and Regulations (Formation Law) requires that an Facilities (BKPM Regulation No. 6 of 2018), and enacted regulation be published in the following the Presidential Regulation No. 44 of 2016 on gazettes: (i) the state gazette, (ii) additional state List of Business Activities Closed and Open for gazette, (iii) state news gazette, (iv) additional Investment (Presidential Regulation No. 44 of state news gazette (v) regional gazette, (vi) 2016 or the 2016 Negative List). The law and the additional regional gazette or (vii) regional news regulations apply equally to domestic investment. gazette. Indonesia adopts the presumptio iures de The Law on Capital Investment provides for iure principle, whereby it is assumed the public non-discrimination (national treatment and most- knows the laws and regulations. This is in line with favoured treatment), as well as for the principles Article 81 of the Formation Law, which stipulates of certainty, openness, impartial efficiency, that the public is deemed to know the laws and sustainability, business security, and accountability regulations after such laws and regulations have as they pertain to implementing capital investment been officially promulgated. in the country. The main objectives of the Law The Government of Indonesia has undertaken are to increase national economic growth, create measures to ensure that the public has better job opportunities, improve sustainable economic access to laws and regulations. For example, it development, improve Indonesia’s competitiveness, established the National Documentation Network and increase its national technological capability. and Legal Information (JDIH), a platform where The Law on Capital Investment defines “capital the public can access legal information. Many investment” as all forms of capital investing provincial governments have established their own activity both by domestic and foreign investors JDIH website. In relation to foreign investment, (who may be a foreign individual, enterprise or BKPM has its JDIH platform, which provides government) to undertake business within the access to foreign investment-related regulations territory of Indonesia. “Foreign investment” is (although not necessarily comprehensive). BKPM’s defined as investment activity to conduct business JDIH platform is accessible here. in the territory of Indonesia by a foreign investor, whether using entirely foreign capital, or in Consultation with Stakeholders partnership with a domestic investor. Based on Article 96 of the Formation Law, the Foreign investment is also subject to sector- public has the right to give any verbal and/or specific laws and regulations. Sectoral laws also written advice to the government in relation to include restrictions for foreign investors. The draft laws and regulations. The law also specifies 2019 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA |7 the category of public that can give such advice, government may be retroactive, if it is necessary to that is, an individual or a group that has an interest avoid (i) a greater damage and/or (ii) disregard to in the substance of the draft laws and regulations. the rights of the citizen. However, the prevailing law does not impose any obligations on the government to ensure that As noted above, the Law on Capital Investment consultation with the public is conducted prior to states that the implementation of capital passing of any laws and regulations. investment is based on the principles of, among others, legal certainty and accountability. The Law further provides that each investor is entitled Predictability and Stability in Policies to (i) certainty of rights, law and protection, (ii) and Rules transparent information on the business sectors The Formation Law gives the Constitution being operated, (iii) rights to service, and (iv) all Law 1945 the final authority in legal matters facilities under prevailing laws and regulations. in Indonesia. It stipulates that any inferior law shall not contain provisions conflicting with the B. International Legal Instruments Constitutional Law of 1945. The Formation Law Regulating Foreign Investment also allows the review of any regulation that may be deemed in conflict with a superior regulation. Indonesia has undertaken legally binding It dictates the following hierarchy of regulations: international investment commitments through a variety of international investment n Constitutional Law of 1945 agreements (IIAs) — signed at the bilateral, n The decision of the People’s Consultative plurilateral and multilateral level. These Assembly of the Republic of Indonesia (Majelis commitments mainly cover entry and Permusyawaratan Rakyat) establishment conditions, protection, as well as the legality of specific types of incentives n Law, or Government Regulation in Lieu of Law (see Table 1.). It is important for Indonesia to reflect these commitments in its domestic legal n Government Regulation framework to ensure consistency as well as to monitor their compliance. n Presidential Regulation Having been a member of the WTO since n Provincial Regional Regulation January 1, 1995, Indonesia has commitments n Regency Regional Regulation under several WTO Agreements. Under the General Agreement on Trade in Services (GATS), Under the Formation Law the Government and Indonesia grants rights to services suppliers from People’s Representative Council of Indonesia need other WTO member countries. This includes to disseminate a draft of a rule before its passage services supplied through commercial presence into law, for the purpose of providing information (defined as establishment of a territorial presence), to the public and interested parties. in other words through FDI. These rights are granted through commitments undertaken in Rules may also not apply retroactively, with “schedules”. The “schedules” list sectors being certain exceptions. The Annex to the Formation opened, the extent of market access granted in Law states that generally a law should be effective on those sectors (for example, whether there are the date of its enactment. However, it also provides any restrictions on foreign ownership), and any that an alteration of the effective date is possible limitations on national treatment (whether some if it was expressly stated in the law, among other rights granted to local companies will not be things, by providing a specific effective date of the granted to foreign companies). Indonesia has law or delegating the determination of the effective made commitments on market access and national date to another law with the same hierarchy. Law treatment in 6 out of 12 services sectors that feature No. 30 of 2014 on Government Administration also in the WTO Classification:1 (i) Business services, stipulates that the effective date of a decision by the | 8 2019 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA Table 1. Indonesia’s International Investment Framework Agreement(s) as Basis of Commitments Type of Agreement Investment Policy Dimensions Covered WTO GATS Agreements Multilateral Entry and establishment WTO TRIMs Agreement Multilateral Entry and establishment incentives WTO SCM Agreement Multilateral Incentives WTO TRIPS Agreement Multilateral Protection Treaties with Investment Provisions (19 Plurilateral or Bilateral May cover entry and establishment, signed, 14 in force) protection, incentives Bilateral Investment Treaties (42 signed, 26 Bilateral May cover entry and establishment, in force) protection, incentives International Centre for Settlement of Multilateral Protection (Dispute settlement) Investment Disputes (ICSID) Convention Convention on the Recognition and Multilateral Protection (Dispute settlement) Enforcement of Foreign Arbitral Awards (New York Convention) IMF Articles of Agreement (Art. VIII Multilateral Protection Acceptance) Double Taxation Avoidance Agreements (68 Bilateral Taxation treaties in force) Source: World Bank Analysis (ii) Communication services, (iii) Construction committed not to apply certain investment and related engineering services, (iv) Financial measures that restrict or distort trade (local services, (v) Tourism and travel related services, content requirements, trade balancing and (vi) Transport services. In these sectors, requirements, foreign exchange restrictions Indonesia has made partial commitments on and export restrictions). These measures are market access and national treatment for specific prohibited both when the obligation for the services in 15 sub-sectors. “Partial” means that foreign investors is mandatory and when it is tied although commitments have been made, there to obtaining an advantage (that is, an incentive). are still limitations and/or reservations, which Incentives are further regulated by the WTO may differ in their restrictiveness. For example, Agreement on Subsidies and Countervailing they may be more restrictive by limiting the Measures (SCM), which prohibits, among equity contribution of the foreign investor or others, certain types of export subsidies. Under less restrictive by merely requiring foreign the WTO Agreement on Trade-Related Aspects service suppliers to become a member of a union of Intellectual Property Rights (TRIPS), foreign chamber. In addition, under GATS every member investors’ intellectual property rights are is obligated to unconditionally extend to service protected. In case of a violation of any of its WTO suppliers of all other WTO members Most- commitments, Indonesia may be sued under the Favored Nation (MFN) Treatment. However, WTO dispute settlement mechanism. Indonesia has made reservations in that regard in two services sectors: Construction and related Indonesia has further entered into obligations engineering services, and Financial services. For through international investment agreements — example, Indonesia reserves the right to maintain 26 Bilateral Investment Treaties (BITs) and 14 preferential shortlisting schemes for Association Treaties with Investment Provisions (TIPs) are of Southeast Asian Nations (ASEAN) contractors currently in force. The latter category comprises of civil works or industrial construction. treaties that include obligations commonly found in BITs (for example, a preferential trade Under the WTO Agreement on Trade Related agreement with an investment chapter. Table 2. Investment Measures (TRIMs), Indonesia has provides an overview of select IIAs: Indonesia’s 2019 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA |9 latest IIA (Indonesia-Qatar BIT, 2018), an IIA treatment. Both ACIA and the ASEAN-China with expansive regional coverage (ASEAN-China Investment Agreement include the prohibition of Investment Agreement, 2010), as well as its IIA performance requirements. Whereas the former with the largest home country measured by that makes a reference to TRIMs, the latter prohibits a country’s share in Indonesia’s total FDI stock larger number of performance requirements than in (ASEAN Comprehensive Investment Agreement, TRIMs (a so-called TRIMs+ standard). ACIA, 2012). The table shows that although generally the main protection guarantees are Some of Indonesia’s reviewed IIAs contain provided in the reviewed agreements, the BIT commitments to liberalize. Both the ASEAN- with Qatar provides for less protection because it China Investment Agreement and ACIA include does not include national and most-favored nation such commitment, but with a different scope Table 2. Comparison of Indonesia’s Select IIAs Largest Home Country Latest IIA (date of entry Expansive Regional IIA (% of total FDI stock): into force): Indonesia-Qatar Coverage IIA (highest ASEAN Comprehensive BIT (2018) number of members): Investment Agreement (2012) ASEAN-China Investment (Singapore) Agreement (2010) Scope of Application Covers Pre-establishment Yes No Yes Exclusions from Scope Taxation measures (with No Taxation (except exceptions), government expropriation and procurement, subsidies or transfers), government grants, services supplied in procurement, subsidies exercise of governmental or grants, services authority supplied in the exercise of governmental authority Standards of Treatment National Treatment (NT) Pre- and post-establishment No Post-establishment Most-Favored-Nation Pre- and post-establishment No Pre- and post- Treatment (MFN) establishment Fair and Equitable Yes Yes Yes Treatment (FET) Full Protection & Security Yes Yes Yes Expropriation Direct and indirect Direct and indirect Direct/indirect expropriation expropriation, payment of expropriation, payment of and payment of compensation compensation compensation Rights to Transfer Funds Yes Yes Yes Prohibition of Reference to TRIMs No TRIMs+ (Prohibiting Performance a larger number of Requirements performance requirements than TRIMs) Dispute Resolution State-State Dispute Yes Yes Yes Settlement Investor-State Dispute Yes Yes Yes, limited to post- Settlement establishment Source: World Bank Analysis based on IIAs obtained from United Nations Conference on Trade and Development (UNCTAD) Investment Policy Hub | 10 2019 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA and under reservations. ACIA offers both pre- seven publicly known investor-State arbitrations. establishment national treatment and MFN, but One of these cases has been settled, three decided only in specific sectors: manufacturing, agriculture, in favor of the State, two discontinued and one fishery, forestry, mining and quarrying, as well decided in favor of neither party (liability found as in services incidental to these. Reservations but no damages awarded). are included as country-specific schedules. The ASEAN-China Investment agreement offers pre- Acceptance of Art. VIII of the IMF Articles establishment most-favored nation treatment Agreement requires Indonesia to maintain and reserves all existing measures that are not in current account convertibility, enabling compliance with that treatment. In addition, both investors to transfer certain payments related treaties generally exclude the following from the to their investments. Indonesia is also party to 68 scope of the treaty: taxation measures, measures Double Taxation Avoidance Agreements (DTAAs) governing government procurement, subsidies or that are in force, influencing its ability to tax grants provided by one of the Parties, or services foreign investors and investments. supplied in exercise of governmental authority. C. Key Institutions for Investment Indonesia has in recent years overhauled its bilateral treaty commitments. Since 2014 Promotion Indonesia has effectively terminated 22 BITs, Indonesia has national and sub-national (regional mostly on a unilateral basis. Indonesia is also and provincial) level investment promotion currently reviewing its model BIT. In that regard agencies charged with investment promotion it is considering providing investor-state dispute functions for all economic sectors. settlement (ISDS) on a case-by-case basis, requiring the exhaustion of local remedies as National Level Institutions a pre-condition, as well as making mediation mandatory. At the same time, Indonesia is in the The Investment Coordinating Board, an process of entering regional or “megaregional” independent government agency that directly agreements. Indonesia is involved in ongoing reports to the President of the Republic of negotiations on the Regional Comprehensive Indonesia, is the main institution responsible Economic Partnership Agreement (RCEP), which for investment promotion in Indonesia (see covers ASEAN member states as well as large Box 1). economies in the pacific area such as China, Australia, and Japan. Moreover, in 2018 Indonesia The BKPM is also charged with regulatory expressed interest to join the Comprehensive functions, including but not limited to issuing and Progressive Agreement for Trans-Pacific regulations related to foreign investment. Before Partnership (CPTPP). CPTPP is a trade and the government established an Online Single investment agreement between 11 countries, Submission (OSS) system on July 9, 2018, to covering a market of 500 million people, 13.5% of consolidate most license applications into one world GDP, and 15.3% of world trade. online system, business licenses for most foreign investment companies had been issued by BKPM. Indonesia is a member of treaties covering On January 2, 2019, the OSS system operation investment arbitration. It is a member of the was transferred from the Coordinating Ministry of New York Convention and the International Centre Economic Affairs to BKPM (see further Section for Settlement of Investment Disputes (ICSID 3 – Investment Entry and Establishment – Foreign Convention), facilitating the enforcement of Investment Approval). arbitral awards. It has to date been a respondent in 2019 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA | 11 Box 1. Investment Coordinating Board (BKPM) —Composition and Main Functions The BKPM was established in 2007 to coordinate and facilitate investment promotion implementation and investment partnership, among other functions. The President Regulation No. 90 of 2007 on BKPM, as amended, stipulates its composition, main duty and functions. The BKPM is composed of: n Chairman n Co-chairman n Secretary General n Deputy Chairman for investment planning n Deputy Chairman for investment climate development n Deputy Chairman for investment promotion n Deputy Chairman for investment cooperation n Deputy Chairman for investment services n Deputy Chairman for investment supervision and controlling n Inspectorate Its main mandate is to coordinate policies and services relating to capital investment based on the provisions of laws and regulations of the country, and its functions include the following: n Analysing and proposing national investment planning n Coordinating implementation of national policies in the field of investment n Analysing and proposing policies of investment services n Determining norms, standards, and procedures for the implementation of investment services n Developing opportunities and potential investments in the region by empowering business entities n Creating investment maps in Indonesia n Coordinating promotional activities and investment cooperation n Developing investment sectors through investment fostering by, among others, promoting partnerships, improving competitiveness, creating healthy competition, and disseminating the broadest information in terms of investment activities n Fostering the implementation of investment, assisting in the settlement of various obstacles, and providing consultations on problems faced by investors in carrying out investment activities n Coordinating and implementing one-stop services n Coordinating domestic investors that are investing outside Indonesia n Providing licensing services and investment facilities n Fostering and serving general administration in the areas of planning, administration, organization and governance, employment, education and training, finance, law, public relations, archiving, data and information processing, and household equipment n Implementing other functions in the field of investments in accordance with the provisions of the legislation | 12 2019 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA The BKPM has established the Indonesia does not specifically focus on foreign investment Investment Promotion Centre (IIPC), an only, but investment in general. official representative of BKPM in other countries. This entity is in charge of promoting Sub-National Investment Promotion Indonesian investment to potential investors Agencies abroad. The IIPC’s functions are: Article 30 of the Law on Capital Investment n To carry out investment marketing campaigns empowers regional and provincial governments and provide investment information; to implement capital investment activities that fall within their authority. Most local Coordinate n and synchronize investment governments at the province and regency level marketing programs with Indonesian generally have their own local investment agency. representatives, relevant institutions in the The name of this agency may vary from one local respective state of domicile and working area, government to another, but it is commonly called as well as government institutions and business Dinas Penanaman Modal dan Pelayanan Terpadu entities in Indonesia; Satu Pintu or the Investment and One-Door n Facilitate investment mission from the Integrated Services Agency. respective state of domicile and working area Although the establishment of the Online to Indonesia and investment mission from Single Submission System (OSS) in 2018 has Indonesia to the respective state of domicile centralized and integrated licensing processes and working area; (see further Section 3 – Investment Entry and n Facilitate investment problem solving of new Establishment), regional governments continue or existing investors and encourage investment to supervise business actors to ensure they meet realization from the state of domicile and their commitments and impose sanctions for non- working area that have received licenses from compliance through the OSS agency. BKPM; D. Foreign Investment Promotion n Monitor investment interest and policy in the respective state of domicile and working area; Strategy The Indonesian government does not have a n Facilitate Indonesian investors who invest in the specific foreign investment promotion strategy, respective state of domicile and working area but its investment strategy and targeted n Propose the work programs and budget needs economic sectors can be inferred from the in order to accomplish the duties and achieve country’s 20-year National Long Term the investment targets set by BKPM; Development Plan (Rencana Pembangunan Jangka Panjang Nasional or RPJPN) (2005- n Perform other duties given by BKPM and 2025). The RPJPN has been implemented the head of Indonesia representatives in the through Law No. 17 of 2007, and is publicly respective state of domicile. accessible at the official website of the Ministry of National Development Planning/National Under President Regulation No. 90 of 2007 on Development Planning Agency. It is structured BKPM, as amended, a “high level” Investment to be implemented in four stages, with each Committee has been established to conduct stage having a five-year plan called the National research and obtain insights from experts, Medium Term Development Plan (Rencana stakeholders and public figures for the purpose Pembangunan Jangka Menengah Nasional of investment development. The Committee is RPJMN). The current five-year plan launched led by the chairman of BKPM and composed of 9 in January 2015, Third RPJMN of 2015-2019, members, who are experts, stakeholders and public contains the Nawacita development agenda (that figures in the field of investment. The Committee is, nine priority programs) of President Joko Widodo’s administration. 2019 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA | 13 In 2011, the Indonesian government further technology in the country. It identifies eight primary issued the Masterplan for Acceleration programs and 22 primary activities as the focus and Expansion of Indonesia’s Economic of development. The eight primary programs are: Development (Masterplan Percepatan dan agriculture, mining, energy, industrial, marine, Perluasan Pembangunan Ekonomi Indonesia tourism, telecommunications and the development “MP3EI”). The MP3EI forms an integral part of of strategic regions of Indonesia. The 22 primary the National Long Term Development Plan 2005 – activities encouraged for large scale investment 2025 and its main objective is to enable Indonesia are: shipping, textiles, food and beverages, steel, to become one of the 10 major world economies by defense equipment, palm oil, rubber, cocoa, animal 2025. It aims to boost Indonesia’s economic growth husbandry, timber, oil and gas, nickel, copper, and social development by targeted acceleration of bauxite, fisheries, tourism, food and agriculture, the development of existing programs, promotion the Jabodetabek area, the Sunda Straits strategic of certain targeted economic sectors, and increase area, transportation equipment, and information and in infrastructure and energy supply, as well as the communication technology. development of human resources and science and | 14 2019 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA 3. INVESTMENT ENTRY AND ESTABLISHMENT Market Entry and Sectoral Limitations to the 2016 Negative List. In addition, investment in some sectors can be subject to geographical Article 12(1) of Law No. 25 of 2007 on Capital restrictions. For instance, hospital business (under Investment expressly permits investment in KBLI No. 86103) is open to a maximum of 67% all business sectors of the economy, except in foreign investment; however, foreign investors those sectors that are specifically closed or originating from ASEAN countries may hold up open subject to restrictions under Indonesian to 70% equity in companies engaging in hospital law. More specifically, Article 12(2) states that business, provided that the hospital is located in foreign investment is prohibited in certain sectors a capital city in the eastern Indonesian provinces such as weapons and war equipment and in sectors (except for Makassar and Manado). that are determined closed by law (Prohibited Sectors). Article 12(3) empowers the Indonesian Certain sector-specific laws may also impose government to determine the sectors closed to prohibitions or restrictions on FDI in the relevant both domestic and foreign investment by way sector, or require the relevant regulator’s of Presidential Regulation based on criteria of approval. For example, the regulation on e-money health, morals, culture, environment, national issued by Bank Indonesia (BI), Indonesia’s central defense and security, and other national interests. bank, in May 2018 introduced a restriction on Similarly, Article 12(5) empowers the government foreign ownership in e-money companies. Apart to determine the business sectors open with from the Prohibited and Restricted Sectors, and restrictions based on national interest, also by way sector-specific restrictions, the general position is of Presidential Regulation (Restricted Sectors). that 100% foreign equity is permitted in a sector or sub-sector. The registration and licensing of On May 18, 2016, the Indonesian government FDI is centralized and integrated through the OSS enacted Presidential Regulation No. 44 of implemented in July 2018. 2016 on the List of Business Activities Closed and Open to Investment (2016 Negative List), which revoked the Presidential Regulation No. Prohibited and Restricted Sectors 39 of 2014 with a prior list of business activities Table 3 lists some of the Prohibited and closed and open for investment. The 2016 Restricted Sectors based on Law No. 25 of 2007 Negative List sets out the (i) Prohibited Sectors and the 2016 Negative List. The 2016 Negative specifically reserved for the government where no List contains a long list of business activities that are private investment is permitted, whether domestic prohibited or restricted, organized by reference to or foreign, (ii) Restricted Sectors in which the characterization of business activity described investment is restricted via conditions or equity in the Indonesian Business Classification Codes caps, and (iii) open business sectors permitting (Klasifikasi Baku Lapangan Usaha Indonesia 100% investment subject to specified licensing (KBLI). The KBLI numbers are used by BKPM and other requirements. It should be noted that to determine which foreign investment restrictions there are ongoing discussions relating to revision will apply to foreign investors under the 2016 of the 2016 Negative List. Negative List. Foreign investors originating from ASEAN The detailed list of the Prohibited and Restricted countries can avail themselves of higher foreign Sectors is provided online, here. equity caps in certain business activities pursuant 2019 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA | 15 Table 3. List of Major Prohibited and Restricted Sectors based on the 2016 Negative List and Law No. 25 of 2007 Prohibited Sectors Scope Only Foreign Investment Prohibited Weapons Weapons, ammunition, explosives and war equipment Hunting Catching and propagating plants and wildlife from natural habitat Forestry Exploitation of timber forest products of natural forest; procurement and distribution of forest plant seeds; utilization of water environment services business in forest area Fishing Fish catching using fishing ships in Indonesian waters, territory and open sea Manufacturing Sea sand extraction Electricity Power plants <1 MW, construction and installation of low/medium voltage electric power utilization, electric power installation examination and testing on low/medium voltage electric power utilization Oil and Gas Onshore upstream oil and gas production installation; onshore pipeline installation, horizontal/vertical tank, onshore oil and gas storage and marketing installation, onshore oil and gas drilling services, well operations and maintenance services, design and engineering services, technical inspection services Medicine Traditional medicine processing, natural extract, raw material pharmaceutical wholesale business, pharmacy, drugstore, health equipment store and optician Wholesale and Retail Trade Commercial vehicle and spare parts retail business, supermarket with retail space extent less than 1200 M2, minimarkets with retail space extent of less than 400 M2, retail business in a number of areas such as jewelry, antiques, textile, games and toys, and others Logistics Public shipping Telecom Provider, operator and construction service provider for telecom tower Financial Non-bank foreign exchange trader, conventional and Sharia smallholder’s credit bank Business Services Commission agent, property/real estate agent; survey of peoples opinion and market research (exception for ASEAN investors) Health Services Basic medical clinic services Media and Entertainment Publishing of newspaper, magazine, film promotion facility, advertisement, poster stills, billboards (exception for ASEAN investors) Both Domestic and Foreign Investment Prohibited Agriculture Cultivation of marijuana Fishing, Marine and Forestry Lifting of valuable artifacts from sunken cargo, utilization of coral from nature; catching certain listed fish species Beverages Alcoholic liquor, beverages, malt beverages Chemicals and Chemical Products Industrial chemical industry and ozone depleting substances; industry of certain chemicals listed as chemical weapons; pesticide active substances; alkaline chlorine production Culture and Education Public museums, historical and archeological remains Travel and Tourism Gambling/casino Logistics Provision of air navigation services Transportation Administration of motor vehicle testing, organization and operation of weigh stations, organization and operation of terminals for passenger land transport Telecom Management and operation of radio frequency spectrum and satellite orbit monitoring station; public broadcasting TV and radio | 16 2019 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA Restricted Sectors Restrictions on Foreign Equity Agriculture Seeding/cultivation of staple crops in area more than 25 ha (up to 49%); plantation seeding in area of more than 25 ha (up to 95%); certain fruit and vegetable seeding (up to 30%); horticulture (up to 30%); R&D on genetically modified organisms (GMOs) (up to 49%) Forestry Hunting, wildlife plant breeding (up to 49%); nature tourism (up to 49% but 70% for ASEAN investors) Energy and Mineral Resources Oil and gas construction services platform (up to 75%), spherical tank (up to 49%); offshore pipeline installation (up to 49%); oil and gas geology surveying (up to 49%); geothermal surveying, drilling (up to 95%); geothermal operation and maintenance (up to 90%) Industrial Automobile maintenance and repair (up to 49%) Defense and Security Main or supporting component industry (up to 49%); security consulting (up to 49%); security guard provider (up to 49%); security education and training (up to 49%) Public Works Drinking water business (up to 95%) Whole and Retail Trade Department store with retail space extent of 400 M2—2000 M2 (up to 67%); warehousing (up to 67%) Tourism Museum management (up to 67%); management of historical and archeological remains (up to 67%); tourism travel bureau (up to 67%); catering (up to 67%); hotels up to three stars ( ), motels, billiards, bowling, art galleries (up to 67%) Transportation Cargo land, passenger land, domestic sea, international sea, interprovincial inland water (up to 49%); airport transportation support services, airport activities, maritime cargo handling, freight (up to 67%); domestic and international scheduled commercial air transport (up to 49%) Communications and Telecom Telecom network services, content telecom services, call centers, ISP, data communication systems, public internet telephony (up to 67%); mail provider (up to 49%) Financial Investment finance company, venture capital (up to 85%); loss insurance, life insurance, reinsurance (up to 80%) Manpower Indonesian worker placemat service, worker/labor provider service (up to 49%); work training (up to 67%) Health Patent medicine (up to 85%); medical equipment testing (up to 67%); pest control (up to 67%); acupuncture (up to 49%); hospital, basic and special medical clinics (up to 67%); medical equipment supplier (up to 49%) Source: Analysis by Baker McKenzie based on country’s laws and regulations. Note: The table provides information on the 32 specific sectors identified for the purpose of this research2. The list of sectors is therefore not exhaustive. 2019 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA | 17 There is no general requirement to form a Minimum Investment and Paid-up joint venture with a local partner to establish Capital Requirements business in Indonesia, but in Restricted Sectors where less than 100% FDI is permitted, foreign Foreign investors are subject to minimum investors are (by implication) required to form investment as well as paid-up capital joint ventures with a local partner. For example, requirements. In general, per Article 6 of the because FDI in the automobile and repair industry BKPM Regulation No. 6 of 2018, the minimum is limited to 49% the only way a foreign company issued and paid-up capital for foreign investors can set up operations in that industry within is 2.5 billion rupiah (Rp), while the minimum Indonesia is by establishing a joint venture with investment value for foreign investors is more one or more local partners. A foreign investor may than Rp10 billion per line of business (excluding not bypass the foreign equity caps in the Restricted the investment in land and building). In other Sectors by mergers and acquisitions. words, the total minimum investment threshold is Rp10 billion, with 25% of total investment to be injected as equity. The remaining balance may Restrictions on Non-Equity Contract be injected as shareholder loan. For example, Based Investments if a foreign investment company engages in 3 Generally, no special restrictions or conditions business lines, then it must have a minimum of are imposed on foreign investors relative to Rp2.5 billion issued and paid-up capital and more domestic investors as regards non-equity, than Rp 30 billion investment. This threshold must contract-based investments such as franchising, be fulfilled within 1 year after the date the foreign outsourcing, licensing, and so forth. investor obtains a business license to establish commercial operations in the country. Forms of Establishment These requirements applicable to foreign Pursuant to Article 5 of the Law on Capital investors may be superseded by minimum Investment, all foreign capital investment in thresholds or other conditions in sector specific Indonesia must be implemented through an regulations. For example, Article 8 of the Ministry Indonesian limited liability company domiciled of Transportation Regulation No. PM 49 of 2017 in the country, often referred to as a Penanaman stipulates that a freight forwarder with a status of Modal Asing or “PMA company”. Foreign foreign investor must have minimum investment of investors may freely invest, and generally hold any US$4 million and minimum 25% of the authorized type of shares in a PMA company (for example, capital must be issued and paid-up. Similarly, in ordinary shares and preference shares). The the banking sector, for commercial banks there is BKPM requires domestic companies be converted a minimum paid up capital requirement of Rp3 into a PMA company if any shares of the domestic trillion. company are owned by foreign investors. Apart from the Restricted Sectors, there is no statutory Quantitative Limits prohibition against the establishment of a wholly There are generally no mandatory quantitative foreign-owned PMA subsidiary in any other sector, limits on the number of foreign service provided the necessary regulatory approvals to providers, enterprises or market players that carry on business activities in Indonesia have been can operate in a given sector. obtained. Foreign investors are also allowed to set up a representative office in Indonesia, subject to regulatory approvals. Setting up of branch offices Restrictions on Expatriate of foreign companies in Indonesia may be allowed Appointments only in certain fields, such as banking and certain In general, there is no specific restriction on energy projects. foreigners being appointed as board members of local companies or in key managerial positions, | 18 2019 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA but foreigners are not permitted to handle any provided. However, in practice, it may be take matters related to human resources. Under the longer for the issuance of the above-mentioned Ministry of Employment Decree No. 40 of 2012, documents. foreigners are prohibited from holding positions that handle matters related to human resources, In general, there is no regulation expressly specifically the following positions: requiring foreign investors to hire local employees, but Article 10 of the Law on Capital n Personnel director Investment states that an investment business n Industrial relation manager has an obligation to give priority to Indonesian manpower in meeting its hiring needs. It also n Human resource manager obligates an investment business to increase the n Personnel development manager competencies of Indonesian manpower through n Personnel recruitment supervisor training in accordance with applicable laws. n Personnel placement supervisor Local Sourcing Requirements and R&D n Employee career development supervisor Requirements n Personnel declare administrator The use of local content is required in some n Chief executive officer sectors (as an operational condition), but the n Personnel and careers specialist requirement applies equally to both domestic and foreign investors. For example, Article 22 (1) n Personnel specialist of Ministry of Trade Regulation No. 70/M-DAG/ n Career advisor PER/12/2013 (as amended) stipulates that modern n Job advisor stores and shopping centres must provide trading goods that are locally manufactured of at least 80% n Job advisor and counselling of the total products sold. n Employee mediator There are no requirements to invest in local R&D n Job training administrator in order to establish a business in the country. n Job interviewer n Job analyst Foreign Investment Approval n Occupational safety specialist Pursuant to Article 5 of BKPM Regulation No. 6 of 2018, an approval is required in the form The procedures for obtaining foreigners’ work of a business license (izin usaha) to conduct permits, including the timeline, are regulated commercial operations in the country. It should under Ministry of Employment Regulation be noted that domestic investors must also obtain No. 10 of 2018 on Procedures of Utilization this business license. In general, the business license of Foreigner Workers (MOE Regulation No. approval will be given if the investment does not 10). Under MOE Regulation No. 10, the relevant violate the 2016 Negative List and has fulfilled government institution must approve Expatriate the minimum investment amount requirement and Manpower Utilization Plan (RPTKA) within 2 applicable sector-specific requirements. working days after the RPTKA application has fulfilled the requirements. Specifically, for any The Government of Indonesia has recently works pertaining to a national priority program, introduced an Online Single Submission (OSS) the relevant government institution must grant the System. Business licenses for most foreign approval of RPTKA within 1 working day after the investment companies were previously issued by RPTKA application has fulfilled the requirements. BKPM. However, pursuant to the Government The relevant government institution must issue the Regulation No. 24 of 2018 on Electronic Integrated notification to the employers within 2 working days Business Licensing Services (GR 24/2018), the after the information on the candidates is correctly OSS system consolidates most license applications 2019 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA | 19 into one online system. The OSS system applies to an obligation to fulfil certain commitments and all business entities and is intended to capture all obligations which may vary from one sector to sectors and to integrate all government agencies. another. The business licenses and operational/ commercial licenses will only be effective after all The introduction of the OSS system signals a commitments and obligations imposed to enable change in approach to registering a business. the holders to conduct activities are fulfilled. These Rather than the government checking compliance commitments may take the form of obtaining prior to licenses being issued, the OSS system approvals or permits from the local government assumes that companies will self-assess and with jurisdiction over the project location. ensure compliance. In case of non-compliance, per GR24/2018 a company’s registration will be In general, a business license is currently frozen, and dealings with the government and issued without any expiration date. As such, it third parties will be delayed or will become more is valid as long as the company is still conducting difficult until there is compliance. Currently, the relevant business, or as long as the business foreign investors are first required to establish license has not been revoked. For a business a foreign investment company by obtaining the license issued through the OSS system, the establishment approval from Ministry of Law and process is regulated under GR 24/2018 and its Human Rights and a Business Identity Number implementing regulations, and described in the (NIB) from the OSS system. Thereafter, the Guidelines of Business Licensing Through Online foreign investment company needs to obtain its Single Submission (OSS) for Businesses issued necessary business licenses and any applicable in July 2018 by the Coordinating Ministry for operational/commercial licenses from the OSS Economic Affairs. Business licenses for certain system or other relevant authorities, depending on sectors such as electricity, downstream oil and the type of business. gas, mineral and coal, public works and housing, and licenses to open a branch or representative Under the OSS system, business licenses and office in the country are not yet administered by operational/commercial licenses are issued with the OSS system. | 20 2019 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA 4. INVESTMENT PROTECTION Protection Against Expropriation n Compensation for losses Investments in Indonesia, both domestic n Compensation for takeover and foreign, are generally protected against expropriation under the Law on Capital n Payments for technical assistance and technical Investment. Article 7 of the Law on Capital and management service fees, and payments Investment specifically prohibits the government to under project contracts, and payments for undertake any nationalization action or take over the intellectual property rights ownership rights of domestic or foreign investors n Proceeds from the sale of assets of capital unless under legal provision. In the event that the investment companies government either nationalizes or takes over the ownership right of any investors, the government These repatriation rights do not infringe upon is required to pay compensation based on market the government’s ability to require reporting value. If there is no consensus on the amount of of repatriation activities and transfer of funds, compensation among the parties relative to the receive tax and royalties and other government nationalized assets, then the dispute shall be settled income from capital investment, nor do these rights through arbitration. provide protection from creditors. Article 9 of the Law empowers the Minister of Finance and courts Restrictions on Inflow and Outflow of to request the bank or other institution to delay Funds transfer or repatriation until all liabilities of the investor are met. Article 8 of the Law on Capital Investment stipulates that an investor may freely transfer Indonesia currently permits the free transfer and repatriate in foreign currency its assets to of funds subject to a number of reporting parties appointed by the investor, in accordance requirements that aim to prevent, among other with prevailing laws of the country. The types of things, money laundering. In most cases, the bank assets include the following: executing the transfer of funds is responsible for reporting the transfer. Additionally, Bank Indonesia n Capital has introduced regulations requiring reports of n Profits, bank interest, dividends and other transactions over a certain value. income In general, all domestic transactions must n Additional funds which are required to finance be conducted using Indonesian currency capital investment (rupiah), with special exceptions granted to specific business sectors, purposes and areas as n Funds for repayment of loans stipulated by Bank Indonesia (see further Box 2.). This mandatory use of rupiah is not intended n Royalties or expenses as a capital control because any person can freely hold, transfer or exchange foreign currency. The n Personal income of expatriates who work in transfer of foreign exchange to and from abroad capital investment companies is, however, subject to disclosure and reporting n Proceeds of sale or liquidation of the capital obligations to Bank Indonesia. investment company 2019 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA | 21 Box 2. Mandatory use of Rupiah for Domestic Transactions in Indonesia Bank Indonesia Regulation No. 17/3/PBI/2015 on Mandatory Use of Rupiah Within the Territory of the Republic of Indonesia (PBI 17/2015) requires that a party (whether domestic or foreign) must use Rupiah for any transaction conducted within the territory of Indonesia. Article 4 of PBI 17/2015 provides that the mandatory use of rupiah is not applicable for: n Certain transactions related to the implementation of the State budget n Receipt or grant of offshore grants n International commercial transactions n Bank deposits in foreign currency n Foreign (offshore) loan transactions n Transactions in foreign currency conducted based on prevailing laws and regulations (such as any business in foreign currency conducted by banks n Transactions in the primary and secondary market of securities issued by the government in foreign currency) Pursuant to PBI 17/2015, “international commercial transactions” include: n Any export and/or import of goods to or from outside the Indonesian customs area; and/or n Cross border commercial transactions which include: n Cross-border supply (that is, supply of services from one country to another country. For example, online purchase or call centers); and n Consumption abroad (that is, services provided by service providers outside Indonesia to Indonesian citizens. For example, services for Indonesian citizens provided by foreign hospitals). Any additional activities related to the export or import of goods to or from outside the Indonesian custom area are not categorized as “international commercial transactions” and are therefore subject to the mandatory use of rupiah. These activities include activities conducted using vessels, airplanes, or other transportation means. Additionally, under Bank Indonesia Regulation No. 18/18/PBI/2016 on Foreign Exchange to Rupiah Transaction between Banks and Domestic Parties, any conversion of Rupiah to a foreign currency in excess of specified thresholds requires an underlying transaction. The specified thresholds are: n For the purchase of foreign currency against rupiah, limited to US$25,000 per month per customer for spot transactions and US$100,000 per month per customer for derivative transactions; n For the selling of foreign currency against Rupiah, limited to US$5 million per transaction per customer for a derivative transaction in the form of a forward and US$1 million per transaction per customer for an option transaction. The “underlying transaction” referred to above must relate to one or more of the following activities: n Domestic and international trade of goods and services, n Investment in the forms of direct investment, portfolio investment, loans, capital and other investment inside and outside the Republic of Indonesia, or n Granting of a bank loan or financing in foreign currency or rupiah for investment and trade activities. The “underlying transaction” must not include: n A placement of funds in banks in the form of, among others, savings account, demand deposit account, time deposit, or Negotiable Certificate Deposit, n Money transfers by a remittance company, n Granting of credit facility not yet withdrawn (for example, standby loan and undisbursed loan), or n Use of Bank Indonesia Securities in foreign currency. | 22 2019 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA Specific reporting requirements also apply to to submit certain reports to: Bank Indonesia, offshore loans. Under the prevailing laws and the Ministry of Finance (MOF), and Offshore regulations in Indonesia, a non-bank company Commercial Loan Coordinating Team (PKLN acting as a borrower of an offshore loan is obliged Team) (see for example, Box 3.). Box 3. Reporting Requirements for Offshore Loans BI issued Regulation No. 16/21/PBI/2014 on the Implementation of Prudential Principles in Managing Offshore Borrowings by Non-Bank Corporations (Regulation 16/21). Together with Regulation 16/21, BI also issued Bank Indonesia Circular Letter No. 16/24/DKEM of 2014 as last amended by Bank Indonesia Circular Letter 17/18/DKEM of 2015 on the Implementation of Prudential Principles in Managing Offshore Borrowings by Non-Bank Corporations which sets out the implementation of the Regulation 16/21 in more detail. Regulation 16/21 requires Indonesian non-bank companies that borrow offshore in foreign currency to fulfil three prudential criteria: (i) Hedging Ratio (ii) Liquidity Ratio (iii) Credit Rating. Under Regulation 16/21, there is no approval requirement. Borrowers must submit a report (together with supporting documents) to BI about their compliance with the prudential requirements. BI will monitor the compliance and if BI finds that a borrower is not in compliance with the three prudential criteria, it will apply an administrative sanction in the form of a warning letter and monetary sanctions. Transfer of Foreign Currency must be from Bank Devisa. BI Regulation No. 16/10/PBI/2014 on Receiving Foreign Currency From Export Revenue and Withdrawal of Offshore Loans (Regulation 16/10) requires that any foreign currency arising from (i) export revenue must be received through or (ii) offshore loans must be withdrawn from, a bank which is licensed by BI to do foreign exchange activities (Bank Devisa). Regulation 16/10 in conjunction with BI Circular Letter No. 18/5/DSta of 2016 on Receiving Offshore Loan Foreign Currency further emphasis that the offshore loans that are subject to this requirement are those arising from: n Non revolving loan agreements that are not used for refinancing purposes; n Any difference between the amount of a refinancing facility and the amount of the previous loan; and n Debt securities in the form of bonds, medium term notes, floating rate notes, promissory notes and commercial paper. The withdrawal of the loan must be reported by the borrower to BI. This report must be accompanied with a supporting document evidencing that the borrower has withdrawn the offshore loan from a Bank Devisa. This report must be filed with BI at the latest of the 15th day of the following month, which may be submitted together with the Monthly Report (as defined below). Also, the debtor must provide a written explanation and supporting documents to BI if there is any discrepancy of an equivalent amount of more than Rp50 million between the amount of loan disbursed and the total loan commitments. These requirements do not apply to offshore loans given for the purpose of refinancing where the amount of the new loan is the same as the existing loan. Reports on Offshore Loans to BI: Based on Bank Indonesia Regulation No. 16/22/PBI/2014 on the Reports of Foreign Exchange Traffic Activities and the Prudential Principles Implementation Report in Managing Offshore Loan for Non-Bank Corporation (as amended) (Regulation 16/22) a company that incurs an offshore loan must report it to BI. The purpose of Regulation 16/22 is to mitigate all risks caused by offshore borrowing by Non-Bank Corporations to Indonesian Monetary system. Under Regulation 16/22, a company intending to obtain long term offshore loans (that is, a loan having a tenor of more than one year) is required to submit an offshore loan plan report to BI. The offshore loan plan must be submitted no later than the March 15 of the relevant year. Any amendments to the offshore loan plan must be submitted at the latest by July 1 of the relevant year. Furthermore, a company that receive offshore loan is also required to file an online monthly report on the realisation of the offshore loans with BI at the latest of the 15th day of the following month. No offshore loan plan is required for short term offshore loans. 2019 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA | 23 In addition, the borrower must submit prudential principles implementation reports (PPIR) as follows: n PPIR and quarterly financial report: at the latest three months after the reported quarter n Attested PPIR and audited yearly financial report: by the end of June of the following year n Credit rating report: by the end of the month following the month when the loan is entered into Reports on Offshore Loans to MOF: The obligation to submit a report to the MOF is based on Decree of Minister of Finance No. 261/MK/ IV/5/1973 on Provisions on the Receiving of Offshore Loan, as amended by Decree of the Minister of Finance No. 417/KMK.013/1989 and further amended by Decree of the Minister of Finance No. 279/ KMK.01/1991. The reporting obligation to the MOF only applies for: n An offshore loan that has a term of more than 1 year after the date of signing n An offshore loan that has a term of 1 year or less but is revolving in nature, making the offshore loan exceed the term of 1 year. Reports on offshore loan to PKLN Team: The offshore loans that must be reported to the PKLN Team include: n Short-term offshore loans for trading purposes (for example, usance letters of credit (L/C), red-clause L/C, standby L/C) that are not used to fund and/or support projects that have correlation with the government or state-owned companies (including government banks/regional development banks); n Offshore loans received by privately owned companies for the funding of projects that do not have a correlation with the government or state-owned companies in the form of government capital participation, guarantee for raw materials supply, guarantee for the purchase of products, or correlation in any other form; and n Any other offshore loans determined by the PKLN Team (for example, offshore loans in the framework of money market such as money market line, term deposits for non-residents and commercial papers sold to non-residents, that are not related to the government’s or state owned company’s projects). Dispute Settlement Administrative Law is provided under Law No. 30 of 2014 on Government Administration (Law No. Law on Capital Investment provides that if 30), which requires that a government decision must there is a dispute between the government and be founded on provisions of a law, regulation and an investor that cannot be settled amicably, the General Principle of Good Governance (GPGG) dispute can be settled through arbitration, an based on the following principles: alternative dispute settlement forum, or by the courts. Consent for international arbitration is given n Legal certainty on a case-by-case basis. As Indonesia is a member n Expediency of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Award 1958, n Impartiality foreign arbitration awards are enforceable in n Accuracy Indonesia. However, foreign court judgments are n No abuse of authority not enforceable under Indonesian law. n Openness | 24 2019 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA n Public interest The authority also needs to inform the relevant n Good services party at least 10 working days before the enactment of the decision (except as regulated otherwise). n Other general principles to be determined, Law No. 30 also provides an opportunity for a party provided that the principle has been used as a to object to a government decision to the relevant basis for the judge’s consideration in a legally government institution. If a party does not agree binding court decision. with the result of the objection, the party may make Article 46 of Law No. 30 requires that if a an appeal to the higher authority of the relevant government decision creates an imposition to a government institution. Furthermore, a party may party, the authority will inform the relevant party file a claim to the administrative court if they remain with the legal basis, requirement, documents and unsatisfied with the result of the appeal. relevant facts before implementing that decision. 2019 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA | 25 5. INVESTMENT INCENTIVES Under Article 18 of the Law on Capital over land, immigration service facilities and import Investment, the Indonesian government license facilities. can grant fiscal incentives to investors who expand their business or undertake new The Ministry of Finance has promulgated a capital investment, and fulfil at least one of number of regulations granting tax incentives to the stipulated criteria. These criteria include give effect to the provisions of Articles 18-24 of employing a number of workers, investing in high- the Law on Capital Investments. The incentives priority areas or in infrastructure development, are made available to both domestic and foreign undertaking tech transfer, R&D or “pioneer investors. The main regulatory framework for tax industry” (with wide scale application and incentives includes the following: strategic value to Indonesia), locating in a remote n Minister of Finance Regulation No. 150/ or underdeveloped area, preserving environment, PMK.010/2018 on Tax Holiday Facility; using domestic capital goods or machines or equipment, or making partnerships with micro, n Government Regulation No. 18 of 2015 on Tax small or medium size enterprises or cooperatives. Facilities for Investments in Certain Business Sectors and/or Certain Areas as amended by Article 18 further stipulates that fiscal incentives Government Regulation No. 9 of 2016; may be in the form provided in the list below, promulgated in a Regulation of the Minister of n Law No. 8 of 1983 on Value Added Tax and Finance: Sales Tax on Luxury Goods as amended by Law No. 42 of 2009; n Net income tax reduction up to certain level of investment made within certain period; n Government Regulation No. 81 of 2015 on Import and/or Delivery of Certain Strategic n Import duty exemption or reduction for imported Taxable Goods that are Exempted from Value capital goods, machinery, or equipment Added Tax; domestically unavailable; n Law No. 10 of 1995 as amended by Law No. 17 n Import duty exemption or reduction for raw of 2006 on Customs; materials or supportive materials for production within certain period and meeting certain n Minister of Finance Regulation No. 176/ requirements; PMK.011/2009 as last amended by Regulation No. 188/PMK.010/2015 on Exemption of n Value added tax (VAT) exemption or suspension Import Duty for Import of Machine, Goods for imported capital goods or machinery and Materials for the Purpose of Industry or equipment domestically unavailable for Development or Expansion in the Framework of production within a certain period; Capital Investment. n Accelerated depreciation or amortization; Some examples of tax incentives available under n Land and building tax reduction, especially for these regulations include tax holidays and corporate certain sectors or in certain regions. income tax reduction for qualifying investments in a pioneer industry, and VAT and custom duty Articles 21-24 further provide that the government exemptions if services or goods meet certain may grant other non-tax benefits and facilitated stipulated criteria. For an overview of pioneer services and/or licensing to investors, such as rights industries, see Box 4. | 26 2019 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA Box 4. Pioneer Industries under Minister of Finance Regulation No. Nomor 35/PMK.010/2018 Minister of Finance Regulation No. Nomor 35/PMK.010/2018 lists the following as “pioneer industries” having broad and strategic relevance to the country’s economy: n Integrated upstream base metal industry n Integrated oil and gas refinery industry n Integrated oil, gas and coal-based petrochemical industry n Integrated inorganic chemical based industry n Integrated organic chemical based industry n Integrated pharmaceutical raw materials industry n Semiconductor and primary computer component industry that is integrated with computer manufacturing industry n Main component of communication tools industry that is integrated with smartphone manufacturing industry n Main component of health equipment industry that is integrated with irradiation, electromedical or electrotherapy manufacturing industry n Main component of industrial machinery industry that is integrated with machinery manufacturing industry n Main component of machinery manufacturing industry that is integrated with motor vehicles manufacturing industry n Robotic components industry that is integrated with manufacturing industry n Main component of ship industry that is integrated with ship manufacturing industry n Main component of aircraft industry that is integrated with aircraft manufacturing industry n Main component of train industry that is integrated with train manufacturing industry n Power plant engine manufacturing industry n Economic infrastructure n Digital economy, namely data processing, hosting and associated activities For certain services activities an incentive 3. Activities other than those stated in point 1 and is provided in the form of a 0% VAT rate. 2, above, whose results are used outside of the Export of taxable services is subject to VAT. customs area, by the following means: However, Minister of Finance Regulation No. 32/ PMK.010/2019 on Limitation of Activities and i delivered directly or indirectly, among others Type of Taxable Services that Export are Subject by means of mail and electronic means; to Value Added Tax (MoF Regulation 32) stipulates ii provision of access to be used outside of the that the following activities would be subject to a customs area. 0% VAT rate if certain requirements are met: 1. Activities related to export of movable goods to The requirements to qualify for 0% VAT are that: be used outside of the customs area; (i) the service is based on a written agreement that clearly states the type of the taxable service, gives 2. Activities related to immovable goods located details on the activities performed in the customs outside of the customs area; area to be exported, and the value of the delivery, 2019 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA | 27 and (ii) that there is payment made by the service in Special Economic Zones. For example, a plot of recipient to the exporter, supported by a valid proof land may be obtained through a land acquisition for of payment. Business activities carried out mainly public interest scheme funded by the state or the for export may also enjoy Bonded Zone facilities regional government budget. and the imported goods may be exempted from customs duty, excise and import taxes. Companies There is a centralized database of tax incentives having a Bonded Zone license may sell a maximum offered to investors in Indonesia, available at of 50% — for domestic consumption — of the the official website of BKPM (accessible here). previous year’s export realization value and/or In addition, the Indonesian government lists all tax sales value to other Bonded Zone areas. regulations on the official website of the Director General of Tax, accessible here. However, there For both domestic and foreign investment is no centralized database of financial incentives companies there are several regulations that available for investors. aim to provide financial incentives, for example, reducing production costs by cutting the price Eligibility Criteria and Approval Process of gas and electricity for certain industries. For instance, in the natural gas sector President The granting of tax/financial incentives to Regulation No. 40 of 2016 on the Determination investors is contingent upon satisfying certain of Natural Gas Prices for Certain Industry and criteria. If the incentive is provided in a published Regulation of Minister of Energy and Natural law/regulation, the eligibility criteria are often Resources No. 16 of 2016 on the Guidelines for the laid out in the same law /regulation. The approval Determination of Certain Prices and User of Natural process for receiving tax/financial incentives is Gas allows certain industries using natural gas (for not automatic. Applicants are required to apply example, steel, ceramics, petrochemical, and so for the incentives through the OSS system prior forth) to purchase natural gas at favorable prices. to commencing commercial operations in the This incentive is subject to, among others, obtaining country and the OSS system will notify the a recommendation from the Minister of Industry. investor if the stipulated criteria are met for the Similarly, in the electricity sector, Regulation of incentives. After the investor receives notification Minister of Energy and Natural Resources No. that the requirements are fulfilled, the investor 28 of 2016 on Electricity Tariff provided by PT must submit the supporting documents through Perusahaan Listrik Negara (Persero) regulates the OSS system. The incentives are granted by the specific tariffs for Industry and for certain special Director General of Tax on behalf of the Minister economic zone in Indonesia. of Finance in consultation with the BKPM and the ministry in charge of the sector in which the Law No. 39 of 2009 on Special Economic Zones investment is contemplated. provides incentive for companies that are located | 28 2019 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA 6. INVESTMENT LINKAGES For the purpose of this section research was No. 18 of 2015 on Tax Facilities for Investments in focused on availability of incentive schemes Certain Business Sectors and/or Certain Areas (as to increase local sourcing, technology transfer amended by Government Regulation No. 9 of 2016), and measures to improve information exchange certain tax incentives are available to investors between foreign investors and domestic suppliers. (whether domestic or foreign) for capital investment Several incentives aim at creating linkages between that has high local content or high absorption of domestic companies and foreign investors. Article Indonesian manpower. Additionally, some sector 18(3) of the Law on Capital Investment states that specific regulations may require investors to use the government may grant incentives to investors local content (for example, telecommunication, if capital investment undertakes technology transfer electricity, mining, oil and gas) or to transfer their or if it is in an industry that uses domestic capital technology to their local partner (for example, goods or machines or equipment. Under Regulation electricity sector). 7. OUTWARD FOREIGN DIRECT INVESTMENT For this section, research was focused on investors overseas. The BKPM is charged with whether there are any legal instruments coordinating the investment activities conducted specifically covering outward investment and if outside Indonesia by local investors. Certain there are, whether they impose any restrictions restrictions apply relative to the conversion of on outward investment. Indonesia does not the rupiah into foreign currency, as described in have an omnibus legislation to regulate Outward Section 4 (Investment Protection). Foreign Direct Investment (OFDI) by Indonesian 8. RESPONSIBLE INVESTMENT For this section, research was focused on target foreign investors or foreign investment, whether there are any measures within the and are equally applied to domestic investors. In country’s investment legislation that are addition, there are other laws that apply to foreign specifically targeted to ensure responsible investors as well, which may serve to preserve investment. Indonesia has undertaken several the environment and to ensure products produced measures in the country’s investment policy comply with national and international standards. and legal framework to promote responsible Notably, Indonesia has undertaken the following investment. None of these measures specifically measures: 2019 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA | 29 n Under Law on Capital Investment, an investor n Under the Indonesian Company Law, has the obligation to implement corporate companies that manage or utilize natural social responsibility. This obligation includes, resources or conduct activities that may among others, imperatives (i) to keep the have an impact on natural resources must environment sustainable; (ii) to create workers’ fulfil all relevant social and environmental safety, health, amenity, and welfare; and (iii) for responsibilities. The Company Law also investors engaged in a nonrenewable natural requires inclusion of social and environmental resource business to allocate funds for location responsibility funds in company budgets for all recovery. limited liability company, whether domestic or foreign. n The requirement to preserve the environment is also contained in specific regulations n Concerning labor conditions, under Law concerning forestry, and natural gas and oil. No. 24 of 2011 on Social Security Organizing For example, Law No. 22 of 2011 on Natural Oil Body, each person (including foreigners and Gas requires a business entity to prevent and working in Indonesia for at least 6 months) restore any environmental damage, including must be enrolled in the social security imposing a post-mining operation obligation. programs that are administered by the Similarly, under the Government Regulation relevant social security organizing body No. 45 of 2004 on Forest Protection a holder of (Badan Penyelenggara Jaminan Sosial a forest utilization permit is required to protect (BPJS). An employer has the obligation to enroll the forest, among other things, by (i) preventing its employees into the social security programs. its disruption by other parties, (ii) preventing, Even a definite period employee is required to be extinguishing and post-wildfire handling, (iii) enrolled into the social security programs. provisioning personnel and utilities for the protection of the forest, (iv) maintaining water n Law No. 20 of 2014 on Standardization and sources, and (v) cooperating with other holders Conformity Assessment imposes general of forest utilization permits, and the citizenry. requirements for compliance of a product with national standards. The regulation n BKPM Regulation No. 7 of 2018 on requires certain products to obtain a Standard Guidelines and Procedures for Maintenance Nasional Indonesia (SNI) mark, that is, a sign of the Implementation of Capital Investment the product meets the Indonesian National (BKPM Reg. 7) further requires every Standard. SNI mark approval is administered investor to be responsible for maintaining by the Indonesian National Bureau of Standards environmental sustainability and ties non- (Badan Standardisasi Nasional or BSN). BSN compliance to concrete sanctions. Under lists certain products that are subject to testing BKPM Reg No. 7, a company that causes pursuant to standards issued by the BSN. Based environmental damage or harms public safety on the relevant institution or ministry, there are may be subject to an administrative sanction two types of SNI (depending on the goods): (i) in the form of suspension and revocation of the mandatory SNI and (ii) voluntary SNI. Goods investment license, among other sanctions. that are subject to mandatory SNI should have SNI mark approval before the goods can be used or traded in Indonesia. The technical SNI mark approval process will depend on the relevant institution or ministry that oversees the goods. | 30 2019 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA 9. RECENT POLICIES ON NEW TECHNOLOGIES This section considers Indonesia’s recent policy through GR 82 in response to the concern over the measures on new technologies (that may affect transfer of data from Indonesia offshore. GR 82 both domestic and foreign investors). Globally, provided for a transitional provision of five years policy measures on new technologies tend to focus for existing electronic system operators to comply on the enabling (sectoral) regulatory framework, with the regulations. Under GR 82, electronic as well as on incentives, digital standards, and system operators that provide public services were clusters. At the same time, countries have taken required by October 2017 to have data centers and measures that highlight their changing approaches disaster recovery centers in Indonesia as part of a to national security. Other emerging policies that, business continuity plan. These data localization though not directly related to investment, as a matter requirements were replicated in the Ministry of of fact impact investments, are data localization Communication and Informatics Regulation No. 20 requirements as well as rules and regulations of 2016 on Personal Data Protection in Electronic concerning the treatment and use of digital data. Systems, under which Electronic System Operators that provide “public services” must have a data center Indonesia has passed new legislation on data and disaster recovery center in Indonesia. However, protection. It has a patchwork of laws and there was no definition of public services under GR regulations that address the use of an individual’s 82 or the Personal Data Protection Regulation. private or personal information through electronic media, the most recent being the Minister of GR 71 dispenses with the concept of “public Communication and Informatics Regulation No. 20 services”, and only mandates public electronic of 2016 on Personal Data Protection in Electronic system operators to place electronic systems Systems, which was enacted on December 1, 2016. and data in Indonesia. Even with the five-year Under this Regulation, personal data (for example, transitional period for GR 82, electronic systems name and date of birth) can only be “used” (which is operators had difficulties fulfilling the data widely interpreted to include acquiring, collecting, localization requirements. Multinational companies processing, analyzing, storing, transferring and tend to have global data center arrangements deleting) after express and opt-in consent is with their offshore group entities. Under GR 71, obtained from the relevant data subject. The consent Private Electronic System Operators can place can be obtained either manually or electronically, their electronic systems and data in or outside of and in the Indonesian language (although there is Indonesia, unless otherwise regulated. However, no prohibition of a dual language format). Further, Private Electronic System Operators must allow the “use” of personal data is limited for specific “supervision” by government agencies, including purposes set out in the collection form. granting access to the electronic systems and data for monitoring and law enforcement purposes (all Data Localization of which will be subject to further implementing regulations). In addition, GR 71 stipulates that Indonesia has recently reduced data localization institutions that are deemed to have “strategic requirements by enacting Government electronic data”, which include those in, for Regulation No. 71 of 2019 on the Implementation example, finance, health care, defense and other of Electronic Systems and Transactions, effective sectors, must connect electronic documents and on 10 October 2019 (GR 71). GR71 revokes electronic backup records to a certain data center in the Government Regulation No. 82 of 2012 on the event of an incident that must be reported to the the Implementation of Electronic Systems and cyber security authority. Institutions are not defined, Transactions (GR 82). On October 15, 2012, so they may include private companies, and there Indonesia had enacted data localization requirements is also no definition for “certain data center”, so further clarification is required. 2019 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA | 31 10. CITY SPECIFIC REVIEW — JAKARTA Special Capital Region of Jakarta (Daerah The Central Government sought to limit such Khusus Ibukota Jakarta or DKI Jakarta) is the local requirements by annulling problematic capital city of Indonesia, and one of the main bylaws issued by local governments, under destinations for foreign investment in Indonesia. a special authority granted under Law No. The BKPM report for investment value per province 23 of 2014. However, the Constitutional in Indonesia for the year 2018 ranks DKI Jakarta Court of Indonesia ruled that authority to be as the province with the second biggest investment unconstitutional. Law No. 23 of 2014 empowers (i) value (behind only West Java). As the capital city of the Governor (head of province), as representative of Indonesia, DKI Jakarta is home to the Government the Central Government, to annul legislation issued and Ministries’ offices, the National Stock Exchange, by the Regency/City Government (Regency/City Bank Indonesia, BKPM’s head office and the OSS Regulation) and (ii) the Ministry of Home Affairs office (now integrated into BKPM). Additionally, (MoHA) to annul legislation issued by Provincial most of the major corporations’ and financial Government (Provincial Government Regulation) institutions’ headquarters are in DKI Jakarta. This that would be contrary to the provisions of more provides better access to foreign investors in DKI authoritative laws and regulations, or contrary to Jakarta in terms of coordinating with the relevant the public order or decency. However, decisions of government authority regarding the issuance of the Constitutional Court (No. 137/PUU-XIII/2015; the licenses or permits that are required for their No. 56/PUU-XIV/2016) deemed MoHA and the business activities. Governor’s authority to be unconstitutional. As a result, the Supreme Court remains the only avenue Indonesia recognizes regional autonomy and available to review problematic regulations issued there is wide law-making authority at the by a province, regency or city. Additionally, under regional levels. Law No. 23 of 2014 on Regional Regulation No. 1 of 2011 on judicial review at the Government stipulates that a law that is enacted Supreme Court, the public is not allowed to make at the sub-national level should not conflict with oral submissions and the process is solely based on any regulation at a higher (that is, national) level. document review. Thus, for example the regulations issued by the regional government of DKI Jakarta commonly Furthermore, local regulations are often not supplement or act as the implementing regulations easily accessible. There is no single repository of the regulations at the national level. Yet regional of local regulations available in Indonesia. Each governments, like the Jakarta regional government local government organizes its own database of can create cumbersome local regulations that hamper regulations. It is usually available under the JDIH the local business climate. For example, additional platform of that region. For example, Jakarta’s local content requirements or lengthy procedures to JDIH platform is available here. However, the local obtain certain licenses that may be time consuming regulation databases are typically not user-friendly, (for example, lengthy procedures to obtain a license nor always up to date and complete. to construct or additional reporting requirement of employment welfare) may be imposed. | 32 2019 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA 11. COMPETITION LAW & POLICY For the purposes of this section research Pursuant to the Merger Control Framework, was focused on merger control and leniency mergers, consolidations and acquisitions (as frameworks in the country. defined in Article 1 of Law No. 5) that result in combined assets, sales (or both) exceeding The primary law governing competition the following prescribed thresholds must be in Indonesia is Law No. 5 of 1999 on the notified to the CA: Prohibition of Monopolistic Practices and Unfair Competition, which came into force on n For a non-banking sector, if the asset value 5 March 2000. of the merged entity exceeds Rp2.5 trillion or the turnover of the merged entity exceeds Rp5 The Indonesian Competition Commission (Komisi trillion; or Pengawas Persaingan Usaha) (Competition Authority or CA), established in 2000, is the main n For the banking sector, if the combined asset body responsible for implementing competition value of the merged entity exceeds Rp20 trillion law and policy in the country. The asset value is determined based on the calculation of assets located in Indonesia and the A. Merger Control turnover value is determined based on the turnover Indonesia’s merger control regime is provided from Indonesia. in a number of legal instruments (collectively, A merger, consolidation or acquisition is the Merger Control Framework): deemed to have occurred when there is a n Articles 28 and 29 of the Law No. 5 of 1999 on change of control. The term “control” is defined Prohibition of Monopoly and Unfair Business as: (i) voting rights above 50%; or (ii) voting rights Competition Practices; equal to or less than 50%, that include the ability to influence or determine the management policies n Regulation No.3 of 2019 on the Assessment of or the management of a business entity. Mergers, Consolidations or Share Acquisitions which may lead to Monopolistic Practices or Unfair Indonesia has adopted a mandatory post- Business Competition (the 2019 Regulation); merger notification regime, although there is also a voluntary pre-merger procedure n Government Regulation No. 57 of 2010 on available. Voluntary pre-closing notification Mergers, Consolidations and Acquisitions of (referred to as “consultation”) is available using Shares that May Result in Monopoly or Unfair the same form and requiring the same level of Business Competition Practices; and detail as the mandatory post-closing notification process. The consultation process results in n Regulation No. 04 of 2012 on Guidelines for the CA issuing an opinion to which the CA is the Imposition of Fines for Delay for Notifying committed following subsequent submission of Mergers, Consolidations and Acquisitions. the mandatory post-closing notification, unless The Competition Authority is the primary there is a material change to the competitive enforcement authority established for the conditions in the market and so long as the gap enforcement of the Merger Control Framework between the issued opinion and submission of the in the country. It should be noted, however, that mandatory post-closing notification is no more there may be other filing obligations in certain than two years. The consultation process therefore sectors, such as banking and finance, and oil and gas does not negate the obligation of a mandatory post- (upstream), and for foreign investment in general. merger notification filing. However, there will not 2019 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA | 33 be another assessment of the merger in question anticompetitive or monopolistic conduct resulting so long as there is no material change. Mandatory from the transaction. In practice, the remedies post-merger notification must be made no later agreed by the CA to date are limited to behavioural than 30 days after the transaction completes. The remedies, such as reporting sales and market shares. forms of notification are available at the CA’s To date, there is no precedent of a structural remedy website, but available only in the local language. having been required by the CA. Two-Phase Procedure, Review Period File Access and Third Party Intervention and Information Requests Third parties do not have the right to access the There is no fast track procedure available CA merger notification files. The notice on the in Indonesia for review of mergers by the CA’s website contains the names of the parties, the CA, although the 2019 Regulation appears to date a notification was submitted, and the status provide for a two-phase review process. The of the submission. Apart from the CA’s opinion, formal review process is split into an “initial which is subject to the filing party’s redaction, no assessment” and a “comprehensive assessment”. other information is open to public. If no competition concerns arise during the initial assessment period, a decision to that effect will Third parties can submit non-solicited be adopted. However, the 2019 Regulation does information formally or informally to the CA not state the maximum period for this first review. regarding a transaction and can request to Only if material competition concerns arise will be interviewed by the CA during the formal the CA conduct a comprehensive assessment that review phase. However, the CA has the right to will be conducted by an “assessment commission”. make the final decision on whether the interview The formal substantive review period expires 90 takes place. working days after the full formal notification is declared complete. Although there is no Substantive Assessment limitation on the number of times the CA may The substantive assessment includes the request information during its review, the 2019 review of typical effects on competition, Regulation provides that clarification and review including market concentration, barriers to of supporting documents and the notification entry, unilateral and coordinated effects, and will be conducted by the CA in 60 days or fewer. whether there are efficiency gains or a failing However, in practice, additional information firm defence. Additional factors may be analysed requests may be made after the formal review including the protection of micro, small and stage has been initiated. medium enterprises, impact on workforce and regulatory requirements. Remedies If the CA determines that a merger, consolidation Penalties and Appeals or acquisition causes a negative impact on Statutory penalties are imposed for failure to competition and remedies are required, the submit notification in a timely manner, in the CA will issue a Conditional Approval setting amount of up to Rp1 billion per day of delay out the behavioural or structural remedies it with a maximum penalty of Rp25 billion. If requires to alleviate competition concerns. The remedies are not implemented, the CA may initiate filing party has 14 working days from receipt of the an investigation, which may eventually lead to Conditional Approval to agree to these remedies. administrative penalties for the violation of the If the proposed remedy is accepted by the filing law (for example, abuse of dominance) including party, the CA will issue an opinion approving the fines of up to Rp25 billion per violation found and/ transaction subject to the remedy. If the merging or undoing the transaction. There is no separate party fails to respond to or fulfil the remedy, the CA violation for failure to implement a remedy. will conduct an investigation into the existence of | 34 2019 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA The CA’s decisions arising from an investigation B. Leniency Program may be appealed to a district court, with final appeal to the Supreme Court (on application of The current legislation covering anti- law, not assessment of facts). monopolistic practices in Indonesia does not recognize leniency. A draft revision to the law includes a proposal to have a leniency program Publicity and Deadlines for Merger in place in the future, in order to encourage Decisions cartelists to come forward voluntarily and report A short description of the notification decisions their activities to the CA. In the past, many is published on the CA’s website, which includes cartel-related decisions reached by the CA were the CA’s analysis subject to redactions and overturned in the courts due to a lack of direct corrections requested by the filing party. Typically, evidence. It is believed that by introducing a the reasoning of the CA is included in the published leniency program, more cartelists will provide decision but the values of the data (for example, first-hand evidence and assist the CA with its market share percentage, revenue amount and other investigations. similar confidential information) are redacted. 2019 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA | 35 ENDNOTES 1 The WTO services sectoral classification list Services are categorized into 12 sectors: (W/120) is a comprehensive list of services sectors and sub-sectors covered under the GATS. It was 1. Business services compiled by the WTO in July 1991 and its purpose 2. Communication services was to facilitate the Uruguay Round negotiations, ensuring cross-country comparability and 3. Construction and related engineering services consistency of the commitments undertaken. The 160 sub-sectors are defined as aggregate of the 4. Distribution services more detailed categories contained in the United 5. Educational services Nations provisional Central Product Clas). The list can be accessed under the following link: 6. Environmental services http://www.wto.org/english/tratop_e/serv_e/ mtn_gns_w_120_e.doc. 7. Financial services 8. Health related and social services 9. Tourism and travel related services 10. Recreational, cultural and sporting services 11. Transport services 12 Other services not included elsewhere | 36 2019 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA 2 For the purpose of this research, 32 sectors have been identified. This is not an exhaustive list of all sectors of the economy. Primary: Services: 1. Agriculture, Hunting, Forestry, and Fishing 18. Electricity, Gas, and Water 2. Mining, Quarrying, and Petroleum 19. Alternative Energy 20. Construction Manufacturing: 21. Wholesale and Retail Trade 3. Agroprocessing, Food Products, and Beverages 22. Hotels and Restaurants 4. Textiles, Apparel, and Leather 23. Other Travel and Tourism-related Services 5. Chemicals and Chemical Products 24. Logistics, Transport, and Storage 6. Rubber 25. Telecommunications 7. Plastic Products 26. Computer and Software Services 8. Pharmaceuticals, Biotechnology, and Medical Devices 27. Financial Services including Insurance 9. Metals and metal products 28. Real Estate 10. Non-metal mineral products 29. Business Services 11. Wood and wood products (other than Furniture) 30. Professional, Scientific and Technical Services (Engineering, Architecture, and 12. Furniture so on) 13. Paper and paper products 31. Health Services 14. Printing and publishing 32. Media and Entertainment 15. Automobiles, Other Motor Vehicles, and Transport Equipment 16. Information Technology and Telecommunications Equipment 17. Machinery and Electrical and Electronic Equipment and Components 2019 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA | 37 LIST OF REFERENCE MATERIALS Primary Sources 16. Law No. 13 of 2003 on Labor 1. Law No. 25 of 2007 on Capital Investment 17. Law No. 19 of 2013 on State Owned Enterprises 2. Law No. 40 of 2007 on Limited Liability Companies 18. Law No. 24 of 2011 on Social Security Organizing Body 3. Law No. 12 of 2011 on Formation of Laws and Regulations 19. Law No. 20 of 2014 on Standardization and Conformity Assessment 4. Law No. 3 of 2014 on Industry 20. Law No. 23 of 2014 on Regional Government 5. Government Regulation No. 142 of 2015 on Industry Zone 21. Law No. 11 of 2008 as amended by Law No. 19 of 2016 on Electronic Information and 6. President Regulation No. 44 of 2016 on List Transactions of Business Activities Closed and Open with Requirements for Foreign Investment 22. Government Regulation No. 82 of 2012 on the Implementation of Electronic Systems and 7. President Regulation No. 90 of 2007 on Transactions Investment Coordinating Board (as amended by President Regulation No. 86 of 2012) 23. Government Regulation No. 10 of 2011 on the Guidelines for the Provision of Foreign 8. President Regulation No. 33 of 2012 on Indebtedness and Aid National Documentation Network and Legal Information 24. Minister of Communication and Informatics Regulation No. 20 of 2016 on Personal Data 9. Government Regulation No. 24 of 2018 on Protection in Electronic Systems Electronic Integrated Business Licensing Services 25. Investment Coordinating Board Regulation No. 7 of 2018 on Guidelines and Procedures 10. Investment Coordinating Board Regulation for Maintenance of the Implementation of No. 6 of 2018 on Guidelines and Procedures Capital Investment for Capital Investment Licensing and Facilities 26. Bank Indonesia Regulation No. 17/3/PBI/2015 11. Ministry of Employment Regulation No. 10 of on Mandatory Use of Rupiah Within the 2018 on Procedures of Utilization of Foreign Territory of the Republic of Indonesia Workers 27. Bank Indonesia Regulation No. 18/18/ 12. Ministry of Employment Decree No. 40 of PBI/2016 on Foreign Exchange to Rupiah 2012 on Certain Positions that are Prohibited Transaction between Banks and Domestic to be held by Foreign Workers Parties 13. Law No. 30 of 2014 on Government 28. Bank Indonesia Regulation No. 16/21/ Administration PBI/2014 on the Implementation of Prudential 14. Law No. 39 of 1999 on Human Rights Principles in Managing Offshore Borrowings by Non-Bank Corporations 15. Law No. 40 of 2008 on the Eradication of Race and Ethnical Discrimination | 38 2019 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA 29. Bank Indonesia Circular Letter No. 16/24/ 40. Government Regulation No. 18 of 2015 on DKEM of 2014 on the Implementation of Tax Facilities for Investments in Certain Prudential Principles in Managing Offshore Business Sectors and/or Certain Areas as Borrowings by Non-Bank Corporations amended by Government Regulation No. 9 of 2016 30. Bank Indonesia Circular Letter 17/18/DKEM of 2015 on amendment of Bank Indonesia 41. Government Regulation No. 81 of 2015 on Circular Letter No. 16/24/DKEM of 2014 on Import and/or Delivery of Certain Strategic the Implementation of Prudential Principles in Taxable Goods that are Exempted from Value Managing Offshore Borrowings by Non-Bank Added Tax Corporations 42. Minister of Finance Regulation No. 150/ 31. Bank Indonesia Regulation No. 16/10/ PMK.010/2018 on Tax Holiday Facility PBI/2014 on Receiving Foreign Currency From Export Revenue and Withdrawal of 43. Minister of Finance Regulation No. 176/ Offshore Loan PMK.011/2009 as amended by Regulation No. 188/PMK.010/2015 on Exemption of 32. Bank Indonesia Circular Letter No. 18/5/DSta Import Duty for Import of Machine, Goods of 2016 on Receiving Offshore Loan Foreign and Materials for the Purpose of Industry Currency Development or Expansion in the Framework of Capital Investment 33. Bank Indonesia Regulation No. 16/22/ PBI/2014 on the Reports of Foreign Exchange 44. Regulation No.3 of 2019 on the Assessment of Traffic Activities and the Prudential Principles Mergers, Consolidations or Share Acquisitions Implementation Report in Managing Offshore which may lead to Monopolistic Practices or Loan for Non-Bank Corporation Unfair Business Competition 34. Decree of the Minister of Finance No. 45. Regulation No. 04 of 2012 on Guidelines 261/MK/IV/5/1973 on Provisions on the for the Imposition of Fines for Delay for Receiving of Offshore Loan (as amended by Notifying Mergers, Consolidations and Decree of the Minister of Finance No. 417/ Acquisitions KMK.013/1989 and Decree of the Minister of Finance No. 279/KMK.01/1991) 46. Government Regulation No. 57 of 2010 on Mergers, Consolidations and Acquisitions of 35. ILO Convention No. 100 on Equal Shares that May Result in Monopoly or Unfair Remuneration for Men and Women Workers Business Competition Practices for Work of Equal Value (by virtue of Law No. 80 of 1957) 47. General Agreement on Trade in Services (GATS) 36. ILO Convention on the Elimination of All Forms of Discrimination against Women (by 48. Agreement on Trade-Related Aspects of virtue of Law No. 7 of 1984) Intellectual Property Rights (TRIPS) 37. ILO Convention No. 111 on Discrimination 49. Agreement on Trade-Related Investment in respect of Employment and Occupation (by Measures (TRIMs) virtue of Law No. 21 of 1999) 50. Agreement on Subsidies and Countervailing 38. Law No. 8 of 1983 on Value Added Tax and Measures (SCM) Sales Tax on Luxury Goods as lastly amended 51. Convention on the Recognition and by Law No. 42 of 2009 Enforcement of Foreign Arbitral Awards (New 39. Law No. 10 of 1995 as lastly amended by Law York Convention) No. 17 of 2006 on Customs 52. International Centre for Settlement of 2019 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA | 39 Investment Disputes (ICSID) Convention) Investment Coordinating Board 53. Articles of Agreement of the International 59. FDI Realization based on location for the Monetary Fund period of January to December 2018 issued by Investment Coordinating Board 54. ASEAN Comprehensive Investment Agreement (2012) 60. UNCTAD Investment Policy Hub (https:// investmentpolicy.unctad.org/international- 55. Indonesia—Qatar BIT (2018) investment-agreements) 56. ASEAN-China Investment Agreement (2010) 61. I-TIP Services database (https://i-tip.wto.org/ services/default.aspx) Secondary Sources 62. Double Taxation Avoidance Agreements 57. Frequently Asked Question on Investment (https://iclg.com/practice-areas/corporate-tax- issued by Investment Coordinating Board laws-and-regulations/indonesia) 58. FDI Realization based on sector for the period of January to December 2018 issued by | 40 2019 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA This Investment Policy and Regulatory Review presents information on the legal and regulatory frameworks governing foreign direct investment and competition that affect businesses and foreign investor. Since legal and regulatory frameworks are constantly evolving, a cut-off date was set for the research. This country review therefore covers information available as of May 31, 2019, unless otherwise indicated in the review. IPRRs are available for the following middle-income countries: Brazil, China, India, Indonesia, Malaysia, Mexico, Nigeria, Thailand, Turkey, and Vietnam.