The economic package policy and how it encourages investment in Indonesia

Indonesia’s seventh president, Joko Widodo, pledged during his campaign to increase economic growth and welfare in society. In fact, President Widodo has promised to boost the economy by specifically targeting economic growth of more than 7% by 2019. In order to achieve these goals, he has introduced a number of changes to economic policy through the issuance of 13 economic package policies (EPPs).

The EPPs have proved successful in providing a significant contribution to Indonesia’s economic development. The latest report indicates GDP has reached Rp3086.6trn ($225.3bn), or Rp2353.3trn ($171.8bn) in 2010 constant prices.

The economic growth rate also showed improvement in the second quarter of 2016, increasing 4.66% on the same period in 2015 and 4.91% on the first quarter of 2016 to reach 5.18%. In terms of production, economic growth is driven by almost all business sectors. The financial services and insurance sector has shown the highest growth at 13.51%, followed by the ICT sector with 8.47%.

The success of Indonesia’s economic improvement arises from the government’s initiative of reviewing existing regulations and issuing new regulations. The goal is none other than to stimulate and increase foreign investment interest in Indonesia by providing stimulus and incentives to improve the investment climate, which will eventually make investment procedures easier and increase investors’ interest.

Although not every EPP is entirely concerned with investment, these policies have positively impacted Indonesia’s investment environment.

Location For Investment

One of the focuses of the first EPP is the location of investment. Though it is not directly related to the government’s plan to increase the total amount of foreign investment in Indonesia, it can be seen implicitly as the first EPP that is intended to provide comfort for foreign investors doing business in Indonesia.

To objectify its intentions, the government has issued Government Regulation No. 142 of 2015, concerning Industrial Areas, revoking Government Regulation No. 24 of 2009 regarding Industrial Estates, which is considered insufficient to interpret the provision on industrial areas under Law No. 3 of 2014, concerning Industry (Industry Law).

It should be noted that Article 106 of the Industry Law states that companies engaged in the field of industry must be located in an industrial area, except under certain conditions, for example, where the district or city does not have an industrial area or there are no available plots.

Consequently, to attract investment in the industry sector, the government must first ensure the availability or sufficiency of industrial areas. In line with the president’s directives, the number of industrial areas, especially outside Java, needs to be increased.

This is mentioned in the development plan that is concentrated on the outer islands, such as Bintuni in West Papua, Bitung in North Sulawesi, Palu, Morowali, Konawe in South-east Sulawesi, Buli, Halmahera, Bantaeng in South Sulawesi, Batulicin in South Kalimantan, Ketapang in North Kalimantan, Ketapang in West Kalimantan, Landak in West Kalimantan, Kuala Tanjung, Sei Mangke in North Sumatera, Tanggamus in Lampung, Gresik in East Java and Sayung in Demak.

Ease In Investing 

Overly stringent regulations could hinder industrial competitiveness, significantly impeding the growth of investment; hence, deregulation has become the avenue through which to promote the growth of foreign investments. In EEPs 1-12, the government is focused on widespread deregulation. A total of 200 policies in the EPPs relating to this have been completed and three policies are still in discussion. Such deregulation is expected to increase the competitiveness of industry by rationalising regulations through simplifying procedures and eliminating unnecessary costs.

For example, in the first EPP the government has revised provisions for the import of used capital goods under the Minister of Trade Regulation No. 127/M-DAG/PER/12/2015. Such revisions contain simplified provisions, such as the removal of a recommendation from the Ministry of Industry for the import of used capital goods by reconditioning and re-manufacturing companies.

In addition, the government also made various revisions to regulations related to the implementation of the Indonesian National Standard for goods (SNI), which include tires, glass, ceramics, cement and helmets. In the revisions, the requirements for securing a recommendation from the Ministry of Trade for importing goods with specifications not in line with SNI have been removed.

Investment Licenses 

To increase Indonesia’s ranking of 109th in the World Bank’s ease of doing business index, the government introduced a policy of issuing investment licences within the space of three hours, through the second EPP. A high ease of doing business ranking means the regulatory environment is more conducive to starting and operating a business.

The investment licence is an acceleration of the Principle License application, which is facilitated by the Indonesia Investment Coordinating Board (BKPM) for investment projects under certain criteria. The first criterion for obtaining the investment licence is having an investment value of at least Rp100bn ($7.3m), as stipulated by the Head of BKPM Regulation No. 14 of 2015 on Guidelines and Procedures for Investment Principle Licences, as amended by the Head of BKPM Regulation No. 6 of 2016. In addition, the number of employed must include at least 1000 Indonesian workers.

Other criteria which must be met are: (i) the company is included in a specific industry, zone or location that is part of the Inland Free Trade Arrangement, (ii) the business activity is part of a production supply chain (suppliers are required to submit a statement letter or memorandum of understanding), and (iii) the company is located in a special economic zone (SEZ). The table below shows the sectors that are eligible to apply for an investment licence.

In addition to accelerating the issuance of the investment licence, investors may also be part of a Direct Construction Investment Facility, which allows the construction phase to begin without first obtaining a construction licence.

This policy includes the deferral of several licences, namely, a building construction permit (IMB), an environment permit and the fulfilment of the industrial area code of conduct for projects located in certain industrial areas in free trade zones and free seaports. Projects located in the SEZ are exempted from obligations to own an IMB and environment permit.

The Direct Construction Services Programme (KLIK) is regulated under the Head of BKPM Decree No. 24 of 2016 regarding the Stipulation of Certain Industrial Areas as a Direct Construction Investment Facility.

The regulation categorises the following industrial areas to serve the acceleration of the investment licensing service: Kendal Industrial Area; Bukit Semarang Baru Industrial Area; Wijayakusuma Industrial Area, Semarang; Java Integrated Industrial and Port Estate Industrial Area, Jawa Timur; Bantaeng Industrial Area, Sulawesi Selatan; Cikande Modern Industrial Estate, Banten; Wilmar Integrated Industrial Estate, Serang; Krakatau Industrial Estate Cilegon; Bekasi Fajar Industrial Estate; Delta Silicon 8 Industrial Estate; Karawang Internasional Industrial City Industrial Estate; Suryacipta City of Industri Industrial Estate, Karawang; GT Tech Park Industrial Estate, Karawang; Medan Industrial Estate.

Negative List

Further, the 10th EPP refocuses on ease in investment, based on the issuance of Presidential Decree No. 44 of 2016 (2016 Negative List). The policy provides an opportunity for foreign investors to invest in Indonesia in sectors which previously, pursuant to Presidential Decree 39 of 2014, were closed to foreign investment.

Under the 2016 Negative List, the government provides certain privileges for investors originating from ASEAN member states, since investors from ASEAN enjoy a higher foreign ownership percentage in certain sectors.

Ambitious targets set by the government can also be found in the 12th EPP to improve Indonesia’s ease of doing business ranking from 109th to 40th. To reach that target, the government issued several policies to reduce costs and permits to start a business. This is intended to reduce the number of procedures from 13 obtained over a period of 47 days to seven in 10 days. Under the new policies, investors will save Rp4.1m-5.1m ($299-372), as the investment procedure will now cost only Rp2.7m ($197) compared to Rp6.8m– 7.8m ($496-569) under the preceding policy.

Simplifying Procedures 

In relation to building construction permits, the president instructed the Ministry of Public Works and the Ministry of Environment and Forestry to simplify the licensing procedures with the aim of reducing investment costs. As a result, the government managed to reduce licensing procedures related to construction from 17 obtained over a period of 210 days, at a cost of Rp86m ($6278) for four permits, (the IMB, Environmental Management Plan and Environmental Monitoring Plan, certificate of proper functioning and warehouse registration certificate) to 14 procedures in 52 days, at a cost of Rp70m ($5110) for three permits (the IMB, certificate of proper functioning and warehouse registration certificate). Further, to support the simplification of licensing procedures, the government has simplified tax payment procedures from 54 to 10 time payments with the online system.

In addition, the government has also reduced the number of procedures and cost of registering property from five in 25 days, at a cost of 10.8% of the property value, to three in seven days, at a cost of 8.3% of the property value.

Certainty In Investing 

Certainty in investment is also important to improve the investment climate in Indonesia.

The labour cost issue has been widely regarded as a major factor for uncertainty regarding doing business in Indonesia. To address this, the government introduced the fourth EPP by issuing Government Regulation Number 78 of 2015 on Wages (GR 78/2015).

The determination of the minimum wage under GR 78/2015 is based on a certain formula, which shall be used by regional governments to determine the minimum wage of employees. The formula is as follows: current minimum wage + (current minimum wage x (inflation + GDP growth)).

By using this formula the government hopes to help investors to calculate and determine their business prospects four to five years ahead.

Investment Facilities 

In the context of investment facilities, the second EPP has played a great role in the issuance of the Head of the Capital Investment Coordinating Board Regulation Number 16 of 2015 regarding Guidelines and Procedures for Capital Investment Services Facilities (BKPM Reg 16/2015).

Under BKPM Reg 16/2015, the government provides a tax facility by granting fiscal incentives in the form of waivers and/or reductions of import duties for the import of goods in the context of work contracts and work agreements in the coal mining business, as well as waivers and/ or reductions of import duties in the context of construction or developments for electric power generation for public interests.

Aside from the above, in the second EPP the government has also accelerated the process for tax holiday applications. The government, through the Ministry of Finance (MoF), has committed to a process for tax holiday applications of up to 10 days after BKPM issues its recommendation.

The tax holiday procedure is regulated under the MoF Regulation Number 159/PMK.010/2015 regarding the Granting of Facilities for Income Tax Reduction as amended by the MoF Regulation Number 103/PMK.010/2016 of 2016 (MoF Regulation 159/2015). In MoF Regulation 159/2015, a tax holiday is granted to investors who are pioneering industries, being industries that have extensive connections, give added value and high externality, introduce new technologies and have a strategic value for the national economy, such as:

  • upstream metals industries;
  • natural petroleum refining industries or natural petroleum refining industries and infrastructures, including those in a public-private partnership scheme;
  • base organic chemical industries derived from natural oil and gas;
  • machinery industries that produce industrial machinery;
  • agriculture, forestry and fisheries-based processing industries;
  • ICT industries;
  • sea transport industries; and/or
  • economic infrastructure other than those in a public-private partnership scheme.

These industries may be granted income tax reduction facilities of a minimum of 10% and maximum of 100% of the outstanding income tax. Such tax reductions are awarded for a period of no longer than 15 tax periods and no less than 5 tax periods as of the commencement of commercial production.

In addition to the above, investment facilities to support operational projects are set out in the third EPP. This EPP is mainly aimed at supporting domestic industry business competitiveness by reducing the cost of electricity.

Under this package, the industry customer will get a discount of up to 30% for electricity usage from 23:00 until 08:00. In addition to a tariff reduction, a labour-intensive industry customer may receive a deferral for electricity bill payment of up to 40% of the electricity bill for the first six or 10 months and may pay it off in instalments.

In addition, the government also supports companies’ financial performance by giving a special tariff for asset revaluation and stimulates growth in the Real Estate Investment Fund (REIT), property and infrastructure through the fifth EPP.

To implement the fifth EPP, the government has issued two regulations. The first regulation is the Minister of Finance Regulation Number 191/ PMK.010/2015. Under this regulation, a company intending to re-evaluate its assets before January 1, 2017 will receive a special income tax tariff lower than the standard 10%:

  • submission period between October 15, 2015 to December 31, 2015, income tax tariff of 3%;
  • submission period between January 1, 2016 to June 30, 2016, income tax tariff of 4%; and
  • submission period between July 1, 2016 to December 31, 2016, income tax tariff of 6%.

REIT Incentives

The second regulation is the MoF Regulation Number 200/PMK.03/2015 (MoF Reg. 200/2015). The government issued MoF Reg. 200/2015 to stimulate growth in REIT, property and infrastructure, and remove double taxation in REIT transactions. By removing double taxation, the government hopes that investment in REIT will become more attractive, specifically for funds invested overseas in a tax heaven country which can be invested in Indonesia.

Furthermore, under MoF Reg. 200/2015, any dividend payment by REIT which utilises a Special Purpose Company (SPC) in their investment scheme will not be subject to income tax deduction. SPCs are deemed as low-risk business taxpayers, who may receive a preliminary refund of value-added tax payment.

SEZ Incentives 

The sixth EPP focuses on investments in the Kawasan Ekonomi Khusus (KEK) SEZ. In the implementation of this EPP, the government issued two implementing regulations, namely, Government Regulation No. 96 of 2015 on Facilities and Ease in SEZs (GR 96/2015) and the Minister of Finance Regulation No. 104/PMK.010/2016 of 2016 regarding Taxation Treatment, Customs and Excise On SEZs.

The government, at this time, seems to be very focused on attracting foreign investment by providing abundant facilities and services for the companies and business communities in KEK, including:

  • taxation, Customs and excise;
  • freight traffic;
  • employment;
  • immigration;
  • land; and
  • licensing and non-licensing.

As an illustration, one of the facilities provided in the area of taxation is the income tax reduction from 20% to 100% for those who invest according to the parameters in the table on the preceding page. In addition to the above, the seventh EPP introduced income tax facilities, provided for certain business fields and/or in certain areas, such as coal gasification, geothermal business, copper ore processing and refining (specifically for new construction and expansion of smelter), spinning industry and much more.

Such facilities are set out in Government Regulation No. 9 of 2016 on Amendment of Government Regulation No. 18 Year 2015 regarding the Income Tax Facilities for Investment in Certain Business Fields And/Or In Certain Areas, which is in the form of a reduction in net income of 30% – reducing income tax, accelerated depreciation on tangible assets and amortisation of intangible assets, which were acquired in the framework of new Investment and/or expansion, reducing the amount of income tax on dividends paid to a non-resident taxpayer, meaning a taxpayer without a permanent establishment in Indonesia (10% or less), as well as compensation for losses.

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The Report: Indonesia 2017

Legal Framework chapter from The Report: Indonesia 2017

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