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Indonesia Under Review

Indonesia Under Review

September 2015

The present economic downturn has resulted in three types of policies: to increase tax collections, to protect the rupiah and to stimulate the economy. Specifically, import duties have been increased 15-20% on a wide range of items, including a change in alcohol taxation from a flat volume based tax to a price based tax of 90% for wines and 150% for liquors.

Monthly limits on exchange of rupiah into foreign currency without an underlying transaction have been decreased to $25,000 from $100,000, to prevent speculation at a time of a rapidly declining rupiah. Additionally, the central bank, Bank Indonesia, has started urging commercial banks to limit United States Dollar transactions.

Mandatory rupiah use has come into force as of the 1st of July 2015 for domestic transactions, however, while in principle the concept is sufficiently clear, with respect to specific transactions the full implementation remains opaque. Of particular interest are the available exemption: the strategic infrastructure (which requires government recognition) and the ever-expanding exemption for those who would encounter difficulty in complying (which requires Bank Indonesia dispensation). A specific case under the “difficulty in complying” exemption is the natural resources sector, with respect to which the Ministry of Energy and Mineral Resources and Bank Indonesia has reached an apparent agreement and the ministry has issued a press release stating the following exemptions (it is unclear whether these are automatic of if dispensation from Bank Indonesia is required):

Category 1: Transactions that can immediately comply with the provisions of the regulation (e.g. rent of property and vehicles, Indonesian employee salaries, various support services). Such transactions are granted a transition period of 6 months.

Category 2: Transaction that require time in order to implement the provisions of the regulation (e.g. fuel, import transactions through local agents, long-term contracts, multi-currency contracts). Such transactions have to explore the possibility of changing the agreements.

Category 3: Transactions that are fundamentally difficult to comply with the regulation due to various factors including government regulations (e.g. expatriate employee salaries, drilling services and vessel rental). Such transactions can proceed in foreign currency.

Following substantial declines on the Indonesia Stock Exchange, the Financial Services Authority (OJK) has issued a buyback policy allowing listed companies to repurchase their shares without shareholder approval, and the Ministry of State Owned Enterprises has also stated that it will repurchase shares to support the Jakarta Composite Index (JCI).

Bank Indonesia has raised the Loan To Value (LTV) to 80% from 70% under certain conditions, aiming to encourage lending and to stimulate the economy through the prioperty market, that is also seeing a decline.

The requirement for all foreigners to pass an Indonesian language test administered by the Ministry of Manpower online - a policy of little substance due to uncertainty of how it would be administered and enforced, that nonetheless received a lot of press – has been repealed as per President Joko Widodo’s instruction, with the aim of removing one of the roadblocks to foreign investment.

The Public Private Partnership (PPP) regulation has been revised, allowing direct appointment of private investors who own the land required for the project. A significant technical change is the explicit provision for availability payments, which will no longer need to be artificially structured into a transaction.

Uncertainty in natural resources sector remains, import and export of oil and gas has seen stricter requirements under a Ministry of Trade regulation. While the Ministry of Finance has issued a regulation to incentivize oil and gas exploration by reducing the land and buildings tax burden, making a 100% reduction in tax possible. And after initial discussion regarding raising mining royalties, the government has announced that the ban on bauxite (aluminum ore) and nickel ore exports will potentially be relaxed for firms that demonstrate progress in building a smelter. Furthermore, the Ministry of Energy and Mineral Resources has required all existing, and not just newly issued, mining licenses (IUP) held by companies with the participation of foreign capital (PMA) to be handed over and reissued by the ministry instead of regents/governors. At the same time, IUP issuing authority has been shifted from regents to governors for all newly issued IUPs.

[Last update: 2015-09-04 12:38:21]

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