2022 INVESTMENT POLICY AND REGULATORY REVIEW Indonesia © 2022 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 12 D. Foreign Investment Promotion Strategy 14 3. INVESTMENT ENTRY AND ESTABLISHMENT 15 4. INVESTMENT PROTECTION 24 5. INVESTMENT INCENTIVES 28 6. INVESTMENT LINKAGES 31 7. OUTWARD FOREIGN DIRECT INVESTMENT 31 8. RESPONSIBLE INVESTMENT 31 9. CITY SPECIFIC REVIEW—JAKARTA 33 10. FDI IN THE DIGITAL ECONOMY 34 ENDNOTES 43 LIST OF REFERENCE MATERIALS 45 2022 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA |1 ACKNOWLEDGEMENTS The report was prepared by a core team led by The team would like to thank Aichin Jones for Priyanka Kher comprising Peter Kusek and providing design, layout, and production services. Maximilian Philip Eltgen. The report benefited from valuable inputs and support from Satu The report was prepared under the Analyzing Kristiina Kahkonen, Alexandre Hugo Laure, Siti Barriers to Investment Competitiveness Project, Budi Wardhani and Gerlin May U. Catangui. The supported with funding from the Prosperity Fund team would like to thank Asya Akhlaque, Cecile of the United Kingdom. Thioro Niang and Ivan Nimac for their guidance. Legal research for the preparation of this report was carried out by the international law firm Kilpatrick Townsend, in collaboration with a country-based law firms. | 2 2022 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 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 MFN Most-Favored-Nation MOF Ministry of Finance MoHA Ministry of Home Affairs MP3EI Masterplan for Acceleration and Expansion of Indonesia’s Economic Development 2022 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA |3 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 2022 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA 1. INTRODUCTION This Investment Policy and Regulatory Review currently applicable policies, laws and regulations. (IPRR) presents information on the legal and In some cases, consultations with regulators were regulatory frameworks governing foreign direct conducted to collect up to date information. investment (FDI) in Indonesia. Since legal and regulatory frameworks are constantly evolving, a The research was guided by a standardized cut-off date was set for the research. This country questionnaire, covering a limited set of review therefore covers information available as of topics, including foreign investment entry, December 31, 2021, unless otherwise indicated in establishment, protection and select dimensions the review. IPRRs are available for the following of FDI in the digital economy. The questionnaire middle-income countries (MICs): Brazil, China, focused on de jure frameworks as generally India, Indonesia, Malaysia, Mexico, Nigeria, applicable to a foreign investor, not located in any Thailand, Turkey, and Vietnam. specialized or preferential regime (such as special economic zones). It primarily focused on national, The research for preparing this IPRR was economy-wide (rather than sector-specific) laws undertaken by the international law firm and regulations. For the purpose of the research, it Kilpatrick Townsend & Stockton LLP, in was assumed that the foreign investor is a private collaboration with a local law firm, under multinational company with no equity interest or the supervision of the World Bank Group. management control by the government of its home The research was primarily based on a review of country (that is, not state-owned enterprise). Figure 1. Overview of Topics Covered in IPRR ■ Key Institutions for Investment Policy/Rule Making, Implemention and FDI Promotion ■ Key Legal Instruments ■ FDI Restrictions ■ Transparency/Consultation in Laws ■ IPRs Main Policy & Intermediate Liability and Regulations ■ Legal Instruments ■ Data Governance and Institutions ■ Content Access ■ E-commerce ■ Prohibited and Restricted FDI in Digital Investment Entry Sectors ■ Equity Ceiling Economy and ■ Minimum Investment Sectors Establishment Requirement ■ FDI Approval IPRR ■ R&D, Local Sourcing, Questionnaire Employment, Quantitative, Geographic, Export ■ Schemes to Increase Other Areas Local Sourcing and (Linkages, OFDI, Investment Build Capacity of Local Responsible Protection Suppliers Investment) ■ Restrictions on OFDI ■ Expropriation ■ Transfer of Currency Investment ■ Dispute Settlement Incentives ■ Fair Administrative Conduct ■ Source of Tax and Financial Incentives ■ Accessibility of Tax and Financial Incentives 2022 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA |5 There are aspects that this IPRR does not foreign investment, key institutions involved in cover. It is not a comprehensive review of investment promotion, as well as the country’s the entire legal and regulatory framework foreign investment promotion strategy; it affecting investment. Information presented is also delineates the country’s international not exhaustive, but illustrative of the main topics investment legal framework, including the and issues covered (for example, it does not country’s commitments under the World Trade exhaustively list all available tax and financial Organization (WTO) and select international incentives in the country). It does not present investment agreements (IIAs); recommendations on reform areas. Notably, it does not capture de facto implementation of n Sections 3-6 cover the country’s policies and laws and regulations in the country. Given these domestic legal framework concerning different limitations, information presented in this IPRR dimensions of the lifecycle of an investment: should be interpreted and used while keeping in entry and establishment (Section 3), protection view the overall country context and realities. (4), incentives (5) and linkages (6); Further, it contains information in summary form n Sections 7 and 8 explore emerging investment and is therefore intended for general guidance policy and regulatory areas — Section 7 only. It is not intended to be a substitute for considers outward FDI and Section 8 responsible detailed legal research. investment; This IPRR is organized as follows: n Section 9 focuses on city-specific investment n Section 2 provides an overview of the policy and regulatory measures in the largest country’s investment policy framework, commercial center; and including the legal instruments regulating n Section 10 covers FDI in the digital economy. | 6 2022 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA 2. OVERVIEW OF INVESTMENT POLICY FRAMEWORK A. Domestic Legal Instruments capital investment in the country. It defines Regulating Foreign Investment “capital investment” as all forms of capital investing activity both by domestic and foreign investors (who may be a foreign individual, enterprise or FDI Law and Regulation government) to undertake business within the The primary law regulating foreign investment territory of Indonesia. “Foreign investment” is and the inflow and outflow of foreign capital defined as investment activity to conduct business in Indonesia is Law No. 25 of 2007 on Capital in the territory of Indonesia by a foreign investor, Investment (as amended by Law No. 11 of whether using entirely foreign capital, or in 2020 on Job Creation). The primary regulations partnership with a domestic investor. are the Presidential Regulation No. 10 of 2021 on Investment Business Sectors (as amended Foreign investment is also subject to sector- by Presidential Regulation No. 49 of 2021) and specific laws and regulations. Sectoral laws may the Investment Coordinating Board (BKPM) also include restrictions for foreign investors. The Regulation No. 4 of 2021 on Guidelines and main regulatory body for FDI is the Ministry of Procedures for Risk-Based Business Licensing Investment/BKPM, but depending on the business (BKPM Regulation No. 4 of 2021). The law and the activity, approvals may be required from specific regulations apply equally to domestic investment. industry regulators. In October 2020, Law no. 11 of 2020 on Job Public Access to Foreign Investment Creation (“2020 Law on Job Creation”) Laws and Policies was passed introducing amendments to 79 existing laws in order to reduce bureaucracy There is an obligation for the government to and stimulate investment in a post-pandemic ensure public access to all laws and regulations, economy. This includes easing restrictions on including on foreign investment, through the foreign investment activities to promote ease of requirement to publish all laws and regulations. doing business with the ultimate goal of attracting Law No. 12 of 2011 on Formation of Laws and foreign investors to Indonesia to create more jobs for Regulations (as amended by Law No. 15 of Indonesian people. The implementing regulations 2019, “Formation Law”) requires that an enacted for the 2020 Law on Job Creation introduce, among regulation be published in the following gazettes: other changes, a risk-based approach for business (i) the state gazette, (ii) additional state gazette, licensing, tax reforms, and more flexible labor (iii) state news gazette, (iv) additional state regulations, and significantly liberalize foreign news gazette (v) regional gazette, (vi) additional investment by revoking the 2016 Negative List of regional gazette or (vii) regional news gazette. Investment, replacing it with a new Investment List Indonesia adopts the presumptio iures de iure under the Presidential Regulation No. 10 of 2021 principle, whereby it is assumed the public knows with fewer restrictions, which came into effect in the laws and regulations. This is in line with March 2021. Article 81 of the Formation Law, which stipulates that the public is deemed to know the laws and The Law No. 25 of 2007 provides for non- regulations after such laws and regulations have discrimination (national treatment and been officially promulgated. most-favored treatment), as well as for the principles of certainty, openness, impartial The Government of Indonesia has undertaken efficiency, sustainability, business security, and measures to ensure that the public has better accountability as they pertain to implementing access to laws and regulations. For example, it 2022 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA |7 established the National Documentation Network Under the Formation Law, the Government and and Legal Information (JDIH), a platform where People’s Representative Council of Indonesia are the public may access legal information. Many mandated to disseminate a draft of a rule before provincial governments have established their own its passage into law, for the purpose of providing JDIH website. In relation to foreign investment, information to the public and stakeholders. BKPM’s JDIH platform provides access to foreign investment-related regulations (although not Rules may also not apply retroactively, with necessarily comprehensive). certain exceptions. The Annex to the Formation Law states that generally a law should be effective on the date of its enactment. However, it also provides Consultation with Stakeholders that an alteration of the effective date is possible Based on Article 96 of the Formation Law, the if it was expressly stated in the law, among other public has the right to give any verbal and/or things, by providing a specific effective date of the written advice to the government in relation law or delegating the determination of the effective to draft laws and regulations. The law also date to another law with the same hierarchy. Law specifies the category of public that can give such No. 30 of 2014 on Government Administration also advice, that is, an individual or a group that has stipulates that the effective date of a decision by the an interest in the substance of the draft laws and government may be retroactive, if it is necessary to regulations. However, the prevailing law does avoid (i) a greater damage and/or (ii) disregard to not impose any obligations on the government the rights of the citizen. to ensure that consultation with the public is conducted prior to passing of any laws and As noted above, the Law No. 25 of 2007 states regulations. A specific initiative to create a public that the implementation of capital investment consultation mechanism by the government has is based on the principles of, among others, been the setting up a website to facilitate public legal certainty and accountability. The Law consultation regarding Law no. 11 of 2020. further provides that each investor is entitled to (i) certainty of rights, law and protection, (ii) transparent information on the business sectors Predictability and Stability in Policies being operated, (iii) rights to service, and (iv) all and Rules facilities under prevailing laws and regulations. The Formation Law gives the Constitution Law 1945 the final authority in legal matters B. International Legal Instruments in Indonesia. It stipulates that any inferior law Regulating Foreign Investment shall not contain provisions conflicting with the Constitutional Law of 1945. The Formation Law Indonesia has undertaken legally binding also allows the review of any regulation that may international investment commitments be deemed in conflict with a superior regulation. through a variety of international investment It dictates the following hierarchy of regulations: agreements (IIA) — signed at the bilateral, plurilateral and multilateral level. These n Constitutional Law of 1945 commitments mainly cover entry and n The decision of the People’s Consultative establishment conditions, protection, as well Assembly of the Republic of Indonesia (Majelis as the legality of specific types of incentives Permusyawaratan Rakyat) (see Table 1.). It is important for Indonesia to reflect these commitments in its domestic legal n Law or Government Regulation in Lieu of Law framework to ensure consistency as well as to n Government Regulation monitor their compliance. n Presidential Regulation Having been a member of the World Trade n Provincial Regional Regulation Organization (WTO) since 1st of January 1995, n Regency Regional Regulation Indonesia has commitments under several WTO Agreements. Under the General Agreement on | 8 2022 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 (21 Plurilateral or Bilateral May cover entry and establishment, signed, 17 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 (69 Bilateral Taxation treaties in force) Source: World Bank Analysis Trade in Services (GATS), Indonesia grants rights more restrictive by limiting the equity contribution to services suppliers from other WTO member of the foreign investor, or less restrictive by countries. This includes services supplied through merely requiring foreign service suppliers commercial presence (defined as establishment of to become a member of a union chamber. In a territorial presence), in other words through FDI. addition, under GATS every member is obligated These rights are granted through commitments to unconditionally extend to service suppliers of undertaken in “schedules”. The “schedules” list all other WTO members Most-Favored Nation sectors being opened, the extent of market access (MFN) Treatment. However, Indonesia has made being given in those sectors (for example, whether reservations in that regard in two services sectors: there are any restrictions on foreign ownership), construction and related engineering services, and any limitations on national treatment (whether and financial services. For example, Indonesia some rights granted to local companies will not reserves the right to main preferential shortlisting be granted to foreign companies). Indonesia has schemes for ASEAN contractors of civil works or made commitments on market access and national industrial construction. treatment in 6 out of 12 services sectors that feature in the WTO Classification1: (i) Business services, Under the WTO Agreement on Trade Related (ii) Communication services, (iii) Construction Investment Measures (TRIMS), Indonesia has and related engineering services, (iv) Financial committed to not apply certain investment services, (v) Tourism and travel related services, measures that restrict or distort trade (local and (vi) Transport services. In these sectors, content requirements, trade balancing Indonesia has made partial commitments on requirements, foreign exchange restrictions market access and national treatment for specific and export restrictions). These measures are services in 15 sub-sectors. “Partial” means that prohibited both when the obligation for the although commitments have been made, there are foreign investors is mandatory and when it is tied still limitations/reservations, which may differ in to obtaining an advantage (that is, an incentive). their restrictiveness. For example, they may be Incentives are further regulated by the WTO 2022 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA |9 Agreement on Subsidies and Countervailing provisions go beyond TRIMS in scope and include Measures (SCM), which among others prohibits a higher number of performance requirements that certain types of export subsidies. Under the are prohibited (a so-called TRIMS+ standard). WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), foreign Some of Indonesia’s reviewed IIAs contain investors’ intellectual property rights are commitments to liberalize. RCEP and the protected. In case of a violation of any of its WTO Indonesia-Republic of Korea CEPA include commitments, Indonesia may be sued under the such commitments, providing national treatment WTO dispute settlement mechanism. and most-favored nation treatment in the pre- establishment phase. In both cases, the treaty Indonesia has further entered into obligations partners make reservations: Annex 1 lists measures through international investment agreements that do not comply with the commitments, and — it has signed 42 Bilateral Investment Treaties Annex 2 lists sectors and activities in which of which 26 are in force, and 21 Treaties with countries may maintain existing, or adopt new or Investment Provisions (TIPs) of which 17 are more restrictive, measures. RCEP also contains in force. The latter category comprises treaties a “ratchet mechanism”, which ensures that any that include obligations commonly found in BITs future regulatory or legal change that makes it (e.g. a free trade agreement with an investment easier for investors from one party to access the chapter). Indonesia has in recent years overhauled other party’s market will automatically be locked- its bilateral treaty commitments. Since 2014, in under the Agreement and therefore cannot Indonesia has effectively terminated 23 BITs, subsequently be made more restrictive. mostly on a unilateral basis. At the same time, Indonesia is in the process of entering regional The table shows that generally the main or “megaregional” agreements. Indonesia has on protection guarantees are provided in the November 15, 2020 signed onto the Regional reviewed agreements, although RCEP does not Comprehensive Economic Partnership Agreement provide for investor-State dispute settlement (RCEP), which covers ASEAN member states as (ISDS). Under the RCEP, parties are to enter well as large economies in the pacific area such as into discussions on ISDS no later than two years China, Australia, and Japan. It has not yet ratified after the date of entry into force of the agreement, the agreement. In total, RCEP covers a population and conclude them within three years of the of 2.3 billion people, 26.3 trillion USD of GDP commencement of the discussions. RCEP also and 2690 billion USD in FDI stocks, making it includes a provision for establishing focal points the biggest trade bloc in history. Moreover, in or other entities within member states, for early 2018 Indonesia expressed interest to join the resolution of investor complaints and grievances Comprehensive and Progressive Agreement for against government agencies. Trans-Pacific Partnership (CPTPP). CPTPP is Indonesia is currently reviewing its model BIT. a trade and investment agreement between 11 In that regard, it is considering providing ISDS countries, covering a market of 500 million people, on a case-by-case basis, requiring the exhaustion 13.5% of world GDP, and 15.3% of world trade. of local remedies as a pre-condition, as well as Table 2. provides an overview of select IIAs: making mediation mandatory. Indonesia’s latest IIA (Indonesia - Republic of Indonesia is participating in WTO negotiations Korea CEPA , 2020, not yet in force), an IIA on an agreement on investment facilitation with expansive regional coverage (Regional for development. The aim of the agreement is Comprehensive Economic Partnership/RCEP, to improve the investment and business climate, 2020, not yet in force for Indonesia), as well as by improving transparency, efficiency, and its IIA with the largest home country measured by effectiveness of investment-related administrative that country’s share in Indonesia’s total FDI stock procedures. This agreement will not cover (Indonesia-Singapore BIT, 2018). Both RCEP and market access, investor protection and ISDS. In the Indonesia-Republic of Korea CEPA include December 2021, Indonesia together with 111 other the prohibition of performance requirements. The | 10 2022 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA Table 2. Comparison of Indonesia’s Select IIAs Largest Home Country Latest IIA (date of signing): Expansive Regional IIA (% of total FDI stock): Indonesia - Republic of Coverage IIA (highest Indonesia- Singapore BIT Korea CEPA (2020) (not yet number of members): (2018) (in force) in force) RCEP (2020) (not yet in force) Scope of Application Covers Pre-establishment No Yes Yes Exclusions from Scope Government procurement, Government procurement, Government procurement, subsidies or grants, services subsidies or grants, services subsidies or grants, supplied in the exercise supplied in the exercise services supplied in the of governmental authority, of governmental authority, exercise of governmental taxation measures. taxation measures. authority. Standards of Treatment National Treatment (NT) Post-establishment Pre- and post-establishment Pre- and post- establishment Most-Favored-Nation Post-establishment Pre- and post-establishment 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 and indirect expropriation, payment of expropriation, payment of expropriation, payment of compensation compensation compensation Rights to Transfer Funds Yes Yes Yes Prohibition of No TRIMS+ (Prohibiting TRIMS+ (Prohibiting Performance a larger number of a larger number of Requirements performance requirements performance requirements than TRIMS) than TRIMS) Dispute Resolution State-State Dispute Yes Yes Yes Settlement Investor-State Dispute Yes Yes No Settlement Source: World Bank Analysis based on IIAs obtained from United Nations Conference on Trade and Development (UNCTAD) Investment Policy Hub WTO members co-sponsored a Joint Statement on cases has been settled, three decided in favor of the Investment Facilitation for Development, stating State, two discontinued and one decided in favor the objective to conclude text negotiations by the of neither party (liability found but no damages end of 2022. awarded). Indonesia is a member of treaties covering Acceptance of Art. VIII of the IMF Articles investment arbitration. It is a member of the Agreement requires Indonesia to maintain Convention on the Recognition and Enforcement current account convertibility, enabling of Foreign Arbitral Awards of 1958 (New investors to transfer certain payments related York Convention) and the ICSID Convention, to their investments. Indonesia is also party to 69 facilitating the enforcement of arbitral awards. It Double Taxation Avoidance Agreements (DTAAs) has to date been a respondent in seven publicly that are in force, influencing its ability to tax known investor-State arbitrations. One of these foreign investors and investments. 2022 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA | 11 C. Key Institutions for Investment are issued, depending on the scale of business and Promotion level of risk of the relevant lines of business. The OSS system was first introduced in July 2018 to Indonesia has national and sub-national (regional consolidate most business license applications and provincial) level investment promotion into one online system, prior to which business agencies charged with investment promotion licenses for most foreign investment companies functions for all economic sectors. had been issued by BKPM. The BKPM has established the Indonesia National Level Institutions Investment Promotion Centre (IIPC), an official The Ministry of Investment/Investment representative of BKPM in other countries. Coordinating Board (Badan Koordinasi This entity is in charge of promoting Indonesian Penanaman Modal or BKPM) is the main investment to potential investors abroad. The institution responsible for investment promotion IIPC’s functions are: in Indonesia (see Box 1). Until May 2021, the BKPM was an independent government agency n To carry out investment marketing campaigns directly reporting to the President of the Republic and provide investment information; of Indonesia. In May 2021, based on Presidential Coordinate n and synchronize investment Regulation No. 31 of 2021, the government marketing programs with Indonesian upgraded the BKPM’s bureaucratic status to a a representatives, relevant institutions in the full-fledged government ministry, the Ministry of respective state of domicile and working area, Investment, with the aim of boosting investments as well as government institutions and business and enhancing the ease of doing business in the entities in Indonesia; country. The Chairman of the BKPM assumes the new role of Minister of Investment. n Facilitate investment mission from the respective state of domicile and working area The BKPM is the main link between business to Indonesia and investment mission from and government, responsible for creating a Indonesia to the respective state of domicile conducive investment climate in Indonesia. It is and working area; charged with regulatory functions, including but not limited to issuing regulations related to foreign n Facilitate investment problem solving of new investment. As part of the reforms initiated under or existing investors and encourage investment the 2020 Law on Job Creation, on August 9, 2021, realization from the state of domicile and the BKPM launched an upgraded version of online working area that have received licenses from single submission (OSS) system for business BKPM; licensing, adopting a risk-based assessment approach (OSS RBA) pursuant to the Government n Monitor investment interest and policy in the Regulation No. 5 of 2021. This new regulation respective state of domicile and working area; significantly reforms the licensing regime, n Facilitate Indonesian investors who invest in the shifting it from the prior commitment-based respective state of domicile and working area; approach to risk-based approach. In particular, the Government Regulation No. 5 of 2021 on Risk- n Propose the work programs and budget needs Based Criteria Business (GR 5/2021) repeals the in order to accomplish the duties and achieve prior approach of the government under the old the investment targets set by BKPM; OSS system of issuing licensing in advance subject to the fulfilment of certain commitments. Instead, n Perform other duties given by BKPM and under the new OSS RBA, certain requirements the head of Indonesia representatives in the and conditions need to be fulfilled before licenses respective state of domicile. | 12 2022 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA Box 1. Ministry of Investment/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 Presidential Regulation No. 90 of 2007 on BKPM (as supplemented by the Presidential Regulation No. 64 of 2021), stipulates its composition, main duty and functions. The BKPM is composed of: n Chairman n Vice Chairman n Secretary General n Deputy Chairman for Investment Planning n Deputy Chairman for Strategic Investment Downstream 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 Deputy Chairman for Investment Information and Technology 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 Analyzing and proposing national investment planning n Coordinating implementation of national policies in the field of investment n Analyzing 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 Coordinating the implementation of duties, development and administration support to all of the organization structures within BKPM n Management of state’s assets or goods which is within BKPM’s responsibility n Supervision over duty implementation within BKPM n Implementing other functions in the field of investments in accordance with the provisions of the legislation 2022 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA | 13 Sub-National Investment Promotion targeted economic sectors can be inferred from Agencies the country’s 20-year National Long Term Development Plan (Rencana Pembangunan Article 30 of the Law No. 25 of 2007 empowers Jangka Panjang Nasional or RPJPN) (2005- regional and provincial governments to 2025). The RPJPN has been implemented implement capital investment activities that fall through Law No. 17 of 2007, and is publicly within their authority. Most local governments accessible at the official website of the Ministry at the province and regency level generally have of National Development Planning/National their own local investment agency. The name of Development Planning Agency. It is structured this agency may vary from one local government to be implemented in four stages, with each to another, but it is commonly called Dinas stage having a five-year plan called the National Penanaman Modal dan Pelayanan Terpadu Satu Medium Term Development Plan (Rencana Pintu or the Investment and One-Door Integrated Pembangunan Jangka Menengah Nasional Services Agency. RPJMN). The current five-year plan launched Although the establishment of the OSS in 2018 in January 2015, Third RPJMN of 2015-2019, has centralized and integrated licensing processes contains the Nawacita development agenda (that (see further Section 3 – Investment Entry and is, nine priority programs) of President Joko Establishment), regional governments continue Widodo’s administration. to supervise business actors to ensure they meet Based on the Presidential Regulation No. 90 of their commitments and impose sanctions for 2007 as amended by Presidential Regulation No. noncompliance through the OSS agency. The 24 of 2020 on the BKPM, the following deputies OSS RBA attempts to integrate local governments are tasked with a responsibility of driving foreign licensing systems within the OSS and streamline investment: the business licensing process at the regional level. n Deputy Chairman for Investment Planning D. Foreign Investment Promotion n Deputy Chairman for Investment Climate Strategy Development The Indonesian government does not have n Deputy Chairman for Investment Promotion a specific foreign investment promotion strategy, but its investment strategy and n Deputy Chairman for Investment Cooperation | 14 2022 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA 3. INVESTMENT ENTRY AND ESTABLISHMENT Market Entry and Sectoral Limitations n Sectors with Restrictions — These are subject to specific conditions, e.g. reserved for Article 12(1) of Law No. 25 of 2007 expressly domestic investors only, foreign equity caps, permits investment in all business sectors of and businesses requiring special licenses. 37 the economy, except in those sectors that are business activities fall under this category, specifically closed or open subject to restrictions down from 350 business activities under the under Indonesian law. More specifically, Article 2016 Negative List. Only 12 business fields are 12(2) states that foreign investment is prohibited in reserved for domestic investors and 25 business certain sectors such as weapons and war equipment fields are subject to foreign equity caps. and in sectors that are determined closed by law (Prohibited Sectors). Article 12(3) empowers the n Sectors Reserved for Cooperatives and Indonesian government to determine the sectors MSMEs — There are two sub-categories: closed to both domestic and foreign investment by way of Presidential Regulation based on criteria n Activities that are reserved for cooperative of health, morals, culture, environment, national and MSMEs only (60 business activities fall defense and security, and other national interests. under this category). These are business Similarly, Article 12(5) empowers the government activities that do not use technology or use to determine the business sectors open with simple technology, are labor intensive or restrictions based on national interest, also by way related to special cultural heritage, or the of Presidential Regulation (Restricted Sectors). capital required for business activities does not exceed IDR 10 billion (excluding land As part of the reforms under the 2020 Law and building) on Job Creations, on March 4, 2021, the Indonesian government enacted the Presidential n Activities that are open to foreign investment Regulation No. 10 or 2021 (which was amended if the business is conducted based on a by Presidential Regulation No. 49 of 2021). The partnership with a cooperative or MSME (i.e., new regulation revokes the 2016 Negative List requiring compulsory partnership which can (promulgated under the Presidential Regulation be in the form of operational cooperation, No. 44 of 2016 on the List of Business Activities franchise, distribution, joint ventures, profit Closed and Open to Investment) and provides a sharing, outsourcing etc.) These are business new, significantly liberalized, investment list activities with scale-up purpose to enter the (“2021 Investment List”). The general principle supply chain. 46 business activities fall under under this list is that a business line is open to this category. 100% foreign investment unless subject to specific n Priority Sectors — These business lines are limitations in the regulation. open to 100% foreign investment and are entitled The 2021 Investment List classifies business to receive fiscal and non-fiscal incentives. fields into the following categories: Investments under this category are of national strategic significance, capital intensive or labor n Prohibited Sectors — These are specifically intensive, require advanced technology, or are reserved for the government where no private pioneering industries, export-oriented and/or investment is permitted, whether domestic oriented towards research, development and or foreign. 6 business lines fall under this innovation (e.g., textiles, pharma, automotive, category, down from 20 business activities cosmetics etc.). 246 prioritized business lines under the 2016 Negative List. are enumerated under this category. 2022 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA | 15 n Other Sectors — Any sectors not listed in high-risk, high technology, and/or high-value the above categories are open to all investors, construction works have been removed; and including 100% foreign investment. drinking water business is also fully liberalized from previously capped 95% to 100% foreign Apart from the Prohibited Sectors, Sectors investment. Reserved for Cooperatives and MSMEs, and Sectors with Restrictions, the general position is that 100% foreign equity is permitted in a Prohibited and Restricted Sectors sector or sub-sector. The registration and licensing Table 3 lists the Prohibited and Restricted of FDI is centralized and integrated through the Sectors based on the 2021 Investment List. reformed OSS RBA implemented in August The 2021 Investment List enumerates the 2021. Certain sector-specific laws (particularly business activities that are prohibited, restricted in financial and banking sectors) may impose or prioritized, organized by reference to the prohibitions or restrictions on FDI in the relevant characterization of business activity described sector, or require the relevant regulator’s approval. in the Indonesian Business Classification Codes For example, the regulation on e-money issued by (Klasifikasi Baku Lapangan Usaha Indonesia Bank Indonesia (BI), Indonesia’s central bank, (KBLI). The KBLI numbers are used by BKPM in May 2018 introduced a restriction on foreign to determine which foreign investment restrictions ownership in e-money companies. However, will apply to foreign investors under the List. Article 13 of the Presidential Regulation No. 10 or 2021 states that all sector–specific requirements There is no general requirement to form a under laws and regulations will continue to be joint venture with a local partner to establish effective so long as those laws and regulations business in Indonesia, but in Restricted Sectors do not contradict the provisions and requirements where less than 100% FDI is permitted, foreign under the 2021 Investment List. investors are (by implication) required to form joint ventures with a local partner. For example, Notably, the reforms since 2020 have because FDI in the automobile and repair industry significantly liberalized foreign investment is limited to 49% the only way a foreign company in a number of important sectors, reducing can set up operations in that industry within the prohibited sectors from 20 to 6 business Indonesia is by establishing a joint venture with lines and removing or liberalizing foreign one or more local partners. A foreign investor may equity caps and other restrictions in various not bypass the foreign equity caps in the Restricted other sectors, reducing the restricted sectors Sectors by mergers and acquisitions. from 350 to 37. Some of the liberalized sectors include: wholesale distribution previously capped Restrictions on Non-Equity Contract at 67% is 100% open to foreign investment; Based Investments foreign equity caps for the telecom, media and technology, transportation, healthcare, energy Generally, no special restrictions or conditions and construction services have been removed, are imposed on foreign investors relative to permitting 100% foreign investment; airport domestic investors as regards non-equity, services and seaport facilities previously capped contract-based investments such as franchising, at 49% and airport-related services and terminal outsourcing, licensing, and so forth. supporting services previously capped at 67% are now 100% open to foreign investment; foreign Forms of Establishment equity restrictions on electricity transmission and electricity distribution and on power plants with a Pursuant to Article 5 of the Law No. 25 of 2007, capacity greater than 1 MW have been removed all foreign capital investment in Indonesia must to permit 100% foreign investment; foreign equity be implemented through an Indonesian limited restrictions in construction consultancy services liability company domiciled in the country, and construction implementations services for often referred to as a Penanaman Modal Asing or “PMA company”. Foreign investors may freely | 16 2022 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA Table 3. List of Major Prohibited and Restricted Sectors based on the 2021 Investment List Prohibited Sectors Scope Reserved for Government Ammunition Weapons system equipment Museums Government museums Relics Historical and ancient relics Navigation n Flight navigation operations n Telecom/infrastructure to shipping navigation and vessels Prohibited for Both Domestic and Foreign Investment Narcotics Cultivation of Class 1 narcotics Gambling Gambling/casino activities Fishing, marine and forestry n Fish catching for species listed in Attachment I of the Convention on International Trade in Endangered Species of Wild Fauna and Flora; n Coral and sea rock utilization or harvesting as material for building/calcium, aquariums, and souvenirs/jewelry, as well living and recent death coral Chemicals and chemical products n Chemical weapon industries n Industrial chemical substances and ozone depleting substances industry Prohibited for Foreign Investment Agriculture Coffee processing industry that has obtained geographical indications Alcoholic Beverages Alcoholic liquor, beverages, malt beverages Textiles Batik Industry: stamped batik industry Chemicals and Chemical Products Traditional cosmetics industry Pharma, Medicine n Industry of raw materials for traditional medicine for humans n Industry of traditional medicine products for humans Wood and Wood Products n Wooden goods industry n Ship industry­—Phinisi; Outrigger / Cadik; Other wooden boats with traditional distinctive designs Travel and Tourism Special Umrah and Hajj travel agency activities Media and Entertainment Art gallery Fishery Fish processing Handicrafts Traditional handicrafts Food Crackers and chips industry E-Commerce in certain products E-commerce involving goods such as (1) food and beverages, tobacco, chemicals, pharmacy, cosmetics, and laboratory equipment; (2) textile, clothes, footwear and personal equipment; (3) household and kitchen equipment Sectors Reserved for Cooperatives and MSMEs­—No Foreign Investment Permitted Agriculture, Hunting, Forestry, Fishery Food crop farming with an area of less than 25 Ha, collection of forest products Agro-processing, Food Products Fish preservation industry, brown sugar industry, crackers, chips industry Textiles Weaving, ikat, batik, embroidered fabrics, traditional clothing Rubber Rubber curing industry Pharma, Medicine Traditional medicine Metals and Metal Products Industry of cutting tools and hand tools for agriculture, including cutting tools and hand tools for agriculture from metal that is not driven by power, carpentry tools Non-metal Mineral Products Manufacture of household appliances made of clay/ceramic, in the form of pottery and decorative ceramics Wood and Wood Products Wickerwork industry, wood carving craft industry 2022 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA | 17 Automobiles, Other Motor Vehicles and Industry of maintenance and repair of motorcycles other than those integrating with Transport Equipment sale of motorcycles Other Manufacturing Traditional Musical Instrument Industry Electricity Provision of electricity for power generation < 1 MW Construction Construction of buildings using simple and intermediate technology, Civil road construction includes maintenance, road construction using simple and intermediate technology, Installation of prefabricated buildings for construction of irrigation and drainage networks, drinking water, Construction of civil buildings, telecommunications for transportation infrastructure, demolition, land preparation using simple and intermediate technology Wholesale and Retail Trade -Retail trade - minimarket, non-alcoholic beverages, pharma goods and medicines, rice, bread, pastries and cakes, coffee, granulated sugar, etc. Retail trade through postal orders and the internet for commodities of food, beverages, tobacco, chemicals, pharmaceuticals, cosmetics, laboratory equipment, textiles, clothing, footwear, personal goods, household goods and kitchen utensils Hotels and Restaurants Lodging services- one star hotels, guest houses Travel and Tourism Tourism travel agents, tour guides Professional, Scientific and Technical Transportation consulting activities, architectural activities, engineering and Services technical consulting, engineering installation, and lab testing using simple and intermediate technology, inspection and testing of electrical power on installations supply of electricity or use of electric power Health Services Primary Clinics: private maternity homes, clinic general medical, public medical clinics, residential health services and basic health care facilities Other Services Photocopying, document preparation and other special office support services, laundry, barbershops, beauty salons Restricted Sectors Restrictions on Foreign Equity Defence and security Weapons and ammunition industry; War vehicle industry; Industry of defense radar for weapon systems; Warship industry; Military aircraft industry—up to 49% or more subject to approval from Ministry of Defence Construction Construction of buildings—office building; industrial building—up to 67% (70% for ASEAN countries' investors) Logistics, Transport and Storage n Water transport; domestic scheduled and non-scheduled air transportation (commercial); air transport activities; domestic passenger liner and tramp activities; domestic sea transport for tourism; domestic liner and tramp sea freight for goods; domestic sea transport for special goods; pioneer domestic sea transportation of goods; domestic sea transportation using public shipping; overseas liner and tramp sea freight for goods; overseas sea transportation for special goods; interprovincial sea public transport; river and lake transportation with non-fixed and irregular routes—up to 49% n Postal and courier services—up to 49% Professional, Scientific and Technical Consultancy in the field of electrical power installation—up to 67% (70% for ASEAN Services countries' investors) Media and Entertainment Private broadcasting agency; subscription based broadcasting agency; community radio agency; community television agency— up to 20% for business expansion and development only Publishing Publishing of newspaper, magazine and bulletin (press)—up to 49% for business development and expansion only Horticulture Up to 30% Insurance Up to 80% pursuant to the Government Regulation No. 14 of 2018 on Foreign Ownership on Insurance Companies | 18 2022 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA Foreign Investment Subject to Partnerships with Cooperatives and MSMEs Agriculture, Hunting, Forestry, Fishery Cultivation of broiler chickens, rearing of marine fish, hatchery of marine fish Mining and Quarrying Salt production/extraction business Agro-processing, Food Products Agro-processing, fishery product processing business, fish canning, pickled fruits and vegetables industry Chemical and Chemical Products Coconut industry, essential oil industry Pharma, Medicine Medical device industry in Class 2101 Metals and Metal Products Nails, nuts, bolts industry, jewelry goods of precious metal Non-metal Mineral Products Manufacture of bricks and ceramics, lime industry, recycle of non-metal material industry Automobiles, Other Motor Vehicles and Two- and three-wheeled motor vehicles components and apparatus Industry, Transport Equipment Service of repairing ships, boats and floating buildings, Repair services for other transportation equipment, not motorized vehicles Machinery and Electrical and Industry of engine and turbine components and parts, Industry of spare parts and Electronic Equipment and Components accessories for motorized vehicles with four or more wheels Other Manufacturing Coconut fiber industry, Industry of imitation jewelry and similar goods, Gemstones industry Construction Construction of bridges and overpasses using simple and intermediate technology Postal and Courier Courier agent activity Health Services Clinical health labs Source: Analysis by Kilpatrick Townsend & Stockton LLP based on country’s laws and regulations. Note2: The table is based on a review of 32 specific sectors identified for the purpose of this research. The list of sectors is therefore not exhaustive. invest, and generally hold any type of shares in a In April 2021, the BKPM issued Regulation PMA company (for example, ordinary shares and No. 4 of 2021 pursuant to which a PMA is preference shares). The BKPM requires domestic required to have a minimum of IDR 10 billion companies be converted into a PMA company if capital investment for every five-digits of KBLI any shares of the domestic company are owned per project location (excluding the investment by foreign investors. Apart from the Restricted in land and building), with minimum paid- Sectors, there is no statutory prohibition against up capital of IDR 10 billion. Paid up capital the establishment of a wholly foreign-owned is the minimum value of the initial investment PMA subsidiary in any other sector, provided required to establish a PMA which is 25% of the necessary regulatory approvals to carry the minimum capital requirement. Each business on business activities in Indonesia have been sector to be entered may require the establishment obtained. Foreign investors are also allowed to set of a separate PMA and in such case the minimum up a representative office in Indonesia, subject to capital requirements apply to each business sector regulatory approvals. Setting up of branch offices to be entered into, subject to a few exceptions. of foreign companies in Indonesia may be allowed For example, a PMA engaged in the food and only in certain fields, such as banking and certain beverage industry with a total investment value of energy projects. more than IDR 10 billion will not be required to add another IDR 10 billion if it engages in another Minimum Investment and Paid-up business line that is still within its two initial digits Capital Requirements of the KBLI number. Similarly, a PMA engaged in large-scale trading or construction with a total Foreign investors are subject to minimum investment value of more than IDR 10 billion will investment as well as paid-up capital not be required to add another IDR 10 billion if it requirements. engages in another business line that is still within 2022 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA | 19 its four initial digits of the KBLI number, and for matters related to human resources. Under the industrial activities that produce various products, Ministry of Manpower Decree No. 349 of 2019, there needs to be five matching KBLI numbers in foreigners are prohibited from holding positions order waive the requirement of additional IDR 10 that handle matters related to human resources, billion for paid-up capital. specifically the following positions: This requirement does not apply to n Personnel director representative offices and foreign business n Industrial relation manager entities that conduct business in Indonesia without having a local subsidiary as a PMA n Human resource manager company. Article 12 of BKPM Regulation No. 4 of n Personnel development manager 2021 also stipulates that other applicable laws and n Personnel recruitment supervisor regulations may require a different threshold for the capital requirement. For example, Article 8 of n Personnel placement supervisor the Ministry of Transportation Regulation No. PM n Employee career development supervisor 49 of 2017 stipulates that a freight forwarder with n Personnel declare administrator a status of foreign investor must have minimum investment of US$4 million and minimum 25% n Personnel and careers specialist of the authorized capital must be issued and n Personnel specialist paid-up. Similarly, in the banking sector, for n Career advisor commercial banks there is a minimum paid up capital requirement of IDR 3 trillion. Technology- n Job advisor based start-ups in SEZ are also exempted from n Job advisor and counselling the minimum investment value requirement for n Employee mediator foreign investment of IDR 10 billion (excluding lands and buildings) for certain period of time. n Job training administrator n Job interviewer Prior to this new BKPM regulation in 2021, the minimum issued and paid-up capital for n Job analyst foreign investors was IDR 2.5 billion and n Occupational safety specialist the minimum investment value for foreign The procedures for obtaining foreigners’ work investors was more than IDR 10 billion per permits, including the timeline, are regulated line of business. With this increase in paid up under the new Government Regulation Number capital requirements from IDR 2.5 billion to IDR 34 of 2021 on Procedures of Foreign Manpower 10 billion, the government aims to attract more Utilization (GR 34/2021) issued in February high-value investments in the country. 2021. This new regulation implements the Law No. 11 of 2020 on Job Creation and aims to Quantitative Limits simplify the process for hiring expatriate workers There are generally no mandatory quantitative in Indonesia and in turn attract greater investment limits on the number of foreign service into the country. providers, enterprises or market players that Under the prior regulation (Ministry of Manpower can operate in a given sector. Regulation No. 10 of 2018), employers were required to obtain approval from the Ministry of Restrictions on Expatriate Manpower for their foreign worker utilization Appointments plan (Rencana Penggunaan Tenaga Kerja Asing or In general, there is no specific restriction on RPTKA) and a notification issued by the Ministry foreigners being appointed as board members of prior to employing foreign workers. GR 34/2021 local companies or in key managerial positions, removes the notification requirement but adds a but foreigners are not permitted to handle any requirement for RPTKA feasibility assessment. | 20 2022 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA In this assessment, the Ministry of Manpower Regulation No. 27 of 2015 on Technical will determine within two business days whether Requirements for Telecommunication Devices the submitted information and documents are with LTE Technology requires minimum 30% in order and deemed feasible based on the local content for “base station” and minimum 20% feasibility assessment, and upon such verification local content for “subscriber station.” Further, and payment of the Foreign Worker Utilization certain regulations only encourage prioritizing Compensation Fund by the applicant, the Ministry local industries, such as Presidential Decree No. will issue the RPTKA approval. 146 of 2015 on Construction and Development of Oil Refinery and Minister of Trade Regulation GR 34/2021 obligates employers to submit an No. 71 of 2019 on Operation of Franchises. annual report to the Ministry of Manpower on their employment of foreign workers, which There are no requirements to invest in local report will cover the implementation of (i) foreign R&D in order to establish a business in the workers employment, (ii) education and training country. However, the government provides of Indonesian co-workers, and (iii) transfer of tax incentives for R&D activities in 11 specific technology and expertise from foreign workers business sectors, among others in the form of to Indonesian co-workers. New administrative reduction in gross income of up to 300% of the sanctions are introduced in the form of a fine on amount spent on R&D. The scope of business employers (for up to IDR 36 million), temporary eligible for this incentive are the following sectors suspension of application process for the RPTKA related to: food; pharmaceuticals, cosmetics, approval and revocation of RPTKA approval for and medical devices; textiles, leather, footwear, violations of the provisions of GR 34/2021. and miscellaneous; transportation; information and communications technology; energy; capital In general, there is no regulation expressly goods, components, and auxiliary materials; requiring foreign investors to hire local agroindustry; base metal and non-metallic employees. However, pursuant to Article 10 of minerals; basic chemicals based on oil, gas and the Law No. 25 of 2007 and Article 2 of the GR coal; as well as defense and security. 34/2021, every employer is obligated to give priority to Indonesian manpower in meeting its hiring needs and to increase the competencies of Indonesian Foreign Investment Approval manpower through education and training. Foreign investors require approval in the form of a business license (izin usaha) to conduct Local Sourcing and R&D Requirements commercial operations in the country. It should be noted that domestic investors must also obtain The use of local content is required in some this business license. In general, the business license sectors (as an operational condition), but the approval will be granted if the investment does not requirement applies equally to both domestic violate the 2021 Investment List and has fulfilled and foreign investors. For example, Article 7 the minimum capital investment requirement and of Ministry of Trade Regulation No. 23 of 2021 applicable sector-specific requirements. stipulates that shopping centers must provide a promotion area for locally manufactured goods In 2018, the Government of Indonesia with a space minimum 30% of the total area of introduced the Online Single Submission the shopping centers. Some industrial regulations (OSS) system to grant business licenses, provide more benefits for the utilization of local which was further reformed in August 2021 products (e.g., price preference for tender in oil and pursuant to the Law No. 11 of 2020 regarding Job gas industry). Minister of Trade Regulation No. 7 Creation, BKPM Regulation No. 4 of 2021 and of 2013 concerning Development of Partnership Government Regulation No. 5 of 2021 on Risk- for Food and Beverages Franchises requires food Based Criteria Business Licensing (GR 5/2021). and beverage franchises to source 80% of their raw Business licenses for most foreign investment materials and equipment domestically. Similarly, companies were previously issued by BKPM. The Minister of Communication and Information OSS system consolidates the license applications 2022 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA | 21 into one online system, applies to all business n Low risk business activities — Only a business entities, and intends to capture all sectors and identity number (known as Nomor Induk integrate all government agencies. It also provides Berusaha or NIB) is required to prepare for the comprehensive information about various policies business activities (such as land acquisition, and requirements set out for business, including the building construction, equipment procurement, maximum foreign ownership of relevant business hiring manpower etc.) and operate or conduct in accordance with the 2021 Investment List, commercial activities. Certain supporting the required procedures, as well as the estimated licenses may also be required depending on the timeline for the license application process for business activity. improved transparency. n Medium risk business activities — These are The introduction of the reformed OSS system divided into medium-low and medium-high risk. (OSS RBA) signals a change in approach to registering a business. The OSS RBA adopts n For medium-low risk business activities, only a risk-based assessment approach under which an NIB and standard certification (in the form certain requirements and conditions will need to of self-declaration) is required to prepare for be fulfilled before licenses are issued depending the business activities and operate or conduct on the scale of business and level of risk of the commercial activities. Companies are also relevant business lines. This new risk-based required to submit a self-declaration in the approach changes the prior commitment-based OSS system committing to meet the applicable approach of the government. Under the old business or product standards. Supervision is OSS system, licenses were issued subject to the carried out by the government to ensure that fulfilment of certain commitments and obligations business actors meet the business standards. (such as obtaining local permits and approvals n For medium-high risk business activities, from local government) and these licenses an NIB and standard certification (self- became effective only after all commitments and declaration) are required to prepare for the obligations were fulfilled. business activities but business actors can GR 5/2021 contains information on (i) KBLI operate or conduct commercial activities numbers for business activities (divided by only after the government verifies the business sectors), the level of risk for the KBLI standard certification. Certain supporting numbers, and the licenses required for the KBLI licenses may also be required depending on numbers based on the level of risk, (ii) supporting the business activity. licenses required to conduct the business activities n High risk business activities — An NIB (divided by business sectors), (iii) requirements is required to prepare for their business and/or obligations to obtain the required licenses activities and a business license is required and supporting licenses, (iv) guidelines for the to operate and conduct commercial activities. government to determine the level of risk of a Certain supporting licenses, business standard business activity, and based on the level of risk, certification or product standard certification determine the required licenses, and (v) guidelines may also be required. for ministers and sectoral agencies in determining business standards (requirements) or product Under the OSS system, companies must self- standards (requirements) applicable for their assess the required business licenses and the business sectors. corresponding KBLI number, capital requirements and other requirements and conditions to obtain the Business activities are categorized based on the licenses and to ensure compliance. In case of non- risk level of the business activities, which will compliance during government checks, a company’s determine the required licensing. The lower the registration may be frozen, and dealings with the business risk, the simpler the process to attain a government and third parties may be delayed or business license: become onerous until there is compliance. Foreign | 22 2022 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA investors are first required to establish a foreign effective after the recipient investor complies with investment company by obtaining the establishment the applicable commitments/obligations imposed approval from Ministry of Law and Human Rights on the investor with respect to the sector or business and an NIB from the OSS system, in addition to activity for which the license is granted. Some other licenses depending on the level of risk of the sectors, e.g. manufacturing, may require more business activities. commitments/obligations to be fulfilled compared to services in general. These commitments may In general, a business license is currently issued be in the form of obtaining approvals or permits without any expiration date. As such, it is valid from local government having jurisdiction over as long as the company is still conducting the the project location. If the local government has relevant business, or as long as the business license not been integrated with the OSS RBA system, it has not been revoked, with few sector specific might be more time consuming to obtain approvals exceptions (e.g., mining business license). For a or permits from that local government. Business business license issued through the OSS system, licenses for certain sectors such as electricity, the process is regulated under GR 5/2021. In downstream oil and gas, mineral and coal, public practice, issuance of business licenses through the works and housing, and licenses to open a branch OSS RBA system can generally take around 2-5 or representative office in the country are not working days. The business licenses will only be administered by the OSS system. 2022 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA | 23 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 No. 25 of 2007. n Payments for technical assistance and technical Article 7 of the Law specifically prohibits the and management service fees, and payments government to undertake any nationalization action under project contracts, and payments for or take over the ownership rights of domestic or intellectual property rights foreign investors unless under legal provision. In n Proceeds from the sale of assets of capital the event that the government either nationalizes or investment companies takes over the ownership right of any investors, the government is required to pay compensation based These repatriation rights do not infringe upon on market value. If there is no consensus on the the government’s ability to require reporting amount of compensation among the parties relative of repatriation activities and transfer of funds, to the nationalized assets, then the dispute shall be receive tax and royalties and other government settled through arbitration. income from capital investment, nor do these rights provide protection from creditors. Article 9 of the Restrictions on Inflow and Outflow of Law empowers the Minister of Finance and courts Funds to request the bank or other institution to delay transfer or repatriation until all liabilities of the Article 8 of the Law No. 25 of 2007 stipulates that investor are met. an investor may freely transfer and repatriate in foreign currency its assets to parties appointed Indonesia currently permits the free transfer by the investor, in accordance with prevailing of funds subject to a number of reporting laws of the country. The types of assets include requirements that aim to prevent, among other the following: things, money laundering. In most cases, the bank executing the transfer of funds is responsible for n Capital reporting the transfer. Additionally, Bank Indonesia n Profits, bank interest, dividends and other has introduced regulations requiring reports of income transactions over a certain value. n Additional funds which are required to finance In general, all domestic transactions must capital investment be conducted using Indonesian currency (rupiah), with special exceptions granted to n Funds for repayment of loans specific business sectors, purposes and areas as stipulated by Bank Indonesia (see further Box n Royalties or expenses 2.). This mandatory use of rupiah is not intended as a capital control because any person can freely n Personal income of expatriates who work in hold, transfer or exchange foreign currency. The capital investment companies transfer of foreign exchange to and from abroad n Proceeds of sale or liquidation of the capital is, however, subject to disclosure and reporting investment company obligations to Bank Indonesia. | 24 2022 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA 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. 2022 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA | 25 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 (as amended by Regulation No. 18/4/PBI/2016, 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 (as amended by BI Regulation No. 17/23/PBI/2015, 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. | 26 2022 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA 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. Dispute Settlement n Other general principles to be determined, provided that the principle has been used as a Law No. 25 of 2007 provides that if there is a basis for the judge’s consideration in a legally dispute between the government and an investor binding court decision. that cannot be settled amicably, the dispute can be settled through arbitration, an alternative Article 46 of Law No. 30 requires that if a dispute settlement forum, or by the courts. government decision creates an imposition to a Consent for international arbitration is given on party, the authority will inform the relevant party a case-by-case basis. As Indonesia is a member with the legal basis, requirement, documents and of the New York Convention on the Recognition relevant facts before implementing that decision. and Enforcement of Foreign Arbitral Award 1958, The authority is required to inform the relevant foreign arbitration awards are enforceable in party at least 10 working days before the enactment Indonesia. However, foreign court judgments are of the decision (except as regulated otherwise). not enforceable under Indonesian law. Law No. 30 also provides an opportunity for a party to object to a government decision to the relevant Administrative law and judicial review principles government institution. If a party does not agree under Law No. 30 of 2014 on Government with the result of the objection, the party may make Administration (as amended by Law No. 11 of 2020, an appeal to the higher authority of the relevant Law No. 30) require that a government decision government institution. Furthermore, a party may must be founded on provisions of a law, regulation file a claim to the administrative court if they remain and General Principle of Good Governance (GPGG) unsatisfied with the result of the appeal. based on the following principles: Foreign investors are not required to exhaust local n Legal certainty remedies (in general and state administrative n Expediency courts) before referring the dispute to international n Impartiality arbitration, with few sector-specific exceptions. For example, Article 154 of Law Number 4/2009 as n Accuracy amended by Law Number 3/2020 and Law Number n No abuse of authority 11 /2020 on Mineral and Coal Mining, states that n Openness any dispute that emerges in the implementation of mining business license and special mining business n Public interest license shall be settled through court and domestic n Good services arbitration in accordance with laws and regulations. 2022 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA | 27 5. INVESTMENT INCENTIVES Under Article 18 of the Law No. 25 of 2007, The Ministry of Finance has promulgated a the Indonesian government can grant fiscal number of regulations granting tax incentives to incentives to investors who expand their give effect to the provisions of Articles 18-24 of business or undertake new capital investment, the Law No. 25 of 2007. The incentives are made and fulfil at least one of the stipulated criteria. available to both domestic and foreign investors. These criteria include employing a certain number The main regulatory framework for tax incentives of workers, investing in high-priority areas or includes the following: in infrastructure development, undertaking tech transfer, R&D or “pioneer industry” (with wide n Minister of Finance Regulation No. 130/ scale application and strategic value to Indonesia), PMK.010/2020 on Provision on Deduction locating in a remote or underdeveloped area, of Corporate Income Facility (Tax Holiday preserving environment, using domestic capital Facility) (PMK-130). goods or machines or equipment, or making n Government Regulation No. 78 of 2019 on Tax partnerships with micro, small or medium size Facilities for Investments in Certain Business enterprises or cooperatives. Sectors and/or Certain Areas. Article 18 further stipulates that fiscal incentives n Law No. 8 of 1983 on Value Added Tax and may be in the form provided in the list below, Sales Tax on Luxury Goods as lastly amended promulgated in a Regulation of the Minister of by Law No. 7 of 2021 on Harmonization of Finance: Taxation Regulations. n Government Regulation No. 81 of 2015 on n Net income tax reduction up to certain level of Import and/or Delivery of Certain Strategic investment made within certain period; Taxable Goods that are Exempted from Value n Import duty exemption or reduction for Added Tax, as lastly amended by Government imported capital goods, machinery, or Regulation No. 48 of 2020 (GR 81). equipment domestically unavailable; n Law No. 10 of 1995 as lastly amended by Law n Import duty exemption or reduction for raw No. 17 of 2006 on Customs. materials or supportive materials for production n Minister of Finance Regulation No. 176/ within certain period and meeting certain PMK.011/2009 as lastly amended by Regulation requirements; 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 production within a certain period; of Capital Investment. n Accelerated depreciation or amortization; Some examples of tax incentives available n Land and building tax reduction, especially for under these regulations include tax holidays and certain sectors or in certain regions. corporate income tax reduction for qualifying investments in a pioneer industry, and VAT and Articles 21-24 further provide that the government custom duty exemptions if services or goods meet may grant other non-tax benefits and facilitated certain stipulated criteria. For an overview of services and/or licensing to investors, such as pioneer industries, see Box 4. rights over land, immigration service facilities and import license facilities. | 28 2022 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA Box 4. Pioneer Industries under PMK-130 Minister of Finance Regulation No. 130/PMK.010/2020 on Provision on Deduction of Corporate Income Facility (Tax Holiday Facility) lists the following as “pioneer industries” having broad and strategic relevance to the country’s economy: n Upstream basic metal; n Oil and gas refinery; n Petrochemicals from oil, gas, or coal; n Organic basic chemicals from agriculture, plantation, or forestry products; n Inorganic basic chemicals; n Pharmaceutical raw materials; n Irradiation, electro medical, or electrotherapy equipment; n Main components of electronics or telematics equipment; n Machinery and main components of machinery; n Robotics components that support the creation of manufacturing machinery; n Main components of power plant machinery; n Motor vehicles and main components of motor vehicles; n Main components of vessels; n Main components of trains; n Main components of aircraft and activities supporting the aerospace industry; n Agricultural, plantation, or forestry-based processing that produce pulp; n Economic infrastructure; and n Digital economy which includes data processing, hosting, and related activities The Government issued Regulation No. 78 of 1. Activities related to export of movable goods to 2019 provides for the tax allowances available be used outside of the customs area; for companies that invest in certain business 2. Activities related to immovable goods located sectors and/or regions. Criteria for obtaining tax outside of the customs area; allowances include high investment or exports, large workforce and high local content. 3. Activities other than those stated in point 1 and 2, above, whose results are used outside of the For certain services an incentive is provided in customs area, by the following means: the form of a 0% VAT rate. Export of taxable i. delivered directly or indirectly, among others services is subject to a 10% VAT. However, Minister by means of mail and electronic means; of Finance Regulation No. 32/ PMK.010/2019 on Limitation of Activities and Type of Taxable ii. provision of access to be used outside of the Services that Export are Subject to Value Added customs area. Tax (MoF Regulation 32) stipulates that the following activities would be subject to a 0% VAT The requirements to qualify for 0% VAT are that: rate if certain requirements are met: (i) the service is based on a written agreement that 2022 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA | 29 clearly states the type of the taxable service, gives (iii) encourage business involvement to develop details on the activities performed in the customs high quality human resources; (iv) increase area to be exported, and the value of the delivery, competitiveness; and (v) encourage businesses to and (ii) that there is payment made by the service conduct R&D in the country. recipient to the exporter, supported by a valid proof of payment. Business activities carried out mainly Law No. 39 of 2009 on Special Economic for export may also enjoy Bonded Zone facilities Zones provides incentive for companies that and the imported goods may be exempted from are located in Special Economic Zones. For customs duty, excise and import taxes. Companies example, a plot of land may be obtained through a having a Bonded Zone license may sell a maximum land acquisition for public interest scheme funded of 50% — for domestic consumption — of the by the state or the regional government budget. previous year’s export realization value and/or There is a centralized database of tax incentives sales value to other Bonded Zone areas. offered to investors in Indonesia, available at For both domestic and foreign investment the official website of BKPM. In addition, the companies there are several regulations that Indonesian government lists all tax regulations aim to provide financial incentives, for example, on the official website of the Director General of reducing production costs by cutting the price Tax. However, there is no centralized database of of gas and electricity for certain industries. financial incentives available for investors. For instance, in the natural gas sector President Regulation No. 40 of 2016 on the Determination Eligibility Criteria and Approval Process of Natural Gas Prices for Certain Industry and Regulation of Minister of Energy and Natural The granting of tax/financial incentives Resources No. 16 of 2016 on the Guidelines for to investors is contingent upon satisfying the Determination of Certain Prices and User of certain criteria. If the incentive is provided in a Natural Gas allows certain industries using natural published law/regulation, the eligibility criteria gas (for example, steel, ceramics, petrochemical, are often laid out in the same law /regulation. and so forth) to purchase natural gas at favorable The approval process for receiving tax/financial prices. This incentive is subject to, among others, incentives is not automatic. Applicants must obtaining a recommendation from the Minister apply for the incentives through the OSS system of Industry. Similarly, in the electricity sector, prior to commencing commercial activities in Regulation of Minister of Energy and Natural the country and the OSS system will notify the Resources No. 28 of 2016 on Electricity Tariff investor if the stipulated criteria are met for the provided by PT Perusahaan Listrik Negara incentives. After the investor receives notification (Persero) regulates specific tariffs for Industry and that the requirements are fulfilled, the investor for certain special economic zone in Indonesia. must submit the supporting documents through the OSS system. The incentives are granted by the Government Regulation No. 45 of 2019 provides Director General of Tax on behalf of the Minister tax incentives to Indonesian companies to: of Finance in consultation with the BKPM and (i) encourage investment in labor intensive the ministry in charge of the sector in which the industries; (ii) facilitate job creation in Indonesia; investment is contemplated. | 30 2022 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA 6. INVESTMENT LINKAGES For the purpose of this section research was Under Regulation No. 18 of 2015 on Tax Facilities focused on availability of incentive schemes for Investments in Certain Business Sectors and/ to increase local sourcing, technology transfer or Certain Areas (as amended by Government and measures to improve information exchange Regulation No. 9 of 2016), certain tax incentives between foreign investors and domestic are available to investors (whether domestic or suppliers. Several incentives aim at creating foreign) for capital investment that has high local linkages between domestic companies and foreign content or high absorption of Indonesian manpower. investors. Article 18(3) of the Law No. 25 of 2007 Additionally, some sector specific regulations may states that the government may grant incentives require investors to use local content (for example, to investors if capital investment undertakes telecommunication, electricity, mining, oil and gas) technology transfer or if it is in an industry that uses or to transfer their technology to their local partner domestic capital goods or machines or equipment. (for example, 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 whether foreign investment, and are equally applied to there are any measures within the country’s domestic investors. In addition, there are other investment legislation that are specifically laws that apply to foreign investors as well, which targeted to ensure responsible investment. may serve to preserve the environment and to Indonesia has undertaken several measures in the ensure products produced comply with national country’s investment policy and legal framework and international standards. Notably, Indonesia has to promote responsible investment. None of these undertaken the following measures: measures specifically target foreign investors or 2022 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA | 31 n Under Law No. 25 of 2007, an investor has responsibilities. The Company Law also the obligation to implement corporate social requires inclusion of social and environmental responsibility. This obligation includes, among responsibility funds in company budgets for all others, imperatives (i) to keep the environment limited liability companies, whether domestic sustainable; (ii) to create workers’ safety, or foreign. health, amenity, and welfare; and (iii) for n Concerning labor conditions, under Law investors engaged in a nonrenewable natural No. 24 of 2011 on Social Security Organizing resource business to allocate funds for location Body and amended by Law no. 11 of 2020, recovery. each person (including foreigners working n The requirement to preserve the environment in Indonesia for at least 6 months) must could also be found in the Law No. 32 of 2009 as be enrolled in the social security programs amended by Omnibus Law (“Environmental that are administered by the relevant Law”). The Environmental Law serves as the social security organizing body (Badan main law to supervise of the impact of business Penyelenggara Jaminan Sosial (BPJS). activity to the environmental. There is also Law An employer has the obligation to enroll its No. 41 of 1999 on Forestry (as lastly amended employees into the social security programs. by Omnibus Law, “Forestry Law”) that serves Even a definite period employee is required to as the main law to supervise the Indonesian’s be enrolled into the social security programs. forestry protection and management. Certain n Law No. 20 of 2014 on Standardization and industries that have significant impact to Conformity Assessment imposes general environmental and forestry, such as mining, requirements for compliance of a product also requires certain environmental-related with national standards. The regulation obligation such as post-reclamation activity. requires certain products to obtain a Standard n BKPM Regulation No. 5 of 2021 on Nasional Indonesia (SNI) mark, that is, a sign Guidelines and Procedures for Supervision the product meets the Indonesian National of the Risk-Based Licensing (“BKPM Reg. Standard. SNI mark approval is administered 5”) requires every investor to be responsible by the Indonesian National Bureau of Standards and maintain environmental sustainability. (Badan Standardisasi Nasional or BSN). BSN Under BKPM Reg No. 5 a company that lists certain products that are subject to testing causes environmental damage or harms the pursuant to standards issued by the BSN. Based safety of the public may be sanctioned by on the relevant institution or ministry, there are an administrative sanction in the form of the two types of SNI (depending on the goods): (i) suspension and revocation of the investment mandatory SNI and (ii) voluntary SNI. Goods license, among others. that are subject to mandatory SNI should have n Under the Indonesian Company Law, SNI mark approval before the goods can be used companies that manage or utilize natural or traded in Indonesia. The technical SNI mark resources or conduct activities that may approval process will depend on the relevant have an impact on natural resources must institution or ministry that oversees the goods. fulfil all relevant social and environmental | 32 2022 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA 9. CITY SPECIFIC REVIEW — JAKARTA Special Capital Region of Jakarta (Daerah The Central Government sought to limit such local Khusus Ibukota Jakarta or DKI Jakarta) is the requirements by annulling problematic bylaws capital city of Indonesia, and one of the main issued by local governments, under a special destinations for foreign investment in Indonesia. authority granted under Law No. 23 of 2014 (as The BKPM report for investment value per province amended by Law No. 11 of 2020). However, the in Indonesia for the year 2020 ranks DKI Jakarta as Constitutional Court of Indonesia ruled that the province with the third biggest investment value authority to be unconstitutional. Law No. 23 of (behind West Java having the second place and 2014 empowers (i) the Governor (head of province), East Java at the first place, both all of them are on as representative of the Central Government, to annul Java island). As the capital city of Indonesia, DKI legislation issued by the Regency/City Government Jakarta is home to the Government and Ministries’ (Regency/City Regulation) and (ii) the Ministry of offices, the National Stock Exchange, Bank Home Affairs (MoHA) to annul legislation issued Indonesia, BKPM’s head office. Additionally, most by Provincial Government (Provincial Government of the major corporations’ and financial institutions’ Regulation) that would be contrary to the provisions headquarters are in DKI Jakarta. This provides better of more authoritative laws and regulations, or access to foreign investors in DKI Jakarta in terms of contrary to the public order or decency. However, coordinating with the relevant government authority decisions of the Constitutional Court (No. 137/PUU- regarding the issuance of the licenses or permits that XIII/2015; No. 56/PUU-XIV/2016) deemed MoHA are required for their business activities. and the Governor’s authority to be unconstitutional. As a result, the Supreme Court remains the only Indonesia recognizes regional autonomy and avenue available to review problematic regulations there is wide law-making authority at the issued by a province, regency or city. Additionally, regional levels. Law No. 23 of 2014 on Regional under Supreme Court Regulation No. 1 of 2011 on Government stipulates that a law that is enacted Judicial Review at the Supreme Court, the public at the sub-national level should not conflict with is not allowed to make oral submissions and the any regulation at a higher (that is, national) process is solely based on document review. level. 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. 2022 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA | 33 10. FDI IN THE DIGITAL ECONOMY This section examines Indonesia’s legal and afforded protection under the Copyright Law regulatory framework impacting investment in No. 28 of 2014, as amended. The Copyright Law digital activities and infrastructure. The first sub- provides for protection on a range of original section assesses FDI-specific restrictions that apply works of authorship in the form of literary works to 19 different digital economic sectors or activities (including computer programs), musical works, (see Table 4). The following sub-sections review artistic works, photographs, films or sound a number of legal and regulatory dimensions that recordings, broadcasts, architectural works, applied may affect both foreign and domestic investments works and other works in science, art and literature. in the digital economy: intellectual property rights, A copyright owner is granted a bundle of exclusive data privacy, data localization, intermediary liability, economic rights to reproduce, display, publish, content access, and e-commerce. distribute, adapt, translate, announce, rent, and perform the copyrighted works. The Copyright FDI-Specific Restrictions Law also recognizes authors’ and performers’ moral rights covering the right of paternity and the right Indonesia permits foreign direct investment in of integrity. Although the Copyright Law does not most key digital economy areas identified in expressly mention creations made on the Internet Table 4. Restrictions apply to drones, e-commerce, or in a digital environment, the copyright rules fintech, healthtech, insurtech, logistichstech, and applied for conventional works in physical media traveltech. To the extent any of the following digital also apply for digital works. sectors fall under the “prioritized” sectors of the 2021 Investment List, not only is FDI permitted Copyright holders may seek civil and criminal 100% in such sectors but certain fiscal and non-fiscal remedies against infringers. A copyright owner invectives are available to investors in these sectors. whose work is reproduced, disclosed or used in any other illegal or infringing manner may apply to the Other than equity ceilings listed above, Indonesia courts to (i) prevent the entry of suspected infringing has no specific restrictions to FDI in the digital goods into commercial trade routes; (ii) withdraw economy. There is no separate screening process for from distribution, confiscate and retain as evidence digital FDI. Nor are there any minimum investment suspected infringing goods; (iii) secure evidence requirements or other discriminatory restrictions or and prevent the disappearance of evidence by the quotas or local sourcing requirements specifically alleged infringer; and (iv) order cessation of the for FDI in the digital economy sectors. No infringement to stop further loss and damage. Interim special restrictions are placed on the appointment and permanent injunctive relief is also available to of expatriates on the board of directors or key cease the infringing activities. Criminal remedies for managerial positions in the digital economy. There a violation of copyright include fines of up to IDR 4 is also no specific regulation in respect of work billion and/or imprisonment for up to 10 years. permits for the digital economy sector. Rather, the rules applicable to FDI in the traditional sectors The Copyright Law empowers the Minister described in the sections above equally apply to of Law and Human Rights (MOLHR) FDI in the digital economy. and the Minister of Communications and Informatics (MOCI) to coordinate in shutting Intellectual Property Rights down electronic systems (information and communication technology media) or contents Digital products (such as e-books, digital that disseminate infringing copyright content. platforms, downloadable music, digital content, Any person who is aware of any activities that software, and databases, to name a few) are infringe copyrights on an electronic system may | 34 2022 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA Table 4. FDI Equity Restrictions in Indonesia’s Digital Economy Sectors Digital Activity/Sector FDI Equity Restrictions, if any; “100%” Means No Caps on Foreign Equity 3D Printing 100% AI and Machine Learning 100% Big Data & Analytics 100% Blockchain 100% Cryptocurrency 100% Drones Up to 49%, more subject to approval from Ministry of Defence E-Commerce 100% (with the exception of e-commerce in certain products/industries reserved for MSMEs, such as food and beverages, tobacco, chemicals, pharmacy, cosmetics, and laboratory equipment; textile, clothes, footwear and personal equipment; household and kitchen equipment) Fintech Up to 85% for fintech business activities that involve the facilitation of payment transaction and/or peer-to-peer lending Gig Worker Platforms 100% Healthtech n 100% for healthtech services (e.g., web portal/digital platform for commercial intermediary services, but not providing healthcare services) n Healthcare services allocated to or required to be conducted under a partnership with MSMEs n Telemedicine and e-pharmacy services are restricted sectors for investment (both domestic and foreign) under the Ministry of Health Regulation No. 20 of 2019 on Telemedicine between Healthcare Facilities, with restrictions temporarily relaxed during COVID-19 Insurtech n 100% for insurtech services (e.g., web portal/digital platform for commercial services, but not providing insurance services) n Insurance services are capped at 80% foreign equity under the Government Regulation No. 14 of 2018 on Foreign Ownership on Insurance Companies IoT Devices 100% Logisticstech n 100% for logisticstech services (e.g., web portal/digital platform for commercial services, but not providing logistics services n Logistics services are limited to 49% foreign equity under the Presidential Regulation No. 59 of 2021 Robotics 100% Social Network Platforms 100% Cloud computing Infrastructure (e.g. 100% Datacenters) Telecom Services 100% Telecom Equipment to Enable Digital 100% Infrastructure and Digital Connectivity Traveltech 100% traveltech services (e.g., web portal/digital platform for commercial services, but not providing travel or tourism) Source: Analysis by Kilpatrick Townsend and Stockton based on country’s laws and regulations. 2022 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA | 35 submit notification of infringement to the MOLHR n Education, research, scientific writing, report, for verification and process. The MOLHR will make critic, or review so long as it does not harm the a recommendation to the MOCI to (i) take down the reasonable interest of the creator or copyright copyright infringing contents, or (ii) block access to holder; the relevant electronics system. n Security and governance, legislative, as well The Copyright Law does not define “fair use”, as dispute resolution affairs; but it regulates a scope of activities that would n Lecture, that is intended for education and not be considered as copyright infringement. These are, among others: scientific purposes; n Show that is free of charge, so long as it does n Publishing, distributing, communicating, and/ or duplicating the national emblem and/or not harm the reasonable interest of the creator. anthem so long as it is the same as the original n Modifying architectural works so long as it version; is conducted based on technical performance n Publishing, distributing, communicating, and/ consideration. or duplicating anything performed by or under n Duplication (1 copy only) or adaptation of the name of government, unless it is protected computer program conducted by the user, so by prevailing laws, or there is a statement long as it is for: made on such copyrighted works or when such copyrighted works are published, distributed, n Research and development of such computer communicated, and/or duplicated; program; n Taking the actual news, either in whole or n Archive and backup of a legally purchased parts, from the news agencies, broadcasting computer program in order to prevent any institutions, and newspapers or any other loss, damage, or unusable. similar sources, provided that the sources are completely mentioned; n Duplicating a published copyrighted work for personal purpose can only be made once n Creating or disseminating copyright content and done without the consent of the creator through information technology and or copyright holder. However, this does not communications media that is intended for include: non-commercial purpose and/or benefit for the creator or related party, or the creator declares n Architectural works in the form of buildings that he/she does not object to such creation and or other construction forms; dissemination actions; n Entire or substantial parts of a book or music n Duplicating, publishing, and/or distributing sheet; the portraits of the president, vice president, n Entire or substantial parts of digital database; ex-president, ex-vice president, national hero, the leader of national institution, the leader n Computer program, unless it is for the use of ministry/government institution, and/or mentioned above. the head of region so long as it respects their dignity in accordance with the prevailing laws; n Duplication that is intended for personal purpose, but it causes loss and/or damage to n Using, taking, duplicating, and/or modifying the creator or copyright holder. a copyrighted work and/or neighbouring right product in whole or for substantial parts only Trade secrets are granted statutory protection cannot be deemed as a copyright infringement pursuant to Law No. 30 of 2000 if the relevant if the source is completely mentioned, and it is information is confidential in nature, has for the following purposes: economic value and maintained its confidentiality | 36 2022 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA through appropriate efforts by its proprietor. These regulations set out obligations for electronic No specific provisions pertaining to compensation system providers when they handle personal data, claim and/or injunction are provided for in the trade including security and confidentiality obligations. secret law. However, it does provide for criminal punishment in relation to trade secret infringement There is no general regulatory authority with up to 2 years imprisonment and/or a fine up to that is specifically responsible for protecting IDR 300 million. personal data and ensuring compliance with data protection laws. However, MOCI is usually While Indonesia’s IP protection laws are responsible for administering and enforcing generally at par with international standards, regulations related to personal data protection. the enforcement of IP rights in the country is Sector-specific authorities such as Bank of weak. Concerns include widespread online piracy Indonesia and Ministry of Health supervise data and counterfeiting and, in particular, the lack of protection compliances in their respective sectors. enforcement against counterfeit products. A general rule across these regulations is that consent of the data subject is required for the Data Privacy collection, processing, and use of their personal Indonesia does not have an omnibus data information and the use of such information must protection law. However, personal data be in accordance with prior stated purposes. By protection rules are set out in sectoral laws and regulation, consent is considered valid if obtained in regulations, which include: an explicit manner. Although the regulator has not provided any guidelines on what “explicit manner” n Law No. 23 of 2006, as amended by Law No. 24 means, based on practice this would include an of 2013 on Demographic Administration affirmative action by the data subjects. The GR 71/2019 also stipulates among other things that data n Law No. 11 of 2008 on Electronic Information processing may be carried out without consent of and Transactions, dated 21 April 2008, as the data subject in order to fulfill: amended by Law No. 19 of 2016, dated 25 November 2016 (“EIT Law”) n Legal obligations of the parties in accordance with statutory provisions; n Government Regulation No. 71 of 2019 on the Application of Electronic Transactions and n Vital interests of the data subject; and Systems, dated 4 October 2019, (“GR 71/2019”), which amended Government Regulation No. n Legitimate interests of the parties. 82 of 2012 Concerning Electronic System and Transaction Operation There is also no requirement to conduct data privacy impact assessments. n Minister of Communications and Informatics (“MOCI”) Regulation No. 5 of 2020 on Private Personal data must be retained for at least 5 Electronic System Providers, dated 24 November years, unless determined otherwise by sector- 2020, as amended by MOCI Regulation No. specific laws and regulations. For example, the 10 of 2021, dated 21 May 2021 (“Private ESP e-commerce sector regulation requires e-commerce Regulation”) providers to retain transaction data and non- transaction data for at least 10 years and 5 years n MOCI Regulation No. 20 of 2016 on Personal respectively. Data Protection in Electronic Systems (“PDP Regulation”) Based on the Private ESP Regulation, the government institutions and/or law enforcement n Ministry of Health Regulation No. 269/ agencies have the right to access personal data MENKES/PER/III/2008 on Medical Records that is collected and stored by private ESPs for regulatory monitoring and law enforcement n Bank of Indonesia Regulation No. 22/20/ purposes. PBI/2020 regarding Protection of Bank Indonesia Consumers 2022 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA | 37 The regulations do not provide for a specific right Data controllers and processors are obligated to to be forgotten but data subjects have the right appoint data protection officers if they process to request erasure of their personal information, personal data for providing public services or if in addition to the right of access to data, right to their main activities require regular and systematic rectification of errors, right to object processing, monitoring of personal data on a large scale, or right to restrict processing, right to withdraw processing of specific data on a large scale. consent, right to object to marketing, right to data portability, and the right to complain to MOCI for Violations are subject to administrative penalties data protection violations. (such as warning, suspension of processing data, compensation and administrative fines) and Administrative and criminal sanctions apply criminal penalties of up to IDR 70 billion and/ to any processing of personal data (including or imprisonment of up to 7 years, or both, and transfer) without prior consent of the data more severe fines of up to IDR 210 billion for subject. The administrative sanctions are in the corporations. form of: n Verbal reprimands Data Localization General data localization requirements apply n Written reprimands to public, but not to private electronic system n Administrative fines providers. Before 2019, Indonesia had strict data localization requirements that required electronic n Suspension of activities system providers (ESPs) providing public services to have data centers and disaster recovery centers n Access-blocking in Indonesia as part of a business continuity plan. n Removal from the list of registered electronic These requirements were significantly relaxed system providers in 2019 by limiting the application to public ESPs which are public bodies and entities that n Announcement in the online website are operating electronic systems on their behalf. Pursuant to GR 71/2019, public ESPs (e.g., Criminal sanctions are in the form of imprisonment government institutions) can only manage, process up to 8 years and/or fines up to IDR 2 billion. and/or store personal data outside of the Indonesian In 2020, a draft of the Personal Data Protection territory upon approval from the Minister of Act (PDP Bill) was introduced in the Indonesian Communications and Informatics. Private ESPs, House of Representatives for deliberation. however, are permitted to manage, process and/or The PDP Bill, if enacted into law, would result store personal data offshore, provided that they can in the first comprehensive law in Indonesia that ensure that the data are accessible to the relevant specifically deals with the protection of personal authorities in Indonesia for supervisory and law data, particularly data in the control of private enforcement purposes. entities. Additionally, data localization requirements The PDP Bill distinguishes between general and may apply depending on the type of services specific data (such as health, financial, biometric provided by the ESP. For example, in the banking data) but does not differentiate processing sector under the Financial Services Authority requirements for these two types of data. It follows (OJK) Regulation 13/2020, commercial banks are the GDPR approach in identifying roles of data not allowed to store data outside Indonesia, unless controller and data processor, and grants numerous it has obtained the prior written approval from OJK. rights to data subjects along the lines of the GDPR, ESPs need to comply with several requirements such as right of access, right to rectification, right to before making cross-border data transfers. GR erasure, right to data portability and right to object. 71/2019 permits electronic system providers to | 38 2022 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA transfer data offshore provided the data subject’s (as amended by Law No. 19 of 2016) (EIT Law), consent is obtained for the transfer and the providers MOCI Circular Letter No. 5 of 2016 on Limitations comply with their obligations in the regulation. and Responsibilities of User Generated Content Furthermore, under the PDP Regulation, such Platform Providers and Merchant Trading through consent must be in Bahasa Indonesia (or in bilingual E-Commerce (MOCI Circular), and MOCI format) and collected online or by paper. Electronic Regulation No. 5 of 2020 on Private Electronic system providers (other than state administrative System Providers, effective as of November 24, agencies) can store or process all types of data 2020 as amended by MOCI Regulation No. 10 of outside Indonesia. All cross-border personal data 2021, dated 21 May 2021 (Private ESP Regulation). transfer must be reported to the MOCI and such report must contain information on: Pursuant to the EIT Law (Article 15) an electronic system provider is responsible for the operation n Destination of the transfer; of its electronic system and to maintain a reliable and secure electronic system, and is legally n Name of the recipient; responsible for providing the electronic system n Date when the cross-border personal data except in compelling circumstances involving transfer will be conducted; and fault or negligence of users. The MOCI Circular, a set of non-binding rules issued in 2016 for electronic n Purpose of the cross-border personal data systems providers, states the scope of responsibility transfer. for an electronic system to implement its system and manage all content reliably, safely and responsibly, After the cross-border personal data transfer is and exempts an electronic system provider from conducted, the transferring party must file another liability if it complies with the terms of service report to the MOCI on the implementation of the by clearly stipulating that users are responsible cross-border personal data transfer. for their uploaded content, or in the event of force majeure, or errors or negligence of users. In line The draft Personal Data Protection Act (PDP with Article 5 of the GR 71/2019, the Private ESP Bill) further regulates cross-border transfer. Regulation requires an electronic system provider Under the PDP Bill, transfer is allowed in four to ensure that its electronic system does not contain circumstances: any illegal content and the ESP does not facilitate n To recipient countries or international the dissemination of such content. This implies organizations that have data protections equal to an obligation to monitor content. Illegal content or higher than in Indonesia; includes content that is in violation of laws and regulations, causes anxiety for society and disturbs n If there is an international treaty between public order based on the government’s assessment, Indonesia and the recipient jurisdiction allowing or posts or provides access to content related to for data transfer between the two jurisdictions terrorism or pornography. Under Art. 11 of the Private ESP Regulation, a “User Generated Content” n If there is a data transfer agreement between ESP (defined as an ESP “in the Private Sector of the transferor and transferee with adequate which the provision, presentation, uploading, and/ data protection obligations equivalent to those or exchange of Electronic Information and/or provided for in the PDP Bill; or Electronic Document is conducted by Users”) may n Upon consent of the data subject. avoid liability for hosting user generated content on its systems if the ESP: Intermediary Liability n Implements a proper governance document Intermediary liability of private sector for handling electronic information (such as electronic system providers is addressed under the rights and obligations of users in using the a number of legal instruments: Law No. 11 of services and the rights and obligations of the 2008 on Electronic Information and Transactions provider in operating the electronic system, and 2022 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA | 39 responsibility of users for uploading content) Content Access and provides a channel for customer complaints; MOCI Regulation No. 5 of 2020 on Private n Discloses information of the users who have Electronic System Providers requires all uploaded or made available illegal content to private electronic systems operators, including the relevant authorities for law enforcement and electronic systems operated by foreign entities, supervisory purposes; and to register with MOCI and agree to provide law enforcement officials access to their systems and n Establishes a system to take down any illegal data. The electronic system operators are broadly content found within their system (see further defined to include social media and other content- below). sharing platforms, digital marketplaces, search Government Regulation No. 80 of 2019 on Trade engines, financial services, data processing services, through Electronic Systems (“GR 80/2019”) and communications services providing messaging, also provides “safe harbor” or exemption from video calls, or games. Illegal content is also broadly liability to intermediary services operators for defined in the regulation and MOCI is empowered to illegal content on their electronic systems or take down or block any illegal content on electronic platforms. Pursuant to GR 80/2019, liability is systems in Indonesia. For example, any content exempted if an intermediary: depicting pornography or facilitating gambling can be directly taken down by MOCI via MOCI’s n Merely acts as a conduit of the information; IT infrastructure. MOCI can also block or remove illegal fintech apps in an app store to stop users from n Stores such information temporarily for the downloading and installing such apps. These powers sole purpose of streamlining communications; are based on the EIT Law and its implementing regulations that prohibit distributions of illegal n Provides information storage space services contents in the electronic systems. (hosting); or With regard to political contents, MOCI has invoked n Acts as search engine. the Decree of Provisional People’s Consultative The Private ESP Regulation provides for a notice Assembly No XXV/MPRS/1966 of 1996 on and takedown that allows other government Dissolution of The Communist Party of Indonesia, agencies but not private actors to make notices. Declaration as a Prohibited Organization in the ESPs are obligated to take down or block prohibited Entire Territory of the Republic of Indonesia or content on their electronic system upon becoming the Indonesian Communist Party and Prohibition aware, within 24 hours after receiving a warning of Any Activity to Spread or Develop Communist/ from MOCI, or within 4 hours of such notice for Marxism-Leninism Understanding or Teachings urgent prohibited content that threatens public order (“Decree XXV”) in enforcing takedown against any or morality such as child pornography content, content relating to the communist party, including terrorism content and content that causes public symbol, flag and other paraphernalia. unrest. A private actor may file a complaint with MOCI with a takedown request against the ESP. E-Commerce MOCI may investigate such claim and based on it issue a takedown notice to the ESP. E-commerce in Indonesia is regulated by the following laws and implementing regulations ESPs are obligated to ensure the accuracy of mainly based on consumer protection principles: the personal data that they are collecting and/or n Government Regulation No. 80 of 2019 on processing. Trade through Electronic Systems (“GR Penalties for violations include administrative 80/2019”) sanctions in the form of warning letters, of Trade Regulation No. 50 of 2020 n Ministry temporary suspensions, revocation of business license, fines, and blocking of access to the ESP’s on the Provisions on Business Licensing, electronic systems in Indonesia. | 40 2022 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA Advertising, Guidance, and Supervision of activities (e.g., social media companies, hosting Businesses in Trade through Electronic Systems providers, caching providers, search engine (“MOT Reg 50/2020”) companies). n MOCI Regulation No. 20 of 2016 on Personal E-commerce business actors are required to Data Protection in Electronic Systems (PDP obtain a license through the OSS system to carry Regulation) out e-commerce activities, with an exception for intermediary service operators that are not direct n Law No. 7 of 2014 on Trade beneficiaries of e-commerce transactions or are n Law No. 8 of 1999 on Consumer Protection not directly involved in an e-commerce contractual relationship. The regulation imposes certain n Law No. 11 of 2008 on Electronic Information compliance obligations on e-commerce business and Transactions, dated 21 April 2008, as actors, which include: amended by Law No. 19 of 2016, dated 25 n Prioritizing the use of an Indonesian domain November 2016 (“EIT Law”) name (e.g., .id) n Government Regulation No. 71 of 2019 on the n Using server equipment housed in a data center Application of Electronic Transactions and Systems, dated 4 October 2019, (“GR 71/2019”), which complies with prevailing laws and which amended Government Regulation No. regulations 82 of 2012 Concerning Electronic System and n Registering as an electronic system operator Transaction Operation with the Ministry of Communication and n Bank Indonesia (BI) Regulation No. 20/6/ Informatics PBI/2018 on Electronic Money (E-Money n Submitting periodical data and/or information Regulation) to the statistics bureau n BI Regulation No. 18/40/PBI/2016 regarding n Maintaining data and retaining data for a Payment Transaction Processing Operations specific period (financial transactions data for (BI Reg 18/2016) 10 years and other data for 5 years) The main official authority for regulating Removing n negative content from their e-commerce is the Ministry of Trade (MOT). electronic systems upon becoming aware, GR 80/2019 classifies e-commerce business actors otherwise e-commerce business actors are in three categories: liable for negative content on their platforms n Providing and keeping valid evidence of n Merchants — These are business actors who conduct e-commerce activities for commercial e-commerce transactions purposes either through their own electronic n Complying with prevailing laws and regulations system or through an electronic system (e.g., consumer protection laws, advertising provided by an e-commerce operator. code) n E-commerce operators — These are business n MOT Reg 50/2020 provides that electronic actors who provide a service or electronic advertisement broadcasts must: system to facilitate an e-commerce transaction (e.g., online marketplace, online classified ads, - Comply with the advertising code of online retail) ethics; n Intermediary service operators — These - Not deceive consumers regarding the are business actors who provide intermediary quality, quantity, materials, usage and or indirect services to support e-commerce price of the goods/services, and the time 2022 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA | 41 that the goods/services will be received by business actor is required to appoint a consumers; representative domiciled in Indonesia that is authorized to act on its behalf if it has: - Not provide misleading guarantees or warranties on the goods/services; n Conducted transactions with more than one thousand (1,000) consumers within a year; and/ - Not contain any misleading, false, or or inaccurate information on the goods/ services; n Delivered more than one thousand (1,000) packages to consumers within a year - Provide information on the risks of using the goods/services; MOCI strictly requires electronic system providers, including those that facilitate electronic - Not exploit any event or individual without payment systems, to register with MOCI. the authorization or approval of such Electronic system providers that facilitate the use individual; g. provide an exit function for of electronic payment systems, including e-wallets, the broadcasted electronic advertisement must also obtain a license from Indonesian’s central (through a “close” or “skip” sign placed in bank, BI. an area in the advertisement that is easily seen and accessible to the consumer) Non-compliance with GR 80/2019 subjects the offending e-commerce business actors n MoTR 50/2020 also requires e-commerce to administrative sanctions in the form of business actors to assist government warning letters, inclusion in a list of prioritized programs by prioritizing trade in domestically monitoring, inclusion in a black list, temporary produced goods and services, increasing suspension of services of e-commerce operators, competitiveness of domestic products and or revocation of business license. Criminal services, and domestic e-commerce business sanctions for noncompliance include up to 2 years actors are required to provide promotional of imprisonment and a fine of up to IDR 500 million. space for domestically produced goods and services. Indonesia has not implemented the UNCITRAL model laws on e-commerce and e-signature. Electronic contracts addressed to Indonesian However, it has adopted some aspects under each consumers must use the Indonesian language. model laws in its e-commerce laws and regulations. GR 80/2019 also stipulates that personal data For example, under the EIT Law, there are similarities cannot be transferred offshore, unless the recipient of rules regarding e-signature. country is deemed by the Ministry of Trade (MOT) as having the same level of personal data standards There are no restrictions on online sales per se; and protection as Indonesia. To date, MOT has not however, the online sales of regulated products issued the list of such countries. (e.g., drugs or medicine that requires a specific prescription) require regulatory approvals. Under MOT Reg 50/2020, a foreign e-commerce | 42 2022 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA 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 4. Distribution services of the more detailed categories contained in 5. Educational services the United Nations provisional Central Product Classification (CPC). The list can be accessed 6. Environmental services under the following link: 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 2022 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA | 43 2 For the purposes of this research, the following 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 so 12. Furniture forth) 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 | 44 2022 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA 10. LIST OF REFERENCE MATERIALS Primary Sources Law No. 30 of 2014 on Government 13. Administration (as amended by Omnibus Law) 1. Law No. 25 of 2007 on Capital Investment (as amended by Law No. 11 of 2020 on Job 14. Law No. 39 of 1999 on Human Rights Creation) 15. Law No. 40 of 2008 on the Eradication of Race 2. Law No. 40 of 2007 on Limited Liability and Ethnical Discrimination Companies (as amended by Law No. 11 of 2020 on Job Creation) 16. Law No. 13 of 2003 on Labor (as amended by Omnibus Law) 3. Law No. 12 of 2011 on Formation of Laws and Regulations (as amended by Law No. 15 of 17. Law No. 19 of 2003 on State Owned Enterprises 2019) (as amended by Omnibus Law) 4. Law No. 3 of 2014 on Industry (as amended by Law No. 24 of 2011 on Social Security 18. Law No. 11 of 2020 on Job Creation) Organizing Body (as amended by Omnibus Law) 5. Government Regulation No. 142 of 2015 on Industry Zone 19. Law No. 20 of 2014 on Standardization and Conformity Assessment 6. Presidential Regulation No. 10 of 2021 on Investment Business Sector (as amended by 20. Law No. 23 of 2014 on Regional Government Presidential Regulation No. 49 of 2021) (as lastly amended by Omnibus Law) 7. President Regulation No. 64 of 2021 on 21. Law No. 11 of 2008 as amended by Law No. Investment Coordinating Board 19 of 2016 on Electronic Information and Transactions 8. President Regulation No. 33 of 2012 on National Documentation Network and Legal 22. Government Regulation No. 71 of 2019 on Information the Implementation of Electronic Systems and Transactions 9. Government Regulation No. 5 of 2021 on Implementation of Risk-Based Business 23. Government Regulation No. 10 of 2011 on Licenses the Guidelines for the Provision of Foreign Indebtedness and Aid 10. Investment Coordinating Board Regulation No. 4 of 2021 on Guidelines and Procedures for 24. Minister of Communication and Informatics Risk-Based Business Licensing and Investment Regulation No. 20 of 2016 on Personal Data Facilities Protection in Electronic Systems 11. Ministry of Employment Regulation No. 8 of 25. Investment Coordinating Board Regulation No. 2021 on Procedures of Utilization of Foreign 5 of 2021 on Guidelines and Procedures for Workers Maintenance of the Risk-Based Licensing 12. Ministry of Employment Decree No. 349 of 26. Bank Indonesia Regulation No. 17/3/PBI/2015 2019 on Certain Positions that are Prohibited to on Mandatory Use of Rupiah Within the be held by Foreign Workers Territory of the Republic of Indonesia 2022 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA | 45 27. Bank Indonesia Regulation No. 18/18/PBI/2016 ILO Convention on the Elimination of All 36. on Foreign Exchange to Rupiah Transaction Forms of Discrimination against Women (by between Banks and Domestic Parties virtue of Law No. 7 of 1984) 28. Bank Indonesia Regulation No. 16/21/PBI/2014 37. ILO Convention No. 111 on Discrimination in on the Implementation of Prudential Principles respect of Employment and Occupation (by in Managing Offshore Borrowings by Non- virtue of Law No. 21 of 1999) Bank Corporations (as amended by Bank Indonesia Regulation No. 18/4/PBI/2016) 38. Law No. 8 of 1983 on Value Added Tax and Sales Tax on Luxury Goods as lastly amended Bank Indonesia Circular Letter No. 16/24/ 29. by Law No. 7 of 2021 DKEM of 2014 on the Implementation of Prudential Principles in Managing Offshore 39. Law No. 10 of 1995 as lastly amended by Law Borrowings by Non-Bank Corporations (as No. 17 of 2006 on Customs lastly amended by Bank Indonesia Circular 40. Government Regulation No. 78 of 2019 on Tax Letter No. 18/6/DKEM/2016) Facilities for Investments in Certain Business 30. Bank Indonesia Circular Letter 17/18/DKEM Sectors and/or Certain Areas 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 (as amended by Government Corporations Regulation No. 48 of 2015) 31. Bank Indonesia Regulation No. 16/10/PBI/2014 Minister of Finance Regulation No. 130/ 42. on Receiving Foreign Currency From Export PMK.010/2020 on Tax Holiday Facility Revenue and Withdrawal of Offshore Loan (as amended by Bank Indonesia Regulation No. Minister of Finance Regulation No. 176/ 43. 17/23/PBI/2015) PMK.011/2009 as lastly 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 33. Bank Indonesia Regulation No. 16/22/ of Capital Investment PBI/2014 on the Reports of Foreign Exchange Government Regulation No. on Electronic 44. Traffic Activities and the Prudential Principles Integrated Business Licensing Services Implementation Report in Managing Offshore Loan for Non-Bank Corporation 45. Ministry of Employment Decree No. 40 of 2012 on Positions That Are Prohibited for Foreign 34. Decree of the Minister of Finance No. 261/MK/ Workers IV/5/1973 on Provisions on the Receiving of Offshore Loan (as amended by Decree of the 46. Ministry of Employment Regulation No. 10 of Minister of Finance No. 417/KMK.013/1989 2018 on Procedures of Utilization of Foreigner and Decree of the Minister of Finance No. 279/ Workers KMK.01/1991) 47. Ministry of Trade Regulation No. 23 of 2021 ILO Convention No. 100 on Equal 35. on Guidelines for Development, Arrangement, Remuneration for Men and Women Workers and Supervision of Shopping Centers and for Work of Equal Value (by virtue of Law No. Supermarkets 80 of 1957) | 46 2022 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA 48. Bank Indonesia Circular Letter 18/6/DKEM for the Payment of Value Added Tax of Certain of 2016 on the Implementation of Prudential Taxable Goods Which is Strategic in Nature Principles in Managing Offshore Borrowings Exempted from Value Added Tax that are not by Non-Bank Corporations Used in Accordance with the Initial Purpose or Being Transferred, and the Imposition of 49. Law No. 7 of 1984 on the Ratification of the Sanctions for Late Payment of Value Added Convention on the Elimination of All Forms of Tax Discrimination Against Women (Convention on the Elimination of All Forms of Discrimination 56. Government Regulation No. 85 of 2015 on the Against Women) amendment of Government Regulation No. 32 of 2009 on Bonded Stockpiling Areas 50. President Regulation No. 40 of 2016 on the Determination of Natural Gas Prices for Certain Minister of Finance Regulation No. 131/ 57. Industry PMK.04/2018 on Bonded Zone 51. Regulation of Minister of Energy and Natural Minister of Finance Regulation No. 161/ 58. Resources No. 16 of 2016 on the Guidelines for PMK.04/2018 on Refund of Import Duty Paid the Determination of Certain Prices and User of on the Imported Goods and Materials to be Natural Gas Processed, Assembled, or Installed on Other Goods for the Purpose of Export 52. Regulation of Minister of Energy and Natural Resources No. 28 of 2016 on Electricity Tariff 59. Law No. 41 of 1999 on Forestry as amended by provided by PT Perusahaan Listrik Negara Omnibus Law (Persero) 60. Presidential Regulation No. 90 of 2007 as lastly 53. Law No. 39 of 2009 on Special Economic amended by Presidential Regulation No. 24 of Zones 2020 on the BKPM Minister of Finance Regulation No. 96/ 54. PMK.010/2020 on the Amendment of Minister Secondary Sources of Finance Regulation No. 11/PMK.010/2020 Frequently Asked Question on Investment 61. on the Implementation of Government issued by Investment Coordinating Board Regulation Number 78 of 2019 on Income- Tax Facilities for Investments Within Certain Business Sectors and/or Certain Regions Minister of Finance Regulation No. 115/ 55. PMK.03/2021 on Procedure for The Granting of Facilities Exempted from the Imposition of Value Added Tax on Import and/or Delivery of Certain Strategic Taxable Goods, Procedure 2022 INVESTMENT POLICY AND REGULATORY REVIEW – INDONESIA | 47 This Investment Policy and Regulatory Review presents information on the legal and regulatory frameworks governing foreign direct investment. 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 December 31, 2021, 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.