Economy & Trade

Selecting the Optimal Location for Indonesian Manufacturing

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By Samuel Glickstein

In recent years Vietnam, Myanmar, and India have attracted a significant amount of media attention as potential manufacturing powerhouses. Although these countries may deserve consideration, Indonesia, the world’s fourth largest country, maintains numerous strengths that beckon to the business community. With over 260 million people and a total median age of 28.6 years, Indonesia possesses both a large workforce and a young population. Furthermore, increasing urbanization eases the cost of doing business for foreign companies that manufacture their goods in Indonesia and intend to sell their products to the country’s rising middle class. The Indonesian government has also realized the importance of developing the country’s manufacturing sector in increasing economic growth, creating employment opportunities, and reducing the archipelago’s reliance on exporting commodities. President Joko “Jokowi” Widodo has released numerous policy packages since September 2015 aimed at easing the cost of doing business in Indonesia, increasing foreign investment to make the economy more competitive, and boosting industrialization.

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A Guide to Indonesia’s Industrial Parks and Special Economic Zones

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By: Dezan Shira & Associates
Editor: Alexander Chipman Koty

Indonesia is composed of over 13,000 islands and home to over a quarter of a billion people. The country’s island-based geography presents rich diversity in ethnic, religious, and linguistic communities, as well as incredible biodiversity and a wide array of natural resources. While these features contribute to Indonesia’s unique advantages, they should also be at the forefront of investor’s minds when considering investment.

Understanding the infrastructure deficit

Amidst a variety of governance-based concerns, which are the subject of intense scrutiny and the target of government reform under the current administration, infrastructure remains a salient variable for investments, with significant profit implications. Pegged by the Asian Development Bank at a massive US$700 billion, infrastructure deficits in Indonesia can restrict the ability of investors to conduct operations in a successful manner. Fortunately, Indonesia has a number of investment options available to mitigate the impact of these challenges. Regardless of the nature of investment chosen, various factors – including tax incentives, infrastructure and logistics, proximity to resources, and labor costs and skill levels – must be taken into consideration when choosing a location for investment in Indonesia.

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Industrial parks

Industrial parks offer a cost effective way to increase access to basic infrastructure and ensure that production can be carried out in an efficient and effective manner. Located throughout the country, these investment options have become more targeted in recent years, often specializing in select industries and providing investors with the resources, utilities, and connections to transport networks required to optimize production chains.

Special economic zones

Special Economic Zones (SEZs) in Indonesia are open to foreign investment and offer investors access to preferential regulatory infrastructure and taxation in an attempt to channel investment into specific locations. Indonesia currently has nine SEZs and plans for a total of 25 to be in place by 2019.

Economic Zones Indonesia

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To facilitate investment in these zones, the Widodo administration has instituted a number of incentives targeting investors setting up within SEZs. Outlined within Package 6 of the administration’s reforms, foreign investors operating in Indonesia’s SEZs stand to gain from several preferential policies if they meet funding requirements. Incentives include income tax reductions from 20-100 percent for up to 25 years, VAT exemptions on the import of raw materials, and VAT exemptions on manufactured goods sold within Indonesia. Additionally, land rights can be obtained for up to 30 years and further extended by 10 additional years.

Despite the generous tax holidays offered by the Indonesian government, it is not always advisable to invest in an SEZ rather than another location. One of the primary goals of SEZs is to develop Indonesia’s rural and less industrialized regions, meaning that infrastructure in these areas may be poor – including unreliable power supplies – and skilled labor difficult to find.

Choosing the optimal location for investment

As mentioned above, a number of factors all play a role in determining the optimal location for manufacturing in Indonesia. Understanding that industrial parks and SEZs are an integral solution to mitigating the costs of lagging infrastructure, the following map above highlights relevant industrial parks and SEZs throughout Indonesia. For more information on opportunities within specific zones, please contact indonesia@dezshira.com


About
 Us

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in Indonesia, China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email indonesia@dezshira.com or visit www.dezshira.com. Stay up to date with the latest business and investment trends in Asia by subscribing to our complimentary update service featuring news, commentary and regulatory insight.

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Indonesia Booming As Foreign Investors Seek China Alternatives 

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By: Dezan Shira & Associates

The Indonesian economy is becoming the darling of Asia as economic growth hits 5.0 percent and the stock markets booms as foreign investors pour money into the country. The 2016 GDP growth rate, released by the Indonesian Central Statistics Agency last week, exceeds growth figures of 4.8 percent seen in 2015. Of this growth, part came from a healthy 5 percent increase in domestic consumption, while Indonesian imports and exports also increased, as did investment.

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Remitting Profits Overseas from Indonesia

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By: Dezan Shira & Associates
Editor: Alexander Chipman Koty

In comparison to Singapore, Malaysia, and Thailand, Indonesia is more prohibitive to foreign businesses. Not only does Indonesia generally demand higher taxation, but it also has more bureaucratic red tape. Still, many investors are intrigued by the country’s enormous potential. Like Thailand, loss prevention requirements, timing requirements, and pre-remittance compliance are not required. In addition, Over 60 countries hold DTAs with Indonesia, reducing the relatively high withholding taxes the country levies. In order for investors to qualify for DTA benefits, recipients of remittances must confirm their tax residency by providing the Indonesian Tax Office with a certificate of domicile certified by their home country’s tax authority. Foreign entities operating through Permanent Establishments (PEs) generally have the same tax commitments as resident companies. PEs have a relatively broad definition in Indonesia and are subject to particular government regulations and tax rates. As such, investors should be certain whether or not their businesses accidentally qualify as PEs.

Dividends: Remittance of dividends is liable to a 20 percent withholding tax. This amount can be reduced through a DTA. Even with a DTA, however, the rate is generally still between 10 and 15 percent. If the nonresident recipient has a PE in Indonesia, domestic rates of 10 to 15 percent apply.

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