Indonesia’s trade had a huge boost in January this year as it soared to a US$1.4 billion surplus, way up from US$10 million in January 2016. Also encouraging was the increase in the non-oil and gas exports, up 29.2 percent Y0Y to US$9.4 billion, while imports in the non-oil and gas sector also rose to 14.5 percent at just under USD12 billion.
Recent years have seen numerous high-profile cases by the Indonesia tax authority against prominent foreign tech firms. Most notable of these cases is that of Google, which allegedly used an Indonesian RO to carry out its in-country business activities, but shifted all taxable profit to an offshore entity in Singapore. However, Google’s case is not uncommon. In fact, many investors also do the same thing and invoice clients from offshore entities, presenting themselves and their businesses to legal issues.
Although previously this tax avoidance strategy may have been low-risk, the recent crackdown by the tax authorities demonstrates how essential it is that investors, even those using ROs in the country, take measures to ensure full tax compliance. Thus, to avoid the fate of Google and others, it is essential for companies operating ROs in Indonesia to have a strong grasp of tax regulations. Further, given the complexity of such regulations, investors are encouraged to seek the assistance of professional services experts of tax officials to avoid costly oversights.
Tax Treatment of Representative Offices
As ROs may not engage directly in profit generation, many investors assume the only tax they must be concerned with are withholdings on employee salaries. However, Indonesia’s Tax Authority has in fact put into place specific regulations for the tax treatment of ROs, stipulating that if ROs carry out activities to generate profit in Indonesia, even if the revenues are paid directly to an offshore parent, then such activities will be found to be liable for corporate taxation.
ROs are categorized as a special class of taxpayers that have to use specified tax calculations to inform its CIT liability, even if the ROs are not directly booking revenue. The current tax rate under this special category is 0.44 percent of Gross Export Values (GEVs). GEVs are overall replacement values for revenues of a foreign company that operates an RO in Indonesia. These revenues come from goods or services delivered to persons or corporate entities located in Indonesia by the RO. Additionally, if the RO of foreign entities are de-facto found to be engaging in profit making activity on behalf of the parent company, then the parent company will be liable for the Branch Profits Tax specified in a tax treaty between Indonesia and the parent’s home country.
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Dezan Shira & Associates Brochure
Dezan Shira & Associates is a pan-Asia, multi-disciplinary professional services firm, providing legal, tax and operational advisory to international corporate investors. Operational throughout China, ASEAN and India, our mission is to guide foreign companies through Asia’s complex regulatory environment and assist them with all aspects of establishing, maintaining and growing their business operations in the region. This brochure provides an overview of the services and expertise Dezan Shira & Associates can provide.
An Introduction to Doing Business in ASEAN 2016
An Introduction to Doing Business in ASEAN 2016 introduces the fundamentals of investing in the 10-nation ASEAN bloc, concentrating on economics, trade, corporate establishment and taxation.We also include the latest development news in our “Important Updates” section for each country, with the intent to provide an executive assessment of the varying component parts of ASEAN, assessing each member state and providing the most up-to-date economic and demographic data on each.
An Introduction to Foreign Investment in Indonesia
Indonesia stands out in the ASEAN region for its competitive wages, large labor pool, and burgeoning domestic market. With a population exceeding 250 million, the country is poised to become an immensely lucrative market as it develops further and the urban consumption class continues to grow. In this inaugural issue of Indonesia Briefing magazine, we examine these trends, and highlight how Indonesia has made enormous strides in streamlining and liberalizing its business environment.
The Guide to Manufacturing in Indonesia
Choosing if, where, and how to establish foreign manufacturing operations in Indonesia can be a significant challenge. While the archipelago’s vast diversity may initially seem daunting, a number of options are available which will allow entry and operations to be conducted in a seamless manner.In this issue of ASEAN Briefing, we discuss the growing importance of Indonesia as a hub for manufacturing within Southeast Asia, and provide guidance on how to select and establish operations within the country.
As a country with a population exceeding a quarter billion – by far the largest in ASEAN – Indonesia is an alluring market for foreign companies to promote and sell their products and services w. With a young population (the median age is 29 years, which is low by regional standards) and a large and growing middle class, many foreign businesses have established Indonesian subsidiaries to tap into the large market.
However, in many cases – especially for small and medium-sized enterprises (SMEs) or other investors lacking the resources of multinational corporations – it is prudent to ease into the market slowly with a less expensive and lighter footprint to explore opportunities and gain market insights before committing to larger investments. For companies looking to conduct market research, identify potential partners, provide post-sales service or other support services, or even oversee the execution of commercial agreements with local partners, a Representative Office (RO) offers a low risk and low cost local presence. An RO can be an ideal structuring option to take advantage of Indonesia’s vast potential without committing substantial investment capital for patient investors initially content to conduct more limited activities and without a need to generate revenue locally.
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.
By: Dezan Shira & Associates
Editor: Samuel Glickstein
Foreign firms in Indonesia can protect their investments by familiarizing themselves with the country’s intellectual property rights (IPR) landscape. Indonesia possesses a strong legal IPR framework that generally meets international standards. The country is a member of the World Trade Organization (WTO) and has acceded to the Agreement on Trade-related Aspects of Intellectual Property (TRIPs Agreement). Furthermore, Indonesia has ratified most major international IP agreements, including the Paris Convention and the Berne Convention. In 2014 the Indonesian government amended the 2002 Copyright Law to improve the efficiency and effectiveness of the country’s IPR system and protect copyright owners. The changes include extending copyright protections for most types of works from 50 years to 70 years after the death of the author, outlawing the illegal upload and download of copyrighted material for commercial purposes, creating harsher penalties and criminal sanctions for copyright violations, and establishing landlord liability for “deliberately and knowingly” permitting the sale or duplication of copyright infringing products.
However, it is difficult to safeguard and enforce IPR in Indonesia. The Office of the United States Trade Representative has placed Indonesia on its Special 301 Priority Watch List, a list of trading partners that experience IPR protection and enforcement issues. Counterfeiting as well as physical and online piracy are common in Indonesia. According to the International Intellectual Property Alliance, 86 percent of business software in the archipelago is unlicensed and retail piracy rates are likely even higher. Investigators from the Directorate General of Intellectual Property (DGIP) do not have authority to arrest people and must cooperate with the police for enforcement action. IP owners in Indonesia must file formal complaints with the police before authorities can take action. Carrying out raids on businesses that violate IPR in Indonesia is an expensive and time-consuming process because the police must interview witnesses.
By: Dezan Shira & Associates
Editor: Samuel Glickstein
In order for a foreign firm to thrive in Indonesia, it must adapt to the country’s labor laws and human resource procedures. Although there is some space for flexibility in human resource management in Indonesia, the country’s labor laws and regulations have established firm protections for workers. Employers who violate these obligations will likely face significant legal repercussions. Therefore, it is paramount that employers learn about Indonesian manpower laws and the expectations that they may encounter when they interact with local workers.
By: Dezan Shira & Associates
Editor: Samuel Glickstein
In March 2016, the Indonesian Ministry of Trade (MOT) issued Regulation No. 22 of 2016 on General Provisions on the Distribution of Goods. This law explains how goods can be distributed directly and indirectly within Indonesia. It defines a number of terms in Indonesian law including, distributors, sub-distributors, agents, sub-agents, grocers, retailers, etc. Furthermore, this regulation states that importers and distributors must go through retailers to sell their goods to consumers.
However, prevailing analysis on Regulation No. 22 indicates that changes it puts forward are meant for domestic companies and not foreign investment.
Distribution Via Local Partnerships
Foreign investment (PMA) companies are currently subject to regulation under Ministry of Trade Regulation No. 11 of 2006, which prohibits PMA companies from directly selling their goods to retailers. According to this regulation, PMA companies have to appoint a local distributor/agent to sell goods to a retailer. Then the retailer can sell the original products to consumers. Therefore, PMA companies must add another layer to their distribution chains, which will likely increase the price of their products.
Regulatory Update: Updated Income Tax Allowances in Indonesia Extend Incentives to New Business Lines
By Winnindo Business Consult
Editor: Mourme Taruna Halim and Samuel Glickstein
In April of 2015, the Indonesian government released a revised regulation on income tax allowances titled Government Regulation (PP) No. 18 / 2015 on Income Tax Allowance for Investment in Certain Business Fields and/or Regions. The regulation updates and revises the previously applied Regulation No. 52 / 2011 on income tax allowances and has been in effect since May of 2015.
Eligibility for incentives
Broadly speaking, the measures introduced set out to increase investment by providing a tax allowance for corporate taxpayers. To qualify, investors must have been shown to establish new investments or expand their businesses in Indonesia. Allowances under the regulation will now extend to the following sectors:
- Food and beverages
- Petrochemicals (such as crude palm oil and crude palm oil kernel processing)
- Coal mining and natural oil processing
- General Mining Operations
- Renewal energy power plants
- Pharmaceutical (modern and traditional) industry
- Marine and fishing industry
Regulation No.18/2015 also includes certain maritime sectors , such as the shipyard and seaport industry, which consists of shipping manufacturing, shipping equipment, shipping supplies and spare parts, and cargo loading and handling services.
By Samuel Glickstein
Indonesia possesses enormous potential for renewable energy. According to a 2015 report by the International Energy Agency (IEA), the nation has 75 gigawatts (GW) of hydropower potential and 28 GW, or 40 percent, of global geothermal reserves. The report also states that the archipelago holds solar energy potential of approximately 1,200 GW. Although Indonesia’s wind power potential is relatively small at less than 1,000 MW due to low wind velocity, this resource has also recently caught the attention of foreign companies.
Investors may consider Indonesia’s growing demand for energy as a significant reason to invest in the nation’s renewable energy sector. The country’s energy consumption has increased rapidly since the early 2000s, aided by a growing economy, rising middle class, and upticks in urbanization. In addition, the country’s electrification ratio (the percentage of households that are connected to the power grid) is approximately 82 percent, one of the lowest ratios in the Asia-Pacific region. This means that millions of Indonesians do not have access to electricity. Energy use is set to rise in coming years as the Indonesian government works to reduce poverty and develop remote areas that are not connected to the national power grid.
Financial Services Update: Registration and Supervision of Actuaries, Public Accountants, and Appraisers in Indonesia
By Agus Sugih Hart, Winnindo Business Consult
Editor: Samuel Glickstein
On December 21, 2015, the Indonesia Financial Services Authority (Otoritas Jasa Keuangan/OJK) published Regulation No. 38/POJK.05/2015 titled “Registration and Supervision of Actuaries, Certified Public Accountants, and Appraisers to Provide Services for the Non-Banking Financial Industry in Indonesia”. According to this regulation, actuaries, public accountants, and appraisers must register with OJK as non-banking financial industry (IKNB) service providers before they can conduct services for non-banking financial institutions (LJKNB). The term LJKNB includes insurance companies, pension funds, leasing companies, and other non-banking financial institutions (including Sharia law-based financial institutions).