The Republic of Indonesia is a constitutional democracy with an executive presidency.
Indonesia has a well-balanced economy, in which all major sectors play an important role. Agriculture historically has been the dominant sector in terms of both employment and output. The country has a vast range of mineral resources, which have been exploited over the past four decades, enabling the mining sector to make an important contribution to the balance of payments.
Indonesia has a well-diversified trading economy. Oil and gas are the country’s largest export category, followed by coal (and other mining products), palm oil, agricultural products, electrical machinery and equipment, mineral fuels and fish.
As a founding member of the Association of South-East Asian Nations (ASEAN), Indonesia is committed to ASEAN’s aim of liberalizing trade and investment (by 2010 for the first six member countries and by 2015 for the remaining four member countries). Together with two other founding members, Malaysia and Singapore, Indonesia called for ASEAN to create a single market earlier than the 2020 target. Indonesia joined the ASEAN-China free trade agreement (ACFTA) in 2003 and the ASEAN-South Korea Free Trade Agreement in 2005. Indonesia and Japan signed the Indonesia and Japan Economic Partnership in 2007.
A few commodities and services remain classified as “administered prices.” These include petroleum, electricity, liquefied petroleum gas, rice, cigarettes, cement, hospital services, generic medicine, potable/piped water, city transport, air transport, telephone charges, trains, salt, toll road tariffs and postage.
Indonesia’s intellectual property laws recognize patents, trademarks, copyrights and industrial designs. Both the licensor and licensee may sue for infringement. The laws assign civil cases to the commercial court and establish a mechanism for alternative settlement by arbitration, as well as allowing for court-ordered injunctions against infringement.
Under the Trademark Law, registration of a licence with the directorate-general is mandatory. Trademark protection is valid for 10 years and can be extended for an additional 10-year period. Patent is valid for 20 years while simple patent is valid for 10 years.
The Copyright Law extends protection to creations in science, art and literature.
The currency in Indonesia is the Rupiah (IDR).
Banking and financing
The Banking Law of 1992, as amended in 1998, permits two categories of traditional banks:that remains is between banks that offer current accounts and those that do not (primarily the general commercial banks and “people’s credit banks” (BPRs). The only functional distinction BPRs). BPRs, which undertake simple kinds of banking activities, operate on a small scale and target their services to lower income individuals. Commercial banks are free to offer various banking services, although foreign exchange transactions require special qualifications and a permit. Indonesia’s main financial centres are Jakarta, Semarang, Bandung and Surabaya (on the main island of Java), Medan, Palembang (on the island of Sumatra), Denpasar (in Bali) and Makassar (in Sulawesi). Singapore functions as Indonesia’s offshore banking center.
The Investment Co-ordinating Board (BKPM) is responsible for promoting foreign and domestic investment and approving most project proposals in Indonesia. Other government agencies or ministries handle investments in the oil and gas, banking and insurance industries. The BKPM or the corresponding provincial board approves foreign and domestic investment in all other sectors.
Foreign investors that wish to carry out operations in Indonesia must form a limited liability company.
The Foreign Investment Law includes a guarantee that that foreign investors will be treated equally to domestic investors and that the Indonesian government will not nationalize a foreign investment or revoke the investor’s rights to control a foreign investment, unless it is in the national interest to do so and provided compensation is paid.
A corporate taxpayer (limited liability company) investing in certain industries (high priority economic sectors on the national scale as stipulated by government regulation) and/or areas (high economic potential to be developed) may be entitled to income tax benefits in the form of:
- An additional reduction of taxable income up to 30% of the amount invested;
- Accelerated depreciation or amortization;
- Extension of the tax loss carryforward for up to 10 years; and
- A reduced (10%) withholding tax on dividends paid to nonresidents, or less if so provided under an applicable tax treaty. A request for this facility must be submitted by the taxpayer to the Minister of Finance, who will issue a decision on whether to approve the request after considering recommendations from the Head of the Investment Coordinating Board (BKPM) within 10 days at the latest.
The Ministry of Finance is expected to announce a new tax holiday in the near future, which will be available to taxpayers that make a new pioneer industry investment. Pioneer industries are industries that bring strategic value to the national economy, have broad connections, bring new technology, and provide value added and high externality.
The rupiah, the local currency, is freely convertible, although approval of Bank Indonesia (central bank) must be obtained by any person (individual or corporate) before more than IDR 100 million is taken out of the country. Authorization of Bank Indonesia may be provided only for the purpose of testing of cash machines, overseas exhibitions and other purposes that according to the bank, is to serve public interest.
Any person carrying IDR 100 million or more into Indonesia must verify the authenticity of the funds with Indonesian customs upon arrival. A bank in Indonesia that is requested to make a wire transfer with value not exceeding IDR 100 million must be accompanied by a formal declaration signed by the customer. A wire transfer with a value of USD 100,000 or more to a nonresident must supported by a statement and supporting documention obtained from the customer for the underlying transaction.
Indonesia does not restrict the transfer of foreign currency funds to or from foreign countries, but inbound investment capital requires approval. Offshore loans must be registered with Bank Indonesia, with subsequent movements reported monthly to enable the bank to monitor the country’s foreign exchange exposure. Domestic commercial banks must submit monthly reports to Bank Indonesia on their foreign exchange transactions. A detailed per transaction report is required for transactions exceeding USD 10,000, while transactions less than US 10,000 may be aggregated. Late submissions of the monthly foreign exchange transaction report will be subject to an IDR 5 million per day fine; failure to report the foreign exchange transaction be subject to an IDR 100 million fine. A license will be cancelled if the bank does not submit the report for six consecutive months. Financial institutions are also required to submit monthly reports on their foreign currency transactions; the penalty for late submission is IDR 1 million per day and IDR 20 million for failure to report.
Non-financial institutions must report the movement of financial assets (such as equity in overseas companies and savings at overseas banks) and liabilities (such as overseas loans and trade payables) between residents and nonresidents, including overseas transactions by residents. The requirement, applicable to companies with total assets of at least IDR 100 billion or annual sales of at least IDR 100 billion, is for transactions that are not conducted through a domestic bank or financial service company.
Investment Law No. 25 of 2007 guarantees foreign investors the right to transfer (in the currency of the original investment) all after-tax profits, certain costs and (in the event of nationalization) compensation. In certain circumstances, convertibility is guaranteed for capital repatriation.
A new foreign currency Law will be introduced in the near future, under which local transactions will have to be made in IDR.