Performance Requirements and Incentives

The GOI notified the WTO of its compliance with Trade-Related Investment Measures (TRIMS) on August 26, 1998. The government issued on January 1, 2007 a regulation providing investment tax incentives to 15 industries: textiles, chemicals, pulp and paper board, pharmaceutical, products that use rubber as raw materials, iron and steel making, electronics, and component products for land transportation. The regulation allows qualifying investors to deduct up to 30 percent of their realized investment from gross taxable income (five percent of the realized investment per annum for the first six years of the project); carry forward losses for up to ten years; utilize an expedited depreciation schedule; and reduce from 15 to 10 percent the income tax rate on dividends paid outside Indonesia. The incentives will apply to both domestic and foreign direct investors, either for new investment or expansion of existing plants.

The new 2007 investment law offers incentives to new investors and investors expanding their investment in Indonesia, provided that the investment projects satisfy at least one of the conditions listed in the law: create employment for a large number of workers; relate to the infrastructure sector; involve the transfer of technology; classify as a pioneer industry (the government will define “pioneer industry” in subsequent regulation); located in isolated areas, in areas bordering other countries likes Malaysia in West/North Kalimantan, or in developing areas; provide sustainable environmental development; involve research and development; involve partnership with micro-, small- or medium-sized enterprises; or use capital goods, machinery or equipment produced domestically.

Types of incentives that may be offered include: reduction of income payable by five percent of capital investment annually for six years; import duty exemption or tax relief for importation of capital goods, machinery or equipment not produced domestically; import duty exemption or tax relief for importation of raw materials or supporting materials within a certain period of time; exemption or suspension of imposition of value-added tax on imported capital goods, machinery or equipment not produced domestically within a certain period of time; acceleration of amortization; and reduction of land-building tax rates for certain sectors.

Indonesia expects foreign investors to contribute to the training and development of Indonesian nationals, allowing the transfer of skills and technology required for their effective participation in the management of foreign companies. Under Ministry of Manpower regulations, any expatriate who holds a work and residence permit must contribute $1,200 per year to a fund for local manpower training at regional manpower offices. As a general rule, a company can hire foreigners only for positions that the government has deemed open to non-Indonesians. Employers must have manpower-training programs aimed at replacing foreign workers with Indonesians.

At present, Indonesia does not have formal regulations granting national treatment to U.S. and other foreign firms’ participating in government-financed and/or subsidized research and development programs. The State Ministry for Research and Technology handles applications on a case-by-case basis. However, the Ministry is currently drafting regulations to enable interested parties to participate in research and development programs in certain circumstances.

Indonesia does not require investors to purchase from local sources or export a certain percentage of output. The government eased rules in June 1998 that encouraged investors to locate in industrial estates. Foreign firms are not required to disclose proprietary information to the government before investing.

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