In February, Indonesian President Joko Widodo's government submitted a draft bill to the country's parliament. The draft is widely known as the "omnibus law" and aims to transform Indonesia's economy. The bill has strong implications for multinationals operating in or considering investing in Southeast Asia's largest economy.
The omnibus law is a comprehensive bill that would regulate many provisions in various industry sectors into one law. It seeks to strengthen the economy by increasing competitiveness, creating jobs and making it to easier to do business in Indonesia.
Last October, President Widodo presented his vision of Indonesia in 2045. An English translation of the speech quotes him as saying, "Our dream is that by 2045, Indonesia's gross domestic product will have reached US$7 trillion. Indonesia will have become one of the top five world economies with a poverty rate nearing zero percent. That is what we must head toward."
The government realizes that to fulfil this vision, it must address the problem of over-regulation in Indonesia. Bureaucratic red tape has long hampered growth in the country and deterred foreign investment. Indonesia is currently ranked 73rd among 190 economies in the World Bank's Ease of Doing Business list. President Widodo has set his sights on Indonesia achieving a rank of 40.
The omnibus law is designed to help meet these lofty goals, in part by streamlining the country's complex, sometimes redundant regulatory environment. The law would ease restrictions in 11 critical areas, including labour law, capital investment, business licensing, corporate tax and land acquisition. Needless to say, these measures if adopted would make Indonesia a far more attractive destination for foreign businesses and investors.
Below are a few of the proposed changes we believe will most affect foreign investors.
Simplifying business licensing
Any business in Indonesia now requires one or more licenses to operate, and many of these must be extended after a certain period. The responsibility for issuing business licenses is spread across many government institutions and regional governments. This multi-layered system, involving various state, local and central agencies, makes it very difficult for an investor to know what business permits and licenses must be obtained, where to obtain them, and in what order they should be applied for.
The omnibus law strengthens existing regulations by simplifying the business license process across almost all business sectors, including maritime and fisheries, energy and mineral resources, electricity, infrastructure, and transportation. In addition, many licences will be combined or scrapped entirely.
The role of the national Investment Coordinating Board (BKPM) will be strengthened and is set to play a pivotal role in streamlining the issuing of all business licenses. Under the proposed law, a foreign investor will be able to obtain a business licence through an online single submission (OSS) system, eliminating the need to go through multiple ministries or other government institutions.
The omnibus law will also introduce a risk-based-approach system, dividing businesses into categories of low, middle and high risk. Businesses deemed low risk will no longer be required to obtain a business license, only a registration number. Middle-risk businesses will also not be required to obtain a business license, but will need a standard certification. High-risk businesses will still be required to obtain a full business licence.
Easing foreign investment restrictions
Although the omnibus law is lacking implementation details on the subject of investment restrictions, the proposed main regulation reads: "All business lines are open to direct investment, save for those that are designated as closed to investment or which constitute activities that are reserved to the central government."
Indonesia now uses the so-called negative investment list, which includes a number of business lines that are only partially open to foreign investment (i.e. these lines have foreign ownership caps). To take two examples, companies engaged in large horticulture business are open to foreign ownership of up to 30 percent, and companies engaged in broadcasting business are open to foreign ownership of up to 20 percent.
Though it's not clear at this time, under the omnibus law we expect these and other business lines will be fully open to foreign ownership. (That is, these lines would be available for 100 percent foreign ownership.) If this is indeed the case, the new law will mark a dramatic liberalization of Indonesia's foreign direct investment (FDI) regime.
This element of the omnibus law must be clarified by a presidential regulation that includes a list of closed business lines. This hasn't yet been issued.
Easing labour laws
Indonesia has relatively strict labour laws. For example, the laws provide for generous mandatory severance compensation, by far the most generous in the APAC region. These and other worker-friendly laws deter many foreign investors. The omnibus law aims to make labour laws more flexible and market-friendly, and bring them more in line with other countries in the region.
It must be said that this is a sensitive subject in Indonesia that has generated considerable opposition from labour unions and other parties. While this should not be dismissed, some resistance is to be expected when a government seeks to relax worker protections.
Streamlining corporate tax regulations
A large part of the proposed omnibus law covers corporate taxation. Currently, there are many different tax laws in the country.
Essentially, the bill provides for a unification of Indonesia's scattered tax regulatory framework. It aims to minimize overlapping regulations and provide many corporate tax incentives, including adjustments to the following rates.
Corporate income tax rate
The bill will gradually decrease the corporate income tax rate from 25 to 20 percent for the period 2021 to 2023.
Furthermore, qualified public companies that trade at least 40 percent of their shares on the Indonesian stock exchange can apply for an additional 3 percent rate reduction. This decrease will make Indonesia more competitive with neighbouring countries.
Dividend tax rate
The bill will provide for income-tax-free dividend payments, as long as the full amount is re-invested in Indonesia.
Interest tax rate
Indonesia's current interest tax rate of 20 percent is high relative to other APAC countries. The proposed omnibus law will provide for a reduction of the rate of income tax coming from interest payments. The exact reduction has not yet been determined.
The deliberation of the omnibus bill is currently on hold due to the pandemic and is expected to be picked up in a few months. Despite this unavoidable delay, the proposed omnibus law clearly shows the Indonesian government is committed to minimizing red tape in virtually every area of business to woo foreign investors. Those investors should keep in mind that the omnibus bill will be deliberated in parliament and that there could be changes to the draft before it becomes law.
Originally published 20 May, 2020
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