III. Indonesia’s economic prospects for 2024
Topic Feature
A. Indonesia’s economic prospects for 2024
In the midst of global environmental disruption throughout 2023, both in terms of supply chains, natural disasters, financial sector volatility, and geoeconomic fragmentation, the Indonesian economy is relatively resilient. This achievement is the foundation for the growth rate in 2024. The government is optimistic that the Indonesian economy is expected to grow by 5.16% (yoy) in Q1 2024, an increase from growth of 5.04% (yoy) in Q4 2023, with the main causal factors:
1. The increase in household consumption, which is estimated to grow by 5.02% (yoy) in Q1 2024, is higher than the growth of 4.47% (yoy) in Q4 2023, driven by the increase in people’s purchasing power due to the increase in minimum wages and assistance social services from the government
2. Government spending: expected to increase in Q1 2024, in line with preparations for the general election (election) which will be held in February 2024. Uncertainty ahead of the election causes investment to grow by 4.10% (yoy) in Q1 2024, lower from growth of 5.02% (yoy) in Q4 2023.
3. Exports are expected to grow limited by 1.70 % (yoy) in Q1 2024, higher than growth of 1.64 p% (yoy) in Q4 2023 caused by demand which is estimated to still be positive from China and other developing countries
4. Imports are expected to contract further by minus 0.92% (yoy) in Q1 2024, compared to growth of minus 0.15% (yoy) in Q4 2023 due to the weakening of the rupiah against the US dollar
With various policies and APBN support, Indonesia has also managed to face significant pressure due to the decline in several commodity prices. It was recorded that gas prices fell 38.8% (ytd), crude oil 10.3%, palm oil 12.3%, even coal fell by 63.8%.
B. Indonesian economic projections for 2024 Indonesia’s economic growth in 2023 will experience a slight slowdown to 5.05%, but will still show significant resilience in household consumption, investment and exports.
Global economic challenges full of uncertainty can be mitigated through monetary and fiscal policy measures implemented with the principle of prudence at the domestic level. By maintaining a stable economy, sustainable growth, protecting vulnerable communities, and accelerating structural reforms, it is hoped that the projected economic growth of around 5.0% in 2024 can be achieved.
5 SETTING UP BUSINESS IN INDONESIA 2024
C. Global economic challenges in 2024
According to the IMF, 2024 will be characterized by significant global challenges. Global economic growth is projected to slow to 2.9%, the reasons are:
1. War in Ukraine,
2. Global inflation will reach 6.5% in 2023, down from 8.8% in 2022, but is still expected to remain high in 2024, at 4.1%
3. The increase in interest rates is expected to reach 5.2 percent in 2024, up from 3.5 percent 2022.
4. The global economy is expected to experience a slowdown in growth from 2.6% in 2023 to 2.4% in 2024, which is the third slowdown in a row
5. Economic growth in developed countries is estimated to slow slightly by 1.5% yoy in 2023, to 1.2% (yoy in 2024).
6. China’s economy is expected to slow to 4.5% (yoy) in 2024 (revised down by 0.1% from previous estimates).
7. Global trade remains weak in 2024I as a result of weakening investment in the property sector, while weakening sentiment could weigh on consumption.
With various policies and APBN support, Indonesia has also managed to face significant pressure caused by the decline in several commodity prices. It was recorded that gas prices fell 38.8% (ytd), crude oil 10.3%, palm oil 12.3%, even coal fell by 63.8%.
Real GDP Growth in ASEAN Countries (Percent change)
Estimate Projections Difference from October 2023 WEO Projections 1/
Source: IMF, World Economic Outlook, January 2024 Update.
Note: The selected economies account for approximately 83% of world output. 1/ Difference based on rounded figures for the
Data and forecasts are presented on a fiscal year basis.
6 SETTING UP BUSINESS IN INDONESIA 2024
Table 3.
Country 2022 2023 2024 2025 2024 2025 Indonesia 5,3 5,0 5,0 5,0 0,0 0,0 Malaysia 8,7 4,0 4,3 4,4 0,0 0,0 Philippines 7,6 5,3 6,0 6.1 0,1 0,0 Thailand 2,6 2,5 4,4 2,0 1,2 –1,1 Singapore n.a n.a n.a n.a n.a n.a
current
October 2023 WEO forecasts. 2/
and
D. The world bank
1. Projections of several Indonesian macroeconomic indicators
The Indonesian Economic Prospects publish by The World Bank estimate that Indonesia’s economic growth will remain strong, the inflation trend will decrease, and the value of the currency will remain stable.
The World Bank proposes several actions that will drive productivity and efficiency, helping reduce the short-term costs of emissions reductions and adaptation, while strengthening long-term growth prospects.
The forecast for Indonesia, outlined in the bank’s Global Economic Prospects report, fell from the bank’s June 2023 projection of 5.0 percent growth in 2025. The international lender has kept its 2024 growth forecast for Indonesia at 4,9 percent.
GDP growth fell slightly from the bank’s June 2023 projection of 5.-% to an average of 4.9% in 2024-2026 because of the fall in commodity prices
Private consumption is expected to be the main driver of growth in 2024. Business investment and public spending are also expected to increase as a result of reforms and new government projects.
Inflation is expected to decline to 3.2% in 2024 from an average of 3.7% this year, still within Bank Indonesia’s target range. following the post-pandemic recovery, commodity prices and domestic demand growth rates returned to normal levels. However, at the same time, the impact of the El Nino weather pattern is upward pressure on food prices, which could disrupt food production in some places.
Services exports are expected to benefit from a continued recovery in the tourism sector, while lower commodity prices and weaker global growth will hamper goods exports.
Government revenues as a share of GDP are expected to increase as the impact of tax reform materializes, while government spending is expected to gradually return to pre-pandemic levels.
2. Challenges
The challenge for the country is to capitalize on its already strong economic fundamentals to achieve faster, greener and more inclusive economic growth.
Reforms that remove various obstacles that limit growth in efficiency, competitiveness and productivity need to continue. This will enable Indonesia to accelerate growth, create more and better jobs, and achieve its vision of becoming a high-income country by 2045
Domestic challenges include, among others, economic & political uncertainty due to the Presidential and Legislative Elections on February 14, 2024, rising food prices, increasing government budget deficits in connection with holding the elections and the decline in the exchange rate of Rp against US$.
3. Risk from outside Indonesia
To maintain economic stability, Indonesia have to downside risks that come from outside Indonesia: higher-for-longer interest rates in major countries, could weight on global demand, increase borrowing costs, and make it harder to borrow on world market. Global geopolitical uncertainty could disrupt value chains.
Indonesia’s transition to a low-carbon and climate-resilient economy can bring Indonesia to a new phase of economic growth and poverty alleviation
7 SETTING UP BUSINESS IN INDONESIA 2024
Continued...
D. The world bank
4. Targeted Actions
The World Bank proposes several actions that will boost productivity and efficiency drivers, help reduce the short-term costs of emissions reductions and adaptation, while strengthening long-term growth prospects
Steps:
1. Accelerate economic growth and strengthen resilience while slowing greenhouse gas emissions.
2. Capitalize on the progress that has been made in addressing the challenge of climate change through fiscal, financial and trade policies.
3. Help increase income and disincentivize the use of fossil fuels through Fiscal Policy
4. Mobilize funding for mitigation and adaptation to climate change through fiscal instruments such as green bonds. Fiscal instruments such as bonds
5. Make it easier to import products needed for climate change adaptation and mitigation through trade policy reform
6. Accelerate the green transition by developing plans to complete fuel subsidy reform and expand carbon pricing. This could simplify or gradually eliminate non-tariff trade measures on green goods.
Bank Indonesia will pursue a policy of stabilizing the rupiah exchange rate through spot foreign exchange intervention and Domestic Non Deliverable Forward (DNDF), in addition to purchasing government securities (SBN) in the secondary market if necessary
3) Pro-market Strategy
The direction of this strategy is to strengthen the effectiveness of Bank Indonesia’s policy transmission to financial markets and the economy, including attracting foreign portfolio inflows. The benefits of this strategy include money and foreign exchange markets will develop further with greater transaction volume and liquidity and more participants, with more efficient mechanisms for establishing interest rates and exchange rates.
4) Management of inflow and outflow of foreign exchange
This strategy, in accordance with international rules, will be strengthened to:
• supporting the adequacy of foreign exchange reserves and the external resilience of the Indonesian economy.
• expanding foreign exchange placement instruments from Export Proceeds (DHE) from Natural Resources (SDA), as required in Government Regulation Number 36 of 2023, into 7 (seven) types of instruments, to other types of foreign exchange instruments according to progress in market deepening.
Seven strategic steps to control inflation in 2024
Seven strategic steps taken by the Government and Bank Indonesia in 2024 include:
1. Implementing consistent monetary and fiscal policies with efforts to support inflation control and encourage economic growth;
2. Controlling inflation in the Volatile Food group so that it can be controlled below 5%, with a focus on commodities such as rice, various chilies and various onions;
3. Maintaining supply availability and smooth food distribution to mitigate short-term risks, including anticipating shifts in the harvest season and increased demand ahead of National Religious Holidays (HBKN);
4. Strengthening food security through efforts to increase productivity and food down streaming;
5. Strengthening the availability of food supply data to support the formulation of inflation control policies;
6. Strengthening the synergy of the Central and Regional Inflation Control Teams (TPIP-TPID), including through the National Movement for Controlling Food Inflation (GNPIP);
7. Strengthening communication to maintain inflation expectations.
8 SETTING UP BUSINESS IN INDONESIA 2024 ....Continuation
V. Doing business in Indonesia 2024
An Introduction to Doing Business in Indonesia 2023 covers the following:
A. Corporate establishment;
B. Human resources and payroll;
C. Tax and accounting;
D. Audit and compliance.
Topic Feature
A. Corporate establishment
Continued... Requirement and Process of company registration based on Type of Legal Entities:
• Local Company, Foreign Direct Investment Company known as a Limited Liability Company, and Representative Office.
1. LOCAL COMPANY (PT)
A foreigner can start doing business in Indonesia as a local citizen or a foreign investor under a local nominee arrangement as this kind of company allows only 100% local ownership. On the contrary to other legal entities, a local company is not a subject to such strict requirements and limits.
Local Company (PT) is the most common legal entity in Indonesia
Even though a local company is intended for Indonesian citizens only, there are some circumstances under which a foreign investor can incorporate a local company in Indonesia as well.
Registration Process of a Local PT
Step 1
Step 2
Company Name Application
Submit your company name to the Ministery of Law & Human Rights
Article of Association Preparation
This requires presence of notary
Step 3 Deed of Establishment Approval
Approved by The Ministery of Law & Human Rights
Step 4 Certificate of Domicile Acquisition
Obtained form local government to show business location
Step 5 Tax Payer Registration Number (NPWP) Application to secure other licenses, banking activities, and fulfilling tax obligations
Step 6 Application of NIB
Alongside NIB, Business Licenses and Location Permit will also be granted one day following the registration via OSS
11 SETTING UP BUSINESS IN INDONESIA 2024
Benefits of a Local Company in Indonesia for Foreigners
Even though there are other legal entities particularly designed for foreigners — a limited liability foreign-owned company and representative office — starting a local company might bring more benefits to some foreign entrepreneurs.
a. Not Restricted from Some Business Fields
The Negative Investment List is a document that regulates foreign ownership of businesses based on business sectors they operate in. Thus, some business activities are fully closed to non-domestic investors, and some are partially limited. On the other hand, a local company is not a subject to this regulation, and it might be the only choice how to start a business in Indonesia in your field.
b. Lower Incorporation Costs
In comparison with a foreign-owned company, the paid-in capital of a local company is much lower. In general, it ranges from IDR 50,000,000 up to more than IDR 10,000,000,000. The amount of the capital defines the size of the company, which further determines whether a company is eligible to sponsor a work permit for a foreign worker (and how many).
• Small : IDR 50,000,000 – 500,000,000
• Medium : IDR 500,000,001 – 10,000,000,000
• Large : above IDR 10,000,000,001
2. FOREIGN OWNED COMPANY (PT PMA)
A foreign-owned company in Indonesia, known as PT PMA, has been designed to meet the needs of foreign entrepreneurs. On the contrary to the incorporation process of a local company or a representative office, establishment of a foreign-owned limited liability company (LLC) in Indonesia might be more challenging and time-consuming.
The Negative Investment List stipulates the maximum allowed foreign ownership in particular business sectors, causing some industries to be fully closed or only partially open to foreigners. Therefore, having an expert partner in Indonesia or engaging professional assistance becomes a critical point to succeed when forming an international company in Indonesia.
Foreign-owned limited liability company is a legal entity that can be fully owned by foreigners. However, the maximum foreign ownership is determined by the business sector and business activities. The restrictions are listed in a regulation called the Indonesian Negative Investment List.
Establish a PT PMA Company: The Procedures.
Step 1 Approval of Company
It should consist of three words that are not vulgar or obscene
Step 2 Deed of Incorporation
It should include an Asticle of Association, and a notary must be present
Step 3 After submission of Deen of Incorporation by the notary, the Ministery of Law and Human Rights will give approval
Step 4 Registration of Tax ID (NPWP)
A valid NPWP is required for securing other company’s licenses, banking activities, and fulfilling tax obligations
Step 5 Domicile Letter
Required to show the location of your business
Step 6 Application of NIB
Alongside NIB, Business Licenses and Location Permit will also be granted one day following the registration via OSS
Step 7 Application of Others Licenses
Depending on the business sector, additional licenses such as commercial license and tourism license may be required before operation
12 SETTING UP BUSINESS IN INDONESIA 2024 ...Continuation A. Corporate establishment Continued...
...Continuation
A. Corporate establishment
Benefits of a Foreign-Owned Company
Although the establishment process is more demanding, foreign-owned companies offer vital benefits that entirely compensate the previously invested time andefforts.
a. Employment of Foreign Workers
b. A foreign-owned company can sponsor and issue work permits as well as stay visas (working ITAS) for its international employees.
c. Furthermore, this kind of company is allowed to sponsor business visas of its business partners and clients arriving in Indonesia for a short stay.
d. Full International Ownership
To attract more foreign investors and multiple investments critical to the Indonesian economy, Indonesia has been relaxing the limited foreign ownership lately.
Wholly-owned foreign companies became less rare, and it is, therefore, likely that you can start an international company without any partnership or local shares of your property.
3. REPRESENTATIVE OFFICE
Commonly considered as a branch of parent company overseas, it can be your first step to enter the Indonesian market. The purpose of this legal entity is marketing activity, preparing the establishment of PT PMA, or conducting market research. No direct selling or generating revenues is allowed.
Registering a Representative Company in Indonesia
A representative office means market presence without large capital investment.
The primary purpose of representative offices in Indonesia is testing the water before the actual company incorporation.
Furthermore, a representative office might conduct market research, approach potential clients and build brand awareness of your business. However, no activities that generate profit are allowed, and this is the prominent factor that distinguishes a representative company in Indonesia from other legal entities.
Registration Process of a Representative Office in Indonesia
Step 1: obtaining a representative office (KPPA) license
Step 2: obtaining domicile letter from the local subdistrict
Step 3: applying for taxpayer registration number (NPWP)
Step 4: getting a company registration certificate (TDP)
The Benefits of Representative Office in Indonesia
a. Low Incorporation Cost
As mentioned, a representative office (RO) is an affordable way of how to penetrate the market in Indonesia. Whether you are not sure about your target audience or the presence of business partners, these companies will help you to understand the Indonesian market properly.
b. Visa Sponsorship
Even though representative offices are not permitted to generate revenues, they are entitled to sponsoring work and stay permits for their foreign employees. Moreover, an RO can sponsor a business visa for business partners coming to Indonesia.
Organisational Structure
To establish a representative office in Indonesia might be the most feasible solution for many entrepreneurs due to its lenient corporate structure. As opposed to a foreign company no shareholder or director is required, and only one chief executive is sufficient.
Currently, four types of representative offices are available:
a. KPPA: General RO of a Foreign Company
b. KPPPA (known as KP3A or K3PA): RO of a Foreign Trading Company
c. BUJKA: RO of a Foreign Construction Service Company
d. KPPA MIGAS: RO of a Foreign Oil and Gas Company
13 SETTING UP BUSINESS IN INDONESIA 2024
B. Human resources & payrol
Indonesian Employment Law And Covid-19:
As a result of the serious economic disruptions from COVID-19, there are several options available to employers under Indonesian employment law, as follows:
1. SALARY CUTS AND UNPAID LEAVE
a. If employees freely agree to the employer’s proposal to salary cuts and/or unpaid leave, that agreement should be recorded in writing.
b. If there is a union at the company then the employer must consult with and secure the approval of the union for any agreed salary cuts and/or unpaid leave.
c. If employees decline to agree to salary cuts and/or unpaid leave, the employer can seek to encourage agreement by implying that employees who do not agree to the proposed changes could potentially be made redundant, subject to a mutual termination agreement (“MTA”) or, if disputed, approval from the labor court.
It is important to secure the consent from each employee for proposed salary cuts and/or unpaid leave. The agreement with employees must be signed in the Indonesian language. A dual-language form of the agreement can be drafted but the prevailing language must be Indonesian. If the agreement is not signed in the Indonesian language, there is a risk that it could be considered null and void if disputed in the courts.
2. EMPLOYEE TERMINATIONS
The central government and regional governments have not issued any impending regulations with regard to the termination of employment, specifically during the COVID-19 pandemic. Companies should therefore, follow the regulations stipulated in the Labor Law.
There are a number of different scenarios employers might consider in response to COVID-19 as follows:
a. The complete closure of the business.
The business is no longer financially viable and the redundancy of all the employees, or laying off only a portion of the workforce. Considerations include the following:
• Under the Indonesian Manpower Law, terminations for efficiency basically can be done only when there is a closure of the business (including partial closure or a reduction of overall business activities), either preceded with or without losses for two consecutive years (this is relevant for determining termination entitlements).
• Whether a force majeure event would be an acceptable reason for employee terminations with minimal severance payment.
• If the business is not being shuttered, employee terminations can still be done but only with the express written agreement of employees by way of a mutual termination agreement (“MTA”).
• Without an MTA the proposed terminations will be deemed as being disputed and can only be settled through the labor court, a process that can take six months or more, during which the employees’ salaries must be paid.
• Indonesia does not recognize the concept of notice of termination. Unless an MTA is reached, the lengthy and costly termination process for permanent employees is as follows:
a. The parties (the employer and employees, or if applicable, a labor union) are required to meet in an attempt to reach an amicable termination settlement, a process known as bipartite negotiation.
b. If a settlement is reached, an MTA should be executed and registered at the relevant labor court;
c. If negotiations fail, either the company or the employee may file the dispute with the relevant manpower affairs office. The manpower office will ask both parties whether the dispute should be resolved through conciliation with private conciliators or mediation with a mediator from the manpower office.
d. If the non-binding written recommendation of the conciliator or mediator is rejected, the matter must be brought by either party to the relevant labor court to approve the termination and the benefits payable in connection with the termination.
e. If the labor court decision is appealed the case then goes to the Supreme Court.
14 SETTING UP BUSINESS IN INDONESIA 2024
Continued...
B. Human resources & payrol Continued...
• Statutory Severance Requirements
1. For contract/fixed-term employees:
The balance of the contract must be paid to fixed-term employees terminated before the end of their fixed-term employment agreement.
2. For permanent employees:
A permanent employee’s entitlement in connection with termination of employment depends on their years of service and the circumstances of the separation. The categories of possible separation entitlements under Article 156 of the Manpower Law consist of:
a. severance pay of up to nine months’ wages,
b. service pay of up to 10 months’ wages, and
c. other compensation (ie, for unused annual leave, any applicable relocation costs or expenses, compensation for housing, medical and hospitalization, and other separation benefits as may be agreed).
Under the Indonesian Manpower Law, in the event of terminations as a result of the company closing down due to two consecutive years of continuous losses or due to force majeure, terminated permanent employees are entitled to single severance pay, single service pay, and compensation
In the event of terminations for downsizing due to efficiency reasons (ie, not due to financial losses or force majeure), terminated permanent employees are entitled to double severance pay, single service pay and compensation.
Note that an ex gratia payment of two to three months’ salary on top of the permanent employee’s mandatory severance entitlements may be necessary to ensure the mployee signs an MTA to avoid the costly labor court process..
3. EMPLOYMENT WAGES
Worker/Labor Protection and Business Continuity for the Prevention and Control of COVID-19.
Under the circular – Letter of Republic of Indonesia Ministry of Manpower No. M/3/HK.04/III/2020 on Worker/Labor Protection and Business Continuity for the Prevention and Control of COVID-19 – employers must continue paying the full wages of employees working from home unless an agreement between the two parties says otherwise.
Employees who are under the ODP (monitored) status will still be entitled to full salaries. An ODP status means the person has a travel history of entering a COVID-19 hotspot and came in contact with possible COVID-19 patients, and thus have to go into self-isolation.
Employees who are under the PDP status (surveillance) are those that have displayed symptoms of COVID-19, such as fever, respiratory problems, and dry coughs and are undergoing self-isolation – they will be categorized as being on sick leave. The company will then have to adhere to the Law No. 13 of 2003 (Labor Law).
Under the Labor Law, the employee on sick leave is entitled to:
a. 100 percent of wages during the first four months of sick leave;
b. 75 percent of wages during the second four months of sick leave;
c. 50 percent of wages during the third four months of sick leave; and
d. 25 percent of wages during each subsequent month of sick leave (until the termination of employment is agreed upon).
Possible Deduction Of Employees’ Payroll And THR
In essence, companies cannot make wage deductions beyond those agreed upon by employers and employees in their respective work contracts. This can be excluded if the clause regarding wage deduction is prescribed in a work contract, collective agreement or the company regulations. This wage deduction also applies to certain conditions, such as fines, compensation, and advance payment of wages.
15 SETTING UP BUSINESS IN INDONESIA 2024 ...Continuation
...Continuation
B. Human resources & payrol
Although, based on the Circular of the Minister of Manpower No. M/3/HK.04/III/2020 regarding Worker/Labor Protection and Business Continuity in the Context of Preventing and Countering Covid-19, it mentions that for companies that limit business activities by considering business continuity, changes in wage levels and ways of payment can be made in accordance with agreement between the company and their employees. However, this does not have a strong legal basis, which may lead to industrial relations disputes, where dispute of rights are defined in Article 1 number 2 of Law No. 2 of 2004 regarding Industrial Relations Disputes Settlement:
“dispute of rights refers to a disput which occurs due to the non-fulfillment of rights because there is inconformity between the implementation or interpretation of provisions under laws and regulations, employment agreement, company regulation, or collective labor agreement.”
THR is a part of non-wage income. As is the case in a wage, the company shall also pay the THR to employee(s) at least 7 (seven) day before the Religious Holiday. THR is regulated in a number of regulations including Government Regulation No.78 of 2015 concerning Wages and Regulation of the Minister of Manpower (GR No.6 of 2016 concerning THR for employees in the Company).
As per the Minister of Manpower Regulation No.20 of 2016 concerning Procedures for Granting Administrative Sanctions, companies who fail to pay on time or does not pay THR to employees may be subject to consequences in the form of fines or administrative sanctions with accordance to the prevailing laws and regulations. However, for companies that have difficulty paying THR amid Covid-19, they can open a dialogue with employees to reach agreement on other options in paying the THR to employees. The company can propose a suspension of THR payments up to a mutually agreed period or the company can pay THR in stages to employees
Postponement Of Employees’ Minimum Wages For The Protection Of Employees’ Right
Companies are facing issues such as low running income, disrupted production, but the burden of expenditure is keeping the business world on the verge of mass bankruptcy. With the economic decline, companies may not be able to pay finance expenses without any income including their employees’ wages by the end of June 2020.
It is stipulated in Law No.13/2003 that the employer is prohibited from paying the employees’ wages lower than the minimum wages. However, an employer who is unable to pay the minimum wages can ask for a postponement for the payment of minimum wages to their employees. This postponement of the payment of minimum wages is explained in Article 90 paragraph (2) of Law No.13/2003 wherein the specific article .
The postponement of the payment of minimum wages by a company that is financially unable to pay minimum wages is intended to temporarily release the company from having to pay minimum wages for a certain period of time. If the postponement comes to an end, the company is then under an obligation to pay minimum wages that are applicable at the time of postponement, where the remaining wages that were not paid during the postponement period will be paid to the employee (aggregate amount of remaining wages for the postponement period) subsequent to the end of postponement period.
The procedure for the postponement of the payment of minimum wages is regulated in Minister of Manpower and Transmigration Decree No. Kep.231/ MEN/2003 concerning Procedures for Postponing the Application of the Minimum Wage. The application for the postponement of the minimum wage payment obligation must be submitted by the employer to the Governor through the provincial Manpower Office no later than 10 (ten) days before the minimum wage is implemented effectively The application itself must be made in the form of a written agreement between the employer and the employees/labor union, which was made pursuant to an in-depth, honest, and open negotiation between the 2 (two) parties.
Thus, if the employer is in financial distress due to the Covid-19 outbreak and has not been able to pay his employees’ wages according to the minimum wage, then the employer can postpone payment of wages by first negotiating with the employees or worker union/ labor union. However, the postponement of payment of the minimum wage by employers to employees does not eliminate the obligation of employers to pay the difference in minimum wages during the postponement period (where the remaining amount of wages that was postponed must be given to the employee after the end of the postponement period).
16 SETTING UP BUSINESS IN INDONESIA 2024
C. Tax and accounting
In a bid to provide certainty to tax and fiscal during COVID-19 pandemic, the Government has issued Government Regulation Number 29 of 2020 on Income Tax Facilities to Address Corona Virus Disease (Covid-19). The statement was made by Taxation Regulation Director II Yunirwansyah in a virtual Media Briefing on Taxation on Thursday (25/6), in Jakarta.
Taxpayers who support the Government’s efforts in tackling COVID-19 pandemic are eligible for income tax facilities. Based on the Regulation, the Government provides 5 tax facilities; among others:
1. Indonesian Resident Taxpayers (WPDN) who produce medical equipment and/or Household Health Supplies (PKRT) to handle COVID-19 are entitled to an additional reduction in net income by 30 percent of the costs incurred. The medical equipment includes of N95 surgical masks and respirators, body protection, medical disposable ventilators, and diagnostic test reagents for Covid-19. Meanwhile the PKRT may include antiseptic hand sanitizers and disinfectants.
2. For taxpayers who give donations to address COVID-19, the donations can be deducted from gross income. These donations must be supported by the receipt of donations and received by charitable institutions that have Taxpayer Identification Numbers (NPWP) such as National Disaster Management Agency (BNPB), Regional Disaster Management Agency (BPBD), Ministry of Health, Ministry of Social Affairs, or charitable institutions. However, the deduction must either follow provisions of Government Regulation Number 29/2020 or Number 93/2010.
3. In Government Regulation Number 29 of 2020, the donations may be given to the BNPB, BPBD, Ministry of Health, Ministry of Social Affairs, or charitable institutions that have the NPWP. The charitable institutions are obliged to report the donations. In this regard, donations may be given in the form of money, goods, and others.
4. Donations that have been deducted as a reduction in gross income under Government Regulation No. 93 of 2010, cannot be further reduced under Government Regulation Number 93/2010. The taxpayers must choose between Government Regulation Number 29 or Number 93
5. The Regulation also states that individual taxpayers that are health workers and assigned to provide health services to address Covid-19 will receive additional income from the Government in the form of honoraria or other benefits.The additional income is subject to final Article 21 Income Tax withholding at a rate of 0 percent.
6. The health workers consist of medical staff and health support staff including cleaners, administrative staff, morticians, ambulance drivers, and other supporting staff.
7. Income of taxpayers in the form of the Government’s compensation and reimbursement for the use of assets based on Government Regulation Number 34 of 2017 is subject to a final income tax of 0 percent.
8. Taxpayers of publicly-listed company who are willing to buyback shares traded on the stock exchange are entitled to a 3 percent lower rate. Thus, 40 percent of their shares will be traded on the Indonesian Stock Exchange (BEI) or owned by at least 300 parties. Each party may only own shares of less than 5 percent of the total issued and fully paid shares within a minimum of 183 calendar days within a tax year. The parties do not include publicly-listed company taxpayers that repurchase their shares and/or are affiliated. The taxpayers are considered meeting these requirements once they received appointment and approval from the Ministry/ Financial Services Authority (OJK). The share buyback is carried out from 1 March until 30 September 2020. The share can only be owned until 30 September 2020. They are obliged to submit report of share buyback in their Annual Tax Returns (SPT). (Ministry of Finance/EN)
(Source: Office of Assistant to Deputy Cabinet Secretary for State Documents & Translation Date 26 Juni 2020)
Tax Developments In Response To Covid-19
Tax-related measures introduced in Indonesia in response to the COVID-19 pandemic are regulated under Ministry of Finance (MoF) Regulation No. 86/PMK.03/2020 and MoF Regulation No. 110/PMK.03/2020 on Tax Incentives for Taxpayer Affected by the Coronavirus Outbreak, and Government Regulation in Lieu of Law (Perppu) no 1 year 2020.
17 SETTING UP BUSINESS IN INDONESIA 2024
Continued...
Article 21 Employee Income Tax
For the months of April – December 2020 for employees who:
• receives income from a qualified employer (There are 1,189 categories of industries and companies, those listed in the Attachment A of MoF No. 86/PMK.03/2020)
• has a Tax ID number (NPWP)
• receives an annualized regular gross income not exceeding IDR 200 million. Bonus and Religious. Holiday Allowance are not included in calculating the threshold.
The employer should give the Art. 21 income tax as additional payment to the employee.
The taxpayer should prepare e-billing with notes “employee income tax is borne by Government based on MoF 86/PMK.03/2020.”
Tax Developments In Response To Covid-19
Tax-related measures introduced in Indonesia in response to the COVID-19 pandemic are regulated under Ministry of Finance (MoF) Regulation No. 86/PMK.03/2020 and MoF Regulation No. 110/PMK.03/2020 on Tax Incentives for Taxpayer Affected by the Coronavirus Outbreak, and Government Regulation in Lieu of Law (Perppu) no 1 year 2020.
Article 21 Employee Income Tax
For the months of April – December 2020 for employees who:
• receives income from a qualified employer (There are 1,189 categories of industries and companies, those listed in the Attachment A of MoF No. 86/PMK.03/2020)
• has a Tax ID number (NPWP)
• receives an annualized regular gross income not exceeding IDR 200 million. Bonus and Religious. Holiday Allowance are not included in calculating the threshold.
The employer should give the Art. 21 income tax as additional payment to the employee.
The taxpayer should prepare e-billing with notes “employee income tax is borne by Government based on MoF 86/PMK.03/2020.”
Article 22
Income Tax
on
Imports
can be exempted for companies who:
• have a business classification stated in that is among those listed in the Attachment H of of MoF No. 86/PMK.03/2020 (there are 721 specific industrial fields or companies that have been granted KITE (Import Facility for Export Purposes)).
• Qualified taxpayers must apply for this incentive via DJP Online website. If approved, the DJP Online system will issue a Tax Exemption Letter (SKB) that is valid starting from the issuance date up to and including 31 December 2020.
The taxpayer should submit realization letter to DGT (three months period for April – June 2020), realization letter should be submitted on 20 July 2020 at the latest and on the 20th of the following month thereafter, through DJP online with specific format that can be uploaded from DJP online.
Article 25 Income Tax
• 50% reduction of the Article 25 Monthly Tax Installments for qualified taxpayers (1,013 specific industrial fields, listed in the Attachment M of MoF No. 110/PMK.03/2020) is provided.
• 50% reduction of the Article 25 Monthly Tax Installments for qualified taxpayers (1,013 specific industrial fields, listed in the Attachment M of MoF No. 110/PMK.03/2020) is provided.
• This reduction in tax installments is valid until the tax period of December 2020.
• Qualified taxpayers must inform the tax office that they are utilizing this incentive via DJP Online website.
18 SETTING UP BUSINESS IN INDONESIA 2024
...Continuation C. Tax and accounting Continued...
Value Added Tax
• The government will automatically consider qualified taxpayers (listed in the Attachment P of MoF No. 86/PMK.03/2020) as low-risk and provide a preliminary VAT refund facility for the fiscal periods April through December 2020.
• Applicable for VAT returns (including amendments) that are submitted before 20th January 2021 with overpayment status, with a maximum amount of IDR 5 billion (per month).
• Taxpayer is not in the preliminary evidence audit position and did not perform any criminal actions during the last five years before VAT return submission.
New digital economy tax measures
• On 31 March 2020, the Indonesian government issued the Government Regulation in Lieu of Law (Peraturan Pemerintah Pengganti Undang- Undang/ Perppu) No.1 Year 2020 (the regulation) which purports to apply new measures to the digital economy.
• On 16 May 2020, Perppu 1/2020 was passed into Law No. 2 Year 2020. The new law imposed tax on over-the-top electronic transaction. This tax is imposed on foreign traders, foreign service providers, and / or trade operators through an overseas electronic system (PMSE) that cannot be designated as a permanent establishment (BUT). The issuance of these regulations occurred in the context of the Indonesian government’s response to Covid-19.
• Starting July 2020, PER-12/PJ/2020 imposes 10% VAT to the provision of intangible goods and services through an e-commerce system by nonresidents for consumption in Indonesia.
• The obligation to register and account for VAT applies to foreign e-commerce providers (including foreign platforms, foreign individuals and digital companies). Foreign e-commerce providers are entitled to appoint a representative in Indonesia to fulfil their tax obligations.
On-line platform operators may wish to verify their VAT obligations in Indonesia.
• The obligation to collect VAT from payments made by Indonesian buyers and customers is the responsibility of the e-commerce business providers (either e-commerce foreign or domestic providers, or offshore traders). The Indonesian tax office will appoint the e-commerce business providers as VAT collectors if the transactions satisfy certain thresholds in the Indonesia market.
E-commerce marketplace providers will be appointed as VAT Collectors if their activity in the Indonesian market meets either of the following thresholds:
• transaction value with customers in Indonesia exceeding IDR 600 million in a year or IDR 50 million in a month;
• access to their e-commerce platform from Indonesia exceeds 12 thousand users in 12 months, or one thousand users in one month.
Other tax measures
• MoF Regulation No. 125/PMK.010/2020 on import Value Added Tax (VAT) for newsprint paper and/or magazine paper, borne by the 2020 state budget until December 31, 2020
• Liquefied Natural Gas or LNG has been added to list of products the imports of which will no longer be charged with VAT : Government Regulation No. 48/2020 on the amendment to Government Regulation No. 81/2015 on the import and/or submission of taxable strategic goods that are exempted from added value taxes,
• MoF Regulation No. 96/PMK.010/2020 on the amendment to MoF Regulation No. 11/PMK.010/2020 on the implementation of Government Regulation No. 78/2019 on Income Tax Facilitation for Investment in Certain Business Fields and/or Certain Regions. The regulation effectively gives the Indonesia Investment Coordinating Board (BKPM) the authority to determine the eligibility of companies for the tax allowance as the application must now be done through the BKPM’s Online Single Submission (OSS) system. This regulation came into effect starting August 10, 2020.
19 SETTING UP BUSINESS IN INDONESIA 2024 ...Continuation C. Tax and accounting Continued...
(VAT)
C. Tax and accounting
RECOVERY PLAN
1. Business or taxation Incentives
Taxes borne by the government such as reduction in article 25 (corporate income tax), exemption from income tax Article 21 (employee income tax), Article 22 on imports tax, and preliminary VAT refunds.
2. Ministries & Regional Governments
Almost 35% of Ministeries & Regional government budget has been allocated to boost tourism sector, food security and fisheries, industrial estates, ICT development, Central Government loan to regional governments, and anticipating economic recovery.
REQUIREMENTS TO QUALIFIED INCENTIVES
1. Companies/individual need to obtain an Ease of Import for Export Purposes (KITE) under certain Business Classification Code (KLU) in the Attachment MoF No. 110/PMK.03/2020.
2. Exemption of Income Tax Article 22 on Import Tax and purchases of the aforementioned goods by agencies/government institutions, referral hospitals, and other parties designated to assist in handling the COVID-19 outbreak as mentioned in appendix I of 86/PMK.03/2020 (PMK 86/2020).
3. Preliminary VAT refund for low-risk Taxable Entrepreneur (PKP) who submits an overpayment of VAT Tax Return overpayment for April – December 2020 tax period up to IDR 5 billion per month.
4. An exemption of Income Tax Article 21 on Employee Income Tax with annual gross income up to Rp200 million. Taxpayer should prepare e-billing with notes “employee income tax is borne by Government based on PMK 86/2020.
D. Audit & compliance
Continued... Guide for Foreign Investors
Investors should be paying attention to Company Law, Investment Law and Market Law.
1. The Company Law
a. Foreign investors should understand, which sets outs the requirements for audit compliance and preparing financial statements. Other important and relevant laws are the Investment Law and Capital Markets Law.
b. If a company’s fiscal year differs from the calendar year, then their deadline for reporting and paying corporate income tax is four months after the end of their fiscal year.
c. There is currently no single unifying regulation on auditing and compliance in Indonesia. Foreign investors will need to be aware that regulations regarding auditing, accounting, and financial reporting are stipulated over several laws and bylaws, and that a good understanding of these can ensure their business stays compliant.
d. Investors should use the services of registered local advisors to make sure they understand the prevailing regulations.
2. The Investment Law
Lys out of the basic requirements on how to operate in Indonesia. These are part of key compliance norms:
a. Implementing good corporate governance;
b. Undertake corporate social responsibility activities;
c. Comply with the labor law;
d. Submit quarterly investment activities to the Investment Coordinating Board (BKPM);
e. Honor the cultural traditions of communities.
f. Criteria for the company to be audited
g. Companies with assets exceeding 50 billion rupiah (US$3.6 million);
h. Public companies;
i. Companies that issue debt instruments;
j. The company is a state-owned enterprise; or
k. The company collects or manages public funds (such as banks and insurance companies).
20 SETTING UP BUSINESS IN INDONESIA 2024 ...Continuation
D. Audit & compliance
By law, a company must keep its accounting records and books for at least ten years from the end of its reporting period. Moreover, audits are to be conducted based on the Indonesian Financial Accounting Standards (SAK), which are set by the Financial Accounting Standards Board (DSAK IAI) and the Indonesian Sharia Accounting Standards Board (DSAS IAI), for sharia-based companies.
Since 2015, the DSAK IAI has converged its accounting standards with that of the International Financial Reporting Standards (IFRS), issued by the IFRS Foundation and the International Accounting Standards Board (IASB). (The IFRS are a set of global accounting standards that apply to all financial reporting, quality control, and auditing standards relating to all profit-oriented entities.)
This is part of Indonesia’s efforts to make local financial statements more comparable and understandable across international boundaries as the country aims to attract greater foreign investment and play a more prominent role within the G20.
VI. Government policies
Topic Feature
for
and sustainable economic transformation through the draft State Budget
Development targets/priorities and transformation stages/agenda are as follows:
Target and transformation stages
1. optimizing state revenues while maintaining the investment climate
2. improve the quality of spending to support strengthening structural reforms and anticipating global uncertainty
3. maintain debt financing within safe and manageable limits and optimize non-debt financing
The stages of the economic transformation agenda
1. Short-term:
focus on controlling inflation (price stability), eliminating extreme poverty, reducing the prevalence of stunting, and increasing investment which will support the goal towards a developed Indonesia in 2045;
2. Medium term – long term
focus on strengthening the quality of human resources, accelerating infrastructure development (physical capital) and encouraging high added value economic 0activities through the down streaming of natural resources, both mining and food products, as well as institutional reform
The government is optimistic that Indonesia will have better economic growth than other countries. Inflation also still tends to be stable, namely 2.6%.
However the uncertainty of current global conditions, among others disrupted supply chains, which will result in spikes in food and energy prices and climate change which makes many countries limit food exports
21 SETTING UP BUSINESS IN INDONESIA 2024
...Continuation
A. Fiscal policy 2024 will be the last budget year
the government under President Joko Widodo (2019-2024), therefore Indonesia is trying to accelerate inclusive
(RAPBN)
B. Monetary policy
Continued...
The focus of Bank Indonesia’s Monetary Policy in 2024 is to control inflation and maintain the exchange rate.
Bank Indonesia has determined that the direction of monetary policy in 2024 will again focus on stability. This policy was created to control inflation according to targets and balance the rupiah exchange rate so that it does not disrupt national economic growth amidst uncertain global conditions
Four strategies of monetary policy
1. Interest rate polic
This strategy is directed in a forward looking and pre-emptive manner to achieve the inflation target set by the Government, around 2.5 plus or minus 1% in 2024 and 2025. There for, Bank Indonesia estimates that national economic growth will be in the range of 4.7- 5.5% in 2024 and 4.8- 5.6% in 2025.
Global and domestic economic dynamics must still be considered. The main risk of inflationary pressure in 2024 largely comes from global turmoil, for example impact of the weakening Rupiah and high world energy and volatile food prices. Meanwhile, core inflation is estimated to remain under control in line with the increase in aggregate demand which is still below potential output capacity.
Coordination with the Government (Central and Regional) through the Central and Regional Inflation Control Team (TPIP and TPID) continues to be strengthened in controlling food price inflation nationally and in various regions through the National Movement for Control of Food Inflation (GNPIP) by mobilizing all 46 Bank offices Indonesia.
Coordination of Bank Indonesia policies with Government policies also continues to strengthen external resilience against global turmoil, control inflation and encourage sustainable economic growth
2. Policy of stabilizing the rupiah exchange
Adequate foreign exchange reserves will continue to be maintained. Fundamentally, the rupiah exchange rate should be able to move stronger and be stable in line with controlled inflation, a current account surplus, attractive returns on domestic financial assets, and relatively high economic growth. However, projections that FFR interest rates will remain high, US Treasury bond yields, and the strength of the United States (US) dollar are putting pressure on causing the weakening of various world currencies, including the rupiah.
Bank Indonesia will pursue a policy of stabilizing the rupiah exchange rate through spot foreign exchange intervention and Domestic Non Deliverable Forward (DNDF), in addition to purchasing government securities (SBN) in the secondary market if necessary
3. Pro-market Strategy
The direction of this strategy is to strengthen the effectiveness of Bank Indonesia’s policy transmission to financial markets and the economy, including attracting foreign portfolio inflows. The benefits of this strategy include money and foreign exchange markets will develop further with greater transaction volume and liquidity and more participants, with more efficient mechanisms for establishing interest rates and exchange rates.
4. Management of inflow and outflow of foreign exchange
This strategy, in accordance with international rules, will be strengthened to:
• supporting the adequacy of foreign exchange reserves and the external resilience of the Indonesian economy.
• expanding foreign exchange placement instruments from Export Proceeds (DHE) from Natural Resources (SDA), as required in Government Regulation Number 36 of 2023, into 7 (seven) types of instruments, to other types of foreign exchange instruments according to progress in market deepening.
22 SETTING UP BUSINESS IN INDONESIA 2024
...Continuation
B. Monetary policy
Seven strategic steps to control inflation in 2024
Seven strategic steps taken by the Government and Bank Indonesia in 2024 include:
1. Implementing consistent monetary and fiscal policies with efforts to support inflation control and encourage economic growth;
2. Controlling inflation in the Volatile Food group so that it can be controlled below 5%, with a focus on commodities such as rice, various chilies and various onions;
3. Maintaining supply availability and smooth food distribution to mitigate short-term risks, including anticipating shifts in the harvest season and increased demand ahead of National Religious Holidays (HBKN);
4. Strengthening food security through efforts to increase productivity and food down streaming;
5. Strengthening the availability of food supply data to support the formulation of inflation control policies;
6. Strengthening the synergy of the Central and Regional Inflation Control Teams (TPIP-TPID), including through the National Movement for Controlling Food Inflation (GNPIP);
7. Strengthening communication to maintain inflation expectations.
Abbreviation
The National Economic Recovery (PEN) Money Market Deepening Blueprint (BPPU) PPKM (the public mobility restriction)
Job Creation (UUCK)
The Investment Coordinating Board (BKPM) Micro, Small and Medium Enterprises (MSMEs). Government Bonds (SUN
Indonesian Crude Price (ICP) Capital Adequacy Ratio (CAR)
The Indonesia Financial Services Authority (OJK) Indonesia Deposit Insurance Corporation (LPS) PMK (Finance Ministerial Regulation)
G2P social aid program (bansos)
DGT: Directorate General of Taxation - The Ministry of Finance
JCI: the Jakarta Composite Index
DPK: third-party funds (in bahasa: Dana Pihak Ketiga) ICP: the Indonesian Crude Price (ICP) ‘
FDI: Foreign Direct Investment Company
The Investment Coordinating Board (in bahasa Badan Koordinasi Penanaman Modal) Foreign Investment Company (in bahasa Pnanaman Modal Asing)
Trading Representative Office (“TRO”) : an Indonesian or foreign national appointed by a foreign company or an overseas company group as representative in Indonesia for promotion and marketing of the company’s products in Indonesia.
Foreign Representative Office (“FRO”) : The FRO is led by one or more Indonesian or foreign citizens being appointed by a foreign company or an overseas company group as representative in Indonesia to carry out the following activities: Handling interests of the company or its affiliated company; and Preparing the establishment and business development of a foreign investment company operating in Indonesia or another country
LLC: Limited Liability Companies in bahasa Perusahaan terbatas) Public Company (Perseroan Terbuka)
The Workers Social Security Program (in bahasa BPJS)
Construction Representative Office (in bahasa -Badan Usaha Jasa Konstruksi Asing –“BUJKA”) T he List of Business Fields (in bahasa –Daftar Negatif Investasi)
Permanent Stay Permit/Card (in bahasa KITAP = Kartu Izin Tinggal )
23 SETTING UP BUSINESS IN INDONESIA 2024
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SETTING UP BUSINESS IN INDONESIA
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