BUSINESS REGULATIONS

Indonesia is in the process of updating the country’s business regulations to make them competitive with the international business community. This chapter discusses briefly some of the most important regulations and useful information to consider in doing business in Indonesia. These are employment regulations; financial reporting and auditing requirements; intellectual property rights and land rights; stock and bond listing requirements and; regulations of the Jakarta Futures Exchange.

Employment Regulations

The Department of Manpower is the government agency that regulates employment practices in Indonesia. It supervises employment conditions, acts as mediator in labor disputes, operates training institutes, issues work permits to expatriates, sets minimum wages, and handles other human resources matters.

Hours of Work and Overtime Payments

The basic 40-hour workweek is comprised of eight-hour days Monday through Friday. Some offices, however, are open seven hours per day, Monday through Friday and five hours on Saturday. For overtime, labor regulations specify that from Monday to Saturday the first hour should be paid 1.5 times the basic hourly rate and two times the basic hourly rate for each additional hour. For Sundays and public holidays, overtime pay is two times the basic hourly rate within the considered normal working hours of the company, afterwards overtime pay is three times the basic rate for the first hour and four times the basic hourly rate for each additional hour.

Wage Rates

Indonesia has competitive wage rates for unskilled workers in Asia but considerable differences exist between industries and geographic locations. For example, wages in the oil sector are higher than those in the agriculture sector, and wages in urban Jakarta are higher than in rural Java and other islands. The Ministry of Manpower regulates the minimum wage for each province or city. For example, the Ministry issued a regulation setting the monthly minimum wage rate in Jakarta at Rp 711,843 as of 1st quarter Year 2005. The data shown later on this chapter contains a list of the current wage rates for 29 provinces in Indonesia.

Leave and Holidays

There are generally 13 paid public holidays in a year. Based on Government Regulation No. 21 Year 1954, employees are entitled to a maximum of 12 working days of paid annual leave. An employee is entitled to receive sick leave for a period of up to 12 months. A female employee is entitled to a three month paid maternity leave. Employees are also given paid leave for occasions such as the birth of a child (one-day) and a death in the family (two days).

Fringe Benefits

Indonesian workers are generally entitled to fringe benefits from their employers. Some of these are:

1.           Payment of income tax due on salaries and wages;

2.           An annual bonus of one month’s pay, usually paid at Lebaran (the annual Moslem festival);

3.           Medical expenses; and

4.           Travel and meal allowances.

Termination

It is a normal procedure for employers to have their new employees (for permanent employment only) undergoes a three-month probationary period. During this three-month period the employers, at their discretion, can dismiss

these new employees. However, after this three-month period, dismissal requires the permission of the Committee for Settlement of Labor Disputes of the Department of Manpower. Should permission be granted, the company is required to provide severance payment, merit payment or service payment to the terminated employee. Employee termination as well as the calculation of severance pay, merit pay and service pay must comply with the manpower regulations, which currently refer to the Decree of the Minister of Manpower No.150/2000. The amount of the severance payment depends on the number of years of service. Therefore, the longer the period of service, the higher the severance pay as well as the merit pay and the service pay. The service pay varies from one month to seven months gross salary. However, in special cases, the payment of severance pay, merit pay and service pay can be higher than the above stipulation. Again, this depends on the agreement between the employer

and employee. With regard to employment termination, the common practice is to give an employee three written warnings prior to terminating service.

Labor Unions

The Law on Labor Unions dated August 2000 describes workers’ rights to establish and develop a labor union that is independent, open, self-reliant, democratic and responsible. The Law further indicates that a labor union can be established by at least ten workers and grants unions the right to enter into collective labor agreements with employers and to represent workers in settling industrial disputes. With the Government of Indonesia’s ratification of ILO Convention 98, any party is permitted to establish a trade union. At the company level there are thousands of trade unions. Membership in any trade union is not

compulsory.

Foreign Investment

Investment policy in Indonesia is very open to foreign investment access. This, among others, is indicated by only a small number of sectors are restricted, the availability of fiscal incentives to attract foreign investors, no limitation on the value of investment, the possibility for foreign investors to wholly own their investment in almost all sectors and simplified investment approval process. The Indonesian Government realizes that investment is one of the most important factors in driving economic growth and, thus, tries hard to improve investment procedures in the future in order to stimulate a more favorable investment climate.

INVESTMENT POLICIES

INVESTMENT POLICIES STATEMENT THE GOVERNMENT OF INDONESIA

Recognizing, that the importance of private sector investment to achieve sustainable economic growth, employment creation, development of strategic national resources, transfer and implementation of competitive technology and technical skills, export growth and improved balance of payments.

Appreciating, that an appropriate legal framework is prerequisite to promoting a stable, predictable and attractive business environment that will encourage and support private economic activity by Indonesian and foreign investors.

Acknowledging, that an appropriate legal framework for investment must provide certain key principles, among which are: equal treatment of investors in similar circumstances irrespective of nationality; protection against expropriation, confiscation or requisition of investments and unilateral alteration or termination of contracts; freedom to repatriate foreign investment capital and net proceeds there on; and access to impartial, quick and effective mechanisms for the resolution of commercial and other investment disputes.

Cognizant, that these principles have increasingly been adopted as standard international practice and have been incorporated into national legislation in many countries, both regionally and globally, and have been recognized in various international documents, including the GATT/WTO Agreements, the APEC Non Binding Investment Principles, and numerous bilateral investment agreements.

Undertake and Resolves to reform the investment policies, legislation and regulations of the Republic so as to create an enabling environment for private investment consistent with the above stated principles, to be characterized by active promotion and facilitation of investment, transparent criteria for the admission and establishment of investments, transparency of government procedures and administration, and minimized restrictions, prohibitions, screening and licensing requirements based on a short "Negative List" of restricted investments. The government has therefore established an Investment Policy Reform Initiative having as its objective the encouragement and facilitation of private sector investment through reform and implementation of transparent, predictable, market oriented policies applied equally to both foreign and domestic investors. In this the Government has recently adopted major policy changes, including liberalizing the rules for foreign investment. The Government is committed to the rapid elimination of the remaining restriction on foreign and local private investment. This statement sets forth newly adopted and current policies of the Government for promoting and facilitating private sector investment in Indonesia. The Government is fully committed to these policies and will take the necessary steps to ensure their effective implementation. This statement will be supplemented by detailed investment guidelines to be issued in the near future. To encourage and facilitate private investment, the Government has adopted the following policies.

NATIONAL INVESTMENT LAW

The Government is preparing a unified law on Investment that will replace the existing Domestic Capital Investment Law and the Foreign Investment Law and regulate investment on all sectors, in accordance with the National Guidelines of the Republic of Indonesia (GBHN). This new law will incorporate market oriented

principles of investment policy and establish basic guarantees such as equal treatment of Indonesian and foreign investors whenever possible, protection against expropriation of investment. Free repatriation of foreign investment capital and returns and a reasonable part of the salaries and wages of expatriate personnel and related concepts drawn from regional and international best practice. Regulations and Decrees issued under the earlier investment laws will be streamlined and reformed to minimize negative list and other restrictions on local and foreign investment. In the interim and as these legislative enactments are prepared, the administration of investment related functions by government agencies and departments will be updated and improved in light of the new policies contained in this Investment Policy Statement.

FREEDOM TO INVEST

Investors shall be permitted to invest in any sector of the economy except in a small number of activities, which are listed on "Negative List". There shall be no restriction on the size of the investment, the source of funds or whether the products are destined for export or for the domestic market. Existing foreign investors may invest in activities other than those initially authorized, except for activities stated on "Negative List".

COMPANY FORMATION

Industrial licenses are still needed based on the principles of fairness, simple, quick and transparent mechanism and procedure. Procedures for company formation are to be administered so as to permit prompt establishment of business enterprises.

TAXES AND DUTIES

The Government is committed to enhance the country's investment climate and international competitiveness by further reducing and simplifying taxes and duties through ongoing tax and trade policy reform programs. The current Indonesia tax law provides tax incentive to investors who invest in certain sectors and or certain areas as follows:

a.     Investment Allowances,

b.    Accelerated depreciation and amortization,

c.     Expanded loss compensation but not more than 10 years,

d.    10% tax rate for dividend paid to foreign taxpayer, except to prevail tax convention maintaining lower tax rate.

Indonesia always tries to maintain equal treatment in tax law not only for taxpayers but also for tax cases that have similarities. By giving tax incentive to investors, Indonesia must assure that this incentive granted still reflect the principle of equal treatment and the application of that principle did not depart from the objective of tax incentive.

AVAILABILITY OF FOREIGN EXCHANGE

The Government will continue to ensure, according to pre-set criteria and procedures, which foreign exchange for import transactions and dividend payments is freely available and the Government is committed to ensuring the ease of repatriation of capital and payments for business services.

ACCESS TO LOCAL FUNDING

The Government is considering introducing a simple system that will allow foreign investments access to local funding based on simple established criteria.

LABOR PRACTICES

Within the framework of the labor laws of Indonesia, the Government recognizes that enterprises may require foreign expertise. Accordingly, it will continue to make residence permits readily available according to prevailing regulation for key personnel required for employment in such enterprises.

GENERAL INFRASTRUCTURE

The Government recognizes the importance of infrastructure to support investment and is committed to make available adequate infrastructure such as transport, electricity, water and communications through partnership mechanisms that attract private capital. Adequate legal protection including guarantees for the integrity of contracts will be provided.

AVAILABILITY OF LAND

The Government is committed to ensure that land for industrial and commercial use is readily available to investors. The Government will receive and simplify all existing land licensing and environmental approval procedures to ensure transparency. The Government is committed to develop new serviced industrial sites and has provided the necessary framework to enable private investors to develop industrial sites including through arrangements for subleasing to other investors.

ENCOURAGEMENT FOR SMALL AND MEDIUM ENTERPRISES

The country's small and medium scale enterprises hold great potential for rapid economic growth and employment creation. The Government is therefore dedicated to continuing with various programs assists these enterprises, including simplifying the regulatory and policy environment, removing obstacles to securing access to raw materials, removing tax related impediments and improving access to credit. The Government will promote mutually advantageous, commercially beneficial subcontracting/ partnership arrangements between large-scale foreign and local firms and small- and medium-scale business.

INVESTMENT PROMOTION

To further enhance the capacity of the BKPM and to create an integrated investment promotion regime, the Government is actively reviewing proposals for the formation of an independent, public private partnership to promote and facilitate all private investment in Indonesia.

INVESTMENT SERVICES

The Government is committed that the investment services for foreign and domestic investment in the era of regional autonomy is more preferable that the current condition. Therefore, a "one stop service" system will be introduced to be implemented in the region.

INVESTMENT PROTECTION

The Government recognizes that security of assets of investors is of paramount importance. It therefore, assures investors that it will avoid using any measures that will adversely affect their property rights. In the case of foreign investors, the Government has negotiated and concluded several bilateral investment treaties, which provide direct protection to investors for the security of their assets as well as assurances for the repatriation of proceeds from their investments. The Government will actively work to pursue to conclude additional bilateral investment treaties with other countries. Indonesia has also joined the Multilateral Investment Guarantee Agency (MIGA).

DOUBLE TAXATION RELIEF

To improve economic and trade relationship with other countries, Indonesia would like to have certain law provisions that regulate the right of tax imposed from each country. The purposes of those provisions are achievement of rule of law, avoiding double taxation, and prevention of tax evasion. Government is entitled to make an agreement with other countries to avoid double taxation and to prevent tax evasion. The framework and the matter of this agreement are based on international convention and other rule of laws and also the tax regulation of each country.

ARBITRATION

The Government recognized that foreign investors must have an appropriate forum to resolve disputes that can not be settled amicably. While such disputes would normally lie within the jurisdiction of a competent court, parties may agree in certain cases to pursue extra-judicial adjudication and to choose an appropriate forum, including international conciliation or arbitration. To that end, Indonesia has become a member of the International Center for Settlement of Investment Disputes (ICSID) at Washington DC.

APPROVALS, LICENSES AND THEIR PROCEDURES

This section explains approval, license and permits and their application procedures that are to be completed before an investor can implement his/her intention to invest in Indonesia. The sector of business of interest to the investor should not conflict with the restrictions stated by the Government of Indonesia. Therefore, it is suggested that an investor should first consult the investment sector restrictions before making his/her decision to invest.

a. Approvals in investment stage:

1.    Approval of Domestic Investment;

2.    Approval of Foreign Investment;

3.    Approval for Investment in Bonded Zones and Integrated Economic Development Zones.

b. Approvals, Licenses, Decrees and Permits in implementation stage:

1.    Permanent business license;

2.    Letter of approval of customs facilities for capital goods;

3.    Letter of approval of customs facilities for basic/auxiliary materials;

4.    Limited importer's identification number decree;

5.    Plan for employment of foreign personnel decree;

6.    TA.01 recommendation;

7.    Expatriate work permit decree;

8.    Other approvals, licenses, decrees and permits not issued by BKPM or BKPMD:

v     Approval of the articles of association of a limited liability company;

v     Tax-payer registration number and taxable entrepreneur confirmation number;

v     Location permit;

v     Building construction permit;

v     Land title;

v     Nuisance act permit.

c. Approvals and Letters on Changes in Investment Plan:

  1.  Approval for Expansion of Investments;

  2.  Approval for the Modification of Project Location;

  3.  Approval for the Modification of Lines of Business and Production;

  4.  Approval for the Modification of the use of Expatriates;

  5.  Approval for the Modification in Investments and Sources of Financing;

  6.  Approval for the Modification of Share Ownership of PMA Companies;

  7. Approval for the Modification in Status of PMA Companies into PMDN Companies;

  8.  Approval for the Modification in Status of PMDN or non-PMA/PMDN Companies  into PMA Companies;

  9.   Approval for Extension of PMDN and PMA Project Completion Periods;

10.   Approval for Merger;

11.   Letter of Modification in Names of Companies;

12.   Letter of Modification in Forms/Patterns of Partnership and/or Business Partners especially for Business Lines requiring Partnership with Small-scale Businesses.

d. Miscellaneous:

1.    Approval for domestic investment in non-oil/gas mining;

2.    Approval for foreign investment in non-oil/gas mining;

3.  License for the establishment of regional representative office of foreign companies;

4.    Approval for the establishment of capital participation based companies.

Laws and Regulations

Decree of the State Minister for Investments/Head of the Investment Coordinating Board No. 38/SK/1999 concerning the Guideline and Procedure for Filing Applications for Investments set up in the Framework of Domestic Capital Investments and Foreign Capital Investments.

Application Forms

1.    Model I/PMDN: Application for New Investment under Domestic Investment Arrangements.

2.    Model I/PMA: Application for New Investment under Foreign Investment Arrangements.

3.    Form KPWPA: Application for the Establishment of a Regional Representative Office in Indonesia.

4.    Application for the Establishment of Capital Participation-based Company.

5.   Form IUT: Application for Fixed Business License in the Framework of PMDN/PMA.

6.    Statement of Commencement of Production (especially for companies located in industrial estate).

7.   Model II/PMDN: Application for Investment Expansion under Domestic Investment Arrangements.

8.    Model II/PMA: Application for Investment Expansion under Foreign Investment Arrangements.

9.   Model III: Application for the Amendment of Provision in Approval of Investment.

10.   Model III.A: Application for Approval of Change in Status.

11.   Model III.B: Change in Status of PMDN or Non-PMA/PMDN Company into PMA Company.

12.   Model III.C: Application for the Extension of Completion Period of PMDN and PMA Projects.

13.   Model III.D: Application for Merger of Companies.

14.   Model IV.A: Application for Approval of the Main List of Capital Goods/Change in Capital Goods.

15.  Model IV.B: Application for the Approval of the Main List of Raw Materials/Auxiliary Materials/Supporting Materials.

16.   Form APIT: Application for Approval of Limited Importer Identification Number.

17.   Form RPTK: Application for Approval of Foreign Personnel Employment Plan.

18.  Form PPt.2: Application for a License to Employ Foreign Personnel in the Framework of PMDN/PMA.