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
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.
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
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
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).
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);
4.Travel and meal allowances.
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.
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
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
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
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
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
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
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.
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".
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.
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
a. Investment Allowances,
b. Accelerated depreciation and
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
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.
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.
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.
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
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.
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
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.
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.
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.
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).
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.
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 InternationalCenter
for Settlement of Investment Disputes (ICSID) at WashingtonDC.
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
1. Approval of Domestic
2. Approval of Foreign
3. Approval for Investment in
Bonded Zones and Integrated Economic Development Zones.
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
8. Other approvals, licenses,
decrees and permits not issued by BKPM or BKPMD:
vApproval of the
articles of association of a limited liability company;
registration number and taxable entrepreneur confirmation number;
vNuisance 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
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.
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
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
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.