Current affairs

Attracting FDI in Indonesia【Job creation and amendments to the tax rules that constitute the Omnibus Law】

2020/08/25

The reason for the decline in direct investment from Japan into Indonesia is not only the corona pandemic but also the problem of the investment environment itself.

During a recent webinar hosted by JETRO, a representative from the Investment Coordinating Agency (BKPM) said that investment in Indonesia from Japan has fallen, and while Japan usually ranks second to Singapore, in the second quarter of 2020 it will be Singapore, Hong Kong, China, Japan and South Korea, in that order.

Indonesian Investment Coordinating Board (BKPM) entry assistance for foreigners who have not yet obtained a Temporary Resident Permit (ITAS)【Jetro Webinar on August 13】

 

Actual foreign direct investment (FDI) in Indonesia in the second quarter of 2020 (based on BKPM webinar data)

Competition to attract a production base with Vietnam

 

By region, investment in Java accounts for just under 50% of the total, with the largest amount of investment in West Java, which has a series of industrial parks along the Tol (highway).

Today, at a webinar titled "Indonesia in the New Global Economic Paradigm: Your Best Investment Destination" hosted by the Indonesian Embassy in Tokyo and the Investment Coordinating Agency (ICOA) for Japanese investors, Coordinating Minister for Maritime Affairs and Investment Luhut and BKPM's Director General Bahlil, among others, explained Indonesia's macroeconomic strategy and policies, as well as the state of improvement in the investment environment.

BKPM also seems to be aware that there are other reasons besides Corona for Japan's drop in the rankings to fourth place after being second to Singapore in terms of direct investment until 2019, and that there are problems with the investment environment itself.

Of the nearly 140 companies that are considering relocating from China to other countries, 21 are Japanese companies, and they are developing Batang Industrial Park in Central Java in order to solve Indonesia's investment environment problems of relatively high land and labor costs.

Indonesia's priority as a relocation destination among companies considering relocating from China (from BKPM webinar material)

Secretary Bahriil said, "There are three obstacles to the investment environment in Indonesia: land, approval, and employment, but for Japanese companies, as long as they bring technology and money, BKPM will support everything else, and we will pick them up at the airport". I could tell that they are aware of rival countries such as Vietnam and Cambodia as investment attractors.

[KBRI Investment Webinar]
(Minister Luhut)
Omnibus law to improve jobs and taxation
The future of nickel batteries
Promoting downstream, no raw material exports
(BKPM director)
Why has Japanese investment dropped from second to fourth place
The obstacles to investment are land, permits, and jobs
⇒If you bring us technology and money, we'll set it all up for you, and we'll pick you up at the airport.

Progress on the Omnibus law

The omnibus bill, the centerpiece of the domestic investment climate to attract foreign investment, consists of two parts: one on job creation (CiptaKerja) and the other on taxation (Perpajakan).

It is still under continuous debate in the Parliamentary DPR on a daily basis, and although the goal was to have it come into effect in August, it seems to be realistically pushed back to September or October.

Does the Omnibus Law allow foreigners to own apartments?【Attracting foreign direct investment through the Job Creation Act and tax reform】

Omnibus law on job creation (Simplifying licensing approval for Special Economic Zone)

  • Simplified Licensing
    Site permits are determined using a single, unified digital map and based on a risk-based approach - an approach that identifies risks that impede the achievement of objectives, identifies their impacts, and increases the likelihood that they will be addressed and achieved.
  • Investment Requirements
    Create a new priority list of investment priority areas and simplify the investment negative list from the current 20 industries to 6 industries to improve openness to foreign investment.
  • Administration
    Centralize authority to simplify the overlap between local and central regulation
  • Work rules that give companies more freedom
    The minimum wage only applies to workers who have been working for less than a year; and Long service salaries are capped at eight months' salary, the government has also prepared a job training program for the unemployed, and The use of foreign workers shall be permitted under special requirements.
  • Ease of doing business
    Abolition of minimum capitalization of IDR 50Milyar; and Making it easier to get a work or business visa, and Flexibility for the patentee, the Incentive system (compensation) for downstream programs in the metals industry.
  • Research and Innovation Support
    Foreign trade policy support products of national innovation, the Special allocations for state-owned and private enterprises for research and development and innovation.
  • Sanctions
    Differentiation of administrative law sanctions from criminal law sanctions and criminal penalties for corruption.
  • Facilitate land procurement.
    Fast change from local land to available land, the Easier Land Change Permit Extensions, More Land Bank under development.
  • Investments and National Strategic Projects
    Establishment of a sovereign wealth fund (a government-sponsored investment fund), provision of land for national strategic projects, and provision of all necessary permits and licenses for national strategic projects.
  • Economic bloc
    Free trade and free port zones where the SEZ administrator has the authority to license, service, incentives and ease of doing business.
  • Incentives for SMEs
    Priority of transfer funds to be used for MSME.

Omnibus Law on Amendments to Tax Regulations

  • Income Tax Reduction
    Corporate tax: 25% (current) to 22% (2021-2022) eventually 20% (2023), dividends (Dividend) are exempt.
  • Application of Intraterritorial Income Taxation
    Dividends of multinational companies are tax-free as long as they are invested in Indonesia.
  • Application of Domestic Taxes
    If an Indonesian works abroad for more than 183 days, he or she may be subject to the relevant country's domestic tax, and foreigners working in Indonesia for more than 183 days will be subject to Indonesian domestic tax.
  • Regulations to increase compliance
    The sanctions will be adjusted and interest on non-compliance fines will be adjusted from 2% (for 24 months) to market rate.
  • Taxing Digital Services
    Adjusts the tax on digital services similar to the tax on traditional entities; multinational digital companies that do not have an Indonesian office are also subject to the tax.
  • Tax break
    Combine tax incentives such as tax holidays, tax allowances and special economic zones into a single cluster.

Production of value-added products through downstream industrialization

Image of downstream chemicals being processed into nickel to add value (from BKPM webinar material)

In addition to the Omnibus Act, Minister Lufut stressed the attractiveness of investing in Indonesia, the downstreaming of metal minerals such as iron and nickel, and Indonesia is aiming to attract foreign companies to manufacture nickel-based electric vehicle (EV) batteries and turn it into a production base.

Indonesia's downstream industry and manufacturing sophistication

 

I was impressed by his words, "Indonesia will join the international supply chain" and "We don't want to export raw materials anymore" by processing the products domestically and adding value to make them internationally competitive in downstream industries.

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