Tue, 26 Oct 2010

In this article, Kelvin Chia and Marlon Wui share on the latest changes to Indonesian Business Laws. A must read for all doing business in Indonesia.

What are some of the latest changes to Indonesian Business Laws that Singaporean businesses need to take note of?

Certain developments in the laws and regulations relating to doing business in Indonesia have occurred since the early part of the year, and some of the notable ones that may be of interest to Singapore businesses are summarized/outlined below.

New Negative List on Investments

On 25 May 2010, the Government of the Republic of Indonesia issued Presidential Regulation No. 36 of 2010 concerning the List of Business Sectors that are considered Closed’ and Conditionally Open’ to Capital Investment, also known as the Investment Negative List (“DNI”).

Key favourable provisions for foreign investment in the DNI are:

(a) Any investor intending to expand its business in the same business field but in a different location does not have to establish a new business entity or obtain a new business permit, unless determined otherwise by decree;

(b) The restrictions under the DNI do not apply to indirect capital or portfolio investments where transactions are made on the domestic capital markets;

(c) Certain business fields have been opened to increased foreign participation as follows:

(i) The siklamat and saccharine industries are now open to foreign investment subject to obtaining certain licences,

(ii) Foreign capital ownership for public works industries in construction has been increased from 55% to 67%,

(iii) Foreign capital ownership in hospital services, specialist doctors clinics, and laboratories has been increased from 65% to 67%, and the location of the businesses are now permitted Indonesia-wide, and

(iv) The culture and tourism sectors in filming service (e.g., film studio, film processing laboratory, dubbing facilities, and printing and film reduplication) are now open to foreign capital of up to 49%; and

(d) As part of Indonesia’s commitments to the Declaration of ASEAN Economic Community, the DNI has provided for certain conditions to increased foreign capital ownership in specified industries by investors from ASEAN member-countries.

The issuance of the new DNI comes on the heels of the setting up of a “One Stop Service” system in the registration and establishment of foreign investment companies in Indonesia, by way of Presidential Regulation No. 27 of 2009 regarding Investment Applications within the Framework of Integrated One Door Services (“Pres. Reg. No. 27/2009”) issued last year. Under Pres. Reg. No. 27/2009, investment procedures have been simplified by creating a one-door integrated services system, whereby the Investment Coordinating Board (“BKPM”) receives a delegation of authority from the technical minister/the head of non-department government institution in charge of the respective business line. To further implement Pres. Reg. No. 27/2009, BKPM has issued four implementing regulations on the matter.

Mining

Following the much-anticipated promulgation of Law No. 4 of 2009 (“Mining Law”), two key implementing regulations on the Mining Law were issued in February this year, i.e., Government Regulation No. 23/2010 and Government Regulation No. 22/2010. Some of the more salient features of the implementing regulations are as follows:

(a) Divestment obligation

Pursuant to Article 112 of the Mining Law in relation to Articles 97 and 98 of Government Regulation No. 23/2010, a foreign investment company (“PMA”) holding a mining business licence (“IUP”) is required to divest at least 20% of its shares to Indonesian parties not later than five years after commencement of production. Further, the implementing regulation (a) specifies that the offering of the shares to be divested must be conducted not later than 90 calendar days from the fifth year following the issuance of the production operation license to the PMA, and (b) requires that, in the event of any increase in the capital of the PMA, the share of the Indonesian party must not be diluted to less than 20% of the increased capital. Under the implementing regulation, “Indonesian parties” to which the above-described divestment may be made consist of the national government, provincial governments, regencies/municipal governments, national and regional state-owned enterprises, and national private business entities.

(b) Existing CoWs and CCoWs

Under Government Regulation No. 23/2010, existing contracts of work (CoWs) and coal contracts of work (CCoWs) will remain valid until their respective expiry dates. Such contracts may also be extended as IUPs without having to go through a tender process, provided the requirements of the implementing regulation on such extensions are complied with. (c) Transportation, Marketing, Processing and Refinery Licence

The implementing regulations provide for a new type of license for companies without a mining licence and engaged in the transportation, marketing, processing and/or refinery of mining products. More details on the application requirements and procedures for the issuance of this licence are expected to be set out further in a ministerial regulation.

(d) Relinquishment of Exploration Area

Under Government Regulation No. 23/2010, progressive relinquishment of exploration areas is mandated, and holders of exploration IUPs are required to relinquish part of their mining areas by the fourth and eight years of the relevant exploration IUPs.

(e) Pricing Control

Government Regulation No. 23/2010 also provides for a framework for pricing and production controls, and more details on this are expected to be determined in a further ministerial decree.

Notification Requirement for Mergers, Consolidations and Acquisitions

To implement the provisions of Articles 28 and 29 of the Indonesian Anti Monopoly and Unfair Business Competition Act (Law No. 5/1999), the Government of the Republic of Indonesia issued Government Regulation No. 57 of 2010 concerning Mergers or Consolidations of Business Entities and Company’s Shares Acquisitions That Cause Monopolistic and Unfair Business Competition Practices, which took effect on 20 July 2010.

Under Government Regulation No. 57/2010, notification is mandatory for a merger or consolidation of business entities or an acquisition of a company’s shares that causes of the value of the assets to exceed IDR 2.5 trillion and/or a sales value exceeding IDR 5 trillion (for the banking industry, in excess of IDR 20 trillion). The notification is required to be submitted to the Business Competition Supervisory Commission not later than 30 days from the effective date of the pertinent merger, consolidation or acquisition. An administrative sanction in the form of a fine of IDR 1 billion for each day of delay (up to a maximum penalty of IDR 25 billion) is imposed on the failure to submit such notification.

Indonesian Language Requirement re: Contracts

Although Law No. 24 of 2009 (“Law 24/2009”) concerning Flag, Language, Coat of Arms and Anthem was issued back on 9 July 2009, some questions on its precise scope in respect of the use of the Indonesian language in contracts or agreements remain to date.

Under Article 31 of Law 24/2009, it is provided that any memorandum of understanding or agreement which involves a state institution, Indonesian government agency, Indonesian private company or Indonesian citizen must be written in the Indonesian language. If such agreement also involves any foreign party, then it must be also written in the national language of such foreign party and/or in the English language. As such, the above provision has been interpreted by some sectors to mean that all agreements or memoranda of understanding must be written in the Indonesian language and, additionally, in the national language of the foreign party and/or in English if such agreements or memoranda otherwise involve an Indonesian party and a foreign party. Others disagree with this interpretation, and to date the implementing regulations on the law have not yet been issued to clarify the scope of the requirement.

As a response to certain requests from Indonesian law firms, the Minister of Law and Human Rights (“MLHR”) has issued a statement on 28 December 2009. Based on the MLHR statement, the MLHR is of the view that agreements or contracts involving a foreign party which are written only in the English language shall not be against the requirements of Article 31 of Law 24/2009, and such agreements or contracts will remain effective or valid, particularly as the implementing regulations have not yet been issued. In respect of the prevailing or controlling language (in the case of an agreement which is executed in the Indonesian language and another language/English), the MLRH stated that, in accordance with the freedom of contract principle, the parties may determine such prevailing or controlling language in the event of any discrepancy between the two language versions.

Notwithstanding the MLHR statement (which may have persuasive but not binding effect in all cases), and given the uncertainties in the absence of the implementing regulations, it is considered prudent from a practical standpoint to have an agreed Indonesian translation on hand, particularly if the agreement involves a substantial transaction and if there is a need to ensure enforcement in Indonesia in the future, and to specify in the agreement which of the two languages will prevail or control in the event of a conflict.

Double Taxation Agreements (“DTAs”)

Lastly, regulations concerning the application of Indonesia’s DTAs to a non-Indonesian resident recipient (“payee”) of income paid by an Indonesian payer have recently been issued (effective from 1 January 2010). The regulations provide that if a payee intends to claim withholding tax benefits under a relevant DTA, it must timely submit an application for a certificate of domicile (“certificate”). The certificate is a standard form issued by the Indonesian tax authority and must be filled in and signed by the payee and then certified by the foreign competent authority of the jurisdiction where the payee is a tax resident. The certificate form is required to be submitted before each payment is made by an Indonesian payer to the payee, otherwise the treaty benefit may not be availed of or, subject to certain conditions, a late submission may only entitle the payee to a refund.