The new regulatory obligation includes:
a prohibition on the use of foreign currency for pricing goods and/or services, and a requirement to use IDR for a broad range of non-cash transactions, including transactions using electronic payments or bank transfers.
The regulations are being implemented through a new Regulation issued by BI on 31 March 2015, that imposes more stringent restrictions on the use of foreign currency than those currently provided under Indonesia’s Currency Law. The BI Regulation is due to take effect on 1 July 2015. In order to implement the BI Regulation, BI issued its Circular Letter on 1 June 2015.
Shipping companies operating in Indonesia will need to ensure that all foreign currency denominated transactions comply with the BI Regulation, as failure to comply can result in criminal or administrative sanctions.
BI may revisit this requirement for shipping companies if it raises practical difficulties in business continuity and national economic growth. It appears from the Circular that BI may give dispensation to the requirement based on applications from the shipping industry. The Circular, however, does not provide specific procedure for securing dispensation.
Limited scope of international trade transactions
While the Currency Law did not define the scope of international trade, the BI Regulation and Circular provide that the use of foreign currency in international trade transactions is now only permitted for two types of transactions:
export and/or import of goods to or from Indonesia (however, supplemental activities to these transactions are not exempted); and cross-border trade in services involving cross-border supply or consumption abroad.
Implications for certain businesses from 1 July 2015
Shipping and port services companies
The BI Regulation will particularly impact shipping companies that provide charter services and port services companies. For non-cash transactions that are not exempt – including charter services (i.e. between Indonesian companies for charter services in Indonesian waters), docking and container services – from July 2015 onwards, companies may no longer charge or denominate their services in foreign currencies. For cashtransactions that are not exempt, companies have not been able to charge or denominate their services in foreign currencies since 31 March 2015.
It remains unclear at this stage if US dollars (USD) can be used to charge port services for international containers. While an existing regulation of the Minister of Transportation allows the use of USD for certain port services in relation to export and import activities, the scope of international trade that is exempt from the requirements of the BI Regulation is limited to the exports and/or imports of goods to or from Indonesia. In addition, the Minister of Transportation issued an instruction on 7 July 2014 to the Directorates General of Land Transport, Sea Transport, Air Transport and Railways, requiring the use of IDR in all transportation activities, including port services. Although this instruction was addressed only to these Directorates General, the intention was to require transport operators to use IDR in their transportation transactions.
Other businesses and activities affected from 1 July 2015 include office building management (for rental charges) and sub-franchise arrangements involving Indonesian sub-franchisees.
Sale and purchase of shares in a foreign investment (PMA) company
It remains unclear whether the purchase of shares in a foreign investment company can still be denominated and paid in USD or other currencies such as the Australian dollar (AUD). We would expect that the sale of shares by a foreign shareholder can continue to be made in USD, or AUD for example.
Contracts prior to July 2015
While the Currency Law indicated that any foreign currency payment would be permitted if this had previously been agreed in writing, the BI Regulation goes further. It only allows foreign currency payments for non-cash transactions that are exempt, regardless of the presence of a prior written agreement.
Contracts entered into prior to 1 July 2015 for non-cash transactions that are not exempt will remain in force until they expire. If the parties intend to use foreign currency for non-cash transactions that are not exempt (such as charter contracts), the relevant agreements will need to be signed before 1 July 2015. Meanwhile, any contract extensions or amendments involving, among others, amendments to parties, price or object, made after 1 July 2015 will be subject to the requirements of the BI Regulation.
As a consequence, shipping companies who have sought debt finance in Indonesia should ensure they have sufficient hedging arrangements to manage the foreign exchange risks.
The BI Regulation reiterates the exceptions under the Currency Law from the requirement to use IDR for certain transactions, which are:
transactions to implement the State budget; grants from or to Indonesia; international trade transactions (see above for the limited scope); bank deposits denominated in foreign currencies; and international finance transactions.
Additional exceptions under the BI Regulation include:
foreign exchange transactions by licensed Indonesian banks in line with Indonesia’s Banking Law and Sharia Banking Law; transactions related to commercial papers issued by the Indonesian Government in a foreign currency denomination under the Sovereign Bonds Law and Sovereign Sharia Commercial Papers Law; foreign exchange transactions conducted in accordance with any Indonesian laws, such as under foreign investment laws for the purpose of repatriation; and foreign exchange transactions which relate to strategic infrastructure projects, including transportation, road, water and power projects. A strategic infrastructure project can be exempted if approved by BI based on a statement by the relevant authorities.
Failure to comply with the new requirements on cash transactions will lead to criminal sanctions under the Currency Law. Failure to comply with the new requirements on non-cash transactions will lead to administrative sanctions, including a fine of one per cent of the transaction value up to a maximum fine of one billion IDR (approximately USD 78,000).
What is next?
It would be prudent to consider what preparatory actions are needed before 1 July 2015 to comply with BI Regulation and the Circular. This would likely include finalising foreign currency denominated contracts before then. In addition, banks need to ensure that Indonesian borrowers who are likely to be impacted, have sufficient hedging arrangements in place.