Indonesia’s Omnibus Law and Effects on Foreign Investors in 2021
“This article was initially published by Floris van der Velde, Associate Director, Business Development at Vistra, one of Greenhouse’s vetted service providers.”
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Background:
Changes foreign investors need to look out for:
- Simplified business licensing
- Eased foreign investment restrictions
- Relaxed labour laws
- Streamlined corporate tax regulations
- Our thoughts
Indonesia’s Omnibus Law
November 2, 2020, marked the day where President Joko Widodo of the Indonesian government passed Indonesia’s Omnibus Law on job creation. Essentially, the Indonesian omnibus law amended many Peraturan Pemerintah (PP), or government regulations, to strengthen the economy by increasing competitiveness, creating jobs, and making it easier to do business in Indonesia.
Its main goal is to stimulate domestic and foreign investment to transform Indonesia’s economic sphere. With that, the omnibus law has brought many more opportunities for multinationals operating in or considering investing in Southeast Asia’s largest economy.
Omnibus law summary
While the omnibus bill received mixed reactions even when it was first drafted in February 2020, introducing the bill was part of the vision of President Widodo for a long time as he mentioned that on several occasions:
- In July 2019, when elections were running high, President Widodo presented his vision for Indonesia as he stood in front of supporters. He assured them of reforming the bureaucracy, investment realization, development of human capital, infrastructure development, and the efficient use of the state budget.
- Later in October 2019, President Widodo presented his vision of Indonesia in his second inauguration as president. An English translation of the speech quotes him as saying, “Our dream is that by 2045, Indonesia’s gross domestic product will have reached US$7 trillion. Indonesia will have become one of the top five world economies with a poverty rate nearing zero percent. That is what we must head toward.”
To fulfill this vision, the Indonesian government realizes it must first address the problem of over-regulation in Indonesia. Bureaucratic red tape has long hampered growth in the country and deterred foreign investment. For example, the World Bank’s Ease of Doing Business index 2021 ranks Indonesia 70 out of 190 countries. Although President Widodo’s wish for Indonesia to achieve a rank of 40 by 2020 has not yet been fulfilled, we see tremendous improvement in simplifying business processes to encourage economic growth.
Primarily, the omnibus law streamlines Indonesia’s complex regulatory environment. This law eased restrictions in 11 critical areas, including labour law, capital investment, business licensing, corporate tax, and land acquisition. Needless to say, these measures would make this country a far more attractive destination for foreign businesses and investors.
So, what does the omnibus law mean?
The omnibus law has amended up to 76 existing laws. In addition, eliminating central and regional government regulations of about 5000 and 16,000 respectively.
Business partners in Singapore, which is Indonesia’s largest foreign investor, are also embracing the new law. As the CEO of the Singapore Business Federation puts it, “Singapore businesses are also keen to partner Indonesian businesses on new opportunities in these sectors,” as he points to the emerging sectors of interest such as “...e-commerce, healthcare, construction, warehousing, and distribution”
Simply put, if you’re wondering whether the omnibus law will affect your business or investment plans, it probably already has.
Below are a few of the changes foreign investors need to look out for.
1. Simplified business licensing
In the past, any business in Indonesia required one or more licenses to operate, which must be extended after a certain period. It was also the responsibility of many government institutions and regional governments to issue these business licenses. This process was across the various state, local, and central agencies, making it a multi-layered system. Therefore, it was difficult for an investor to know what business permits and licenses to obtain, where to get them, and in what order they should be applied for.
With the omnibus law, the process to obtain your business license is a lot easier now.
It simplifies Indonesia’s existing regulations by combining or scraping many business licenses. This has affected almost all business sectors, including maritime and fisheries, energy and mineral resources, electricity, infrastructure, and transportation.
The role of the national Investment Coordinating Board (BKPM) is strengthened and plays a pivotal role in streamlining the issuing of all business licenses. Under the omnibus law, a foreign investor will be able to obtain a business license through an Online Single Submission (OSS) system, eliminating the need to go through multiple ministries or other government institutions.The omnibus law will also introduce a risk-based approach system, dividing businesses into categories of low, middle, and high risk.
- Low-risk businesses only need a registration number
- Medium-risk businesses will need a standard certification
- Only High-risk businesses will still need a full business license
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2. Eased foreign investment restrictions
By introducing the omnibus law, the Indonesian government has opened the majority of the economic sector to 100 percent foreign investment. As the proposed main regulation reads: “All business lines are open to direct investment, save for those that are designated as closed to investment or which constitute activities that are reserved to the central government.” This means that while most businesses are fully open, those carried out by the Central Government are still closed to foreign investments.
Before the omnibus law, Indonesia used the negative investment list. That list included a number of business lines that were only partially open to foreign investment (i.e. these lines have foreign ownership caps). To take two examples, companies engaged in large horticulture businesses are open to foreign ownership of up to 30 percent, and companies engaged in broadcasting businesses are open to foreign ownership of up to 20 percent.Now, in 2021, the previous regulation with the Negative Investment List has been revoked and replaced with a “Positive Investment List”, under Presidential Regulation (PR) 10/2021. Under PR10/2021, virtually all business lines are fully open to 100 percent foreign investment. However, according to ASEAN briefing, this is with the exception of six business sectors
- Class-I narcotics and cultivation;
- All forms of gambling activities;
- Fishing of endangered species;
- Utilization of corals found in nature for the production of jewelry, souvenirs, building materials, etc.;
- Chemical weapons production; and
- Industrial ozone-depleting substances industries and industrial chemicals.
This is one of the most dramatic liberalizations of Indonesia’s foreign direct investment (FDI) regime.
3. Relaxed labour laws
In the past, Indonesia had relatively strict labour laws. The omnibus law has made labour laws more flexible and market-friendly to bring them more in line with other countries in the region.
For example, the laws used to provide generous mandatory severance compensation, by far the most generous in the APAC region. This and other worker-friendly laws deterred many foreign investors. However, while some supported the implementation of the omnibus law in Indonesia, it has also generated considerable opposition from labour unions and other parties. Some critics voiced concerns about the potential lack of protection on the environment and workers’ rights. Thus, we expect continual social resistance as the government navigates through the changes.
4. Streamlined corporate tax regulations
A large part of the omnibus law covers corporate taxation. Currently, there are many different tax laws in the country and the changes from the law have already taken effect.
Essentially, the law provides for the unification of Indonesia’s scattered tax regulatory framework. It aims to minimize overlapping regulations and provide many corporate tax incentives, including adjustments to the following rates.
Corporate income tax rate
Indonesia’s current interest tax rate is at 22 percent for the fiscal year 2021. The omnibus law will provide for a reduction to 20 percent starting year 2022.
Furthermore, qualified public companies that trade at least 40 percent of their shares on the Indonesian stock exchange can apply for an additional 3 percent rate reduction. This decrease will make Indonesia more competitive with neighbouring countries.
Dividend tax rate
The types of taxes and income tax rates on dividends that currently apply are as follows:
- Income Tax Article 4 paragraph (2) is 10% final if dividends are received by domestic individuals;
- Income Tax Article 23 is 15% if it is received by domestic corporate taxpayers and Permanent Establishments (known as Badan Usaha Tetap or BUT);
- Income Tax Article 26 of 20% or according to the agreement in the Double Taxation Avoidance Agreement (P3B), if received by a foreign taxpayer other than Permanent Establishment (known as Badan Usaha Tetap or BUT).
The law will provide income-tax-free dividend payments, as long as the full amount is re-invested in Indonesia.
Interest tax rate
Indonesia’s current interest tax rate of 22 percent is high relative to other APAC countries. The omnibus law will provide for a reduction of the rate of income tax coming from interest payments.
Our thoughts
Indonesia’s omnibus law clearly shows the government’s commitment to minimize red tape in virtually every area of business to woo foreign investors. As such, foreign investors should consider the many changes and how best to go forward with this new law.
Despite the many controversies surrounding the omnibus law, Indonesia’s government is confident that this change will also help the country tide through Covid-19.
Want to know more about how the new changes will affect your business in Indonesia?
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