Ultimate Guide to Doing Business in Indonesia – The Most Complex Jurisdiction

Doing Business in Indonesia - How to be successful in the world's most complex jurisdiction

When it comes to ease of doing business, Indonesia is ranked as the world’s most complex jurisdiction. Compared to other APAC countries like Singapore and Hong Kong, incorporating business in Indonesia can be a hassle. But why is it still one of the most exciting fast-growth markets to enter?

Given the recent global health pandemic and trade war between the U.S. and China, the complexity of setting up and running a business in a new country is even higher. Therefore, we addressed the topics in our webinar with the leadership team of TMF Indonesia, Alvin Christian and Emmanuel Sumaryo, moderated by our COO, Viktor Kyosev.

Based on the discussion, here’s all you need to know about doing business in Indonesia:

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Why is Indonesia the most complex jurisdiction in the Global Business Complexity Index 2020?

Once a year, TMF Group releases “The Global Business Complexity Index“. It is one of the most unique global reports mapping the complexity and ease of doing business in different jurisdictions around the world. Here are the report analyses for Indonesia:

most complex jurisdiction by region
The 3 most complex jurisdictions in each region
most simple jurisdiction by region
The 3 most simple jurisdictions in each region

Complexity in rules, regulations, and penalties

  • Rising complexity: Traditional and multiple layers of legislations that are overlapping and contradictory, 500+ business fields in the Negative Investment List, and complicated and abundant incorporation permits.
  • Drivers of simplicity: Online Single Submission to simplify business incorporation, Omnibus Law to convert Negative Investment List into Positive Investment List and to streamline the regulations, and government’s commitment to FDI for Indonesia as “Investment Heaven”.

Complexity in accounting and tax

  • Rising complexity: Punitive tax laws, resident director required for tax reporting purposes, and rules and standards vary significantly.
  • Drivers of simplicity: Multiple tax incentives during COVID-19 and alignment of IFRS and PSAK at a 2 year gap at the most.

Complexity in HR and payroll (Labor Law)

  • Rising complexity: Stringent manpower law, expensive severance payment regulations, and Industrial Relations Court (PHI) involvement in all employment matters.
  • Drivers of simplicity: Omnibus Law which also covers the manpower law to ease current regulations and single national income tax rate.

Comparison to other ASEAN countries

Against other ASEAN countries; Indonesia on the one hand ranks highest in initial investment, land, and labor costs, along with the highest number of regulated business sectors. On the other hand, Indonesia has quite competitive tax incentives.

Doing Business in Indonesia - incentives comparison SEA

How does COVID-19 impact Indonesia’s GDP growth?

Key Economic Indicator

Under assumptions of longer mobility restrictions and deeper global economic contraction, the annual real GDP growth for Indonesia is estimated to reach -2.0% in 2020.

Key Economic IndicatorMacroeconomic Indicator

Furthermore in the macroeconomic indicators 2020, it was projected that despite the GDP contraction at Q2 by 5.32%, it will rise up to 0.02 GDP growth at Q4.

Macro Economic IndicatorLooking Ahead Worldwide

Looking ahead in the global context, several countries have already been in recession throughout the year, such as Japan, Thailand, the Philippines, even Singapore. Indonesia is at the verge of recession, but is estimated to rise up to a positive GDP growth next year.

Looking Ahead WorldwideWhat does Omnibus Law provide to improve the ease of doing business in Indonesia?

Doing Business in Indonesia - Omnibus Law

Earlier this year, Indonesian President Joko Widodo’s government submitted a draft bill to the country’s parliament. The draft is widely known as the “Omnibus Law” and aims to transform Indonesia’s economy. The bill has strong implications for multinationals operating in or considering investing in Southeast Asia’s largest economy. The proposed changes are:

  • Ease of Investment

    • Simplification of business licencing and land acquisition process
    • Easing foreign investment restrictions ‒ changing into the Positive List
    • Lesser regional government law
    • Establishment of central government sovereign wealth fund
  • Reforming Labor Laws

    • Reductions in severance calculations and paid leave
    • Expanded scope for foreign employees without permits
    • Relaxed outsourcing requirements
    • New social security program for layoff coverage
  • Tax Changes

    • Corporate tax streamlining
    • Corporate Income Tax Rate ‒ implemented as part of COVID-19 tax schemes
    • Income tax free dividend payments
    • Reduction of rate for income tax from interest

What should we know about doing business in Indonesia?

Businesses need to be adaptable

  • GBCI 2020 also found that businesses need to adapt quickly to fast-evolving APAC regulations, as they increasingly shift to support businesses affected by the pandemic.
  • Understanding the rules of engagement with regulators on the ground has never been more important.
  • Firms need to constantly stay abreast of rapidly evolving legislation, and integrate it fast into the policies.

Shifting policies in accounting, regulations, and human resources

  • Accounting and tax
    • Shift away from well-known stringent auditing processes
    • Technology adoption for taxation processes continue to accelerate
  • Rules, regulations, and penalties
    • Relooking regulations for paper and seal culture
  • Human resources and payroll
    • Leading the way many aspects of payroll and benefits, and introducing more new measures to support the economy and the workforce

Global Impetus Towards Internationalization

  • Following the COVID-19 pandemic, we are likely to see a continued impetus towards a global business environment, with international bodies stepping up measures to coordinate and regulate trade.
  • Technology and modernization will act as drivers to place the post-pandemic global economy back on its feet, and APAC businesses need to be aware of and act in response to complexity in their markets.

How do we navigate the complexities?

  • Manage your liquidity ‒ especially true during this time of crisis
  • Find trusted local partners for guidance ‒ a partner on the ground that has already experienced and managed to navigate the complexities
  • Take full advantage of the available government schemes and supports ‒ BKPM very focused on debottlenecking obstacles for investment realisation
  • Focus your time and effort in growth-activities ‒ tap into the massive potential that is Indonesia

 

Watch the full webinar session here:

Since April, we at Greenhouse have been working closely with our network of service providers and partners across Southeast Asia to launch a series of webinars on topics like:

  • Adaptation to COVID-19
  • Business opportunities
  • Fast-growth markets
  • Market entry strategy
  • Opportunities in emerging markets
  • Venture Capital

Reach out to us for any questions about this session!

All experts who have shared on this panel are actually partners of Greenhouse, and their company profiles are listed on our platform. To see a comprehensive profile of each company and approach them, click here.