Indonesia announces removal of investment hurdles

Indonesia's President Joko Widodo is making efforts to act quickly on his announcements after taking up his second term in October 2019. At the end of the year, for example, he presented a comprehensive reform pact that should further open the economy to Foreign Direct Investment (FDI).

Accordingly, Indonesia’s so-called Negative Investment List (DNI), which defines sectors closed for foreign investors, is to be converted into a “Positive List” by January 2020 – effectively opening up new sectors for FDI. The DNI has seen major revisions in the decade, most recently in 2016. In December 2018, a liberalized revision was decided, but was not implemented after protests by local stakeholders who feared more international competition.

According to press reports, there will then be a complete exclusion of foreign companies in only six areas: gambling, endangered plants and animals, cannabis cultivation, processing of corals and certain alkali metals as well as chemical weapons.

Another key element of the reforms is the transfer of competencies in the issuing of business licenses that every foreign company in Indonesia needs. So far, businesses have had to deal with a number of ministries before they can receive their business licenses. In the future, the authority to issue business licenses would be the investment authority BKPM. The basis for this is Presidential Decree No.7/2019, which was entered into force on November 22, 2019.

These are still legal caveats however. According to the Jakarta-based think tank Regional Autonomy Watch (KPPOD), a simple transfer of competencies without fundamental deregulation is ineffective as there exist numerous laws that would still guarantee the de-facto monopoly on decision making – in correlation to licensing – to other ministries.

Tax incentives for companies and expats
In addition to the reforms mentioned, Indonesian ministries are currently being tasked to identify regulations that hinder foreign and domestic investments. Thus far, at least 40 regulations have been identified and are due to be abolished or relaxed, such as the rules for building permit (IMB) and environmental impact studies (AMDAL).

Tax breaks are also planned as further incentives for foreign companies. For example, corporate income tax is to be reduced from the current 25% to 22% in 2021 and even further to 20% in 2023. An additional three-percentage point waiver is said to exist for companies going public. In addition, the income tax for expats is to be reduced and the dividend tax is to be abolished. For this purpose, a digital tax is to be introduced for multinational digital companies.

The pressure to reform in Indonesia is increasingPresident Joko Widodo is considered a reformer who, as a former entrepreneur, understands the concerns of the economy. Since his election in 2014, Indonesia’s has improved its standing among major international business institutions significantly. Nevertheless, the country remains the most difficult to invest in comparison to other large ASEAN economies.

In his course for liberalization, the President fights not only against opposing political parties, but also against the members of his own party from whose establishment he does not originate. Seeing as this is his last constitutional term, foreign companies are hoping that he would be less encumbered by political patronage.

At the same time, the President is driven. Despite a stable economic course with growth rates of over 5% annually, the industrial quota is falling continuously and actual unemployment is high. Foreign direct investment is expected to decline for the second year in a row in 2019 – when calculated in US dollars – and may even fall to its lowest level since 2012. The job creation rate neatly identified by BKPM in terms of FDI has also been falling for years.

According to a World Bank study in September 2019, Indonesia has the second lowest foreign direct investment in relation to economic output among major ASEAN economies and is lagging significantly behind Vietnam, Malaysia and the Philippines. The pressure to reform is increasing.

GTAI is the foreign trade and inward investment agency of the Federal Republic of Germany. The organization advises foreign companies looking to expand their business activities in the German market. It provides information on foreign trade to German companies that seek to enter into foreign markets.