Indonesia in Focus - July 2016

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Summary: Welcome to the latest edition of BLP’s quarterly update on legal developments in Indonesia. We have distilled the latest Indonesia news into this ‘speed read’. Please get in touch for more information.

1. What Brexit means for Indonesia

Following the result for the UK to leave the European Union, the country now faces the largest overhaul of its legal system for generations. Tens of thousands of laws are potentially affected.

Despite these changes, Bank Indonesia expects the impact on Indonesia’s economy to be limited. It is envisaged that the UK is stable enough to build on bilateral investment ties with Indonesia, further to President Jokowi’s visit to the UK in April 2016.

Apart from closer trade ties, tourism and other short-term opportunities may arise from the weaker pound. For the time being, investors continue to enjoy potential safeguards under the bilateral investment treaty and the double taxation treaty between the two countries.

We will discuss key Brexit risks and opportunities for the ASEAN audience at 3pm JKT / 4pm SIN time on Friday, 8 July 2016. There are many steps that businesses can take now to protect their interests. Join the discussion.

2. Indonesia's Tax Amnesty: What this means for Private Wealth 

Indonesia has demonstrated a commitment to global tax transparency and collecting tax on undeclared income and assets held offshore. Indonesia has committed to adopting Automatic Exchange of Information (AEOI) under the OECD Common Reporting Standard. Soon over 100 jurisdictions will begin to collect information and exchange it with other countries, including Indonesia on an automatic basis, and, by as early as 2018, Indonesia may have the information it needs to investigate taxpayers with accounts or structures in offshore jurisdictions. It is critical that Indonesia maintains confidentiality and data safeguards, and ensures the proper use of this information.

Taxpayers are being given a window of opportunity to “come clean” before information is shared. The long-awaited Tax Amnesty Law has been passed by Parliament. Indonesian residents have an opportunity to declare any undisclosed offshore income and assets voluntarily on a more favourable basis than would otherwise apply. For those who voluntarily come forward, tax will apply at rates of 2-10%.

It is expected that taxpayers will recognise this shift towards greater tax transparency and take advantage of this limited window of opportunity. This may be the only opportunity taxpayers have to come forward before the Government comes to them.

Learn more about BLP Private Wealth.

3. Positives and Negatives: Revisions to Indonesia’s Negative Investment List

By replacing the 2014 negative investment list, Presidential Regulation No. 44/2016 [1] (Perpres No. 44/2016) has been welcomed as a step towards liberalising investment restrictions.

Part of Economic Package “X”, key changes include:

  • removal of various sectors from the list including cold storage, non-hazardous waste management and disposal, pharmaceutical raw materials, toll roads and certain tourism sectors (including restaurants and hotels with more than two stars);
  • partial relaxation of distribution (with no production affiliation), e-commerce (if investment value is more than Rp. 100 billion), warehousing and integrated telecommunication services sectors; and
  • some new lines of business – for example, geothermal power plants with capacity of ≤ 10 MW are open to a 67% FDI threshold.

Other sectors have not been so lucky, however, with a tightening of requirements to partner with local Small and Medium Scale Enterprises (MSME). Construction consultancy services with a contract value of less than Rp. 10 billion (using low or medium technology or having low or medium risks), for example, are now reserved for local MSMEs only.

Foreign investors may rely on grandfathering provisions in Perpres No. 44/2016 for existing investments which now fall afoul of the 2016 negative list, provided that Indonesia Investment Coordinating Board (BKPM) approval is in place.

For the sectors that remain on the list, many of the FDI thresholds – 49%, 67% or 95%, depending on the relevant sector - align with the corresponding shareholder approval limits in the Indonesian company law.

4. Indonesia’s Insurance Industry: The Rise of Indonesian Infrastructure Bonds?

Life insurance companies and pension funds (amongst others) must invest at least 20% of their portfolios in government bonds by the end of 2016, according to the Indonesian Financial Services Authority (OJK) Regulation No. 1/POJK.05/2016 [2] (OJK Bond Reg). Other non-bank financial institutions (NBFI) such as general insurers, reinsurers and guarantors, on the other hand, must invest 10% by the end of 2016. In 2017, these numbers will ratchet up to 30% and 20% respectively.

Relevant NBFIs have suggested that it will be challenging to meet the OJK Bond Reg’s requirements. In a potential move to broaden the scope of such requirements, OJK have advised that it may allow relevant NBFIs to invest in infrastructure bonds issued by Indonesian construction SOEs in lieu of government bonds. The Indonesian State-Owned Enterprises Ministry has also expressed support for this.

Any move to promote the domestic bond markets as a source of infrastructure funding whilst relaxing the OJK Bond Reg should be welcomed. It is understood that many SOEs are actively pursuing Indonesian Rupiah denominated bond offerings. However, this initiative must go hand-in-hand with other steps to improve the depth and liquidity of the local bond market, as well as to ensure robust project preparation and consultation with relevant stakeholders. If the proposed bond offerings are unsuitable for portfolio investment by NBFIs, the proposed changes to the OJK Bond Reg may have little practical impact.

If OJK decides that its proposal is feasible, it intends to issue a Circular Letter setting out its position. Various queries remain that will hopefully be addressed by the Circular Letter, such as whether bonds issued by non-construction company SOEs would qualify and whether there will be any restrictions on bond types, payment terms and ratings.

5. Indonesian FinTech: A New Regulation in 2016?

In recent years, there has been a rise in the offering of financial services through the use of technology. FinTech companies, which are not bound by the same regulations as commercial banks, are challenging the traditional banking model. This has attracted greater attention from the Indonesian Financial Services Authority (OJK).

The OJK and the Ministry of Communication and Informatics (MOCI) are currently working together on a new set of regulations to govern FinTech companies, with the aim of releasing the new regulations before the end of 2016. The new regulations are expected to help protect consumers’ interests. The OJK is also considering new regulations relating to licensing, data protection, electronic certification, foreign capital funding and crowdfunding.

At the end of 2015, OJK issued Regulation No. 34/POJK.05/2015 [3](VC Reg) to regulate venture capital funds, a key source of financing for the Fintech sector. The VC Reg was issued to improve economic growth and revitalise the venture capital sector. It sets out, amongst other things, minimum capital requirements, foreign ownership restrictions and licensing requirements. Under the foreign ownership restrictions, the maximum number of shares that can be held directly or indirectly by a foreigner is 85%; this does not apply to existing venture-capital companies established before the issuance of the VC Reg, for so long as there are no changes to that company’s shareholding structure.

 

[1] President Regulation No. 44 of 2016 regarding the Lists of Business that are Closed for Investment and Business that are Conditionally Open for Investment.

[2] OJK Regulation 1/POJK.05/2016 concerning Investments in the Form of State Commercial Paper for Non-Bank Financial Services Institutions.

[3] Regulation No. 34/POJK.05/2015 on Licensing Procedures and Institutional Composition for Venture-Capital Companies.

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