Economic Overview of Indonesia Market

• Indonesia’s economic freedom rank is 11 out of 43 countries in the APAC region. Its overall score is above regional and global averages
• Indonesia is the 2nd largest tin exporter and one of the world’s leading thermal coal exporters
• Around 50% of the Indonesian population is below the age of 30, providing for a young workforce for the country
• The country is focused towards investment in infrastructure (majorly in transportation) over the next decade and plans to spend US$412 billion from 2020-2024
• The top five destinations for FDI in Indonesia are renewable energy, mining, chemical, real estate and metals
• Its top five trading partners include (% of total exports 2018)– China (15.1%), Japan (10.8%), US (10.2%), India (7.6%) and Singapore (7.2%)

Establishing an Entity in Indonesia

Limited Liability Company (PT)

• This is the commonly used business form by foreign investors
• Minimum requirements for setup include one director, two local Indonesian shareholders and one commissioner

Foreign Owned Limited Liability (PMA)

• It is partially or wholly-owned and controlled by foreigners
• Minimum requirements for setup include one resident director, two shareholders and one commissioner
• It can operate anywhere in the country

Representative Office

The operating license for such office is valid only for 2 years, post which it needs renewal
Foreign companies are not allowed to form branch offices in the country, barring the opportunity for future conversion to RO

Public Company

• It is suitable for not-for-profit companies.
• Minimum requirements for setup include at least 300 shareholders and US$ 0.02 billion as paid-up capital

Partnership

• Foreign entities are not allowed to form partnerships
• Three types of partnerships are permitted – civil, firms and limited partnership

Government Regulations and Compliance in Indonesia

Overview

Forex Regulations

• Indonesia maintains an open capital account, albeit with prescribed limitations on transactions.
• Trade-related foreign exchange can be carried out by authorized banks only.
• The Rupiah is freely convertible, however, its transfer to overseas accounts by banks is prohibited.
• Supporting documents are required for the purchase of foreign currency above US$100,000.
• Spot transactions must be fully settled between banks and the foreign parties.

Accounting Standards

• IFRS Standards has not been adopted by Indonesia
• Domestic companies follow Financial Accounting Standards (SAK), which converge to some extent with the IFRS
• Foreign companies whose securities trade in a public market are required to use SAK
• Approval from the Ministry of Finance is obtained to maintain financial reports in the English language and ‘USD’ currency
• Otoritas Jasa Keuangan and Bank Indonesia are the accounting regulatory bodies

Immigration, Secondment, Secretarial Compliance

• Foreigners are prohibited from undertaking work activities without a work permit
• An employer must have Foreign Manpower Utilization Plan (RPTKA) to employ a foreigner
• Single entry and multiple entry business visas can be applied by residents of all countries

Taxation System of Indonesia

• Paying taxes in Indonesia is easier as compared to China, Vietnam and India. The country’s paying taxes rank is 81 while China, Vietnam and India are placed at 105, 109 and 115, respectively
• Transfer pricing is conducted on an arm’s length basis
• There are no separate tax on capital gains. Capital gains are considered ordinary income and taxed at corporate income tax rate

Indonesia Corporate Tax:

• Standard rate – 25%
• Public company with >40% of shares traded on IDX – 15%
• Companies with gross turnover
• Companies with gross turnover

Indonesia Individual Income Tax:

• Up to IDR 50 million – 5%
• Over IDR 50 million to IDR 250 million – 15%
• Over IDR 250 million to IDR 500 million – 25%
• Over IDR 500 million – 30%

Other Taxes:

• Capital Duty
• Payroll
• Real property
• Withholding

Pestel Analysis of China Market

Overview of the Macro-Economic Environment

1) Political

• The president, Joko Widodo has improved fiscal credibility, public infrastructure and has created a market-friendly investment environment. He has also been re-elected for final term (2019-24)
• Continuous improvement in infrastructure is among the government’s top priorities, supporting investment growth
• Improvement in regulatory framework and measures to reduce the cost of starting a business have been implemented
• There is a comprehensive push for decentralisation to transfer political power to regional and provincial leader

2) Economic

• The GDP growth is projected at 5.2% in 2020, up from 5.1% in 2019
• Inflation is expected to fall at 3% in 2020, from 3.2% in 2019 and will likely remain stable in the next few years
• Rising income will support the growth in consumption
• The macro-financial conditions have improved since November 2018, but prolonged depreciation of the Rupiah is a concern
• Global trade tensions and slower growth among developed economies have increased the growth risks for the Indonesian economy

3) Social

• Around 10% of the population still lives below poverty line and rise has been noted in inequality in wealth
• The Government has taken steps for the expansion of national health insurance scheme (Jaminan Kesehatan Nasional) launched in 2014, to cover the whole population by 2019
• Several social security schemes have been introduced to support the society such as life insurance, mandatory provident fund and social security system, among others

4) Technological

• Indonesia is set to become the largest digital economy in South East Asia with market valuation of US$130 billion by 2025, up from US$40 billion in 2019
• Key focus technology areas are cloud, agile and blockchain, among others
• By 2021, 20% of commercial enterprise businesses aim to use AI. It is expected that over 30% of consumers will interact with super bots

5) Environment

• Indonesia mandates environmental license for businesses that may cause changes to the state of land or exploit natural resources
• It has implemented the 3rd generation of environmental law, including protection of the environment to strengthen environmental preservation
• It has also enforced multi-door law to resolve matters related to natural resources to uncover legal violations such as corruption, money laundering, and tax crimes

6) Legal

• The judiciary is independent, but corruption is a challenge due to lack of transparency and corporate governance
• Buying land by foreign investors in both, rural and urban regions and registering property is difficult
• The country has implemented a visa waiver policy exempting citizens of 169 countries from visa requirements allowing a maximum of 30 days stays in the country

Industry Overview

Non-profit Organization

Overview

• Foundations established by foreign entities are not allowed to engage in political activities
• NPOs are subject to income tax

Regulations

• Foreign foundations are prohibited from conducting any intelligence activities
• Legal entity for foundations established by foreigners take more time
• Tax is exempted from income used to provide scholarships and R&D
• Foreign grants to private NPOs are exempted from VAT, but this requires approval from the Director of General Tax
• Other applicable taxes to NPOs include land and building taxes, stamp duty and property acquisition fee
• Tax deductions are available for charitable contributions such as natural disasters, R&D and education facilities

Manufacturing

Indonesia’s manufacturing sector is expected to be the new growth engine for its economic prosperity. By 2023, Indonesia will be one of the top 15 manufacturing hubs in the world.

Overview

• Manufacturing is forecasted to account for 21-26% of the GDP by 2030, up from 20% in 2018
• Average growth rate of 6.3% is expected for the sector between 2020-2024
• The sector employs 14.7% of the workforce and plans to increase this number to 20% by 2024
• Manufacturing companies are restricted from importing finished products for direct sale.

Regulations

• Industrial business license must be obtained except for oil, gas and geothermal energy
• The business license application process takes 14 working days and the license is valid for 30 years
• Foreign companies must have financial audits to apply for a permanent business license
• The government offers 19 out of 50 tax incentives to the sector

Education

Majority of the institutions are private at both, school and university level. The government has also opened the higher education sector for foreign investments, which can provide good opportunities to invest in Indonesia.

Overview

• 20% of the national budget is spent on education, as per constitutional mandate
• Compulsory 9-year education system has been replaced with a 12-year system
• Business players are invited by the government to shape the curriculum and set skills standards
• The sector gets support from the World Bank to overcome challenges and improve delivery and teachers’ quality
• The count of students from Indonesia who studied in the US during 2017-2018 academic year stood at 8,650

Technology Services

Rising e-commerce industry is providing huge opportunities for tech companies to develop solutions in fintech, cyber security, cloud services and other digital transformation solutions for the Government.

Overview

• Indonesia’s ICT readiness ranking is 73 out of 139 countries.
• Government aims to support digitisation of 8 million SMEs and increase their value by US$10 billion by 2020
• Demand for fintech has increased because of growing e-commerce industry
• Spending on cloud computing is expected to reach US$1.2 billion in 2022 with a CAGR of 38.6% from 2016
• National Cyber and Encryption Agency has been set up to provide cybersecurity solutions across the country
• MCIT defines policies on digital government and telecommunication infrastructure

Retail

The increased purchasing power of middle-class population is providing substantial expansion opportunities for retailers.

Overview

• Big hypermarkets are replacing unorganized retail outlets
• In 2018, convenience stores were the largest segment of the retail industry and have been projected to remain the largest through 2023.
• Increased digitization such as online shopping and smartphone penetration is driving the growth of m-commerce market
• Inclination of customers towards organized retailing is attracting retail companies to invest in the country

E-commerce Challenges

• E-commerce has been removed from the list of prohibited sectors for investment
• Poor infrastructure and tough geography is posing a challenge as the country is largely spread over 17,000 islands.
• Slow internet adoption and penetration is a cause of concern for players as it is much behind its peer markets.
• Low adoption of cashless payments is another major hurdle as most people are still wary of online payments.

Hot Topics

• Indonesia to remove licensing procedure formalities to attract foreign investment
• Reasons why Indonesia is finding it difficult to increase its foreign investment
• Joko Widodo, has been re-elected as the President for 2nd term, which means the country can expect much of the same in terms of economic policy and heavy spending on infrastructure, education, and push to reform regulations
  Indonesia signs trade agreements worth more than $100 million
  Indonesia proves economists wrong, posts a trade surplus in October 2019
  Indonesia’s Gadjah Mada University to partner with a popular-ride hailing app in Southeast Asia, to build a workforce that is ready for the future