SCCI Investment and Business Webinar

JAKARTA -As Indonesia emerges from the Covid-19 pandemic, its economic growth prospects are looking brighter. Speaking during the Singapore Chamber of Commerce Indonesia webinar, Enrico Tanuwidjaja, Senior Economist, UOB Indonesia said Indonesia could speed up economic the recovery due to a few factors.

In 2020, Indonesia’s GDP contracted mildly by about 2% of its US$ 1.1 trillion economy or around US$15 to US$20 billion due to the COVID-19 pandemic. But the country’s GDP growth forecast for 2021 is potentially at around 4% – 4.3%.

“There are a few factors which we hope could speed up the recovery. One of the important factor is monetary policy. Bank Indonesia has been cutting interest rates to the lowest level, currently standing at 3.5% and the fiscal stimulus is currently on the role,” Tanuwidjaja said.

He noted that the government needed to ramp up the fiscal stimulus plan while BI continues to keep interest rates low as the economy had experienced a sharp contraction in capacity during the pandemic. Across the economy, capacity and transactions had fallen by 30% to 40% in sectors such as retail, manufacturing, transportation, commercial property. Even with vaccinations now underway, the government needs to maintain health protocols as the economy reopens to ensure that cases do not spike up again. Without such measures, it would be difficult to achieve pre-Covid 19 level economic activity.

Other sectors such as agriculture, forestry, fisheries, mining, manufacturing, construction, consumption and domestic trade, which account for more than half of economic output are also dependent on the success of the vaccine program. Overall, baseline growth will depend on two things: which are vaccine distribution and efficacy with two thirds or 65% of population being vaccinated.

“At least there are still the positive factors in the short term, such as commodity prices which have been rebounding such as coal, ore and rubber. And we can also focus FDI to industrial estates, especially into the two key areas of pharmaceuticals and the food production. However, the long-term outlook is dependent on the successful implementation of the Omnibus Law and the positive effects of RCEP (Regional Comprehensive Economic Partnership). The essence of the Omnibus Law is a cluster of reformation, from business licensing to land procurement acceleration, and in terms of taxation, we learn to move forward the corporate income tax card,” he concluded.

Commenting on the impact of the Omnibus Law, Joel Shen, Partner at Whiters KhattarWong noted that it was a game changer in terms of improving the ease of doing business; reforming the highly restrictive labor law and eliminating the negative investment list.

In the previous regime, foreign investors and entrepreneurs needed to apply for a business identification number or NIB, standard certification by business sector and government as well as business license even for simple businesses. Under the new regulations, the entire licensing process has been relaxed.

The Omnibus Law also does away with the Negative Investment List, replacing with a new Positive Investment List. While many old Indonesian hands view this change as merely cosmetic and a rebranding exercise, it does reduce the number of prohibited sectors from 20 to just 6. It also promises both fiscal and nonfiscal incentives such as cloud infrastructure and guaranteed energy supply for priority sectors.

A side from this positive list, it’s very often that business activity still need to apply licenses beyond that requirement on the positive investment list. These industry or sector specific licenses come with foreign ownership restriction. One of the example is electronic money regulated by BI. Business activity like issuing electronic money or any kind of store value system, usually regulated by behind requirements.

“For all issuers of electronic money or indeed operators, it imposes a foreign investment threshold of 85% which is to say that Indonesians must own at least 15% of the business, but must be able to exercise at least 51% of the control in these businesses. This is just one example of how someone needs to look, not only at the positive list as well, but also at other pieces of regulation that are relevant,” he said.  

Meanwhile, the Omnibus Law also reforms the labor law on three fronts: more grounds on which an employee might be dismissed; reducing statutory severance packages from a maximum of 30 months salary to no more than 19 months; simplifying the work permit application processes and relaxing work permit requirements for foreign workers in startups.

“So my recommendation to everyone on this call, who’s currently contemplating investing into Indonesia, doing business into Indonesia, moving to Indonesia is to speak with your advisors, with your tax advisors, with your legal advisors. By that, you would have a better understanding of what would have the finger on the pulse of developments in this space,” Shen noted.

Tax Rate Reduction

Suyanti Halim, Tax Leader, PwC Indonesia,added that to further support business activity and the investment climate, the government has eased or reduced tariffs on several taxes under the Omnibus Law, including income tax, value added tax (VAT) as well as general taxation provisions and procedures.

On income tax, there are several initiatives to increase investment funding: gradual reduction of corporate income tax (CIT) from 25% to 22% (2020 & 2021); reduction of CIT rates for go public tax payers by 3%; abolition of income tax on dividends gained from within the country; certain income  including dividends from abroad is not subject to income tax to the extent it is invested in Indonesia;  as well as room for adjustment of future income tax rate.

“The government also has several initiatives to improve legal certainty, including: determining foreigners individual tax subject with two criteria i.e. staying more than 183 days in Indonesia become resident tax subject, the foreigners resident tax subject with specific expertise is only on income gained from Indonesia; determine delivery of coal as taxable goods, exclude consignment from taxable good; exclude tax assessment for tax penalties that have been decided and issuance of notice of tax collection expires within 5 years,” she said.

Meanwhile, to create fairness in business climate within the country, government impose electronic transaction taxation where VAT collected through designed platform as well as income tax for platform which meet requirement such as has significant economic presence as a PE ie consolidated gross revenue, turnover in Indonesia and active use of digital media in Indonesia. If PE hindered by a double treaty, the transaction tax will apply instead.

“These are also some pending matters in taxation regulation such as transition rules, dividend exempt and CFC.  It is still not covered yet and still under the grey area. What are we still waiting for is how the government create more certainty for the taxpayer, for example, how to make a last dispute between taxpayers and directorate general of taxation. Also investors need the forward looking defense mechanism and preparations put in place so that when the tax office may come and ask questions, they are not unprepared and come without documentation. Now, taxes are becomes a really important factor in the whole landscape Indonesia investment,” she added.