Essential Investment Gateway into Indonesia (EIGI) English 1 2 Contents A. Introduction to Indonesia 5 1. General overview 2. Demography 3. Investment climate 4. Industry overview and opportunities 5. Regional snapshot B. Identifying Your Investment Stage 14 Five stages to organization evolution C. Establishment of Company: Getting Started 15 1. General investment policy 2. Forms of entity 3. Investment procedures 4. Mergers and acquisitions 5. Regulation of business D. Taxation in Indonesia 23 1. Tax incentives 2. Tax administration 3. Business taxation 4. Taxes on individuals 5. Indirect taxes 6. Withholding taxes E. Audit and Compliance 45 1. Accounting period 2. Currency 3. Language, Accounting Basis and Standards 4. Audit requirements 5. Independence F. Labour Environment 47 1. Employee rights and remuneration 2. Wages and benefits 3. Termination of employment 4. Labour-management relations 5. Employment of foreigners About Deloitte 50 Contacts 52 3 Foreword The current Indonesian government recognizes the fact that it is very important to generate new investments to sustain the growth of the Indonesian economy. As a founding member of the Association of South-East Asian Nations (ASEAN), Indonesia is committed to ASEAN’s aim of liberalizing trade and investment. Several measures, including instituting a one-stop service for permitting to facilitate greater investment, have been taken to make sure investment continues to come. Plans, programs, and legislation to encourage partnerships with local and international investors have also been planned and prepared. To promote investments, Government of Indonesia also releases several Economic Policy Packages or known as Paket Kebijakan Ekonomi. As a part of G20 agenda of liberalizing trade, Indonesia will be one of the strongest allies in Southeast Asia region. Indonesia is actively involves in G20 with the aim to promote international growth and financial stability. Representing emerging countries, Indonesia sees itself as a “big brother” at the G20. In support of the government’s efforts, and to have quick and clear answers for everyone contemplating investing in Indonesia, I am very proud of the collaborative work of Deloitte Indonesia’s dedicated team of experts in putting together this publication, “Essential Investment Gateway into Indonesia (EIGI)”. This publication was written based on our personal experiences when meeting prospective investors and in listening to and answering their usual questions, which do not relate only to “how” but also to “why”. I trust that this publication will also give a broader insight to every prospective investor, and that it will be a prime tool for them to explore the numerous opportunities that await them the moment they start doing business in Indonesia. Claudia Lauw Lie Hoeng Deloitte Indonesia Country Leader 4 A. Introduction into Indonesia Republic of Indonesia (constitutional democracy with an executive presidency) Nationality: Indonesian (40.1% Javanese, 15.5% Sundanese, 3.7% Malay, 3.6% Batak 3% Madurese, 2.9% Betawi and 31.2% other ethnic groups) Language: Bahasa Indonesia, English (business, professional), and local dialects Currency: Indonesian rupiah (IDR). Total Area: 1,904,569 sq km (15th largest) Land: 1,811,569 sq km Water: 93,000 sq km Population: 258,316,051 est. July 2016 (4th largest) Samarinda Kalimantan Corridor Medan Center of production and processing Sumatra Corridor of mining and energy resources Production and processing Makassar center of agricultural products and principal Sulawesi Corridor mining and energy Center of production and processing of resources agricultural, plantation, fishery products and nickel mining Sorong Jakarta; Capital city Merauke Government and Business Center Surabaya; 2nd Largest city Papua Corridor Major Industrial Center Center of Java Corridor and Port food, fishery, Support center for national energy, and Industry and service Bali-Nusa Tenggara Corridor national mining Tourism gateway and main development national food/agricultural support Major Islands: Sumatera, Java, Kalimantan (Borneo), Sulawesi (Celebes), and Papua Minor Islands: Maluku, Lesser Sunda Island (Nusa Tenggara) 5 1. General overview Indonesia ranks the fourth most populous country in the world with real GDP growth 5.2% in the second quarter of 2016, a stronger performance for the last five years. Rise in global commodity prices and higher private investment largely contributed to the economic growth. Investment activity was experiencing a slowdown in 2015, as government’s infrastructure initiative has taken longer to take course. However, it is forecasted to increase by 5.2% on average per year over the next five years as construction of infrastructure and its supporting accelerates faster. More incentives and deregulations are also issued by government to attract both domestic and foreign investment. With Indonesia average inflation reached 3.6% in 2016, down from 6.4% in 2015 and is expected to be maintained at an annual average of 4.4% in 2016-2020. Economic growth Indicator 2015 2016 2017 2018 2019 2020 GDP Growth 4.8 5.2 5.3 5.1 4.7 4.8 (%, y-o-y) Private Consumption 4.8 5.2 5.3 5.4 5.1 5.2 (%, y-o-y) Government Consumption 4.9 5.0 5.2 5.6 5.3 5.2 (%, y-o-y) Investment 5.1 5.3 5.5 5.5 4.6 5.0 %, y-o-y) Exports -1.9 -2.2 2.1 2.2 1.6 1.8 (%, y-o-y) Imports 5.8 -2.1 2.5 3.1 2.5 2.4 (%, y-o-y) Inflation 6.4 3.6 4.1 5.5 4.6 4.4 (%, y-o-y) USD exchange rate 13,795 13,146 13,145 12,950 14,013 14,000 (end period) Table: Government Macroeconomic Assumptions Government aims to bolster growth by launching 13 Economic Policy Packages, such as recovering assets held offshore via tax amnesty programme with a total target of IDR 165 trillion (around USD 12.7 billion). Indonesia’s GDP in 2015 is estimated to have reached USD 861.8 billion and GDP (PPP) per capita is estimated at around USD 11,111. Based on the long-term national development plan (RPJPN), Indonesia plans to achieve per capita income equivalent to a middle income country by 2025. The highest contributor to GDP is the manufacturing industries sector, followed by the agriculture, livestock, forestry & fisheries sector and the trade, hotel and restaurant sector. Private consumption remains the main economic driver. 6 2. Demography Indonesia consists of 34 provinces; 17,508 islands, with more than 255 million people, making Indonesia the fourth largest country in the world in terms of population. The demographic advantages of the 255 million people are: • Over 60% of the population is between 20 and 65, with a low dependency ratio and a dynamic workforce with high literacy • Around 52% of the population lives in urban areas • Indonesia’s population comprises more than 39% of the total population of 10 Southeast Asian countries The working population is projected to grow at 0.7%, compared to 0.5% CAGR for the total population, from 2012 to 2017. Indonesia also has a large consumer base with fast-growing spending power. The middle class is rising in Indonesia. Around 7 million people are expected to join the middle class per year. Consumer expenditure has grown at a 13.8% CAGR from 2000-2012 and is expected to continue at an 11.5% rate in 2012-2017. 3. Investment climate A large part of Indonesia’s economic success is a result of the growing middle class and stable economic growth. Indonesia is one of the MINT economies (Mexico, Indonesia, Nigeria and Turkey), namely those that are the most attractive to long- term investors due to their favourable demographic profiles. Indonesia’s debt to GDP ratio has steadily declined from 83% in 2001 to be less than 26% by the end of 2013 – the lowest among ASEAN countries, aside from Singapore, which has no government debt. As a result, the country continues to receive good reviews. The ratings reflect Indonesia’s resilience to the global financial crisis, improving government and external credit-metrics, and an ability to manage domestic political challenges to the reform agenda. 7 Rating Agency Rate Outlook Fitch Rating BBB- Stable Mood’s Baa3 Stable Standard and Poor’s BB+ Stable Source: Indonesia Investment Coordinating Board (BKPM), 2016 FDI Realization 2015 FDI Realization 2015 by Location by Country of Origin 20% 20% 20% 20% 42% 42% 8%8% 10% 10% 58% 58% 4% 9% 9% 4%3% 34%% 12% 4% 9% 12% 9% WeWset sJat vJaava EaEsat sKta Kliamlimanatnantan Singapore Japan Banten DKI Jakarta SingaSpoourteh KoreaJapanHong Kong Banten DKI Jakarta East Java Others SoutNh eKtohreeralandsHongO Kthoenrgs East Java Others Netherlands Others FDI Realization 2015 by Sector Agriculture, hunting, forestry, and fishery 10% Mining and quarrying 3% 4% Manufacturing 40% Electricity, gas, and water supply 11% Construction Wholesale and retail trade, restaurants, 8% and hotels Transportation, warehousing, and 1% communications 8% 14% Real estate and business services Community, social, and personal services 8 4. Industry overview and opportunities Indonesia has a well-balanced economy, in which all major sectors play an important role. Agriculture historically has been the dominant sector in terms of both employment and output. The country has a vast range of mineral resources, which have been exploited over the past four decades, enabling the mining sector to make an important contribution to Indonesia’s balance of payments. Indonesia has a well-diversified trading economy. Oil and gas is the country’s largest export category, followed by coal (and other mining products), palm oil, agricultural products, electrical machinery and equipment, and fish. Indonesia’s government plans to increase production of core commodities as seen below. However, due to the recent drop in commodities prices, Indonesia has to realign its trade strategy, focusing more on value added industries (manufacturing and smelting) and infrastructure development. In addition, Indonesia’s government plans to increase the production of core commodities for domestic consumption and to reduce heavy reliance on imports. Government sees large potential in e-commerce industry to connect multi industries with local and international market. Jokowi also appointed Alibaba Group as an adviser to develop the digital economy market which create an open access to micro, small and medium-sized enterprises (“SME”) to enter global value chain. According to The Investment Strategic Planning for the period of 2015-2019, Indonesian Government has laid new focus on several business sectors as follows: 35 GW power Infrastructure 24 Seaports generation Corn Agriculture Food estate Cattle plantation Food and Labor-intensive Textile Furniture Toys beverages Chemical and Import-substitution Iron and steel Component pharmaceutical CPO and Wood Electronics derivative products, pulp Automotive Industry products and paper Export-oriented Fish and Rubber Machinery derivative Shrimp products products Downstream industry Cacao Sugar Smelter of natural resources Fishery Maritime Maritime Ship building Cold storage industry technology Meetings, incentives, 15 new Strategic tourism conferences, Tourism, SEZ and Industrial Park 8+11 SEZs industrial areas and parks exhibitions (MICE) 9 Infrastructure Sector The newly elected government plans to improve archipelago connectivity and promotes balanced growth between the western and eastern parts of Indonesia. The government has introduced a “sea toll road” concept to connect Indonesia’s archipelago through seaports in the main corridor between western and eastern islands to reduce high logistics costs. In addition, the government plans to build more roads, toll roads, airports, and railways, not only focusing on Java but also in Sumatra, Kalimantan, Sulawesi, and Papua. Additional infrastructure development is also influenced by China’s new round of reform and overseas expansion. The centrepiece is the One Belt and One Road initiatives (OBOR) which include both foreign policy and domestic economic strategy. Originally billed as a network of regional infrastructure projects, the scope has continued to expand and will now include enhanced policy coordination across the Asian continent, which path crosses Indonesia. High-speed railway from Jakarta-Bandung marks China’s first milestone project and is expected to expand more lanes as it gains permits from the Transportation Ministry. Sea toll concept -the world maritime axis: Main Sea Corridors • Develop 24 new strategic ports • Add vessels (pioneer cargo, transport vessel, pioneer crossing vessel) • Develop 60 crossing ports • Develop 15 new airports • Develop air cargo facilities in 10 airport through PPP • Increase number of pioneer airplanes by 20 units 2015 -2019 Power Road National state • Develop 42 GW • 2,650 km new roads USD 192.7 billion 40.1% Electricity Power Plant • 1,000 km of new Toll Road Infrastructure (7GW + 35,000MW • Rehabilitate 46,770 km Funding Regional state program) existing road needed USD 47.4 billion 9.9% UbSiDlli o4n80 USD 9S2O.7E billion 19.3% NSS•uue2mlwa, w1ara5teei9slrw iak:a,m yK aitnrlaitmecrka-sun rtibanan Jn aa vnad, U••rbD(DBaeenRvv Teetrll)aoo inppns BM2p9oua rssct :siRt iReaspaipdi dT ransit Private sector 30.7% railways Transit (MRT) in 6 USD 147.2 billion • 1,099 km urban railways metropolis and 17 large cities Source: Ministry of Transportation RI, May 2016 5. Regional snapshot For those who are targeting appropriate location to invest in or expand current business scope, we selected top 10 provinces and presented as regional snapshot, with regional GDP on a yearly basis and several indicators in foreign investment field. 10