Indonesia: What happened in 2021 and significant events in 2022
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Key updates to
pieces of regulation in 2021 and 2022
Draft State-owned Enterprise Bill: To strengthen Indonesian state-owned enterprises (SOEs), the Indonesian House of Representatives is currently discussing the draft SOE Bill to replace Law No. 19 of 2003. The draft Bill will regulate, amongst others, the status of the state’s capital in SOEs from the viewpoint of state finance, given that such capital shall originate from separated state assets.
The draft Bill also confirms that SOE losses shall not constitute state losses. This provision is important for avoiding the criminalisation of the SOE’s management if the SOE suffers losses. From a corporate governance point of view, the draft Bill prohibits members of the board of directors and board of commissioners of a SOE from having a concurrent position in another SOE, regional government-owned enterprise or a private company.
Draft New and Renewable Energy Bill: In the framework of energy transmission towards the targeted net zero emission, the Government has included the draft Bill on New and Renewable Energy. It is expected that this will regulate the aspects of new and renewable energy sources, environment management, local content, state control, the role of regional government and the management of new and renewable energy funds. The draft Bill also opens the possibility for individual, private companies and cooperatives to engage in clean energy business activities. The Bill will be synchronised with the existing electricity, nuclear, geothermal and energy laws.
Draft Presidential Regulation on renewable power: The Government is currently finalising the draft Presidential Regulation on the purchase of renewable power by PT Perusahaan Listrik Negara (PLN) (Persero), as the state-owned enterprise given priority of public electricity supply. Under this draft regulation, the electricity price stated in the power purchase agreement may take the form of: (i) a feed-in tariff; (ii) a maximum ceiling price; or (iii) a contractually agreed price. The electricity price shall be effective from the operation date of the relevant power plant.
Draft Oil and Gas Bill: The Government is currently preparing the draft Oil and Gas Bill to replace Law No.22 of 2001. The draft Bill is expected to confirm and strengthen the role of the Government as the holder of the mining authority. The fundamental change it introduces is the Government’s establishment of Special Oil and Gas Business Entity. This will act as the proxy of the Government in the implementation of upstream oil and gas business activities, both by way of self-operation and by entering into a co-operation contract with a state-owned enterprise, national private company or foreign business entity/permanent establishment. By this arrangement, the Government will no longer directly act as a party to the co-operation contract.
New regulation on Investment Lines of Businesses: Following the new investment regulatory framework introduced by Law No. 11 of 2020 on Job Creation (known as the “Omnibus Law”), the President of the Republic of Indonesia issued Presidential Regulation No. 10 of 2021 on Investment Lines of Businesses (New Positive List), which took effect on 4 March 2021. The New Positive List marks a significant opening up of many business sectors in Indonesia, particularly by lifting the maximum foreign ownership restriction. Sectors affected included energy, construction services, distribution/wholesale, transportation and telecommunication.
The general principle is that a line of business is 100% open to foreign investment, unless it is subject to conditions or reserved for micro, small and medium scale businesses (MSME). There are certain conditions and restrictions on foreign ownership such as: (i) certain businesses that are reserved entirely for domestic investors; (ii) certain businesses that are subject to foreign ownership limitations; and (iii) lines of business that are subject to special licensing requirements. For certain businesses that are generally liberalised from a foreign investment limitation under the New Positive List, there remain certain specific reservations for activities of a particular scale or complexity to be undertaken by, or in partnership with, cooperatives and MSME. These reservations, in effect, impose foreign ownership restrictions on such activities, as foreign investment cannot, by definition, be undertaken in Indonesia in the form of cooperatives or MSME.
The New Positive List also identifies a list of prioritised sectors for investment that are entitled to receive fiscal and non-fiscal incentives (e.g. tax holidays, tax allowances, investment allowances, customs and excise allowances, ease of licensing, provision of supporting infrastructure, etc.) in accordance with the prevailing laws and regulations.
Digital bank: The Financial Services Authority (Otoritas Jasa Keuangan (OJK)) issued Regulation No. 12/POJK.03/2021 regarding General Banks (OJK Regulation 12/2021). Aside from regulating various aspects of commercial banks, including the establishment of the Indonesian legal entity bank (BHI Bank), another notable provision relates to digital banks. OJK Regulation 12/2021 defines a “Digital Bank” as a BHI Bank that provides and conducts its business activity mainly through electronic channels without having any physical office, other than the head office or with limited physical office. However, a Digital Bank is not a new type of bank. It must take the form of a BHI Bank that holds a commercial bank license. It should also fulfill certain requirements from the use of innovative and safe technology and having a prudent digital banking business model to implementing adequate customer data protection.
Under OJK Regulation 12/2021, a Digital Bank can either be: (i) a newly established BHI Bank that is set up as a Digital Bank; or (ii) an existing BHI Bank that adopts a new business model to become a Digital Bank. Therefore, there are two alternatives to operating a Digital Bank in Indonesia.
The first alternative is by transforming the existing BHI Bank into a Digital Bank. In this case, the business plan must comply with the requirements for a Digital Bank under OJK Regulation 12/2021. The second alternative is by establishing a new BHI Bank and operating as a Digital Bank where the new Digital Bank must also fulfill the BHI Bank establishment requirements, including the minimum capital requirement of at least IDR 10 trillion (approx. US$703 million).
Employment contract and termination: The enactment of Government Regulation No. 35 of 2021 regarding Fixed Term Employment Contract, Outsourcing, Working Hours and Termination (GR 35/2021) marks the reform of the Indonesian Manpower Regulatory Framework under Law No.13 of 2003 as amended by the Omnibus law. The two important regulatory changes under GR 35/2021 relate to fixed term contracts and termination.
GR 35/2021 provides the criteria for “period” and “completion of certain work” to classify an employment contract as a fixed-term employment contract. If the fixed-term contract is “period based”, the maximum term is five years (including any extension). The fixed-term employment contract must be electronically registered by the employer with the local manpower office within three working days of the signing date. GR 35/2021 also confirms the obligation for the employer to provide the prescribed compensation amount upon termination of the fixed-term employment contract for workers who have continuously worked for at least one month.
In respect of employment termination procedures, GR 35/2021 specifically accommodates amicable termination by recognising termination based on an employee’s acceptance of the termination notice served by employer. The accepted notice must be reported by the employer to the Ministry of Manpower or the local manpower office. GR 35/2021 generally provides more extensive termination grounds, including by accommodating some more detailed requirements before a contract may be terminated. It also introduces various amounts of severance pay in a termination package depending on the termination grounds.
Payment system: On 30 December 2020, in order to restructure the Indonesian payment system, Bank Indonesia issued Regulation No. 22/23/PBI/2020 on Payment System (BI Regulation 22/2020) which took effect from 1 July 2021. Under this regulation, the Indonesian payment system is divided into four elements: mechanism, infrastructure, institutions and access to/source of funding. Furthermore, the payment transaction process is divided into five stages: pre-transaction, initiation, authorisation, clearing, final settlement and post-transaction.
The payment system operator can be in the form of an Indonesian licensed bank (including the Indonesian branch of a foreign bank) or an Indonesian non-bank legal entity. There are two types of payment system operator: (i) Payment Service Provider (Penyedia Jasa Pembayaran (PJP)), which provides services to facilitate payment transactions and requires a licence from Bank Indonesia; and (ii) Payment System Infrastructure Provider (Penyedia Infrastruktur Sistem Pembayaran (PIP)), which provides infrastructure facilities used to transfer funds and requires a stipulation as PIP by Bank Indonesia.
Under BI Regulation 22/2020, an Indonesian citizen and/or an Indonesian legal entity must own 15% of a non-bank PJP and, must own at least 51% of the voting rights shares. In the case of a non-bank PIP, an Indonesian citizen and/or an Indonesian legal entity must own at least 80% of it and, must own at least 80% of the voting rights shares. BI Regulation 22/2020 also requires prior approval of the Bank of Indonesia if the PJP or PIP intends to carry out a corporate action such as a merger, consolidation and spin-off. If the PJP or PIP is acquired, prior approval is also required if it is a non-bank PJP or non-bank PIP. Alternatively, if it is a bank PJP or bank PIP a report to Bank Indonesia must be submitted.
Risk-based business licensing: The enactment of Government Regulation No. 5 of 2021 on Implementation of Risk Based Business Licensing and Regulation of Head of Investment Coordinating Board (BKPM) No. 4 of 2021 on Guidance and Procedures of Risk Based Licensing and Investment Facilities marks the implementation of a risk-based business licensing regime mandated by the Omnibus Law. Risk-based licensing is based on the stipulation of the risk level of the business activity and determines the type of business licensing.
There are four types of risk level: low, low medium, high medium and high. Sixteen business sectors (not including the finance sector) are subject to risk-based business licensing. The main features of risk-based business licensing are: (i) the identification of the risk level: licensing types and procedures are based on the Indonesian Standard Business Sectors Classification (Klasifikasi Baku Lapangan Usaha Indonesia (KBLI); (ii) the processing and issuance of business licensing is through the Online Single Submission System – Risk Based Approach (OSS RBA) as the single national electronic business licensing platform; (iii) the licensing aspect consisting of compliance with the basic requirements and the risk-based business licence; and (iv) that the business licensing will be reviewed, processed and monitored based on the prescribed risk-based business licensing norms, standards, procedures and criteria under the applicable regulations.
All business activities shall comply with the basic requirements (consisting of conformity of business activities with the spatial lay-out plan, environmental approval and the building approval/building certificate of worthiness), followed by obtaining a Business Registration Number (Nomor Induk Berusaha (NIB)) and the applicable business licence, depending on the risk level, being a standard certificate or a business licence.
Harmonisation of Taxation Regulations: On 29 October 2021, the Government enacted Law No. 7 of 2021 on Harmonisation of Taxation Regulations (Taxation Law). The Taxation Law collectively amends various tax laws, including: (i) general taxation provisions and procedures (ketentuan umum dan tatacara perpajakan (KUP)); (ii) income tax; and (iii) VAT.
One of the important provisions on the KUP is that for individual taxpayers residing in Indonesia, the Single Identity Number (Nomor Induk Kependudukan (NIK)) will also serve as the Taxpayer Registration Number (Nomor Pokok Wajib Pajak (NPWP)). The Taxation Law also amends some administrative sanctions imposed on various violations resulting in the issuance of a Tax Underpayment Letter. An investigator of a tax crime is now authorised to block the assets of the suspected taxpayer.
In relation to income tax, the Taxation Law increases the minimum non-taxable income for individual taxpayers to IDR 54 million and adds a new income tax tariff of 35% imposed on individual taxpayers with an annual income of IDR 5 billion and above. The Taxation Law reduces the income tax tariff for domestic corporate taxpayers and permanent establishment from 28% to 22% from 2022. In relation to VAT, the tariff will be increased to: (i) 11% starting 1 April 2022; and (ii) 12% by no later than 1 January 2025.
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