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The Largest Economy in Southeast Asia with Stable Growth

Indonesia’s economic lighthouse stands strong as the world’s fourth most populous nation, powered by the dynamic force of domestic demand. The lifeblood of this flourishing economy is private consumption, energized by an immense market of nearly 70 million middle-class individuals (55% of GDP). Embrace Indonesia as your investment haven, where rich natural resources, a talented young workforce, and a burgeoning domestic market coalesce with a blooming investment atmosphere and an ascending international stature, exhibiting Indonesia’s unshakable strength.

What You Need to Know

Economic Outlook

The Largest Economy in Southeast Asia with Stable Economic Growth

Indonesia is your investment destination. Abundant natural resources, a young and technically trained workforce, and a large and growing domestic market, combined with an improving investment climate and a higher global profile, are just a few of Indonesia’s salient strengths. With stability firmly planted after 17 years of vibrant democratic rule, Indonesia’s vast economic potential is primed for takeoff.

Indonesia is currently the world’s 16th largest economy with more than US$1 trillion in GDP. It is estimated to be the 7th largest economy in the world in 2030 by McKinsey & Company. The only member of G20 from Southeast Asia, Indonesia’s economy had been growing relatively stable at >5% p.a. in the last two decades. Amidst the Covid-19 pandemic in 2020, the economy contracted at -2.07%, the first time since Asia’s financial crisis in 1998, growing at +5.72% in the third quarter of 2022.

On the consumer side, Indonesia has 273 million of the population (2021) and is home to 64 million of the middle affluent class, 1.7x the total population of Canada (2018). It is also the gateway to 650 million of the population in Southeast Asia, the world’s 3rd largest market. The country is also a production base for export with FTAs with 22 countries, including the largest trading bloc, RCEP.

The other reason why investors should invest in Indonesia is the significantly increased demographic bonuses. The demographic bonus is a condition where the productive age is more than the non-productive population in Indonesia.

Based on the Statistic Indonesia (BPS) estimation, Indonesia will get the impact of the demographic bonus in 2020 – 2035. The productive population is predicted to be at the highest chart history during this period, which reaches up to 64 percent of the total Indonesian population. Two of the three populations are of working age with an average age of 28 y.o. In 2022, there are 204.7 million and +1.0% growth of internet users with 73.7% of internet penetration. 191.4 million Indonesians are also active social media users. With improving education and skill, Indonesia offers ample workforces with one of the most competitive and predictable wages in the region.

Politics and Stability

The politics of Indonesia take place in the framework of a presidential representative democratic republic whereby the President of Indonesia is both head of state and head of government and of a multi-party system. The government exercises executive power. Legislative power is vested in the government and the bicameral People’s Consultative Assembly. The judiciary is independent of the executive and the legislature.

Having maintained political stability, Indonesia is one of East Asia Pacific’s most vibrant democracies. As the third largest democracy in the world, Indonesia continues to uphold the values of democracy and Pancasila. To maintain it, the Government of Indonesia measures the Indonesian Democracy Index (IDI). Indonesia scored 78.12 points out of 100 in the 2021 democracy index, categorized as the “medium” category.

The Indonesian government strives to create economic stability and an attractive investment climate for investors. This effort has received international recognition. Based on the ranking results of three international rating agencies, Indonesia is categorized as an investment-worthy country

Law and Red Tape

Indonesian Law No. 25 of 2007 on Capital Investment (Investment Law)

Besides Indonesian Law No. 40 of 2007 on Limited Liability Companies (also known as the “Company Law”), another crucial law that regulates (foreign) investment in Indonesia is Law No. 25 of 2007 on Capital Investment (henceforth “Investment Law”). This Investment Law, which embraces direct investments in all sectors, addresses all key issues that are faced by investors to start a business in Indonesia. Below, we present the full text.

Open policies for Foreign Direct Investments (FDI)

All business activities are open for 100% foreign ownership, except 37 business activities with certain requirements listed in Presidential Regulation 49/2021. The revised regulation evoked restrictions in 350 business activities for FDI, including in ICT, health, transportation, energy and mineral resources, plantation, agriculture, also construction. An FDI company is required to establish a limited liability (PT) with a minimum capital of IDR10 billion (~US$700,000).

Omnibus Law for Foreign Investors

Indonesia’s Omnibus Law

On November 2, 2020, President Joko Widodo of the Indonesian government passed Indonesia’s Omnibus Law on job creation. Essentially, the Indonesian omnibus law amended many Peraturan Pemerintah (PP), or government regulations, to strengthen the economy by increasing competitiveness, creating jobs, and making it easier to do business in Indonesia.

Its main goal is to stimulate domestic and foreign investment to transform Indonesia’s economic sphere. With that, the omnibus law has brought many more opportunities for multinationals operating in or considering investing in Southeast Asia’s largest economy.

Indonesia’s omnibus law clearly shows the government’s commitment to minimizing red tape in virtually every area of business to woo foreign investors. As such, foreign investors should consider the many changes and how best to go forward with this new law. Despite the many controversies surrounding the omnibus law, Indonesia’s government is confident that this change will also help the country tide through Covid-19.

The omnibus law has amended up to 76 existing laws. In addition, eliminating central and regional government regulations of about 5000 and 16,000 respectively.

Simplified business licensing

In the past, any business in Indonesia required one or more licenses to operate, which must be extended after a certain period. It was also the responsibility of many government institutions and regional governments to issue these business licenses. This process was across the various state, local, and central agencies, making it a multi-layered system. Therefore, it was difficult for an investor to know what business permits and licenses to obtain, where to get them, and in what order they should be applied for.

With the omnibus law, the process to obtain your business license is a lot easier now.

It simplifies Indonesia’s existing regulations by combining or scraping many business licenses. This has affected almost all business sectors, including maritime and fisheries, energy and mineral resources, electricity, infrastructure, and transportation.

The role of the national Investment Coordinating Board (BKPM) is strengthened and plays a pivotal role in streamlining the issuing of all business licenses. Under the omnibus law, a foreign investor will be able to obtain a business license through an Online Single Submission (OSS) system, eliminating the need to go through multiple ministries or other government institutions. The omnibus law will also introduce a risk-based approach system, dividing businesses into categories of low, middle, and high risk.

  • Low-risk businesses only need a registration number
  • Medium-risk businesses will need a standard certification
  • Only High-risk businesses will still need a full business license

Eased foreign investment restrictions

By introducing the omnibus law, the Indonesian government has opened the majority of the economic sector to 100 percent foreign investment. As the proposed main regulation reads: “All business lines are open to direct investment, save for those that are designated as closed to investment or which constitute activities that are reserved to the central government.” This means that while most businesses are fully open, those carried out by the Central Government are still closed to foreign investments.

Before the omnibus law, Indonesia used the negative investment list. That list included a number of business lines that were only partially open to foreign investment (i.e. these lines have foreign ownership caps). To take two examples, companies engaged in large horticulture businesses are open to foreign ownership of up to 30 percent, and companies engaged in broadcasting businesses are open to foreign ownership of up to 20 percent.

To implement the law, several regulations have been issued, including Presidential Regulation 49/2021 that revoked the so-called “negative investment list”.
Now, in 2021, the previous regulation with the Negative Investment List has been revoked and replaced with a “Positive Investment List”, under Presidential Regulation (PR) 10/2021. Under PR10/2021, virtually all business lines are fully open to 100 percent foreign investment.

However, according to the ASEAN briefing, this is with the exception of six business sectors:

  • Class-I narcotics and cultivation;
  • All forms of gambling activities;
  • Fishing of endangered species;
  • Utilization of corals found in nature for the production of jewelry, souvenirs,
  • building materials, etc.;
  • Chemical weapons production; and
  • Industrial ozone-depleting substances industries and industrial chemicals.

Relaxed labor laws

In the past, Indonesia had relatively strict labor laws. The omnibus law has made labor laws more flexible and market-friendly to bring them more in line with other countries in the region.

For example, the laws used to provide generous mandatory severance compensation, are by far the most generous in the APAC region. This and other worker-friendly laws deterred many foreign investors. However, while some supported the implementation of the omnibus law in Indonesia, it has also generated considerable opposition from labor unions and other parties. Some critics voiced concerns about the potential lack of protection for the environment and workers’ rights. Thus, we expect continual social resistance as the government navigates through the changes.

Streamlined Corporate Tax Regulation

Streamlined corporate tax regulations

A large part of the omnibus law covers corporate taxation. Currently, there are many different tax laws in the country and the changes in the law have already taken effect.

Essentially, the law provides for the unification of Indonesia’s scattered tax regulatory framework. It aims to minimize overlapping regulations and provide many corporate tax incentives, including adjustments to the following rates.

The corporate income tax rate

Indonesia’s current interest tax rate is at 22 percent for the fiscal year 2021. The omnibus law will provide for a reduction of 20 percent starting in the year 2022.

Furthermore, qualified public companies that trade at least 40 percent of their shares on the Indonesian stock exchange can apply for an additional 3 percent rate reduction. This decrease will make Indonesia more competitive with neighboring countries.

Dividend tax rate

The types of taxes and income tax rates on dividends that currently apply are as follows:

  • Income Tax Article 4 paragraph (2) is 10% final if dividends are received by domestic individuals;
  • Income Tax Article 23 is 15% if it is received by domestic corporate taxpayers and Permanent Establishments (known as Badan Usaha Tetap or BUT);
  • Income Tax Article 26 of 20% or according to the agreement in the Double Taxation Avoidance Agreement (P3B), if received by a foreign taxpayer other than Permanent Establishment (known as Badan Usaha Tetap or BUT).

The law will provide income-tax-free dividend payments, as long as the full amount is re-invested in Indonesia.

Interest tax rate

Indonesia’s current interest tax rate of 22 percent is high relative to other APAC countries. The omnibus law will provide for a reduction of the rate of income tax coming from interest payments.

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