Indonesia Business Regulation

Doing Business in Indonesia
Business Regulations

Indonesia is in the process of updating the country’s business regulations to make them competitive with the international business community. This chapter discusses briefly some of the most important regulations and useful information to consider in doing business in Indonesia. These are employment regulations; financial reporting and auditing requirements; intellectual property rights and land rights; stock and bond listing requirements and; regulations of the Jakarta Futures Exchange.
1. Employment Regulations

The Department of Manpower is the government agency that regulates employment practices in Indonesia. It supervises employment conditions, acts as mediator in labor disputes,
operates training institutes, issues work permits to expatriates, sets minimum wages, and handles other human resources matters.

Hours of Work and Overtime Payments

The basic 40-hour workweek is comprised of eight-hour days Monday through Friday. Some offices, however, are open seven hours per day, Monday through Friday and five hours on Saturday. For overtime, labor regulations specify that from Monday to Saturday the first hour should be paid 1.5 times the basic hourly rate and two times the basic hourly rate for each additional hour. For Sundays and public holidays, overtime pay is two times the basic hourly rate within the considered normal working hours of the company, afterwards overtime pay is three times the basic rate for the first hour and four times the basic hourly rate for each additional hour.

Wage Rates

Indonesia has competitive wage rates for unskilled workers in Asia but considerable differences exist between industries and geographic locations. For example, wages in the oil sector are higher than those in the agriculture sector, and wages in urban Jakarta are higher than in rural Java and other islands.

The Ministry of Manpower regulates the minimum wage for each province or city. For example, the Ministry issued a regulation setting the monthly minimum wage rate in Jakarta at Rp. 426,250 as of January 1, 2001.

Attachment 1, shown at the end of this chapter, contains a list of the current wage rates for 26 provinces in Indonesia.

Leave and Holidays

There are generally 13 paid public holidays in a year. Based on Government Regulation No. 21 Year 1954, employees are entitled to a maximum of 12 working days of paid annual leave. An employee is entitled to receive sick leave for a period of up to 12 months. A female employee is entitled to a three month paid maternity leave. Employees are also given paid leave for occasions such as the birth of a child (one-day) and a death in the family (two days).

Fringe Benefits

Indonesian workers are generally entitled to fringe benefits from their employers. Some of these are:

* Payment of income tax due on salaries and wages;
* An annual bonus of one month’s pay, usually paid at Lebaran (the
annual Moslem festival);
* Medical expenses; and
* Travel and meal allowances.

Termination

It is a normal procedure for employers to have their new employees (for permanent employment only) undergo a three-month probationary period. During this three-month period the employers, at their discretion, can dismiss these new employees. However, after this three-month period, dismissal requires the permission of the Committee for Settlement of Labor Disputes of the Department of Manpower. Should permission be granted, the company is required to provide severance payment, merit payment or service payment to the terminated employee.

Employee termination as well as the calculation of severance pay, merit pay and service pay must comply with the manpower regulations, which currently refer to the Decree of the Minister of Manpower No.150/2000. The amount of the severance payment depends on the number of years of service. Therefore, the longer the period of service, the higher the severance pay as well as the merit pay and the service pay. The service pay varies from one
month to seven months gross salary. However, in special cases, the payment of severance pay, merit pay and service pay can be higher than the above stipulation. Again, this depends on the agreement between the employer and employee.

With regard to employment termination, the common practice is to give an employee three written warnings prior to terminating service.

Social Security

The cornerstone of Indonesia’s social security system is known locally as “Jaminan Sosial Tenaga Kerja” (JAMSOSTEK). Companies that employ at least ten persons and have a payroll of at least Rp. 1 million a month must participate in an employee social security
program provided by PT JAMSOSTEK, a limited state-owned social insurance company. PT JAMSOSTEK provides benefits to employees for workplace accidents, death, health care and retirement. Employer and employee contributions to JAMSOSTEK vary by industry and program. Employees only contribute a share of their income to the retirement program; contributions for the other programs are borne exclusively by the employers. These rules are
also applicable to expatriates, however not mandatory, and they are allowed to withdraw their accumulated premiums when they leave the country.

The following table shows the contributions that JAMSOSTEK requires from employers and employees. Contributions are based on a percentage of the employee’s monthly pay:
Program

Employer’s Contribution


Employee’s Contribution
Accident*

0.24 - 1.74

-Death

0.3

-Health care**
- Single 3.0
- Married 6.0
Retirement

3.7


2

*Dependent upon which industry the employer operates in
**Not compulsory if the employer provides a better health insurance program

Labor Unions

The Law on Labor Unions dated August 2000 describes workers’ rights to establish and develop a labor union that is independent, open, self-reliant, democratic and responsible. The Law further indicates that a labor union can be established by at least ten workers and grants unions the right to enter into collective labor agreements with employers and to represent workers in settling industrial disputes.

With the Government of Indonesia’s ratification of ILO Convention 98, any party is permitted to establish a trade union. At the company level there are thousands of trade unions. Membership in any trade union is not compulsory.

2. Financial Reporting and Auditing Requirements

Books of Accounts and Statutory Records

The Indonesian law requires business enterprises to maintain books and records in such a manner that their financial position may be determined at anytime. The Commercial Code requires that books and records be preserved for 30 years. On the other hand, tax law
requires that records be kept for ten years.

Companies or taxpayers with basic mining contracts, production sharing contracts with Pertamina (the state oil and gas corporation), and those undertaking business activities in the cooperation areas of the Timor Gap - Zone A, may use English and the US Dollar for
tax record-keeping and tax reporting purposes. PMA companies, permanent establishments (PEs) and taxpayers who are affiliates of foreign companies, can use English and the US Dollar for tax record-keeping and tax reporting purposes provided they obtain approval from the Minister of Finance.

Generally Accepted Accounting Principles and International Auditing Standards

In Indonesia, the Generally Accepted Accounting Principles (Indonesian GAAP) are referred to as Pernyataan Standar Akuntansi Keuangan or PSAK and the Indonesian Generally Accepted Auditing Standards (Indonesia GAAS) are referred to as Standar Profesi
Akuntan Publik or SPAP.

The PSAK and SPAP are promulgated and issued by the regulatory body of accountants in the country - the Indonesian Institute of Accountants. The BAPEPAM (Badan Pengawas Pasar Modal) referred to as the Capital Markets Supervisory Agency, or the country’s
Securities and Exchange Commission, also promulgates and issues regulations and rules on the accounting treatment for certain accounts and transactions of public companies. In addition, BAPEPAM issues industry-specific guidelines for publicly listed companies and the
mutual fund, broker-dealer and securities industries. The Indonesian GAAP primarily adopts International Accounting Standards and some of the US Statements of Financial Accounting
Standards while the Indonesian GAAS adopts most of the Auditing Standards promulgated by the American Institute of Certified Public Accountants.

Filing/Reporting Requirements

Companies of identified industries are required to submit their annual audited financial statements to specified government regulatory agencies. Publicly listed companies have to submit their annual audited financial statements to BAPEPAM and the Jakarta or Surabaya Stock Exchange 120 days after the end of their fiscal year. These companies are also required to submit their annual audited financial statements to the Department of Trade and
Industry 180 days after the end of their fiscal year. Technically there are no explicit regulatory requirements to submit audited financial statements to the Tax Office, however, practically some tax officials will expect the taxpayer to attach a copy of the audited financial
statements with the annual tax return when lodged. During tax examinations, examiners will normally ask for the corporation’s annual audited financial statements if there are any.
The table below summarizes the specified industries and companies that are required to file audited annual financial statements, and their submission deadline.

Company/Industry

Deadline
Submission


Regulatory/Government Agency
Banks (inclusive of Management Letter) April 30 Bank Indonesia (Central Bank)
Insurance May 31 Ministry of Finance
Multi Finance April 30 Ministry of Finance
Companies,
Securities Companies March 31 BAPEPAM and the
Jakarta/Surabaya
Stock Exchange
Mutual/Investment Funds, Listed Companies:
- that are engaged in the business of generating funds from the public.
- which issue promissory notes.
- with minimum total assets or net worth of Rp. 25 billion.

Debtors whose annual financial statements are required by banks to be audited.

Foreign companies domiciled and operating their businesses in Indonesia including branches, sub-branches, subsidiaries, agencies and representative offices which have the authority to execute agreements.
June 30 Ministry of Trade & Industry


3. Intellectual Property Rights (IPR)

Indonesia is a member of the World Intellectual Property Organization and a party to the Paris Convention for the protection of Intellectual Property. Indonesia is also a signatory of the General Agreements on Tariffs and Trade (GATT) and to its subsidiary agreement, GATS. The government recognizes the importance of intellectual property protection, and has drawn up a number of bills increasing the protection of intellectual property rights. Indonesia
now has laws covering Patents, Copyrights, and Trademarks.

Recently enacted laws include the Law on Protection of Plant Varieties (Law No. 29 Year 2000), Law on Trade Secrets (Law No. 30 Year 2000), Law on Industrial Design (Law No. 31 Year 2000), and Law on Layout and Design of Integrated Circuits (Law No. 32 Year 2000).

Copyrights

Law No 6 of 1982 as amended by Law No 12 of 1997 governs copyrights in Indonesia. The laws specify the items eligible for copyright protection and the corresponding sanctions for
infringements. It should be noted that these laws only protect foreign copyright owners if Indonesia acceded to one of the international copyright conventions or signed a bilateral treaty with the country that granted the copyright.

As of May 2000, Indonesia’s Directorate of Intellectual Property Rights has submitted three bills on copyrights to the House of Representatives. The bills deal with industrial design, integrated circuits and trade secrets. The government also proposes raising penalties for copyright violators from Rp. 100 million to Rp. 300 million as well as raising the maximum penalty to seven years imprisonment.

Patents

Law No 6 of 1989 as amended by Law No 13/1997 governs patents in Indonesia. Under the law, patents are classified into regular or simple. Regular patents are special rights granted by the government allowing an inventor or other parties to develop the new invention for
a certain period of time. A patent is granted for a period of 20 years starting on the date the application for the patent is received. Simple patents are those inventions, products or methods of production, that do not qualify as new inventions. They are valid for ten years starting from the date when the Certificate of Simple Patent is granted.

Patent holders are allowed to use the patent only in Indonesia except if approved by the Patent Office for outside use. If a product is imported to Indonesia and an Indonesian patent already protects the process by which the relevant product is made, the holder of the
relevant Indonesian patent for the process is entitled to take legal action in Indonesia against the manufacturer of the imported product.

Trademarks

Law No 19 of 1992 as amended by Law No 14/1997 governs trademarks in Indonesia. Individuals or companies use trademarks to distinguish their products from other similar products. The Trademark Office may reject the application for the registration of a
trademark that is similar, in principle or in whole, to well- known trademarks belonging to other individuals or companies for goods and/or services of the same type.

Application for trademark registration using a priority right, as regulated in the International Convention on the Protection of Trademarks, is to be filed in Indonesia no later than six months after the initial filing for trademark registration in another country which is either a signatory to the convention or a WTO member.
4. Land Rights

The Basic Agrarian Law of 1960 is the foundation of land laws in Indonesia. There are 11 land rights under this law. The following are the laws most relevant to an investor:

Right of Ownership (Hak Milik) is an inheritable right reserved for Indonesian citizens only. While legal entities are theoretically entitled to this right, in practice it is no longer issued to them. The right can be sold, exchanged, bequeathed or otherwise transferred.

Right of Exploitation (Hak Guna Usaha) is the right to use land for purposes of agriculture, fishing or cattle raising. The title may be held by PMA companies and may be used as collateral or security for financing purposes. Recent regulatory changes allow title to be
granted for 35 years with a guaranteed extension of 25 years if the land is properly used and managed. Thereafter, assuming certain requirements are fulfilled, title can be renewed.

Right of Building (Hak Guna Bangunan) is the right to construct and own buildings on land. This is the right most commonly obtained by PMA companies. Recent regulations provide for an initial grant period of 30 years and guaranteed extension of 20 years. Thereafter, the right is renewable provided the land is used for the same purpose and all regulatory requirements are met.

Right of Use (Hak Pakai) is the right to use land for a specified purpose. The law prescribes the right of use for a period of 25 years with a maximum extension period of 20 years. It is commonly granted to representatives of foreign governments for construction of embassy buildings and to social, cultural and religious organizations. It has no collateral value to the holders and is not transferable.

Right of Lease (Hak Sewa) is similar to leasehold. Leasehold rights are normally granted to tenants of both residential and commercial premises. Foreign residents in Indonesia as well as foreign corporate representative offices are entitled to lease property. No law or regulation limits the duration of a lease.

The government offers foreign investors land rights that are relevant to the nature of their business. Prospective buyers of land for any purpose should consult the local government authorities on land use, planning and zoning. Based on a Presidential Decree issued in June 1996, foreigners domiciled in Indonesia are allowed to own one residential property.
To meet the regulations of ownership of a house or an apartment, a foreigner must be deemed to be “beneficial to national development” and must be either:

* An Indonesian resident (domiciled permanently in Indonesia) in possession of a permanent resident permit; or
* A non-resident (domiciled in Indonesia only at particular times) in
possession of appropriate visit and immigration stamps in his/her passport.

A foreigner can purchase or construct a house built only on land with the right of use (Hak Pakai), the right of use with the right of proprietorship, or the right of lease (Hak Sewa). An apartment can only be purchased by a foreigner on land with right of use (Hak Pakai). Foreigners are not, however allowed to purchase houses or apartments classified as “low cost housing” or “very low-cost housing”.

Ownership is limited to 25 years, and is extendible for another 25 years provided that the foreigner remains an Indonesian resident or meets the status requirements. If the foreigner departs from Indonesia, the property must be sold or transferred within one year after departure. If the foreigner or his family does not use the house for more than 12 consecutive years, then the foreigner forfeits the “being domiciled” status, for the purpose of owning residential property.
5. Stock Exchange Listing Requirements

The Capital Market Supervisory Agency (BAPEPAM) supervises, regulates and monitors, the activities of the Indonesian capital market, and protects the interests of the investing public. Indonesia has two stock exchanges, the Jakarta Stock Exchange (JSX) or Bursa Efek Jakarta (BEJ) and the Surabaya Stock Exchange (SSX) or Bursa Efek Surabaya (BES).

Share Listing Requirements

On June 30, 2000 the BEJ introduced new listing regulations as part of its effort to increase its competitiveness among regional exchanges and to increase the level of confidence in the capital market. These regulations authorized the creation of the Main Board and Development Board and required companies to implement good corporate governance practices.

Creation of the Main Board and Development Board

Company listings will be classified under one of two boards - the Main Board and the Development Board. The Main Board lists large companies that have a track record of profitability. Companies that have good prospects but are not yet profitable and all other
companies that fail to meet the requirements of the Main Board will be listed on the Development Board. Therefore, start up companies can list their shares on the secondary board.

The following are several of the requirements for listing on the Main Board:
1. Financial statements with an unqualified opinion for the last three years.
2. At least one million shares for listing with at least 200 shareholders, each owning at least one trading lot.
3. Operational and net profits in the last two fiscal years.
4. Total assets of at least Rp. 30 billion and paid-in capital of at least Rp. 3 billion.

Implementation of Good Corporate Governance Practices

The new regulation requires listed companies to implement good corporate governance practices. The companies are required to:
1. Have independent commissioners (not affiliated with the controlling shareholders and/or other directors, not an interlocking director, or not appointed by the controlling shareholders in the Shareholders’ General Meeting).
2. Have an Audit Committee composed of at least three members: an independent commissioner and the rest independent external parties with accounting and finance capabilities.
3. Have a shareholder composition in which the minority shareholders hold at least 5% of paid-up capital or 10,000 shares for the past six months.
4. Possess eco-labeling certificates for companies focused on forest concessions.
5. Submit financial statements to the BEJ on time, or face the risk of transfer to the Development Board if financial statements are submitted more than ten trading days after the set deadline.

Mutual Listing Agreement

The Jakarta Stock Exchange (JSX) and the Amsterdam Exchange (AEX) on March 2000 signed a mutual listing agreement. The bourses have agreed that all companies listed on the JSX as of the year 2000 will be given an automatic listing on the AEX as well.

Bond Listing Requirements

Listing of bonds, like shares, is regulated by the respective stock exchanges. To qualify for listing on the BEJ, bond issuers should have been operational for at least three years; report operating profits for the last two years with no deficit in the balance sheet; list bonds with a face value of at least Rp. 25 billion and a duration of the outstanding bonds of at least four years; and submit their latest audited financial statements with an unqualified opinion from a
public accountant.
6. Jakarta Futures Exchange

The Jakarta Futures Exchange (JFX) was established in August 1999 and commenced operations in December 2000. It is the first futures exchange in the country. The JFX serves as a central location where buyers’ and sellers’ agents meet to trade futures
contracts on the commodities the exchange lists for trading. The commodities traded include crude palm oil, robusta coffee, pepper, plywood, cocoa and rubber. The exchange also plans to include financial trading instruments such as foreign exchange, interest rates and government bonds. Its listed brokers are PT Batavia Futures, PT Artha Berjangka, PT Dana Graha Futures and PT Gading International Berjangka.
7. Regional Autonomy

Law No. 22/1999, “the Law on Regional Administration”, was designed to regulate regional administration and implement the principle of decentralization. Regional autonomy will be
implemented by providing wide-ranging, concrete, fair, and responsible authority to the regions in proportion to their share of national resources. Fundamental portions of this law shall include efforts to bolster the empowerment of the community, foster initiative and creativity, promote community participation, and develop the role and function of Regional Legislative Assemblies.

When Law No. 22/1999 came into effect January 2001, regional governments were granted the authority to regulate their own domestic matters including those related to local business activities. However, since the new system has just begun and is still being fully implemented, there is little information on this subject. The scope of regional autonomy and administration and the contents of future regional regulations have yet to be determined. It should be noted that future regulations issued by regional governments might differ from the existing regulations issued by the central government.

In relation to Law No. 22/1999 to establish regional autonomy, the government issued Law No. 25/1999 regarding Financial Equilibrium between the Central Government and Regional Administrations. The law regulates government financial systems and encompasses the
distribution of funds between the central government and regional administrations. The law is designed to promote inter-regional equity and takes into account the potential, condition and needs of a region. In addition the law addresses regional obligations, the distribution of regional authority and procedures for the exercise of said authority, including financial management and supervision.

Finally, the law regulates the authority of a region to establish reserve funds originating from regional revenues, and a system of financial management and accountability in implementing
decentralization and assistance tasks. The main purposes of this law are empowerment and promotion of regional economic capacity, creation of just, proportional, rational, transparent,
participative, accountable and accurate systems of regional financing, and realization of financial equilibrium between the central government and regional administrations.

Attachment 1

Regional Minimum Wages for 26 Provinces As of January 1, 2001
No. Provinces Minimum Wages - Monthly (Rp)
1. D.I. Aceh 300,000
2. Sumatera Utara 340,500
3. Sumatera Barat 250,000
4. Riau 329,000
5. Jambi 245,000
6. Sumatera Selatan 255,000
7. Bengkulu 240,000
8. Lampung 240,000
9. DKI Jakarta 426,250
10. Jawa Barat 245,000
11. Jawa Tengah 245,000
12. DI Yogyakarta 237,500
13. Bali 309,750
14. Kalimantan Barat 304,500
15. Kalimantan Tengah 282,000
16. Kalimantan Selatan 295,000
17. Kalimantan Timur 300,000
18. Sulawesi Selatan 300,000
19. Sulawesi Tengah 245,000
20. Sulawesi Tenggara 275,000
21. Sulawesi Utara 372,000
22. Nusa Tenggara Barat 240,000
23. Nusa Tenggara Timur 275,000
24. Maluku 230,000
25. Irian Jaya 400,000
26. Maluku Utara 230,000

Source: Ministry of Manpower and Transmigration of the Republic of Indonesia.