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Business Updates | Indonesia Introduces Sixth Policy Package to Spur Special Economic Zones

Indonesia on 5th November 2015 introduced a sixth economic policy package to build upon the success of previous regulatory reforms carried out to attract investment and shore up confidence amidst significant economic headwinds. Having previously zeroed in on key impediments to business in the country such as rising minimum wages (See Indonesia Moves to Address Minimum Wage Woes); Indonesia through its latest policy package intends to expedite the development of special economic zones designed by the government to encourage businesses to set up in less saturated provinces and thereby promote widespread growth across the archipelago (See A Look into Indonesia’s Special Economic Zones).

A series of special incentives

In an attempt to drum up interest among local as well as international investors, the Indonesian government intends to implement a number of fiscal incentives offered to businesses planning to locate in any of the following eight special economic zones:

  • Tanjung Lesung, Banten – Tourism Hub
  • Sei Mangke, North Sumatra – Integrated Palm Oil Industry Hub
  • Palu, Central Sulawesi – Manufacturing, Logistics and Metal Processing Hub
  • Bitung, North Sulawesi – Fishery and Logistics Hub
  • Mandalika, West Nusa Tenggara – Tourism and MICE Hub
  • Morotai, North Maluku – Fishery, Logistics and Tourism Hub
  • Tanjung Api-Api, South Sumatra – Rubber, Palm Oil and Petrochemical Hub
  • Maloy Batuta Trans Kalimantan, East Kalimantan – Palm Oil and Logistics Hub

With each selected to serve as a hub for specialised areas of business determined by the ready availability of resources in close proximity, these special economic zones have for the most part seen development take place at a slower than expected rate. Foremost among the sixth economic policy package’s measures to address this is the introduction of lengthy tax holidays bringing about a 20-100% reduction in income tax lasting for a period of between 10 to 25 years for companies investing at least 1 trillion IDR and engaged in the special economic zone's main area of business. Companies investing less than this amount but more 500 billion IDR are eligible for a similar tax break lasting 5 to 15 years. Businesses involved in industries not identified as the special economic zone’s specialised area of focus can apply for a less advantageous but nonetheless still substantial 30% net-income tax reduction for a six-year period. Moreover, the sixth economic policy package removes VAT on imported raw materials needed by companies in special economic zones.

Indonesia’s sixth economic policy package also puts in place a new mechanism through which expatriates will be able to own residential property in Indonesia. Following on from an earlier decision to allow foreigners to purchase upscale apartments (See Indonesia Opening the Door to Foreign Ownership of Property), the government will now permit foreign ownership of residential houses located in special economic zones. Though foreign property ownership is said to now be unrestricted in special economic zones, the government has yet to clarify as to whether expatriates will be able to obtain freehold land titles instead of land use permits. Of even greater significance is the possibility that Indonesia will also open the door for foreign investors to manage the special economic zones as a means of drawing more manufacturers to these areas. As detailed by the Deputy Chairman for Investment Planning at Indonesia’s Investment Coordinating Board, Mr Tamba P. Hutapea,  a follow-up regulation is to be issued providing further information on the requirements for foreign entities to be eligible to build and manage Indonesia’s special economic zones.

Enough of an attraction?

The announcement of Indonesia’s sixth economic policy package was initially met with enthusiasm, with early reports suggesting that investors from China and Singapore – two markets with considerable experience developing and operating successful free trade zones – were interested in taking advantage of the new opportunities afforded to them in Indonesia. Cynicism has since crept into the discourse surrounding the country’s most recent policy revisions, with industry analysts rightly pointing out that the fiscal incentives do little to allay the primary concerns related to special economic zones in Indonesia, namely inadequate infrastructure and unreliable power supply. Challenges related to a lack of direct access to facilities such as fully-functioning ports will continue to serve as a major deterrent to firms locating in special economic zones, particularly considering the size of investment needed to even qualify for the tax breaks offered by the latest economic policy package.

Shortcomings in appealing to special economic zone investors, combined with the inclusion of entirely unrelated reforms to laws concerning the import of raw materials for pharmaceutical products and the privatization of packaged drinking water, builds for a sixth economic policy package less warmly received than its predecessors. Certainly, Indonesia must be careful to avoid using the packages to introduce piecemeal changes that could be presented more straightforwardly by individual ministries instead of being grouped somewhat haphazardly. Previous policy packages were successful in providing a more cohesive reform strategy with clear themes such as deregulation and cost-cutting; the government should aim to abide by this approach if it hopes to maintain the luster and importance associated with its series of economic policy packages.

Global Business Guide Indonesia - 10th November 2015

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