The draws for foreign investors to Indonesia are obvious; as the fourth-most populous country in the world, years of strong economic growth have turned Indonesia into the largest economy in the Association of Southeast Asian Nations (ASEAN). GDP growth has dipped slightly but is still expected to remain strong at over 5% per year through 2020, and the country’s political stability and growing middle class give Indonesia an enviable foundation for sustainable growth. All told, its no mystery why Indonesia is among one of the most closely watched economies in the world for foreign investors. As the nation looks to take the next step in its development, the Jokowi administration has focused on reforming the market to reduce bureaucratic holdups and increase transparency.
Indonesia came in at 72nd on the World Bank’s 2018 Doing Business report, which measures the ease of conducting business operations across the world. While middle of the pack overall, this ranking reflects the ongoing success of the Jokowi administration’s reform efforts: since 2014, Indonesia has climbed 42 spots in the Doing Business rankings. The World Bank’s 2018 report highlighted the progress Indonesia has made across a number of fields, ranging from reducing start-up fees to strengthening investor protections. Over the past few years, Indonesia has launched a new credit bureau that has increased investor access to start-up capital, introduced new electronic single billing systems that have reduced processing time for international trading, made property registrations easier by digitizing records, and introduced an online system for paying taxes. All told, the World Bank places Indonesia among the world’s top-10 reformers. Indonesia still lags behind the region and the world in the legal structures set up to enforce contracts and handle disputes, but the overall trend is strongly positive. The Jokowi administration has announced that its target is for Indonesia to crack the top 40 in the Doing Business rankings, so further work continues toward that goal.
FDI has risen accordingly in recent years as investor confidence in the country has increased, and Indonesian officials are confident that it will be a driver of growth over the next few years. FDI increased 13.2% YoY in the first nine months of 2017, with most of this going toward electronics, mining, and machinery. Foreign investment is coordinated through the Investment Coordination Board (BKPM), which serves as a one-stop shop for investors to begin licensing and permitting processes. Indonesia’s liberalization reforms have opened up a host of industries to foreign investment over the past decade, but several sectors still have caps on foreign ownership. Geothermal power plants, for example, cannot have more than 67% of their ownership come from foreign sources. Medical supply manufacturing, warehousing, tourism, and telecommunications are some of the other sectors that have caps on varying degrees. Generally, restrictions are less stringent for investors from ASEAN countries.
Indonesia has a flat tax rate of 25% for corporate taxpayers, with all foreign firms with permanent activities in the country subject to this tax. There are a number of incentives available, including an effective rate of 20% for public companies and a 50% discount for small enterprises. Investors can work in coordination with the Ministry of Finance and the BKPM to obtain tax breaks for investing in designated regions or sectors. Indonesia’s personal tax system splits between non-resident and resident subjects, with residents taxed at increasing rates that cap at 30% of taxable income over IDR500 million. Indonesia has a 10% value-added tax applicable on almost all import goods. The government has excluded a handful of industries from VAT on exported goods and services; currently, manufacturing and construction goods are the primary recipients of these waivers. Indonesia also has a land and building tax that levies a 0.5% tax on all land and buildings, with the government in charge of determining the sales value. In the case of a property transfer, the purchaser is charged a 5% tax on the value of the building to acquire the building rights.