This article is reproduced with the kind permission of the author Peter Fanning.
Mr. Fanning is the Vice President (International Liaison) of the Indonesian
Australian Business Council (IABC) and also a counsel of
Hutabarat Halim & Rekan.
The basic law relating to trading is still a pre-independence Dutch ordinance
of 1934. Specific provision (and everything that applies in practice) is made in
executive (government or ministerial) regulations, which means that practice is
fairly flexible. Significant changes to policy were made in 1997 in the face of
the economic crisis. Policy continues to respond to particular needs as
perceived by the government.
Behind all activity, there is considerable freedom of contract, still
effectively regulated by the Indonesian Civil Code (which is actually the Dutch
Civil Code of 1847), and there is no exchange control (reporting but not
control, except if a transfer appears to be suspicious). However it is necessary
to be aware that in every field of business activity there are a variety of
regulations, not always complementary, and not always widely known.
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Trading into Indonesia is beset with problems arising from a slow-moving
bureaucracy, slow-moving customs and inadequate port infrastructure, and all
trading suffers from poor transport.
“Official statistics in China indicate that logistic costs are estimated at
slightly over 10% of the national GDP, and such costs are higher in the
hinterland than in the eastern coastal regions that are much more developed
economically. There are no comparative statistics for Indonesia, but we can
guess that it will be much higher, due to our archipelagic geography and lack of
investment in the sector”. GlobeAsia, 1 May 2008.
Indonesia is sorely in need of improved infrastructure.
The banking system however appears well able to receive and transmit trade
payments – especially using the widespread and internet-based Bank BCA system –
but the system is naturally slow to lend in the face of uncertain legal control.
“Bribery, irregular payments and other collusive practices have had a marked
influence on judicial decisions. Many believe the court system is totally
corrupt with judges on low salaries unfairly tempted by huge personal gain.”
Dean of the Faculty of Law, University of Indonesia, GlobeAsia, 1 April 2008.
Nevertheless Indonesia has a growing population (230 million), with growing
purchasing power.
Retail trading in Indonesia is coming to be dominated by giants such as
Carrefour, Hypermart and Giant. Medium-sized stores (Hero, Gelael) are expected
to be replaced. Small stores (up to 300 square metres) will survive (and are
growing in number), because people in Indonesia shop more frequently, especially
for food, than they do in more developed countries. This is because less than a
quarter of households have refrigerators, and in any case very often food
shopping is delegated to staff with limited mobility. That is still a large
number of households with refrigerators. But the more effective small stores are
those belonging to chains such as Alfamart, Indomart and Starmart. These utilize
central purchasing and logistics, and are in fact part of much larger
conglomerates. Indonesian policy-makers are in a quandary as to whether the
domination of foreign/conglomerate trading interests is good or bad for the
consumer.
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Relevant regulation: Regulation of the Minister of Trade 9/2006
All companies undertaking trading activities must obtain a trading licence
(or SIUP) from the Ministry of Trade – under the category of small, medium,
large or public. By “companies” is meant any form of business undertaking.
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Relevant regulation:
- Decree of the Minister of Trade 229/1997
- Decree of the Minister of Trade 40/2003
Importers of goods into Indonesia must have:
- A provisional importer’s identification number
(APIS)
- An importer’s identification number (API), or
- A limited importer’s identification number (APIT)
Importers may be licensed as general importers or manufacturers. The APIT
applies to companies with any foreign ownership (so-called pma companies).
The only exemptions apply in relation to the import of:
- Personal effects
- Provisional imports
- Goods for religious, charitable, social or cultural
activities
- Goods belonging to foreign missions & international
agencies
- Samples not to be sold
All goods must be new (except for commercial ships and fishing vessels).
Other exceptions may be made from time to time.
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Exporters to Indonesia may undertake trading activity in Indonesia through:
- An agent or distributor in Indonesia
- Franchising
- A representative office (BKPM or Dept of Trade)
- A sole proprietorship or partnership (themselves
closed to direct foreign participation)
- A limited liability company (in which they are part
or full owners)
Producers in Indonesia may use agents or distributors, or retail directly.
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Relevant regulation:
Regulation of the Minister of Trade 11/2006
Government Regulation 36/1977 as amended by 41/1997 as amended by 15/1998
Government Regulation 2/1996 as amended by 42/1997
An agent is defined as a business established in Indonesia which undertakes
the marketing of goods and/or service on behalf of a principal. An agent is not
an individual. The principal may be a manufacturer or supplier, and may be
located offshore or onshore. The agent never acquires any rights to the goods
and services.
A distributor is a business established in Indonesia which acquires and
stores goods or services as well as marketing them. It is a wholesaler, not a
retailer.
Indonesian companies with foreign ownership (so-called pma companies) may be
established specifically to undertake distribution, but must appoint a national
agent. A pma company established as a manufacturer may establish another pma
company to distribute its own products. A pma manufacturer may also retail
directly its own and the products of other manufacturers. But a pma manufacturer
cannot also act as a distributor.
Any business operating as an agent or distributor must register with the
Ministry of Trade and so obtain evidence of registration known as a Surat Tanda
Pendaftaran or STP. An agent may be a sole agent or distributor, and may appoint
sub-agents who must also be registered. If the principal is offshore, the
agreement must be notarized and certified by an Indonesian trade attaché and
submitted to the Ministry of Trade.
These agreements may adopt the law of any country, but if they are written in
a language other than Indonesian, they must be translated by a sworn translator.
Depending on the type of goods being imported, certain other memberships,
recommendations and/or licences must be obtained and produced.
A condition of registration (and re-registration) is a 6-monthly activity
report to the Ministry of Trade.
The registration is for a period of 2 years, unless a shorter period is
specified in the agency or distribution agreement.
A pma company which is a distributor must also appoint a nationally-owned
business to act as an agent or distributor, with the approval of a principal
which is offshore. However any agent or distributor may employ expatriate
technical advisers.
Representative offices of foreign trading companies must appoint a
nationally-owned trading company as an agent or distributor for the offshore
principal.
Disputes arising may be solved in accordance with the procedures set out in
the agreement, or by negotiation or arbitration or litigation in accordance with
whatever law is adopted in the agreement.
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Relevant regulation:
Government Regulation 16/1997 Regulation of the
Minister of Trade 12/2006
A franchise is a commitment whereby the franchisor (either a business or an
individual) allows the franchisee (either a business or an individual) to
undertake business using the intellectual property and characteristics of the
franchisor.
The arrangement is made in a written agreement which is subject to Indonesian
law. The agreement must set out such things as the intellectual property rights
or management, sales and distributions systems which are characteristic of the
franchisor, the franchise zone, the procedure for paying compensation, training
requirements, dispute settlement procedures, provisions for extension or
termination, and may contain provisions for sub-franchises. This agreement must
be for at least 10 years, and sub-franchise agreements must be for at least 5
years. (Small and medium business must be given priority as sub-franchisees, or
at least as suppliers).
A franchisor must be licensed as a business in accordance with the laws of
its own country (whether foreign or Indonesian).
A franchisee must obtain Franchise Registration (Surat Tanda Pendaftaran
Usaha Waralaba or STPUW) from the Ministry of Trade (Director General of
Domestic Trade). This is valid for 5 years and will be extended if the franchise
agreement is still in effect. The stated intention of such registration is to
enable the franchisee to have access to relevant government assistance.
Registrants must report annually on the progress of the franchise business
(changes in the period of the agreement, outlets, ownership, address,
management).
To obtain this registration, the franchisee (or sub-franchisee) must lodge
the franchise agreement and a prospectus of the franchisor (together with all
relevant licences).
This prospectus sets out the business activity of the franchisor (including
financial information), intellectual property rights and characteristics of the
franchisor, requirements to be fulfilled by the franchisee (including
financial), assistance which will be provided, and the rights and obligations of
the franchisor and franchisee.
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Relevant regulation:
Regulation of the Minister of Trade No. 10/2006
The purpose of a representative office of a foreign trading company is to
facilitate the import into Indonesia of goods and services available offshore
and also to facilitate export. The representative office is a sales office, not
the actual providor of goods and services. These are provided directly from
offshore by the principal.
The head of a representative office of a foreign trading company – the
representative - (or assistants within the office) may be Indonesian, or a
foreign citizen, appointed by the foreign trade company or a group of foreign
companies to become its representative in Indonesia. If a foreign citizen is
appointed, at least three Indonesians must also be employed.
Appointments may be for a maximum of three years, and be extended.
The representative may have a head office in Jakarta or in any provincial or
district capital and may open branch offices in any other provincial or district
capital.
Business Activities
The representative may work as a selling agent and/or a manufacturing agent
and/or a buying agent.
The representative may (1) introduce and promote goods produced by a foreign
company or group of foreign companies and give information or directives on the
use or import of the goods to domestic companies/consumers; and (2) conduct
market surveys and supervise domestic sales of the goods to be imported; and (3)
conduct market surveys regarding the availability of goods needed for export by
the foreign company or group of foreign companies he represents; and (4) close
contracts for and in the name of his/her company with domestic companies for the
purchase and export of goods.
Representatives may not trade and conduct sales transactions, for instance by
submitting tenders, signing contracts, and settling claims.
The actual import of goods shall be done by a national or pma company with an
import licence.
The representative office of a foreign trading company must appoint a
national company as its agent for the products it promotes.
Establishment
To obtain a business permit for a representative (Surat Izin Usaha Perwakilan
Perusahaan Perdagangan Asing or SIUP3A), the foreign trading company must make
formal application to the Director General of Domestic Trade (Director of
Business Development), and attach:
- A letter of appointment by the foreign company or group of foreign companies
showing the name of foreign citizen or Indonesian citizen appointed as a
representative, the business of the company, and the period of validity of the
letter.
- A description of the foreign company or group of foreign companies, and a
copy of its constituent documents.
- A statement that the representative will not undertake trade activities
directly.
- A working program of the representative or branch office.
All letters and statements coming from offshore are required to be sighted
and legalised by a representative of the Republic of Indonesia in the country
where the head office of the company is located.
An application may first receive temporary approval which will be valid for 2
(two) months while the representative arranges (1) a business site permit (Izin
Tempat Usaha) issued by the Ministry of Home Affairs, through its regional
administration, (2) a letter of statement of office space (Surat Keterangan
Ruangan Kantor) issued by the relevant regional office of the Ministry of
Industry and Trade, (3) a letter of domicile from the regional government, (4)
evidence of tax registration, (5) expatriate work permit issued by the Ministry
of Manpower and visa issued by the Directorate General of Immigration of the
Minister of Law (if applicable) (6) a guarantee of Rp 5,000,000 if the
representative is a foreign citizen or Rp 1,000,000 if the representative is an
Indonesian citizen, and (7) passport photos of the representative.
This guarantee will be returned at the time of the closing of the
Representative Office, except if the concerned party violates the regulations,
in which case the surety is declared confiscated by the state.
Representatives must submit a report every six months to the Director of
Business Development.
The Representative Office of a foreign company is recognized as a permanent
establishment in Indonesia (of the foreign company) for taxation purposes. It is
not a separate legal entity, and cannot earn income tax, but must withhold and
pay income tax on behalf of its employees, and pat VAT on purchases.
Representative offices (with similar requirements and restrictions) may also
be established with the approval of the Investment Coordinating Board (BKPM)
pursuant to Presidential regulation 90/2000. These are not necessarily trade
related, and are intended to provide the basis for a regional representative
role.
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Relevant regulation: Law 40/2007
Foreign investors who wish to invest directly in Indonesia and personally
manage that investment may generally do so only through establishing a limited
liability company. (In other words, foreigners may not undertake business
activities as individuals, or in partnership, or in any other business form –
with certain exceptions not related to trade). They may choose this means to
establish their own manufacturing and/or distribution facilities within
Indonesia. And of course to export.
A company is formed by at least two founders (because the act of founding
represents an agreement), who after the company is approved are not responsible
personally for any commitments made legally by the company. This is the essence
of limited liability. It is not the liability of the company which is limited,
but that of its shareholders.
A company can be formed for a definite or an indefinite period.
A company becomes a separate legal person at the point that the Minister of
Law and Human Rights (MOL) ratifies its Deed of Establishment - not when the
Deed is signed (Article 7). Its principal organs or parts are the General
Meeting of Shareholders (GMS), the Board of Directors (BOD) and Board of
Commissioners (BOC).
Shareholders set policy, directors manage and represent the company, and
commissioners supervise directors.
The Deed of Establishment (a notarial deed) contains the Articles of
Association (AoA), and specific information regarding shareholders and their
shareholdings, and the names of directors and commissioners.
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Law 25/2007 regulates Investment generally, and the participation of foreign
capital in Indonesia in particular. Presidential Regulation 77/2007 as amended
by 111/2007 sets out the Business Activities Closed to Investment and Open with
Restrictions.
Activities are as defined in a system of standard classifications based on
international classifications, but restrictions are sector-specific. The
difficulty is in defining the boundaries of sectors, which are simply
identified, but not defined.
Trading faces the following restrictions:
Direct selling through marketing
networks: limit of 60% foreign ownership.
General and specialist cargo
transport: limit of 49% foreign ownership
Port facilities: limit of 49%
foreign ownership
Domestic sea transport: limit of 49% foreign ownership
With regard to importing, wholesaling & retailing – the following activities
are closed to foreign ownership:
supermarkets with less than 1,200 m2 selling space
department stores with
less than 2,000 m2 selling space
minimarkets with less than 400 m2 selling
space
community & convenience stores
retailing (including mobile and by
media) of certain agricultural products and food & beverages
retailing
(including mobile and by media) of chemicals, pharmaceuticals, traditional
medicines, cosmetics
retailing (including mobile and by media) of textiles,
footwear & personal necessities
retailing (including mobile and by media) of
household appliances
retailing (including mobile) of fuels & lubricants
retailing (including mobile) of paper products & sports equipment & musical
instruments & office equipment
retailing (including mobile) of handicrafts,
toys, used goods
retailing of construction materials
retailing of
machinery, cars & parts
wholesaleing or importing as agent
importing,
wholesaling & retailing alcohol
trading survey services
property or real
estate broker
vehicle & machinery rental
building cleaning services
laundry/hairdressing/beauty salon/tailoring & other personal services
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Exports are controlled in accordance with international provisions on the
traffic of goods. Goods as listed in regulations of the Ministry of Trade are
either regulated, supervised or prohibited.
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