Indonesia ranked 59th out of 133 countries for the efficiency of its legal framework in settling disputes the World Economic Forum’s 2009-10 Global Competitiveness Report.

Get General advice on how to build an advisory team in the Export guide. 

Many international law firms based in Jakarta have Indonesian specialists in local law.

Foreign lawyers are barred from engaging in legal affairs in Indonesia, unless they work with local counterparts.

It is essential to get well-informed legal advice before signing any contracts or legal documents. It is also indispensable when setting up your legal structure to protect intellectual property, navigate the regulatory system and resolve commercial disputes.

Your legal advice must come from a lawyer who has excellent language skills and extensive experience working with foreign companies already in-market. This would almost certainly be a locally based lawyer. 

In response to foreign investors' concerns, and to stimulate domestic innovation, Indonesia is strengthening intellectual property (IP) protections.

Deloitte Touche Tohmatsu says Indonesia has made significant progress in improving its legal framework to combat counterfeiting. New laws, which recognise patents, trademarks, copyrights and industrial designs, provide for harsher sanctions on infringement.

Both licenser and licensee can sue for infringement. The laws assign civil cases to the Commercial Court and require a settlement within 90 days, extendible to 150 days with permission of the Supreme Court.

The laws also establish a mechanism for alternative settlement by arbitration and allow for court-ordered injunctions against infringement.

However, some laws lack adequate enforcement. As a result, piracy has increased across a multitude of industries.

Indonesia had been on the Office of the US Trade Representative’s Special 301 Priority Watch List on IP protection since 2001.  In 2006 the office took Indonesia off the priority list based on improvements in its enforcement of IP rights, though it added additional work remained.  It is still on the watch list.

Get general advice on protecting your intellectual property in the Export guide. 

The Indonesian income tax structure is based on self assessment and combines a series of withholding taxes on day to day business dealings with a broad-based value-added tax on revenues.

Tax residents of Indonesia are taxed on their worldwide income, irrespective of whether the income is remitted to Indonesia or not, with a credit for tax paid offshore in accordance with both Agreements on the Prevention of Double Taxation and where there are no agreements. 

Main taxes

State (national) taxes – include income tax, valued added tax, sales tax on luxury goods, stamp tax, property tax (on land and buildings).

Regional taxes – include development, motor vehicle, household, road, advertisement, and radio and television taxes.

Custom and Excise taxes – include export tax, import duty, and special taxes on tobacco, sugar, alcohol and gasoline. 

Tax rates

Indonesian income tax law applies to resident and non-resident taxpayers.
For resident taxpayers, the following rates are for individuals:

Annual income                             tax rate

Up to – Rp50.000.000                   5 percent

Rp50.000.001 - Rp250.000.000   15 percent

Rp250.000.001 - Rp500.000.000  25 percent

Over Rp500.000.000                     30 percent

Indonesians on Rp15.000.000 or less are not taxed.  A very large proportion of Indonesians earn less than this amount.

Tax-free allowances (deductions) are available based on marital status and number of dependents.

Corporate tax rates: Companies earning annually more than Rp50 billion must pay an income tax set at a flat rate of 28 percent. This rate will be cut to 25 percent in 2010.

Companies earning less than Rp50 billion a year must pay 14 percent, reducing to 12.5 percent in 2010.

These rates apply to foreign companies deemed to be Permanent Establishments. They are also subject to a withholding tax on the repatriation of after-tax profits.

A foreign corporation with no permanent establishment is subject only to a final 20 percent withholding tax on certain types of income derived from Indonesian sources.

Double taxation agreements are as negotiated with a number of countries following the OECD model. Rates for New Zealand are:

• dividends – 15 percent.
• royalties – 15 percent. 
• interest – 10 percent.
• branch profits – 0 percent.  

Deductions and exemptions

Deductions allowed against income in the determination of taxable income are broadly defined as costs incurred in earning, collecting and maintaining income. 

These costs include depreciation, amortisation, lease payments, interest, royalties, service fees, employee remuneration, business insurance premiums, some inter-company charges, travel costs, and pension contributions to pension funds approved by the Minister of Finance.

There are no tax deductions for:

• distributions of profits (eg dividends).
• provisions in a reserve fund (e.g. provisions for doubtful debts or retirement) life, health and scholarship insurance premiums (unless included as assessable income for the employee).
• benefits in kind provided to employees. This includes the provision of housing, etc. (It should be noted that the benefits are also not assessable in the hands of the employees).
• gifts not related to business activities.
• costs incurred for personal benefit.
• excessive compensation for work performed by shareholders or other parties with a special relationship to the taxpayer. 

Incentives

Indonesia provides income tax facilities for investments in certain designated industries and designated industries in particular areas, including:

• investment allowance at 30 percent of the amount of the qualifying investment (in fixed assets), to be amortised equally over five years.
• accelerated depreciation.
• reduction in the rate of withholding tax (from 20 to 10 percent) for dividends payable to non-residents.
• extension of tax loss carried forward from five years to up to 10 years (the final term is based on specific criteria).

Only limited liability companies and cooperatives may qualify for the tax facilities.

There are also facilities available to reduce import duties and/or defer value added tax on imports of capital equipment or raw materials. 

Annual financial reports must be prepared and given to shareholders within five months of the financial year-end.

Some company accounts must be audited by a public accountant, including those of banks and insurance companies, companies issuing debt instruments, and public companies.

Companies working in some industries must send audited financial reports to the relevant government regulatory agency.

Financial statements must comply with PSAKs, Indonesia’s financial accounting standards, which are based on international and United States accounting standards.

Indonesia ranked 76th out of 133 countries for the strength of its auditing and reporting standards in the World Economic Forum’s 2009-10 Global Competitiveness Report. 

Trade should be by letter of credit or through other confirmed payment methods. Credit is not recommended. 

If you are using a letter of credit, you must show the tariff code number.  At the Indonesian ports, quotes are usually in US dollars and CIF.

There are no set forms for invoices. 

The Rupiah, the local currency, is freely convertible, although approval of Bank Indonesia (central bank) must be obtained before carrying more than IDR100 million out of the country. Any person carrying IDR100 million or more into the country must verify the authenticity of the funds with Indonesian customs upon arrival.

Any bank in Indonesia that is requested to make a wire transfer of IDR100 million or more to a non-resident must obtain a statement letter and supporting documentation from the customer for the underlying transaction.

Indonesia does not restrict the transfer of foreign currency funds to or from foreign countries, but incoming investment capital requires approval. Offshore loans must be registered with Bank Indonesia, with subsequent movements reported monthly.

A detailed per transaction report is required for transactions exceeding US$10,000, while transactions less than US$10,000 may be aggregated.

Companies must report the movement of financial assets (such as equity in overseas companies and savings at overseas banks) and liabilities (such as overseas loans and trade payables) between residents and non- residents, including overseas transactions by residents. The requirement, applicable to companies with total assets of at least IDR100 billion or annual sales of at least IDR100 billion, is for transactions that were not conducted through a domestic bank or financial service company.

Foreign investors can transfer (in the currency of the original investment) all current after-tax profits and certain costs. In some circumstances, convertibility is also guaranteed for capital repatriation.

Foreign banks, joint venture banks and more than 30 national banks are licensed to carry out foreign exchange transactions. 

Many well established companies will be registered with the Indonesian Chambers of Commerce (KADIN). Checking if the local company is registered helps to verify if a company legally exists.

Get general advice on managing commercial risk including doing due diligence in the Export guide. 

Get general advice on becoming a responsible exporter in the Export guide.

(Additional sources used on this page: RSM AAJ Associates, Deloitte Touche Tohmatsu, Baker and McKenzie, Economist Intelligence Unit)

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