Foreign Investors’ Guide to the Omnibus Law 2021

The Indonesian president signed the Omnibus Law on Job Creation on the 2nd of November, 2020. In essence, the law aims to alter several government regulations, as well as to enhance the nation’s economy by increasing competitiveness, creating jobs, and making running business in Indonesia easier. As a result, the law has opened up a slew of new options for multinationals doing business in Southeast Asia’s largest economy.

Indonesia’s Omnibus Law overview

While the omnibus law Indonesia drew varied responses even when it was first drafted in February 2020, President Widodo has stated on various occasions that introducing the bill has been part of his plan for a long time:

• In July 2019, with elections looming, President Widodo stood in front of supporters and shared his vision for Indonesia. He promised them that the bureaucracy would be reformed, that investments would be realised, that human capital would be developed, that infrastructure would be developed, and that the state budget would be used efficiently.
• In his second inauguration, President Widodo revealed his vision for Indonesia in October 2019. “We hope that by 2045, Indonesia’s gross domestic product will have surpassed US$7 trillion,” he says in an English version of the address. Indonesia will have risen to one of the top five economies in the world, with a poverty rate approaching 0%. That is the direction we must take.”

To accomplish this objective, the Indonesian government recognises that it must first address the issue of overregulation in the country. Long-standing bureaucratic red tape has impeded the country’s growth and deterred international investment. Indonesia, for example, is ranked 70th out of 190 nations in the World Bank’s Ease of Doing Business Index 2021. Although President Widodo’s goal of achieving a ranking of 40 by 2020 has yet to be realised, we have seen significant progress in simplifying corporate processes to promote economic growth.

The omnibus law Indonesia, for the most part, simplifies Indonesia’s complicated regulatory system. This legislation loosened restrictions in 11 key sectors, including labour law, capital investment, business licensing, corporation tax, and acquisition of land. These reforms would make the country a considerably more appealing destination for international enterprises and investors.

So, what exactly is the Omnibus Law Indonesia?

Up to 76 current laws have been changed by the omnibus law. Simply put, if you’re asking if the omnibus law Indonesia will affect your business or investment plans, the answer is probably yes.

The following are some of the changes that overseas investors should be aware of.

1) The law simplifies business licensing

Previously, any firm in Indonesia required one or more licenses to operate, each of which had to be renewed after a set length of time. It was a multi-layered structure that involved multiple state, local, and federal authorities. As a result, determining what business licences, where to obtain them, and in what order to apply for them was challenging for an investor.

By consolidating or scrapping several business permits, it streamlines Indonesia’s existing requirements. Maritime and fisheries, energy and mineral resources, electricity, infrastructure, and transportation are just a few of the industries that have been affected.

The National Investment Coordinating Board (BKPM) has been reinforced, and it now has a key role in simplifying the issuance of all company permits. A foreign investor will be able to get a business license through the Online Single Submission (OSS) system, which will eliminate the need to go through several ministries or government organisations. The omnibus bill would also implement a risk-based approach system that divides enterprises into low, moderate, and high-risk categories.

• A registration number is all that is required for low-risk businesses.
• A standard certification will be required for medium-risk firms.
• Only businesses with a high level of risk will require a full set of business licenses.

2) The omnibus law Indonesia eases foreign investment restrictions

The Indonesian government has opened almost 100 percent of business classifications to foreign investment by enacting the omnibus law. This means that, while most enterprises are fully open to foreign investment, those run by the government remain closed.

Indonesia used the negative investment list before the omnibus law. A few business lines on the list were only partially open to foreign investment (i.e. these lines have foreign ownership caps). Companies engaged in big horticulture enterprises, for example, are available to foreign ownership of up to 30%, while companies engaged in broadcasting are open to foreign ownership of up to 20%. 

Under Presidential Regulation (PR) 10/2021, the old regulation with the Negative Investment List has been cancelled and replaced with a “Positive Investment List” in 2021. Almost all business lines are open to 100 percent foreign investment under PR10/2021 with the exception of six business sectors.

3) The omnibus law Indonesia relaxes the labour laws

In the past, Indonesia’s labour laws and regulations were relatively rigorous. The omnibus law made them more flexible and market-friendly, bringing them in line with those of other nations in the area.

The legislation, for example, used to provide hefty required severance pay, which was by far the most generous in the APAC region. Many overseas investors were put off by these and other worker-friendly regulations. While some people welcomed the omnibus law’s implementation in Indonesia, it was met with strong criticism from labour unions and other parties. Some critics expressed concern about the potential lack of protection for the environment and workers’ rights. As a result, we expect popular pushback to continue as the administration works through the changes.

4) The omnibus law streamlines corporate tax regulations

Corporate taxation is a big aspect of omnibus law Indonesia. There are several various tax rules in place in the country right now, and some of them have already taken effect.

Essentially, the law aims to bring Indonesia’s disparate tax regulatory framework under one umbrella. It intends to reduce regulatory overlap and provide numerous corporate tax incentives, including changes to the following rates.

The corporate income tax rate

For the fiscal year 2021, Indonesia’s current interest tax rate is 22%. Beginning in 2022, the omnibus law will reduce the tax rate to 20%.

In addition, eligible public businesses with at least 40% of their shares traded on the Indonesian stock exchange can request for a 3% rate decrease. As a result of the lowering, Indonesia will be more competitive with its neighboring countries.

Dividend tax rate

The following are the many types of taxes and income tax rates that now apply on dividends:

1. If dividends are received by domestic individuals, Income Tax Article 4 paragraph (2) is 10 percent final; 
2. Income Tax Article 23 is 15 percent final if dividends are received by domestic corporate taxpayers and Permanent Establishments (known as Badan Usaha Tetap or BUT); 
3. If received by a foreign taxpayer other than a Permanent Establishment, income tax Article 26 of 20% or pursuant to the agreement in the Double Taxation Avoidance Agreement (P3B) (known as Badan Usaha Tetap or BUT). Dividend payments will be tax-free as long as the entire amount is re-invested in Indonesia, according to the law.

Conclusion of Omnibus Law Indonesia

The omnibus law in Indonesia demonstrates the government’s dedication to reducing red tape in nearly every aspect of the business to attract foreign investment. As a result, international investors should think about the numerous changes and how best to proceed under the new law. Despite the numerous problems surrounding the law, the Indonesian government is optimistic that this reform will aid the country in navigating Covid-19.

If you want to know more about how the new changes will affect your business in Indonesia, feel free to contact us by filling the form below or simply email us at anita@permitindo.com.