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Doing Business in Indonesia

2009

Contents
1. 2. 3. 4. 5. 6. 7. 8. 9. Introduction................................................................................................... 2 Businessenvironment .................................................................................. 4 Foreigninvestment..................................................................................... 15 SettingupaBusiness.................................................................................. 20 Labour .......................................................................................................... 23 Taxation........................................................................................................ 25 Accounting&reporting............................................................................. 44 UHYfirmsinIndonesia............................................................................. 47 UHYofficesworldwide ............................................................................. 47

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1.

Introduction

UHYisaninternationalorganisationprovidingaccountancy,business managementandconsultancyservicesthroughfinancialbusinesscentres inover70countriesthroughouttheworld.Businesspartnerswork togetherthroughthenetworktoconducttransnationaloperationsfor clientsaswellasofferingspecialistknowledgeandexperiencewithintheir ownnationalborders.Globalspecialistsinvariousindustryandmarket sectorsarealsoavailableforconsultation. Thisdetailedreportprovidingkeyissuesandinformationforinvestors consideringbusinessoperationsinIndonesiahasbeenprovidedbythe officeofUHYrepresentatives: KAPHanantaBudianto&Rekan Jl.WijayaII79 KebayoranBaru Jakarta12160 Indonesia Phone: +62811299218 Website: www.hananta.com Email: hananta@hananta.com YouarewelcometocontactHanantaBudiantoforanyinquiriesyoumay have. Informationinthefollowingpageshasbeenupdatedsothattheyare effectiveatthedateshown,butinevitablytheyarebothgeneraland subjecttochangeandshouldbeusedforguidanceonly.Forspecific matters,investorsarestronglyadvisedtoobtainfurtherinformationand takeprofessionaladvicebeforemakinganydecisions.Thispublicationis currentatJune2009. WelookforwardtohelpingyoudobusinessinIndonesia.

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KAPHanantaBudianto&RekanisamemberofUHY,aninternational associationofindependentaccountingandconsultancyfirms,whoseorganising bodyisUrbachHackerYoungInternationalLimited,aUKcompany.Each memberofUHYisaseparateandindependentfirm.Servicesdescribedhereinare providedbyKAPHanantaBudianto&RekanandnotbyUrbachHackerYoung InternationalLimitedoranyothermemberofUHY.NeitherUrbachHacker YoungInternationalLimitednoranymemberofUHYhasanyliabilityfor servicesprovidedbyothermembers.

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2.

Business environment

Indonesia:ABriefProfile IndonesiaislocatedattheregionofSouthEastAsiadanPacificwiththe incomecategorylowermiddleincome.Ithasapopulationwiththe amount:225,630,065.GNIpercapita(US$):1,650. IndonesiaisSoutheastAsiaslargesteconomy.Ithaspresentedahigh annualgrowthexceeding6%inboth2007and2008.Theexpectinggrowth in2009isbetween2%and4.5%. Indonesiahasmorethan237millioncitizens,50%ofwhomareunderthe ageof30. TheIndonesianGDPperpersonexceedsitsAsianneighbours,suchasthe Philippines.ItsGDPperpersonisthreetimesthanVietnam.Indonesiaisa groupofdemocraticnationswithsignificantregionalautonomy.Itis locatedontheworldsmajortraderoutesandhasextensivenatural resources. ItisatoptenmarketforU.S.agriculturalproductsandwithinthetop30 overallmarketsforU.S.exports.IndonesiahasratifiedtheCapeTown Treaty,whichgivesU.S.aircraftexportersaccesstofinancingthrough internationalprotectionandregistrationoffinancialinterests. Indonesiacanbeconsideredoneoftherichestcountriesonearthinterms ofitsbiologicaldiversity.ThecountryislocatedbetweenAsiaand Australia,andcomprisesmorethan17,000islandsthatstretch5,000km fromeasttowest.Becauseofitscomplexgeographicalmakeupand uniquebiogeographicalposition,Indonesiahasenormousecosystem diversityaswellasafascinatinghistoryandheritage. Intermsofhumandiversity,withmorethan230millioninhabitants,the countryranksasthefourthmostpopulousnationintheworldandthe thirdlargestdemocracy.ItisalsotheworldslargestIslamicnation,where aconstitutionalfreedomtopracticeotherreligionsseesmajorgroupsof Christians,Buddhists,Hindusandotherfaithsexistingsidebyside.There areapproximately336distinctrecognisedculturesthatsharemorethan 250spokenlanguages.Thelinguafranca,BahasaIndonesia,wasadopted only77yearsagoandisnowwidelyusedthroughoutthisvastland, servingasameansofcommunicationandasaunifyingfactor. Indonesiaisdiverseandisamongthemostculturallyrichcountrieson earth.Addtothisitsenormousmineral,marineandnaturalresourcesand itisevidentthatitranksasamajoreconomicforceintheregion.

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Followingtheeconomicandfinancialcrisisthathitthecountryin1997,the Indonesiangovernmentrecognisedtheimportantrolethatforeign investmentneededtoplayinthereconstructionoftheIndonesian economy.Duringfollowingyears,successivegovernmentsenactedlegal andregulatoryreformsdesignedtomakeIndonesiaacompetitive destinationforforeigndirectinvestment. AccelerationofEconomicGrowthandTrade TheCentralStatisticAgency(BPS)announcedthatIndonesiasGDPgrew 6.30%in2007.PercapitaincomerosetoIDR17.6millionfromIDR15 millionin2007.Investmenthasincreasedfrom35%in2007to41%infirst quarterof2008.Meanwhile,netexportincreasedby14%in2008from8% in2007. BatamFreeTradeZone(FTZ) VATandLSTinBatam Formanyyears,therehasbeenaparticulartreatmentforBatamasa specialBZ(bondedzone)withmoreVAT(valueaddedtax)facilitiesthan areawardedtoordinaryBZs.TheentireBatamareaisstilldenominatedas aspecialBZ.AcompanycanonlyhaveaBZstatusbasedonaspecific MoFapproval. TheseBatamBZcompaniesareentitledtothesameVAT(andcustoms) facilitiesasthosegrantedBZcompaniesoutsideBatam.However,theVAT andLST(luxuryofsalestax)inBatamareleviedgraduallyonaselective basisontaxablegoodsandservicespurchasedorconsumedbyBatam companies. Currently,thereareseveraltaxablegoodsthathasbeenimportedand deliveredin/toBatamcompaniesandwillattractVAT: Motorvehicles Cigaretteandtobaccoproducts Alcoholicdrinks Electronicgoods. Since1 stJanuary2004,theutilizationorconsumptionofforeigntaxable servicesorforeigntaxableintangiblegoodshasbeensubjectedtoself assessedVAT.DeliverancestaxableserviceswithinortoBatam,asof1st January2006,havenotyetattractedVAT. ThegovernmentdecidedagainstaproposaltoturntheentireBatam IslandsareaintoasingleFTZ.Instead,itwillspecifybondedzonesinto whichbusinessescanimportgoodsdutyfree.Thegovernmentalsonoted

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thatexportbusinessesoutsidethebondedzonescouldstillmakeuseof bondedwarehouses,asthestatusoftheneighbouringRempangand GalangIslands(theislandsclosesttoBatam)hasbeendecidedbythe government. TheBatamAuthority,whichgovernsBatamandhasoverseenitsrapid economicdevelopment,arguedthatthebondedzoneschemewould confuseinvestorsandleadtolocalgovernmentworkload.However,local authoritiesclaimedthatbondedzoneswouldenablethemtobettergovern BatamasmandatedunderIndonesiasdecentralisationlaws. LegalSystem DutchLegalSystemplaysanimportantroleininfluencingthehistoryof IndonesianLegalSystem.TheNederlandIndiesGovernmentapplies concordantieprincipleinthelegalsectorofIndonesianterritoryduring colonialperiod.Basedonthisprinciple,literallyeverylawthatispassed bytheNetherlandsparliamentwouldhavesomeinfluenceinthe Indonesianterritoryafewyearslaterifitisnecessarywithminorchanges. WhenIndonesiabecameindependent,its1945ConstitutioninArticleIIof theTransitoryProvisionsspecifiesthatalllawsandlegislationsexisting undertheDutchcolonialadministrationautomaticallybecamethelaws andlegislationoftheRepublicofIndonesia,untilitisrepealed,revoked, amendedorfoundtobecontradictorytotheConstitution.Asaresult,the businessregulationsgoverninginIndonesiaafterindependenceremained thesameasthelegislationenactedincolonialtimes,suchaspartsofthe CivilCode(BurgerlijkWetboek),theCommercialCode(Wetboekvan Koophandel)andtheBankruptcyOrdinance(FaillissementVerordening),until amendedinbynewlawsintroducedin19602004. Inthe1960s,thegovernmentofIndonesiaordainedseverallawsintended tofosterinvestment,suchastheBasicAgrarianLaw(HukumAgraria)and theForeignInvestmentLaw(HukumPenanamanModalAsing). Fortheperiodof19802000,themajoroverhaulofthelawsgoverning Indonesianbusinesspracticesresultedintheenactmentofseveralmore modernlaws,suchastheMortgageLaw,theCompanyLaw,theCapital MarketLaw,theBankruptcyLaw,theFiduciaryTransferLaw,andthe ArbitrationLawaswellasseveralIntellectualPropertylawsincluding lawsonCopyrights,Patents,Marks,IndustrialDesigns,Integrated Circuits,andPlantVarieties. Similarly,therulesgoverningcommerciallitigationproceduresunder IndonesianlawarefoundintheIndonesianCivilProcedureLawderived fromtheDutchcolonialcivilprocedurecodes(HerzieneIndonesisch Reglement(HIR)andRechtsreglementBuitengewesten(RBg)).The

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Indonesianjudicialsystemisorganizedintothreelevels.Thelowercourt istheDistrictCourt(PengadilanNegeri)establishedinalldistrictsand municipalities(KotamadyaorKabupaten)inIndonesia.Thefirstappellate courtistheHighCourt(PengadilanTinggi)establishedinallprovincesin Indonesia.ThehighestcourtistheSupremeCourt(MahkamahAgung). Unlikecommonlawsystems,Indonesiancivillawdoesnotadheretostrict doctrinesofprecedent.Everycasehastobedeterminedonitsownfacts andmerits.Meanwhileconsiderationisgiventoacademictheoriesand priordecisionsinsimilarcases,especiallydecisionsoftheSupremeCourt. Indonesiaalsohasseparatethreetieredstructuresorcourtsforhandling disputesinadministrativelaw,militarylawandIslamicfamilylaw.Since 1998,anumberofspecializedcourtshavebeenaddedtotheIndonesian judicialsystem,includingtheCommercialCourt,handlingbankruptcy andintellectualpropertymatters,theAntiCorruptionCourt,theHuman RightsCourts,andspecialtribunalsfortax,labour,andfisheriesdisputes. BasedonrecentamendmentstotheConstitution,aConstitutionalCourt wasestablishedin2003andaJudicialCounciliscurrentlyinformation.In 2004,TheIndonesianSupremeCourthasbegantoimplementasetof blueprintsofcomprehensivejudicialreformandhasbeensupportedfrom theIndonesianpublicandtheinternationalcommunityforthiseffort. Thecourtsystemdoesnotprovideeffectiverecourseforresolving commercialdisputes.Thejudiciaryisnominallyindependentunderthe law;however,legalpractitionersfearthatirregularpaymentsandother collusivepracticesofteninfluencecasepreparationandthejudicialruling. Thegovernmentrecognisestheneedforjudicialreformbuthasnotyet takenanyaction.Inseveralinstancesthelocalcourtsacceptedjurisdiction overcommercialdisputesdespitecontractualarbitrationclausescallingfor adjudicationinforeignvenues. IndonesiaisasignatorytotheConventionontheSettlementof Investment. DisputesbetweenStatesandNationalsofOtherStates(ICSID) SofaronlyoneAmericaninvestmentcompanyhasbroughtacasetothe ICSID,whichruledinitsfavour.IndonesiasArbitrationLawrecognises therightofpartiestoapplyanyrulesofarbitrationthattheymaymutually agreeuponandprovidesdefaultproceduralrulesifnootherruleshave beendesignated. AnIndonesiancommercialarbitrationboard,BANI,isavailableifboth partiesagree.CompanieshaveresortedtoadhocarbitrationsinIndonesia

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usingtheUnitedNationsCommissiononInternationalTradeLaw (UNCITRAL)arbitrationrules,aswellasothers.Othercompaniesin IndonesiahaveusedInternationalCriminalCourt(ICC)arbitrations. On12thAugust1999,IndonesiasParliamentpassedArbitrationLaw Number30,endowingtheDistrictCourtofCentralJakartawiththepower toenforceinternationalarbitrationawards.Beforepassageofthenew arbitrationlawin1999,enforcementlaywiththeSupremeCourt,which wasslowtoactondecisions.Since1999,Indonesiancourtshaveswiftly enforcedinternationalarbitrationawardssomehavebeenexecuted withinamonthoftherequestforenforcement.Thenewlawgreatly reducesinstanceswheredistrictcourtsfailtoapplythelaw,andlegal practitionerspredictthattheprocessshouldimproveasmorejudges educatethemselvesaboutarbitration. Since1981,whenIndonesiajoinedthe1958UnitedNationsConventionon theRecognitionandEnforcementofForeignArbitralAwards(NewYork), fewerthantwodozenforeignawardshaveregisteredwithIndonesian courts(mostofwhichhavebeenenforced).Thedomesticandinternational presshavewidelypublicisedrecentcaseswherethoseawardshavenot beenenforced. RighttoPrivateOwnershipandEstablishment RightofOwnership(HakMilik) AHakMilikisthemostentireright(landtenure)ofownershipaperson canownoverlandinIndonesia. Thisrightofownershiphasseveralspecificcharacteristicssuchas: Ithasnotimelimit Itcoverstoallfixturesontheland OnlyIndonesiancitizensandcertainIndonesianlegalentities (badanhukum)thatmayhaveaHakMilik ItcanbetransferredfreelyamongIndonesiancitizensandcertain legalpersons. Thereisapossibilityforhavinghorizontalseparationbetweentheowner oftheHakMilikandtheownerofabuildingontheland.Theholderof thisrightofownershipcantransferthelandtoothers. Inspecialcondition,theHakMilikhastobeconvertedtootherrights,such asaRighttoBuild,RightofUse,orRightofCultivationiftheholdersare foreignersorPMACompanies. RighttoBuild(HakGunaBangunanorHGB) AHakGunaBangunanisarightofleaseholdfortheperiodof30yearsor lessandgivesauthorizationtobuildandpossessabuildingonlandforthe holder.

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ThisRighttoBuildhasseveralcharacterssuchas: ThereisapossibilitythatthisHGBcanbeextendedforanextra20 yearswiththeopportunityforrenewal ThetitleisgrantedbyandregisteredattheLandOffice OnlyIndonesianCitizensandIndonesiancorporations incorporatedinIndonesiaandhavetheirlegaldomicilesin Indonesia,alsoPMACompaniesthatmayholdHGB Itisintendedforlandutilizationasthelocationforbuildingsor facilities Thisrighttobuildcanbetransferredtothethirdpartiesduringits existence AHGBistransferredbyperformingaSaleandPurchase Agreement(AktaJualBeli)intheformofanotarialdeedandit mustberegisteredwiththeLandOffice. Generally,investorsconstructingindustrialprojectsonindustriallandin IndonesialookforaHGBtitleovertheland. Therighttoprivateownershipandestablishmentandrelyontheprivate sectorareassumedastheprincipalengineofeconomicgrowthin Indonesia. StateownedEnterprises(SOEs)alsoplayadominantroleinmanysectors, includingoilandgasretailanddistribution,electricpowergenerationand transmission,civilaviation,banking,andfertiliserproductionand wholesaledistribution. DuringthesethreeyearsIndonesiahasbeenpromotedacompetitionin severalsectorsandreducedtheprivilegesawardedtoSOEs. TheStateMinistryforSOEsisformedin1998bytheParliament. Privatisationplaysanimportantroleonitsmandatebutpolitical oppositionhaseffectivelyhinderedsuchattempts.Forthepurposeof minimizingthelossandpreparingthemselvesforprivatisation,several provincialgovernmentshavemadesomeimprovementintheir managementandtransparencyofprovinciallyownedfirms(BUMDs). RighttoCultivate(HakGunaUsahaorHGU) ThespecificcharacteristicsofRighttoCultivateareexplainedbelow: ItisissuedbyStateownedlandspecificallygrantedforestateor plantationactivities Generally,itsdurationislimitedfor25andatmost35yearsandit hasthepossibilityofrenewal ItisgrantedandregisteredwiththeLandOffice

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HGUistransferabletothethirdpartiesintermsofitsexistenceby performingaSaleandPurchaseAgreement(AktaJualBeli)inthe formofanotarialdeed.ItmustberegisteredtotheLandOffice afterwardsforthecompletionoftransferregistration ThisHGUcanbeheldbyIndonesianindividualsorlegalentities, includingPMAcompanies. RightofUse(HakPakai) Itisarighttouseand/orcollectproducesfromlandadministered bytheStateoritisownedbyanotherperson Itislimitedindurationbythecontractordecree Itisusuallyfora25yearperiodwiththerenewalpossibilityand subjectedtospecificrestrictionsontheintendeduseoftheland Indonesiancitizens,Indonesiancorporations,foreignresidents andforeigncorporationsundertheBasicAgrarianLawcancarry aHakPakai Itneedsthepermissionoftherelevantauthorizedofficerforthe transferofaHakPakaioverStateland Ifitisaccordedwiththecontractgrantingtheright,thetransferof aHakPakaioverlandownedbyprivatecitizens. ObtainingLandTitlesbyPMACompanies Thereisoneimportantprocedurethathastobefollowedbyanew prospectivePMAcompanyandneedslandorrealestatetoperformits businessintermsoflandfortheprocessingoftheLocationPermit. APMAcompanyisallowedbyTheLocationPermittoacquiretheland thatisneededforitsoperation.TheLocationPermitalsofunctionsasfor thetransferofrightsandforutilizingthelandforitsinvestment. TheLocationPermithastobeobtainedfromtheRegent(Camat)with jurisdictionwheresuchlandislocated.ThePMAcompanyhastoprocess torelinquishthelandfromitsoriginallandownerswithin1236months (dependingtheacreageofland)aftertheissuanceofthisLocationPermit. ThecompanyPermitneedstobecarefullyobservedifitobtaineda LocationPermitpreviously,forexample,thepropertypurchaseshouldbe inconformancewithit. Theinvestmentlicensealsoneedstohaveaprovisionontheland. Thus,ifthepropertiesthathavebeenpurchasedbythecompanyhave morethantheacreagestatedinitsinvestmentlicense,thisactionwillnot bepermittedunlessthecompanyfirstsubmitsanapplicationwithBKPM (InvestmentCoordinatingBoard)forarevisionofitsinvestmentlicenseto includealargerlandarea.Itisexpectedforacompanytousethelandin

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conformancewiththetermsofdecreeanditsinvestmentapprovalfor thosethathasbeenobtainedadecreegrantingitsrightintheland. ProtectionofPropertyRights ForeignentitieshavenofreeholdrightstolandownershipinIndonesia. Foreigninvestorslandholdingsareusuallyobtainedthroughlongterm leaseagreements(normallyfor30years)withthegovernmentorprivate parties.Theseleaseholdingscanbeusedascollateral.Government regulationsallowmortgagestoberegisteredagainstrealpropertyand seagoingvesselsintheirappropriateregistries,aswellassecurityinterests inchattel,equipment,accountsreceivable,andinsuranceproceeds.A searchfacilitycurrentlyexistsonlyformortgages.Thelackoftransparency inIndonesiascourtsmeansuncertaintywhethersecurityinterestswillbe recognizedandenforced.Foreigncompaniesmayalsoestablishalimited companyunderIndonesianlawthatcanlegallyobtainrightstoland. Thecourtsystemdoesnotprovideeffectiverecourseforsettlingproperty disputes.TheneweragovernmentandIndonesiasdecentralization processunleashedaflurryofnewlandclaimsbylocalresidentsagainst companies,oftenoperatingongovernmentgrantedconcessionslocatedin theircommunities.Theproblemofincompleteorinaccuraterecord keepingiscompoundedbyanineffectiveandcorruptenforcementsystem. TheUSgovernmentinMay2003againplacedIndonesiaontheSpecial301 PriorityWatchListforinadequateprotectionofIntellectualProperty Rights(IPR),whereIndonesiahasbeensincethe1980s.TheIndonesian governmenthassteadilyimprovedtheregulatoryandlegalframeworkfor theprotectionofIPR;however,enforcementcontinuestofallshort.US businessesreportedthatIndonesiaranksasthethirdlargestproducerof piratedproducts.Theymaintainthat90percentofallCDs(audio,video, andsoftware)soldinIndonesiaarepiratedandestimatethatindustry sufferedlossesin2002ofUSD253million,a33percentincreaseoverprior year. Indonesiasnewcopyrightlaw(Law19/2002)takeseffectonJuly29,2003. ThenewlawincreasesfinesuptoRp500million(USD62,000)and providesforprisontermsofuptofiveyearsfordealersofpirated materials.Thelawdirectscasesofallegedcopyrightviolationstobetried incommercialcourts,andfortherenderingofjudgmentswithin90days. Aspartofthelawsimplementation,theMinistryofIndustryandTrade planstoissueopticaldiscregulationsthatwouldenhancethe governmentsabilitytoidentifyandprosecuteproducersofpirated products.Inanefforttoenhanceinteragencycoordinationonenforcement, IndonesiasMinistryofJusticerecentlyformedanIPRtaskforcemadeup

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ofthenationalpolice,customs,attorneygeneral,judiciary,andmembers ofthecomputersoftwareandentertainmentindustries.Thetaskforcehas alreadyconductedafewhighprofileraids. IndonesiaisamemberoftheWorldIntellectualPropertyOrganization, buthasnotyetratifiedtherelatedWIPOPerformancesandPhonograms Treaty(WPPT).TheMinistryofJusticepreparedaPresidentialdecree ratifyingWPPTlastyear,andJusticeofficialsexpectthePresidenttosign thedecreesometimein2003.Indonesiaaccededtonumerousinternational conventionsonintellectualpropertyrights,includingtheParisConvention fortheProtectionofIntellectualProperty;theBerneConventionforthe ProtectionofLiteraryandArtisticWorks(withareservationonArticle33); thePatentCooperationTreaty;TrademarkLawTreaty;theNice AgreementfortheInternationalClassificationofUnclassifiedGoodsand Services. Patents:Thecurrentpatentlawdatesfrom2001,whichamendedand consolidatedinasingletextallpreviouslegislation.In1997,Indonesian lawextendedthetermofpatentprotectionto20yearsfrom14years,and maintainedtheprovisionforatwoyearpatentextension.Theamendment allowsforthepatentingofplantandanimals.However,someofthe weaknessesoftheoldlawpersist.Chiefamongtheseflawsisthe requirementthataninventormustproduceaproductorutilizeavalue addedprocessinIndonesiainordertoobtainpatentprotectionforthe productorprocess.InventionsthatarecontrarytoIndonesianlawsand regulationsareexcludedfrompatentability,andthestandardfor excludinginventionswithoutdomesticcontentappearstobeinconsistent withTRIPSrequirements. Patents Asper1August2001,IndonesiaordainsaPatentsLaw(LawNumber14 of2001). Thereisadifferencebetweenlocalandforeignapplicants.Thelocalpatent applicantsmayapplypatentthroughtheDirectorateGeneralof IntellectualPropertyRights(DGIPR),theDepartmentofLawand HumanRights.Meanwhile,theforeignershavetosubmitanapplication throughapatentconsultantinIndonesia.DGIPRacknowledgesan internationalapplicationenteringthenationalphase(PCTapplication). Theinventionmustmeeteachcriteria:novelty,inventivestepand industrialapplicabilityinordertogetapatent. TherearetwotypesofpatentsinPatentsLawPatents: StandardPatent

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Protectsaninventionwithclaimcomprisesof process/manufacture,machine/apparatus,product,composition ofmatter(includingchemicalcompoundandmicroorganism). Thishas20yearsprotectionfromthefilingdateandnon renewable. SimplePatent Givessomeprotectiontotheinventionofnewapparatus, equipmentorproductthathasvaluebecauseofitsshape, configuration,constructionorcomposition.Ithas10years protectionfromthefilingdateandnoextension. Trademarks: IndonesiaenacteditsnewtrademarklawonAugust1st2001.Likethenew patentlaw,thelatestversionconsolidatedintoonetextaseriesof trademarklawsenactedoverthepast20years.Thenewlawraisedthe maximumfinefortrademarkviolationstoRp1billion(USD95,000)and slightlyreducedthemaximumpossibleprisonterm.Thegovernment justifiedthismovebyclaimingthatfinancialpenaltieswereagreater deterrenttoIPRviolatorsthanimprisonment.Foreignrightsholders, arguingthatmostIPRcasesneverresultinthemaximumsentence,had pushedforminimumsentencingguidelinesratherthanhigherfines. Thetrademarklawprovidesforthedeterminationoftrademarkrightsby priorityofregistration,ratherthanbypriorityofcommercialuse.Thelaw alsoprovidesfortheprotectionofwellknownmarks,butoffersno administrativeproceduresorlegalgroundunderwhichlegitimateowners ofwellknownmarkscancancelpreexistingregistrations.Currently,the onlyavenueforchallengingexistingtrademarkregistrationsinIndonesia isthroughthecommercialcourts,whichgenerallyhaveissueddecisions withinthreemonthsupholdinglegitimatetrademarks. TheLawNumber15of2001isthelawthatregulatesthemarksforgoods andservices.ThisMarksLawacquiresafirsttofileprinciplewherethe Stategrantstherightofmarktoapersonwhohasregisteredhisorher markatDGIPR. Forseveralreasonsexplainbelow,amarkcannotberegistered: Theapplicanthasabadfaith; Themarkisinthecontrarytopublicorder,moralityandthe existinglaw; Therearenodifferences; Themarkhasbeeninapublicdomain; Themarkisadescriptiontothegoodsorservices;

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Themarkhasasimilarityinprincipleorinitsentiretytotheother registeredmarkforthesamegoods; Themarkhasalikenessinprincipleorinitsentiretywithawell knownmarkforthesameofgoods; Themarkhasasimilarityinprincipleorinitsentiretytoawell knowngeographicalindication; Itisthenameofafamousperson; Themarkissimilartothenameorabbreviation,flag,logo, symbolofthestateornationalinstitutionorinternational institution;and Themarkissimilartothesignorstamporofficialstampusedby ofthestateorgovernmentinstitution. RegistrationProcedure Fortheapplicationofmarkregistration,ithastobesubmittedinthe IndonesianlanguagetoDGIPRwithenclosedtherequireddocuments suchasaPowerofAttorney,aDeclarationofOwnershipand25labelsof themarkconcerned. TheapplicationmustberegisteredthroughtheIndonesianproxybyway ofapowerofattorneyforapplicantwhodomicilesoutsideIndonesia. Forapplicationswhichdonotsatisfyalloftheformalrequirements,itwill bereturnedforcompletionand/orremedialactions,forwhicharemedial periodof2months(or3monthsforapplicationswithapriorityright)in principleisgranted. Applicationsthatarecompleteandmeetalloftheformalrequirements willbeexaminedbyDGIPRfortheirapprovalorrejection.Itsprocess shouldnottakelongerthan9months.Upontheissuanceofthe registrationapprovalbyDGIPR,theapplicationispublishedintheOfficial MarksGazette(BeritaResmiMerek)for3months.Whentheapplication formarkisbeingrejectedthentheapplicantmaysubmitanobjectionora responsetoDGIPRwithin30daysasofthedateoftherejectionletter.A markisregisteredfor10yearsfromthefilingdate.

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3.

Foreign investment

TheLawNumber1of1967isgoverneddirectforeigninvestmentin Indonesia.ItisamendedbyLawNumber11of1970(ForeignInvestment Law)andthelastamendmentwasLawNumber25of2007. TheselawsexplainthatIndonesianGovernmentdemandsforeign investorswhowanttoperformoperationinIndonesiatoformalimited liabilitycompany.Generally,itreferstoforeigninvestmentcompanyor PMA(PenanamanModalAsing)company. TheIndonesiangovernmentagencywhichissuesinvestmentlicensesis TheInvestmentCoordinatingBoard(commonlyreferredtoasBKPM, BadanKoordinasiPenanamanModal).TherearealsootherIndonesian governmentagenciesthatissueimportlicensesandpermitstoemploy nonIndonesianworkers.BKPMdoesnotissuelicensesforinvestmentsin banking,financialinstitutions,insurance,andoilandgas.Instead,these areissuedbyothergovernmentagenciesunderseparatelegislation.For instance,theDepartmentofFinancegovernstheforeigninvestmentin banking,insuranceandstockbrokingandtheDepartmentofMinesand Energyhasaroletoapprovetheforeigninvestmentintheoilandgas sector. SincethebulkofforeigndirectinvestmentinIndonesiaisregulatedbythe ForeignInvestmentLaw,thefollowingfocusesontherulesand regulationsthatmostinvestorswillencounterunderthislaw.Investment throughacquiringsharesinalistedcompanywillalsobediscussedbriefly atthecloseofthissection.AnimportantfeatureoftheForeignInvestment LawistheguaranteethattheIndonesiangovernmentwillnotnationalize aforeigninvestmentorrevoketheinvestorsrightstocontrolaforeign investment,exceptwhereitisdeclaredunderIndonesianlawtobeinthe nationalinteresttodosoandthenonlyuponpaymentofmutually agreeablecompensationdeterminedinaccordancewithprinciplesof internationallaw.Thisguaranteeisaccompaniedbyassurancesthatthe foreigninvestorwillhavetheauthoritytoappointthemanagementofthe foreigninvestmentcompanyandtherighttorepatriatecapitalintheform ofaftertaxprofits,reimbursementsofexpatriatemanpowerexpenses, depreciationoffixedassets,andotherreasons.TheForeignInvestment Lawalsoprovidesforarbitrationofinvestmentdisputesthatmayemerge betweeninvestorsandthegovernment,allowingforsuchdisputestobe submittedtointernationalarbitrationunderrulesoftheInternational ConventionforSettlementofInvestmentDisputes(ICSID).

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BusinessActivitiesOpenforForeignInvestment AlthoughtheForeignInvestmentLawisintendedtoencourageforeign directinvestmentinIndonesia,itrequiresthattheIndonesiangovernment mustregulatethefieldsofbusinessactivitythatareopentoforeign investmentandsettheprioritiesandanyspecialconditionstobeplaced onforeigninvestments.TheForeignInvestmentLawalsoallowsthe Indonesiangovernmenttodeterminethatcertainareasareclosedto furtherinvestment.Italsostipulatesthatindustriesrelatingtonational defencearetoremaintotallyclosedtoforeigninvestmentandthatcertain sectorsthatareimportanttotheStateandaffectthelivelihoodofthe Indonesianpopulationcannotbeundertakenbyforeigninvestorsalone (i.e.,withoutlocalparticipation). Thesesectorsare: harbours production,transmissionanddistributionofelectricpowertothe public telecommunications shipping aviation drinkingwater publicrailway atomicreactors massmedia. Foryears,theIndonesiangovernmenthasbeenissuedalistofdesired investmentsandfieldsofbusinessactivitywhichareclosedtofurther foreigninvestmentinaccordancewiththeprovisionsoftheForeign InvestmentLaw.ThislistiscalledtheNegativeListforInvestment(Daftar NegatifInvestasi). TherehasbeenaconjunctiveeffortinpreparationoftheNegativeListto holdthenumberofrestrictedsectorsataminimumandtoremove numerousconditionsthatpreviouslyhadbeenimposed.Foreigninvestors areverywelcomedwiththisapproach.Ithassignificantlyopenedmany sectorsofbusinessactivitytonewinvestments,bothforeignanddomestic. ThemostrecentNegativeListwasissuedin2008. ItpresentsthewillingnessoftheIndonesiangovernmentforattracting moreforeigninvestments,afterthesubstantialdecreaseininvestmentthat followedthefinancialcrisisthathitIndonesiaandAsiaingeneralinthe late90s.Theprocessofrecoverygraduallygavesomeimprovementin generalpublicsecurity,andotheractionsdirectedtomakeIndonesiamore attractiveforforeigninvestment.Itgivessomecontributiontoan increasingtrendofforeigninvestmentintoIndonesia.

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Allbusinesssectorsareopentoforeigndirectinvestmentbecauseofrecent liberalizationintheinvestmentsector,withthefollowingexceptions: Businesssectorsthatareclosedtoforeigninvestment Activityfield,referredtoasstrategicactivities,whichare significantfortheStateandsubjecttoamaximumforeign shareholdingof95%,including: o publicharboursandshipping o transmissionanddistributionofelectricpowerforpublicuse o telecommunications o aviation,publicdrinkingwater o publicrailways o nuclearpowergeneration,etc. TheBankingandForeignExchangeSystem ExchangeratesareissuedbytheCentralBankonadailybasisfor commercialbankingpurposes.However,fortaxpurposes(incalculating theIndonesianincometaxliabilityonforeigncurrencyincome)the exchangeratesareissuedonaweeklybasisbytheIndonesianMinistryof Finance.ForeignexchangecontrolsdonotexistcurrentlyinIndonesia, howevertransfersoffundsexceedingUSD10,000fromandwithin IndonesiashouldbereportedtotheCentralBank. OpennesstoForeignInvestment Indonesiaencouragesprivatesectorledgrowthandforeigninvestment. Foreigninvestmentapprovalsin2007increasedtoUSD10billion,from USD6billionin2006.ThebiggestforeigninvestmentsarebySingapore investors($130.2million)andarefollowedbyEngland($9.6million), Belgium($6.4million),andSouthKorea($5.7million).Investment approvalsforIndonesianfirmstrendedevenmoresteeplyupward, amountingin2007toUSD3.9billion,fromUSD2.7billionin2006. InvestmentLaw OnMarch29th2007,ParliamentpassedanewInvestmentlawaimedat improvingIndonesiasinvestmentclimateandattractinggreaterforeign investmentintoIndonesia.LawNumber25of2007wassignedbythe PresidentonApril26th,2007.Thelawestablishesbasicinvestment protectionsincludingthefollowing: Equaltreatmentfordomesticandforeigninvestors.However, equaltreatmentisnotapplicabletoinvestorsfromcountries whichobtain,specialrightsbasedinanagreementwith Indonesia.

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TheGovernmentofIndonesia(GOI)willnotundertakeany nationalizationaction,unlessbylaw.IntheeventthattheGOI takesactiontonationalize,itwillgrantcompensationwith specifiedamountbasedonthemarketvalueorarbitrationifthe twopartiesdonotagree. Investorsmayfreelytransferassetstootherparties,aslongas assetsarenotdetermined(bylaw)tobestateassets. Investorsmaytransferandrepatriatecapital,profits,royalties, incomefromassetsales,andothersources,inforeigncurrency,in accordanceprevailinglawsandregulations.However,thisdoes notrestricttherightoftheGOItoreceivetaxesorroyaltiesor implementlawsandregulationsrequiringreportingofthe transferoffunds.TheGOImayalsoimplementlawstoprotect therightsofcreditorsandtoavoidlossestotheState. InvestmentsdisputesbetweentheGovernmentandInvestorsmay besettledthroughinternationalarbitrationbaseduponprior agreementbetweentheparties. ThenewlawappearstoincreasetheauthorityoftheInvestment CoordinatingBoard(BKPM)inbothimplementingandproposing investmentpolicy.TheBKPMsdutiesunderthelawinclude coordinatingandimplementingonedoorintegratedservices, developinganinvestorroadmap,provideconsultationto investorsseekingcapitalinvestments,andothers.Althoughthe lawcontainsnoprovisionauthorizingBKPMtoapprove investments,BKPMapprovalisneededinorderforinvestorsto receiveimmigrationfacilitiesorinvestmentincentives. TheRoleoftheBKPM Foreigndirectinvestmentinthemanufacturing,industrialornonfinancial servicessectorsislicensedbyBKPM.Investmentintheareasofbanking, insurance,generalmining,oilandnaturalexploration,productionand relatedactivitiesarelicensedbyotherregulatorybodies. SectorRestrictions RestrictionsonforeigninvestmenthavebeenregulatedbyRegulationof ThePresidentofTheRepublicIndonesiaNo.77of2007concerninglistof businessfieldsthatareclosedtoinvestmentsandbusinessfieldsthatare conditionallyopenforinvestments.Everysectorhaslimitationsofforeign capitalownership.Theseincludelimitationsupto95%offoreigncapital ownershipinsomeEnergy&mineralsresourcessectors. Anenvironmentalimpactstudymayberequired,thereforetheArticlesof Associationofcorporateshareholders,orpassportsofindividuals,should

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beattached.TheBKPMaimstoprocessapplicationswithinonemonth.In practice,approvalsmaybefaster. InvestmentApplication Theprocessofforeigninvestmentbeginswiththesubmissionofaformal applicationtotheBKPM.Theapplicationmustincludeadescriptionofthe projectincludingnamesofparticipants,totalcapitalrequired,employment details,productionprocessdescription,powerrequirementsand environmentalissues CapitalRequirements ThereisminimumcapitalrequirementbasedonLawNo.40/2007 concerningLimitedLiabilityCompanies.TheyshouldprepareIDR50 millionforminimumcapitaland25%ofcapitalshouldbeissuedandpaid upatthetimeofincorporation.TheBKPMwillgrantapprovalbasedonits assessmentoftheneedoftheproject.Sharecapitalshouldbepaidupin cashorinkindintheformofeithertangibleorintangibleassets.Assets otherthancashshouldbeindependentlyappraised.TheBKPMcan providearangeoffacilitiesincludingimportdutyexemptionsbasedon thesubmissionofamasterlist,investmentrepatriationguaranteesand possibletaxholidays.

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4.

Setting up a Business

LegalEntities Thereisacollectionofrecognisedlegalentitiesforsettingupabusiness inIndonesia,whichisasfollows: PersekutuanPerdata(PP).Apartnershipbetweentwoormore peopleinoneagreementtomakeaprofit. Firma(Fa).Apartnershipbetweentwoormorepeopleinone agreementtomakeacollectivenametodealwiththirdpartiesin makingaprofit. PersekutuanKomanditer(CommanditaireVennootschapCV).A partnershipbetweentwoormorepeopleinoneagreementto makeaprofit.Onepartnerisallowedtoinvestmoneyintothe partnershipwithouthavingtomanagethecompany. However,theabovebusinesstypesapplyonlytolocalcitizens.Thetypes oflegalentitiesthatapplytoforeigninvestorsare: RepresentativeOffice Asthetimegoesby,theglobaleconomicactivityhasexperiencedsome growth.Therearealargenumberofcompanieswhichhavebeen expandedtheirbusinessoperationsbyincludingoperationsandofficesin foreigncountries. Manycompanieshavetheirownrepresentativeofficeinothercountries althoughtheymaynothaveproductionfacilitieslocatedinthosecountries inordertomaintaintheclosesupervisionwiththemanagementofforeign businessactivities. ArepresentativeofficeinIndonesia InIndonesia,arepresentativeofficemaynotownormaintainproduction facilitiesoroperationalactivities,andtherefore,cannotacceptorders, participateintenders,signcontractsorengageintheimportationofgoods. ArepresentativeofficeinIndonesiacanbeanIndonesiancompany,an Indonesianindividual,oranexpatriateindividual.However,awork permitfortherepresentativehastobeappliedtogetherwiththe applicationfortherepresentativeofficelicenseiftherepresentativeoffice istobeheadedbyanexpatriate. ToestablishaRepresentativeOfficewithpermissionfromtheMinistryof IndustryandTrade,thecompanysheadofficeneedstoissuethreeletters:

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i. LetterofIntentstatingtheintentionofthecompanytoestablisha representativeoffice. ii.LetterofAppointmentstatingtheappointmentofthechief representative. iii.LetterofStatementstatingthattheChiefRepresentativewill followIndonesianregulations. Thethreelettersmustbestampedbyanotarypublicandapprovedbythe IndonesianEmbassyinthehomecountryofthefirm.Uponapproval,the IndonesianEmbassywillissueaLetterofNotification(SuratKeterangan). Uponcompletionofthefourletterstheprocesscancontinuetotherelated governmentministryinJakarta,toincorporateafixedlicensefor2years. Otherministriesrequiredifferenttypesofletters. LimitedLiabilityCoorPerusahaanTerbatas(PT) ForeignDirectInvestment,mostoftenreferredtobyitsIndonesian abbreviationPMA,isgovernedprimarilybytheForeignCapital InvestmentLawNo.1of1967,andamendedbyLawNo.25of2007.Asa legalbasis,thelawisfairlyaccommodativetovariousderegulatory policiesandmeasurestodate,andthosethatwillbetakenbythe governmentintheforeseeablefuture. InadditiontoInvestmentLawNo.1/1967,PMAcompaniesaswellas othercompanies,intheirbusinessoperationsarestillsubjectto sector/industrialpoliciesasrequiredbycorrespondingministries. EstablishingaCompany InvestmentApprovalProcess Thelifeofforeigninvestmentcompanieshasbeenextendedbyallowing therenewalofthefixedoperatinglicense(IUT)foranadditional30years. Inotherwords,theinitiallicensesarevalidfor3years(SPPPBKPM),plus 2x30years,foratotalof63years. Theprocessofincorporationofanewforeigndirectinvestmentcompany: InitialLicense(validfor3years) Step1.Prepareandsendtheapplicationwithrequireddocumentation, compiledaccordingtotheinvestmentplan. Setupajointventureagreementifinvestorsplantomaketheinvestment withIndonesianpartners. Step2.ObtaintheInitialLicense(SPPPBKPM),validfor3years. Step3.IncorporationofSPPPBKPM

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a.

b. c.

EstablishArticlesofAssociationwithaPublicNotary detailingproofofcapitalinvestment,andsendittothe MinistryofJusticeforapprovalandissuanceofState Gazette. Registrationofcompanyaddresswithlocalcouncil (domicile). IRDregistration(NPWP+PKP)

RegistrationwiththeDepartmentofIndustryandTrade(TDP) Step4.Keyexpatriatepositions(workpermits). FixedOperatingLicense(30years) Step5.Prepareandsendthe6monthreport(LKPM)totheprovincial BKPMofficeaswellasUUG(HO)nuisanceacttotheregionalofficeof BKPM. Step6.IncorporatefacilitiesMasterlist/APITorpropertyownership. Step7.ProvincialapprovalforFixedLicenses(BAP). Step8.FixedLicense(IUT)for30yearsisissued. ALimitedLiabilitycompanyisestablishedeitherunderforeign shareholdersorthroughajointventurewithIndonesiansorwhollyowned byIndonesianshareholdersandmustbeapprovedbytheMinistryof Justice.ItdoesntmatterwhoistheownerofanIndonesianLimited Liabilitycompany,theymustcomplywithIndonesianlawandare consideredanIndonesiancompanyandthecompanycansubsequentlybe changedorsoldtotheshareholders,foreignorIndonesian. TogetlicenseofChangeofCapitalandChangeofOwnertheapplications shouldbesubmittedtoBKPM.AccordingtoBKPM,theresnochargeto arrangelicences. OffshoreIncorporation Insomesituations,itmaybetoaninvestorsadvantagetoincorporate theirfirmoffshore,whileoperationsarecarriedoutinIndonesia. Theadvantagesanddisadvantagesofoffshoreusuallyfocusonthe facilitiesofferedbytaxhavensinnationslikeMauritiusandtheCayman Islands.Yourmanagementconsultantcanassistyouinmakingthis importantdecision.

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5.
Visas

Labour

Indonesiaissuesarangeofdifferentclassesofvisadependingonthe purposeofaforeignersvisit.Shortvisitvisasvalidfor60daysmaybe issuedonarrivalatanofficialentrypointtopassportholdersfrommost developedandneighbouringcountries.Thepassportsvalidityshouldbe atleastsixmonths. Businessvisasmaybeissuedforbusinessvisitsnotincludingwork. BusinessvisasareissuedbyIndonesianembassiesoverseas,basedona letterofinvitationfromthepartytobevisited.Businessvisasmaybe renewed,onceinthecountry,foruptoamaximumofsixmonths. ForeignersintendingtotakeupemploymentinIndonesia,togetherwith anyforeigndependents,shouldapplyforaKITASorsemipermanent residencevisa.WhilemuchofthepreparatoryworkisdoneinIndonesia, thevisasareissuedbyembassiesoverseasbasedonatemporarystayvisa, orVITAS,issuedbytheimmigrationauthoritiesinJakarta.AKITASvisa isissuedforayear,butmayberenewedforuptofouryearsafterwhicha freshapplicationisrequired. Workpermits AllforeignersplanningtoworkinIndonesiamustobtainaworkpermitin additiontoaKITASvisa.WorkpermitsareissuedbytheDepartmentof ManpowerapproximatelyconcurrentlywiththeVITASvisa.Employment offoreignersmustbeinthecontextofanapprovedmanpowerplan.Many expatriatesareemployedastechnicaladvisers.TheBKPMwillapprovea certainnumberofpositionsforexpatriatesascontainedintheinvestment application. Otherrequirements Allforeignresidentsmustalsoholdapolicepass.Workpermitholders mustpayinadvanceanannualtraininglevyofUSD1,200beforeissueor renewaloftheworkpermit.AllforeignersholdingaKITASvisarequirea validexit/reentryvisatoleaveandreturntoIndonesia.Afinalexit permitonlyisrequiredwhenaworkpermitistobecancelledorwillnot berenewed. ThedevelopmentofIndonesianemploymentregulationsisprogressive andfurtherchangesareexpectedinthecomingyears.Duetotheactive

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involvementofvariousNGOs,theawarenessofIndonesianlaborershas alsoincreasedduringthelast10years. EmploymentAgreements EmploymentagreementsinIndonesiaarecategorizedinto: EmploymentAgreementsforadefiniteperiodinwhichan employmentrelationshiphasadefinitetermorbasedonthe completionofacertainjob(e.g.,employmentbetweenacompany andaninterimworker;oracontractinwhichacompanyemploys someonetosetupacomputernetwork) EmploymentAgreementsforanindefiniteperiodinwhichthe employmentagreementdoesnothavespecifictermorrequirea completionofacertainjob.

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6.

Taxation

Taxsystem LAWOFTHEREPUBLICOFINDONESIANO.28OF2007ABOUT THETHIRDAMENDMENTOFLAWOFTHEREPUBLICOF INDONESIANO6OF1983ABOUTTAXADMINISTRATIONLAW. ThislawgovernsthetaxsysteminIndonesia. Newlaws ThecurrentframeworkofIndonesiastaxlawsdatesfrom1983with subsequentrevisions,mostrecentlyin2007.Thereareseparatelaws coveringincometax,valueaddedtax(VAT)andsalestaxonluxurygoods. Othertaxlawsincludethelawonthetaxingoflandandbuildingsandthe lawonstampduty.Individualarticlescontainedinthelawsmaybe supportedbyimplementingregulationsanddecrees,government regulationsanddecreesoftheDirectorateGeneralofTaxation.The governmentiscommittedtoagreaterintensificationoftaxcollection includingincreasingthenumberofregisteredtaxpayers. Incometax Incometaxisappliedtoresidentcorporationsandindividualsonmost sourcesofincreaseineconomicwealth.Acompanyistreatedasaresident ofIndonesiafortaxbyvirtueofitsestablishmentoritsplaceof managementinIndonesia.Aforeigncompanycarryingoutbusiness activitiesthroughapermanentestablishment(PE)inIndonesiawill generallyhavetoassumethesametaxobligationsasaresidenttaxpayer ResidenttaxpayersandIndonesianPEsofforeigncompanieshavetosettle theirtaxliabilitieseitherbydirectpayments,bywithholdingbythird parties,oracombinationofboth.ForeigncompaniesthatdonothaveaPE inIndonesiaaretosettletheirtaxliabilitiesinrespectoftheirIndonesian sourcedincomebywayoftheIndonesianpartypayingtheincome withholdingthetax. Incometaxshallbeimposedonanytaxpayerinrespectofincomeduringa taxableyear.Thus,theimposingofincometaxhastocarryoutthatthere aretaxpersonandtaxobjecti.e.theincome.Ataxableyearisacertain periodforimposingtheincometax.Thetaxableyearisthecalendaryear. TheIncomeTaxLawgovernsincometaximpositiononTaxpayerrelated withincomereceivedoraccruedinataxableyear.Thetaxpayeris subjectedtotaxifthatpersonreceivesoraccruesincome.ATaxpayerwho receivesincomeiscalledaTaxpayerunderthislaw.ATaxpayeristaxed

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ontheincomereceivedoraccruedduringataxableyearorafractionofa taxableyear,ifthetaxobligationscommenceorendinataxableyear. Taxpayer Taxpayersconsistofresidentandnonresidenttaxpersons.Theresident taxpayerisanindividualandanentity.Thenonresidenttaxpayerisa PermanentEstablishment(PE)andNonPE.TheresidenttaxpayerandPE mustfiletheannualtaxreturn.Theindividualresidenttaxpayerisan individualwhoresidesinIndonesiaorpresentinIndonesiaformorethan 183(onehundredandeightythree)dayswithinany12(twelve)month period,oranindividualwhoinparticulartaxableyearispresentand intendstoresideinIndonesia.Theentityresidenttaxpayerisanentity establishedordomiciledinIndonesia. Thenonresidenttaxpayermeans: AnindividualwhoresidesinIndonesiaorispresentinIndonesiaformore than183(onehundredandeightythree)dayswithinany12(twelve) monthperiod,oranindividualwhointhatparticulartaxableyearis presentinthecountryandintendstoresideinIndonesia. AnindividualwhodoesnotdomicileinIndonesiaorispresentin Indonesiafornotmorethan183(onehundredandeightythree)days withinany12(twelve)monthperiod.Anentitywhichisnotestablishedor domiciledinIndonesiaderivingincomefromIndonesiaotherthanfrom conductingbusinessorcarryingoutactivitiesthroughapermanent establishment. Thesignificantdifferencebetweenaresidenttaxpayerandanonresident taxpayeristhataresidenttaxpayeristaxedonhis/herincomeoriginating fromIndonesiaand/orfromabroad,howeveranonresidenttaxpayeris taxedonhis/herincomederivedonlyfromIndonesia.Therefore,any individualresideinIndonesiaoranyindividualstayinIndonesiaformore than183dayswithinaperiodof12months,oranyindividualwho,within afiscalyear,staysinIndonesiaandintendtoresideinIndonesia,istaxed onhis/herworldwideincomeunderanynameandformwhatsoever. TaxableObject TheTaxableObjectisincome.Increasingineconomicbenefitderivedbya taxpayerandmaybeusedforconsumptionorincreasethewealthofthe taxpayerconcerned,underanynameandformwhatsoever,including: Anyremuneration/compensationrelatedwithwork,services,or activities,gainedfromemploymentorindependentprofession,including: wages,salary,honoraria,doctorsfees,actuarialfees,accountantsfees, lawyersfees

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Anyincomeorcompensationfromanybusinessoractivity Anyincomefromcapitalincludefrommovableandimmovable assets,suchasrewardandgainfromloancondonation (haircuts),etc. WithholdingTaxes WithholdingtaxesisamainsystembywhichIndonesianincometaxhas beengathered.Wheneverspecificincomeitemissubjecttowithholding tax,thetaxpayerhastheresponsibilitytowithholdorcollectthetax. Theratesofwithholdingtaxvaryaccordingtothenatureoftheincome source.Ratesfordomesticpaymentsextendupto15%.Paymentsmade overseasoncertainsourcesofincomemaybeliabletowithholdingtaxof upto20%.Applicabletaxtreatiesmayreducetherateofwithholdingtax. Generally,thepayerisheldresponsibleforwithholdingorcollectingthe tax.Thesewithholdingtaxesarereferredtousetherelevantarticleofthe IncomeTax(PPh)Law,asfollows. (i) Article21,incometax

Taxableincomeiscalculatedfromthegrossrevenuelessoccupationcost (biayajabatan),pensioncontributions,includingcontributionsOldAge Saving. TheregulationofdirectorGeneralofTaxforper31/PJ/2009aboutthe technicalguidelinesofwithholding,paymentandfilingofArticle21 IncomeTaxand/orArticle26IncomeTaxrelatedtothework,services andtaxpayeractivity. EmployersareneededtowithholdArticle21incometaxfromthesalaries payabletotheiremployeesandpaythetaxtotheStateTreasuryontheir behalf.Thesamewithholdingtaxisapplicabletootherpaymentstonon employeeindividuals(e.g.,feespayabletoindividualconsultantsor serviceproviders).Residentindividualtaxpayersthatdonthavean NPWP(TaxIDNumber)aresubjecttoasurchargeof20%inadditionto thestandardwithholdingtax. (ii)Article22incometax Article22incometaxisapplicabletothefollowing: Theimportofgoods; ThesaleofgoodstothegovernmentrequiringpaymentfromtheState Treasury,theStateBudgetGeneralDirectorate,orcertainstateowned companies;

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Thesale/purchasingofautomotives,steel,cement,cigarettes,andpaper products;and Thesale/purchasingofluxurygoods. Thetaxratesfortheseareasfollows:


1.Theimportofgoodsusingan ImporterIdentification(API) 2.Theimportofgoodswithout anAPI 3.Thesaleofgoodstothegovernment andrequiredpaymentfromtheState Treasuryandcertainstateowned companies 4.Thepurchasingofsteelproducts 5.Thepurchasingofautomotive products 6.Thepurchasingofpaperproducts 7.Thepurchasingofcement 8.Thepurchasingofluxurygoods 1.5% 7.5% TaxRate 2.5% TaxBase Importvalue,i.e.,CIFvalueplus dutiespayable Importvalue,i.e.,CIFvalueplus dutiespayable Sellingprices

0.30% 0.45%

Sellingprices Sellingprices

0.10% 0.25% 5%

Sellingprices Sellingprices Sellingprices

TaxpayerswithoutanNPWParesubjecttoasurchargeof100%in additiontothestandardtaxrate. (iii) Article4(2)finalincometax

Residentcompanies,PEs,representativesofforeigncompanies, organisations,andparticularindividualsarerequiredtowithholdfinaltax fromthefollowinggrosspaymentstoresidenttaxpayersandPEs:


Description 1.Rentaloflandand/orbuildings TaxRate 10%

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Description 2.Proceedsfromtransfersoflandandbuilding rights

TaxRate 5%or1%(fortransfersofsimple housesandapartmentsconductedby taxpayersengagedinaproperty developmentbusiness) 2%forsmallqualificationservice provider)or3%(forother qualificationserviceprovider)or4% (fornonqualificationservice provider). Notes: Forcontractssignedbefore1January 2008,applies: Thenewtaxratesasmentioned aboveforpaymentcontractsorpart ofthecontractsasof31December 2008andonwards. Theprevioustaxratesforthose contractswhicharesignedbefore January1,2008.

3.Feesforconstructionworkperformance

4.Feesforconstructionworkplanning

4%(forqualificationservice provider)or6%(fornon qualificationserviceprovider) 4%(forqualificationservice provider)or6%(fornon qualificationserviceprovider) 20%

5.Feesforconstructionworksupervision

6.InterestontimeorsavingdepositsandonBank IndonesiaCertificates(SBIs)otherthanthatpayable tobanksoperatinginIndonesiaandtogovernment approvedpensionfunds 7.Interestonbondsotherthanthatpayabletobanks operatinginIndonesiaandgovernmentapproved pensionfunds

15%oriftherecipientisamutual fundregisteredwiththeCapital MarketSupervisoryBoard (BAPEPAM),thetaxrateis0%for 20092010,5%for20102013and15% thereafter.Iftherecipientisanon residenttaxpayer,thetaxrateis20% oralowerrateinaccordancewith

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Description

TaxRate therelevanttaxtreaty

8.SaleofsharesonIndonesianstockexchanges Foundershareholdersmayopttopaytaxat0.5%of themarketpriceoftheirsharesuponlisting.Ifthey do notoptforthis,gainsonsubsequentsalesaretaxed undernormalrules 9.Incomefromlotteryprizes 10.Forwardcontractderivatives

0.1%

25% 2.5%applicabletotheinitialmargin

(iv)Article23incometax THEREGULATIONMINISTRYOFFINANCENO.244/PMK.03/2008 IncomeTaxArticle23. Certaintypesofincomepaidorpayabletoresidenttaxpayersaresubject toArticle23incometaxatarateofeither15%or2%ofthegrossamounts: Article23incometaxisdueatarateof15%ofthegrossamountsonthe following: b. Article23incometaxisdueatarateof2%forgrossamountsonthe feesofthefollowing: 1. Rentalsofassetsotherthanlandandbuildings 2. Technicalservices 3. Managementservices 4. Consultingservices 5. Appraisalservices 6. Actuaryservices Dividends Interest,includingpremiums,discounts,andloanguaranteefees Royalties Prizesandawards.

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7. Accountingservices 8. Designservices 9. Drillingservicesforoilandgasminingexceptforthose performedbyaPE 10. Supportservicesforoilandgasmining 11. Miningservicesotherthanoilandgassupport 12. Flightandairportsupportservices 13. Forestfellingservices 14. Wasteprocessingservices 15. Laboursupply/outsourcingservices 16. Intermediary/agencyservices 17. Custodianshipandstorageservicesexceptforthose performedbystockexchangesKSEI,andKPEI 18. Sounddubbingservices 19. Filmmixingservices 20. Computerandsoftwarerelatedservices 21. Installationservices(forexample,ofelectricity,machinery, ortelephoneequipment)exceptforthoserenderedby qualifyingconstructioncompanies 22. Maintenanceandimprovementservices(forexample,for electricity,machinery,ortelephoneequipment)exceptfor thoserenderedbylicensedconstructioncompanies 23. Manufacturingservices(Maklon) 24. Investigationandsecurityservices 25. Eventorganisationservices 26. Packagingservices 27. Provisionofspaceand/ortimeforthedisseminationof information 28. Pesteradicationservices

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29. Cleaningservices 30. Cateringservices. (v) Article26Nonresidents

Residenttaxpayers,organisations,andrepresentativesofforeign companiesarerequiredtowithholdtaxatarateof20%fromthefollowing paymentstononresidents: a. Ongrossamounts: 1. Dividends 2. Interest,includingpremiums,discounts(interest),swappremiums, andguaranteefees; 3. Royalties,rentsandpaymentsfortheuseofassets; 4. Feesforservices,work,andactivities; 5. Prizesandawards; 6. Pensionsandanyotherperiodicpayments; 7. AftertaxprofitsofabranchorPE. b. OnEstimatedNetIncome(ENI),beingaspecifiedpercentageofthe grossamount:
ENI EffectiveTax Rate 10% 2% 1% 5%

Insurancepremiumspaidtonon residentinsurancecompanies: bytheinsured byIndonesianinsurancecompanies byIndonesianreinsurancecompanies SaleofnonlistedIndonesiancompanysharesby

50% 10% 5% 25%

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nonresidents

ENI

EffectiveTax Rate

25% Salebynonresidentsofaconduitcompany wherethiscompanyservesasanintermediaryfor theholdingofIndonesiancompanysharesora PE

5%

Wheretherecipientisresidentinacountrywhichhasataxtreatywith Indonesia,thewithholdingtaxratesmaybereducedorexempted. PeriodofTaxPaymentandTaxReturnFiling MonthlyTaxObligations TypeofTax 1.Article21/26Income Tax 2.Article23/26Income Tax 3.Article25Income Tax 4.Article22Income TaxTaxCollector 5.Article4(2)Income Tax 6.VATandLST TaxableEnterprise 7.VATandLST TaxableCollector AnnualTaxObligations TypeofTax 1.CorporateIncome Tax DeadlineforaTax Payment Theendingoftheforth monthafterthebook yearendbeforefiling thetaxreturn Theendingofthethird monthafterthebook yearendbeforefiling DeadlineforaTax Return Theendingofthe fourthmonthafterthe bookyearend Theendingofthe thirdmonthafterthe bookyearend DeadlineforaTax Payment thofthe The10 followingmonth The10thofthe followingmonth The15thofthe followingmonth The10thofthe followingmonth The10thofthe followingmonth The15thofthe followingmonth The15thofthe followingmonth DeadlineforaTax Return thofthe The20 followingmonth The20thofthe followingmonth The20thofthe followingmonth The20thofthe followingmonth The20thofthe followingmonth The20thofthe followingmonth The20thofthe followingmonth

2.IndividualIncome Tax

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TypeofTax

3.LandandBuilding (L&B)tax

4.Dutiesonthe acquisitionsofL&B Rights

DeadlineforaTax Payment thetaxreturn Sixmonthsafterthe receiptofaTaxDue NotificationLetter (SPPT)fromDGT Office Onthedateof acquisition

DeadlineforaTax Return N/A

N/A

EXTENDEDFILINGDEADLINE Intermsofannualincometaxreturn,thereisapossibilityfortaxpayersto extendtheirfilingdeadlineuptotwomonths.Itcanbeperformedby filingawrittennotificationtotheDGTbeforethedeadlineandattachinga tentativetaxcalculation.Basedonthetentativecalculation,thetaxdue havetobesettledbeforesubmittingtheextensionnotification. A2%ofinterestpenaltypermonthisapplicabletothedifferenceuntilthe shortfallispaidwhenevertheactualtaxdueaccordingtothefinaltax calculationishigherthanthetentativecalculation. TAXRATES CORPORATEINCOMETAXRATES Theapplicablecorporatetaxratein2009isaflatrate28%.Itwillbe decreasedupto25%in2010.Thereisa5%taxdiscountofthestandard rateforpubliccompaniesthatmeetaminimumlistingrequirementof40% andotherconditions.Itwillprovideaneffectivetaxrateof23%in2009 and20%in2010. TaxCutforpubliccompanies Startingfrom1January2008,a5%corporatetaxdiscountisawardedto publiccompanieswhomeetthefollowingconditions: Thereisatleast40%publiclyownedoftheirpaidshares Thecompaniesmustcomprise300individualstothelowest degree.Eachindividualholdlessthanfivepercentoftheirpaidin shares Thosetwoconsiderationsmustbefulfilledforatleastsixmonths (183days)inataxyear.

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However,theseserviceswillnotbeapplicableforthoseyearswhereeither orbothoftheconditionsarenotfulfilled. Smallenterprisesareentitledtoataxdiscountof50%ofthestandardrate forataxableincomeuptoRp.4.8billion. Thetermofsmallenterprisesisacorporatetaxpayerthathasanannual turnoverofnotmorethanRp.50billion. Taxcutforsmallenterprises PTYturnoverin2009isRp4.5billionwithtaxableincomeofRp500 million.Calculationsofincometaxpayable:50%x28%xRp500million= Rp70million. PTXturnoverin2009isRp30billionwithtaxableincomeofRp3billion. Calculationsofincometaxpayable: 1. Taxableincomeoftheturnoverthatenjoyingfacilities: (Rp4.8billion:Rp30billion)xRp3billion=Rp480million 2. Taxableincomeoftheturnoverthatdoesnotenjoyingfacilities: Rp3billionRp480million=Rp2.52billion Incometaxpayableis: (50%x28%)xRp480 million 28%xRp2.52billion Incometaxpayable IndividualIncomeTax MainPersonalRelief Annualnontaxableincome(PTKP)forresidentindividualsisasfollows: Taxpayer Rp. 15,840,000 = Rp 67.2 million

= =

Rp Rp

705.6 772.8

million million

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Spouse Eachdependent(max.of3) Occupationalexpenses(5%ofgrossincome,max.Rp. 500,000/month) EmployeecontributiontoJamsostekforoldagesecurity savings(2%ofgrossincome) Pensionmaintenanceexpenses(5%ofgrossincome, Max.Rp200,000/month)

1,320,000 1,320,000 6,000,000

Full amount 2,400,000

Theratesofwithholdingtaxvaryaccordingtothenatureoftheincome source.Ratesfordomesticpaymentsextendupto15%.Paymentsmade overseasoncertainsourcesofincomemaybeliabletowithholdingtaxof upto20%.Applicabletaxtreatiesmayreducetherateofwithholdingtax. NormalTaxRates Theincometaxisusedtofindhowmuchyearlytaxpayerincometax.Tax rateforresidentindividualtaxpayer: I:5%(fivepercent)forRp.0Rp.50,000,000.00 II:15%(fifteenpercent)foroverRp.50,000,000.00Rp. 250,000,000.00 III:25%(twentyfivepercent)foroverRp.250,000,000.00Rp. 500,000,000.00 IV:30%(thirtypercent)foroverRp.500,000,000.00 CalculationofIndividualTaxableIncome Taxableincomeiscalculatedafterallowabledeductions.Forindividuals thereareincometaxexclusionswhicharesetatrelativelylowincome levels.Individualsarebroadlyliabletoincometaxoncashincome. Benefitsinkindprovidedbyemployerstoemployeesarenottaxableto individualsbutarenondeductibleagainstcorporatetaxableincome. Employersarerequiredtowithholdincometaxfromemployeesandpaid totheStateTreasuryeverymonth. Employersprepareaconsolidatedannualtaxreturndetailingeach employeesindividualtaxcalculation.Theemployeeshouldthenfilea separatepersonalreturn.Taxreturnsshouldbefiledby31Marchofthe yearfollowingtheyearofassessment. Taxablebusinessprofitsarecomputedonthebasisofnormalaccounting principlesasmodifiedbycertaintaxadjustments.Generally,adeduction

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isallowedforallexpenditureincurredtoobtain,collect,andmaintain taxablebusinessprofits.Atimingdifferencemayariseinrespectofwhen anexpenditurerecordedasanexpenseforaccountingcanbeclaimedasa deductionfortax. Corporatetaxableincomeiscalculatedafterthedeductionofmostnormal businessexpenses.Ratesofdepreciationareregulated,althoughtaxpayers mayelecteitherthestraightlineordoubledecliningmethod.Provisions thatarenotdeductibleareemployeebenefitsinkindasmentionedabove. Companiesmaychoosetobetaxedonthebasisofafinancialyearother thanthecalendaryear.BooksofaccountmaybekeptinEnglishbasedon theDGTsapproval.Foreigncurrency,i.e.USdollars,maybeusedasthe reportingcurrencyifappropriateapprovalisobtained.Annualfilings shouldbelodgedwithinthreemonthsofthefinancialyear,thoughan extensionmaybeobtained. PaymentofTaxes Taxesarepaidbymonthlyinstalmentsonacurrentyearbasis.Theregular instalmentamountisbasedonthepreviousyearsfilingsaftertaking creditforwithholdingsatsource.Anyshortfallshouldbesettledbythe 25thdayofthethirdmonthfollowingtheendofthefinancialyear. Overpaymentsoftaxmayberecovered,butonlyafterataxaudithasbeen completed.Theselfassessmentprinciple,however,underpinsIndonesian incometaxlaw.Asubstantialpartofindividualincomeiscollectedbyway ofwithholdingbythirdparties. ValueAddedTax LawoftheRepublicofIndonesianumber18of2000thesecond amendmentoftheLawNo81983abouttheValueAddedTaxandLuxury SalesTax. VATisapplicabletotheimportanddeliveryofmostgoodsandservices. InsuranceandbankingarenotsubjecttoVAT.TheVATstandardrateis 10%.Theexportofgoodsiszerorated.Taxpayersarerequiredtosubmita taxreturninthefollowingmonthandshowsdetailsofalloutputand inputVAT.ThenetoutputVATispayablebythe20thofthefollowing month.AnexcessofinputVATmaybecarriedforward(compensated)to thefollowingmonthorrefunded.SupplierswhotradewithsocalledVAT CollectorswillnotcollectVATfromtheircustomersorclients.TheVATis thenpaiddirecttotheStateTreasury.Suchsuppliersmaybeinaconstant overpaymentsituationandmaybeforcedtoseekregularrefunds.

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AccordingtoArticle4oftheIndonesianVATLaw,VATisthetaximposed on: 1. 2. 3. 4. 5. 6. deliveryoftaxablegoodswithinthecustomArea importoftaxablegoods renderingoftaxableserviceinthecustomArea intangibletaxablegoodsutilizationobtainedfromoutsidethe customsareainthecustomsarea taxableserviceusageandobtainedfromoutsidethecustoms areaofIndonesiawithinthecustomsArea exportoftaxablegoods.

NonTaxableGoodsandServices Thereareseveralkindsofgoodswhichareexcludedastaxablegoodsin Article4AofIndonesianVATLaw.Theyare: 1. Productsofmininganddrillingthatisextracteddirectlyfrom thesource,forexamplecrudeoil,naturalgas,geothermal energy,sandandgravel,coal(beforeprocessingintocoal briquettes),ironore,tinore,copperore,goldore,silveroreand bauxiteore; BasicCommoditiesforpublic,forexamplerice,salt,corn,sago andsoybeans; Foodandbeveragesservedinhotel,restaurant,andsuchother places; Money,gold,andvaluabledocuments,securities.

2. 3. 4.

NonTaxableServices Therearealsoseveraltypesofservicesthatarealsoexcludedastaxable services.Theyarethefollowing: 1. medicalhealthservices 2. socialwelfareforexampleorphanagesandfuneralservices 3. postaldelivery 4. banking,insuranceandfinancialleasingservices 5. religiousservices 6. education

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7. cultureandentertainmentwhichhasbeenimposedunder regional 8. entertainmenttax 9. broadcastingservicesnotincludeadvertising 10. shippingandinlandpublictransportation,internationalair 11. transport 12. manpower 13. renderingofservicesbythegovernmentineffortstorunthe governmentingeneral 14. hotelservices. VATMechanism Ingeneral,thetaxpayerswhoprovidetaxablegoodsorperformtaxable serviceshavetoimposetheVATtothebuyer.TheimposingVATis performedbywithholding10%VATrateofthetaxbase.VATonthe exportoftaxablegoodsisfixedat0%.TheeffectiveVATrateondeliveries andimportoftobaccoproductsis8.5%. ThetaxpayerhastomakeataxinvoiceasevidenceforthisVAT withholding.Thetaxinvoiceismadewhentheysellanditiscalledoutput taxinvoice.TheVATwithheldiscalledoutputtax. Whentaxpayersbuytaxablegoodsortaxableservices,theyhavetopayan additionalpaymentofVATwhichiswithheldbytheirsupplier.ThisVAT iscalledinputtaxandthewithholdingproofiscalledinputtaxinvoice. Taxpayershavetocalculatehowmuchtheywithholdinoutputtaxand howmuchinputtaxtheyhaveinamonthperiod.Theoutputtaxina monthissubtractedorcreditedbytheinputtaxinamonth.Iftheresultis positivetheyhavetopaytogovernmentaccount.Onthecontraryifthe resultisnegativethentheycanaskrestitutiontogovernment. ValueAddedTax(VAT)istypicallydueoneventsinvolvingthetransfer oftaxablegoodsortheprovisionoftaxableservicesintheIndonesian CustomsArea.Thetaxableeventsare: 1. DeliveriesoftaxablegoodsintheCustomsAreabyanenterprise 2. Importationoftaxablegoods 3. DeliveriesoftaxableservicesintheCustomsArea;

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4. Useorconsumptionoftaxableintangiblegoodsoriginatingfrom outsidetheCustomsAreaintheCustomsArea 5. Useorconsumptionoftaxableservicesoriginatingfromoutside theCustomsAreaintheCustomsArea 6. Exportationoftaxablegoodsbyanenterprise. Thedeliveryoftaxablegoodsisdefinedverybroadly;itincludesthe following: 1. Deliveriesofatitletotaxablegoodsaccordingtoanagreement 2. Transfersoftaxablegoodsaccordingtoaleasingwithoptionor afinanceleaseagreement 3. Deliveriesoftaxablegoodstoanintermediarytraderoran auctionofficial 4. Ownuseand/orfreegiftoftaxablegoods 5. Remainingtaxablegoodsandcertainassets,whichwere originallynotforsale,atacompanysdissolution 6. Deliveriesoftaxablegoodswithinacompany(e.g.,between branches,orbetweentheheadofficeanditsbranches)unlessthe company,subjecttotheDGTsapproval,centralisesitsVAT reporting 7. Deliveriesofgoodsonconsignment. VATreporting Companiesandindividualsastaxableenterprisesarerequiredtoreport theirbusinessactivitiesandsettletheVATliabilitiesontheseeverymonth. VATisusuallytobeaccountedforonadecentralisationbasis.Asaresult, acompanycarryingoutbusinessactivitiesthroughanumberofbusiness units(branches)intheworkingareasofdifferentdistricttaxserviceoffices (KPP)mustregistereachunitwiththerelevantKPP.Itisinthiscontext thatinternaldeliveriesoftaxablegoodswithinacompanyaresubjectto VAT. SubjecttoDGTapproval,acompanymaycentraliseitsVATreportingand somayexcludeinternaldeliveriesoftaxablegoodsfromthescopeofVAT. ToobtainDGTapproval,acompanymustsatisfyanumberofconditions, includingsalesadministrationcentralisationandtheremovalofthe businessunitstobecentralisedfromanydeliveriesoftaxablegoods. However,companieswhofileetaxreturnsmaychoosetocentralisetheir

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VATreportingwithoutsatisfyingtheotherconditions;theysimplyneedto submitwrittennotificationtotheDGT. DespitethisdefaultVATreportingbasis,companiesregisteredwith certaintaxserviceoffices(KPPPMA,KPPBadora,KPPGoPublic,LTO, andMTOtaxoffices)arerequiredtocentralisetheirVATreporting. VATliabilitiesaretypicallysettledbyusinganinputoutputmechanism. AvendoroftaxablegoodsorataxableservicemusttypicallychargeVAT tothebuyer.Fromthevendorsperspective,itisanoutputtax.Thebuyer hastopaytheVATtothevendor.Fromthebuyersperspective,itisan inputtax.Totheextentthatthegoodsarenecessaryforrunningthe buyersbusiness,theinputtaxcanbecreditedagainstthebuyersown outputtax.Similarly,thevendorcanalsooffsettheoutputtaxagainst inputtaxontheacquisitionoftaxablegoodsortaxableservices.Ifthe accumulatedoutputtaxforaparticularmonthexceedstheaccumulated inputtaxforthesameperiod,thetaxpayerinquestionhastosettlethe differencebythe15thofthemonthfollowing.If,however,the accumulatedinputtaxforaparticularmonthexceedstheaccumulated outputVAT,thetaxpayermayaskforamonthlyrefundorcarryoverthe overpaidVATtothefollowingmonths. ImportVATongoodsandselfassessedVATontheconsumptionoruseof foreigntaxableservicesorintangiblegoodsshouldbeunderstoodinthe contextofthestandardinputoutputmechanism. BecausethenonresidentvendororserviceprovidercannotchargeVAT (cannot,inotherwords,issuetaxinvoices)totheIndonesian buyer/importer,theIndonesianbuyer/importerhastopaytheVATforand onbehalfofthenonresidentvendororserviceprovider.Tothedegree thatgoods/servicesimportedorprocuredarenecessaryforrunningthe importer/servicerecipientsbusiness,theinputVAT(importVATandself assessedVAT)isclaimableasataxcredit. Adeviationfromthestandardmechanism,however,isinforcefor deliveriesoftaxablegoodsandservicestoVATcollectors.TheVAT CollectoriscurrentlyeithertheStateTreasuryorPSCcompanies (includingPertamina). SalesTaxonLuxuryGoods Salestaxesalsoincludesalestaxonluxurygoods(PPnBM).Thistax appliesatthepointofimportormanufactureandisadditionaltoVAT.It isanoncreditableoneofftaxandappliestoawiderangeofgoods.Rates rangefrom10%to50%.

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InadditiontoVAT,deliveriesorimportsofcertainmanufacturedtaxable goodsmaybesubjecttoLST.AparticularitemwillonlyattractLSTonce, i.e.,taxwillbechargedeitheronimportationofthegoodorondeliveryby the(resident)manufacturertoanotherparty. LSTmustbeaccountedforeverymonthtogetherwithVAT.Theimporter orthemanufacturerofthegoodsisheldresponsibleforthesettlementof theLST. ToascertainwhetherornotaparticularitemissubjecttoLSTandto identifytheLSTrate,referenceshouldbemadetotheCustomsBookusing therelevantharmonisedsystem(HS)code. SpecialIndustryRules Certainindustries,inparticularproductionsharingcontractors,mining companiesundercontractsofworkandgeothermalprojectsaresubjectto incometaxinaccordancewithspecialistrules.Ratesoftaxvaryaccording tothegenerationofeachrespectivecontract. TaxTreaties Therearecurrently59taxtreatiesinforcewithothercountries.Provisions typicallyincludereducedwithholdingtaxratesoninterest,dividendsand royaltiesandabroaderdefinitionoftheconceptofpermanent establishmentcomparedwithdomesticlaw. SunsetPolicy Followingtheenactmentofthe2007taxadministrationlaw,taxpayersare allowedtorevisetheirannualcorporateincometaxreturns(CITR)for yearsbefore2007withoutfacinganyinterestpenaltiesontheunderpaid taxamounts.Inthenormalsituation,anunderpaidtaxamountwould triggerinterestpenaltiesat2%permonth.Apartfromtheinterest exemption,thereareotherconcessions: AnydatadeclaredintherevisedCITRcannotbeusedasabasisto issueassessmentsonanyothertaxes TherevisedCITRwillnotbeauditedunlessitclaimsanoverpaid taxrefundorprovestobeincorrect FilingarevisedCITRwhichcallsforanadditionaltaxpayment maystopanongoingtaxaudit.Thisincludesnotonlytheaudit ofcorporateincometaxforwhichtherevisedCITRhasbeenfiled butalsotheauditofothertaxesaslongastherelevanttaxreturns donotclaimtaxoverpayments.

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TheDirectorGeneralofTax(DGT)however,athisowndiscretion,may decidetocontinuetheauditirrespectiveoftheabsenceofoverpaidtax returns.Theconcessionisavailableonlyuptotheendof2008.Hence,to enjoytheconcession,therevisedCITRmustbefiledbefore1January2009.

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7.

Accounting & reporting

ThehistoryofIndonesianGenerallyAcceptedAccountingPrinciples beganwhentheIndonesianAccountantsAssociation(abbreviatedtoIAI), establishedin1957,wasappointedbytheGovernmentofIndonesiain 1984todevelopaccountingstandardsinIndonesiatobeusedmostlyfor LimitedLiabilityPartnership.IAIthenestablishedacommitteetodevelop accountingstandardsinIndonesia.Thiscommittee,whichisresponsible fordevelopingandimplementingtheaccountingstandards,iscalled DewanStandarAkuntansiKeuangan(DSAK). Overtheyears,IAIhasdevelopedmanyaccountingstandardsforvarious typesofbusinesspracticesinIndonesia.InOctober2004,DSAKdeveloped IndonesianGenerallyAcceptedAccountingPrinciplesthatconsistof AccountingMethodsandProceduresforFinancialStatements,Accounting MethodsandProceduresforFinancialStatementofIslamicBanking,59 StatementsofFinancialAccountingStandards,andsevenInterpretations.

TheIndonesianStatementofFinancialAccountingStandardsismostly basedontheInternationalAccountingStandards(IAS),whichwas recentlychangedtoInternationalFinancialReportingStandards(IFRS).

ThesecondmajorsourceoftheIndonesianStatementofFinancial AccountingStandardsistheUnitedStatesGenerallyAcceptedAccounting Principles.Inadditiontotheabovetwosources,theIAIalsopronounces theirownStatementofFinancialAccountingStandardssuchas AccountingStandardforIndonesianVentureCapital,Accounting StandardforMiningIndustry,andanAccountingStandardforIslamic Banking.The59StatementsofFinancialAccountingStandardsconsistof 43GeneralStatements,15statementsforspecificindustriesandone statementrevisedandmergedwithotherGeneralStatements. OtherthanIAI,theGovernmentofIndonesiaalsoappointedBAPEPAM (IndonesianSecuritiesExchangeCommission)toestablishadditional regulations,besidesthoseestablishedbyIAI,designedspecificallyfor publiclyheldcorporations. PresentationofFinancialStatements

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Incompliancewithgovernmentregulation,everylimitedliability PartnershipinIndonesiashouldprepareitsFinancialStatementsin accordancewiththeFinancialAccountingStandardsestablishedbythe IndonesianAccountantsAssociation. TheIndonesianFinancialAccountingStandardsrequirethatFinancial StatementsconsistofanIncomeStatement,BalanceSheet,Statementof Equity,andaNotetotheFinancialStatement.Withtheexceptionofthe CashFlowStatement,FinancialStatementsmustbepreparedbasedonthe accrualbasis,andontheassumptionthatthecompanywillremainin operationfortheforeseeablefuture.FinancialStatementsshouldbe preparedannuallyandauditedbyaregisteredpublicaccountingfirmif thecompanymeetsanyoneofthefollowingcriteria: Thecompanyisutilisingpublicfunds Thecompanyhasissuedobligations Thecompanyisapubliclyheldcorporation. TheAuditedFinancialStatementsofacompanythatmeetsoneofthe criteriaaboveshouldthenbeverifiedandsignedbytheBoardof Directors,andpublishedinthelocalIndonesiannewspaper. Moreover,theMinisterofTradeandCommercerequiresthefillingofthe auditedfinancialstatementsforeverylimitedliabilitypartnershipthat meetsthefollowingcriteria: AccountingforTax Fortaxpurposes,acompanysbookshavetobemaintainedin conformancewiththeprevailingaccountingstandardsunlessthetaxlaw isintheconditiondifferently.ThebooksmustbepresentedinRupiah, composedinIndonesian,andstoredinIndonesia. Foreigninvestment(PMA)companies,PEs,andsubsidiariesofforeign companiescankeeptheirbooksinUSDandcompiletheminEnglish relatedtospecificDGTapproval.Acollectiveinvestmentcontract(KIK) maypermittheusageofUSDaccountingrelatedthatitissuesUSD denominatedinvestmentfunds.DGTapprovalapplicationmustbe submittedwiththeDGTofficenolongerthanthreemonthsbeforethestart Theentityisapubliclyheldcorporation Theentityisutilisingpublicfunds Theentityhasissuedobligationsorpromissorynote TheentityhastotalassetsexceedingIDR50,000,000,000.

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oftheUSDaccountingyear.TheDGTisrequiredtodecideonthe applicationwithinamonth.Ifnodecisionismadewithinthattime,the applicationisautomaticallyapproved. CompaniesthatareregulatedbyaProductionSharingContract(PSC)ora ContractofWork(CoW)withthegovernmentmaybringinto considerationtoapplyUSDaccountinginEnglishbygivingsome notificationtheDGTinwriting.Thisnotificationhastobesubmittedtothe DGTofficebynolongerthanamonthbeforethebeginningoftheUSD accountingyear.AcompanycanalsocompileitsbooksinEnglishbutkeep theminRupiah.Inthiscase,thecompanyhavetosubmitawritten notificationtotheDGTnolongerthanthreemonthsafterthebeginningof thetaxyearinwhichthebooksarecomposedinEnglish. TheusageofaforeignlanguageotherthanEnglishandaforeigncurrency otherthanUSDinacompanysbooksisnotallowed.Irrespectiveofthe currencyandthelanguageused,companiestypicallyhavetosettletheir taxliabilitiesinRupiah(exceptforPSCcompanies)andfiletaxreturnsin Indonesian.Forcorporateincometax,theassertionsmustbepresentedin USDsidebysidewithRupiahintheannualcorporateincometaxreturns. AcompanythathasobtainedapprovaltomaintainUSDaccountingmay returntoRupiahaccountingsubjecttoDGTapproval.Onceapprovalis granted,thecompanymaynotreapplyforUSDaccountingapproval duringthefiveyearsafterthecancellationoftheUSDaccounting.

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8.

UHY firms in Indonesia

KAPHanantaBudianto&Rekan Jl.WijayaII79 KebayoranBaru Jakarta12160 Indonesia Phone: +62811299218 Website: www.hananta.com Email: hananta@hananta.com

9.

UHY offices worldwide

For contact details of UHY offices worldwide, or for details on how to contacttheUHYexecutiveoffice,pleasevisitwww.uhy.com

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