1. Introduction

• 1.1 Why Indonesia?
• 1.2 Indonesia at a glance
• 1.3 Indonesia and Australia: the bilateral relationship

1.1 Why Indonesia?

Indonesia - a nation of 34 provinces across 17,508 islands - is an emerging Asian giant. Indonesia is the world's largest archipelago nation, the largest economy in Southeast Asia and 15th largest in the world. It is also the world's third-largest democracy behind only India and the United States. In recent years, Indonesia's gross domestic product (GDP) has been growing at more than 5 per cent annually on the back of:

• Stable democratic government
• Open trade and investment policies
• Increasing domestic consumption
• Abundant natural resources
• A growing skilled workforce.

While under-developed infrastructure and its legal systems and regulations can be challenging, profound changes in Indonesia's economy and society in recent decades make it an increasingly attractive destination for foreign businesses. And Australia, as a close regional neighbour, is well positioned to take advantage.

Indonesia's transformational changes include:

• Indonesia is home to the world's fourth largest population with about half of its residents under the age of 30
• Indonesia boasts one of the region's most rapidly expanding middle-classes, with purchasing power forecast to grow strongly. A range of opportunities for Australian businesses continue to open up as the larger and wealthier consumer base creates potential for prospective markets.
• Indonesia has outpaced its regional neighbours in recent years, with its economy having averaged over 5% annual growth since 2000.
• Indonesia's GNI per capita was over USD10,500 in 2015, considerably higher than the average for lower middle income nations (around USD6,000). This is bringing significant changes to consumer spending, saving and capital formation pattern.
• Indonesia has developed a stable democratic system of government and a market-based economy that is relatively open to foreign investment and participation
• The Indonesian government has committed to historically high levels of investment in economic and social infrastructure in 2016.
• In its current Master Plan for the Acceleration and Expansion of Indonesia's Economic Development (MP3EI), the government vowed to streamline the investment and regulatory environment for sectors such as agribusiness, mining and resources, health, education, training and information and communications technology

Abundant opportunities

Potential business opportunities in Indonesia abound. The Australian government's overseas trade promotion agency Austrade says the main emerging opportunities in Indonesia for Australian businesses are in consumer goods and services, education and training services, knowledge-based industries and technology.

Among the consumer segments identified for their potential are:

• Design and product development
• New materials, market research and testing
• Retail concepts and online marketing
• Food science and processing
• Cold chain and logistics management
• Consumer finance.

Service industry opportunities exist for businesses involved in:

• Higher education
• Vocational education and training
• Financial and healthcare services
• ICT and telecommunications
• Tourism, recreation and leisure.

Education

A shortage of skills training in Indonesia represents a valuable opportunity for Australian educational institutions. This is aided by the strong perception in Indonesia that education abroad, such as in Australian universities and from foreign education providers in Indonesia, is of a higher quality. Australia is the number one destination for Indonesians studying abroad. A number of Australian universities have set up campuses in Indonesia and established partnerships with Indonesian universities.

Information and communications technology

Information and communications technology is central to Indonesia's economic development aspirations. Its IT market is expanding rapidly, with analysts projecting annual growth of 18 per cent to 2016.

Food and beverages

Growth in discretionary family income and Western-style consumer tastes present huge opportunities for value-added products from abroad. Indonesia's supermarket sector is growing at about 30 per cent a year.

Manufacturing

With it's rapidly growing middle class and competitive workforce, more foreign investors than ever before are taking advantage of Indonesia's strong manufacturing sector. However, it has significant challenges, including intense international competition, increasing labour costs, high transportation and logistics costs, and variable transparency and clarity in regulations.

Infrastructure

The Indonesian government is increasing infrastructure spending and removing legal hurdles to investment. It is actively promoting Public Private Partnership (PPP) schemes to encourage private sector and foreign investment in roads, rail and ports. Renewable energy holds great potential.

Other export opportunities

Austrade has highlighted Australia's strong comparative advantages in areas including supply chain management, workplace health and safety, environmental responsibility and technical expertise.

Investment opportunities

Opportunities for Australians include segments such as the automotive industry, consumer durables, healthcare, education, airports and aviation, and tourism and leisure.

For more information, access the full Indonesia Country Starter Pack

1.2 Indonesia at a glance

Geography

Indonesia is a sprawling tropical archipelago of approximately 17,500 islands. The biggest and most heavily populated islands are Java, Sumatra, Kalimantan (Borneo) and Sulawesi, along with the tourist islands of Bali, Lombok and Komodo. Java is home to almost 60 per cent of the population, including the capital Jakarta, which has a population of more than nine million.

Culture

Three distinct elements – the family, social harmony and religion – underpin Indonesia's national culture. Foreign businesses that want to succeed in Indonesia should understand and embrace these cultural influences.

Indonesians place a high value on social harmony and consensus. Maintaining “face" in public situations is paramount. All parties expect to be treated respectfully and displays of aggression or rudeness are considered unacceptable. In situations requiring negotiation or decision-making, it is important to achieve a consensus that maintains face for all parties. Negotiations may be slowed by indirect expressions of differences in opinion, and a reluctance among Indonesians to use direct words like “no".

Religion is an important part of everyday life in Indonesia. About 85 per cent of the population is Muslim, but there are also significant Christian and Hindu populations. The vast majority of Indonesian Muslims observe a moderate form of Islam.

Politics and government

The Republic of Indonesia is an independent nation state headed by a President and Vice-President. The President is head of state and government as well as commander-in-chief of the armed forces. The republic's highest authority is invested in the People's Consultative Assembly (MPR). The MPR comprises two houses, the 560-member People's Representative Council (DPR) and the 132-member Regional Representative Council (DPD). The DPR passes legislation and monitors the executive branch of government. The DPD is a relatively new chamber that deals with regional issues. The current President is Joko Widodo.

Economy

The Indonesian economy is the largest in Southeast Asia and the 16th largest in the world, with annual gross domestic product (GDP) valued at approximately USD940.9 billion (2016). Looking forward, annual average GDP growth is forecast at 5.7 per cent for the period 2017 to 2021, putting Indonesia on track to join the club of trillion dollar economies within just a few years.

In 2014, the services sector was the most prominent employer in Indonesia, accounting for 45% of local workers (compared to only a third in 1990). This was followed by the agriculture sector which employs 34% of local workers (down from 56% in 1990) and the industry sector (including manufacturing) which accounts for 21% of local workers (having become more prominent in recent years).

In terms of Indonesia's output, the industrial sector accounted for 40 per cent of GDP in 2015. Significant foreign direct investment and government incentives have positioned the industry for future growth. Major industrial sectors include petroleum and natural gas, textiles and apparel, mining, footwear, plywood, rubber and chemical fertilisers. The services sector is equally as important to Indonesia's economy, accounting for 43 per cent of GDP in 2015. Agriculture on the other hand only accounted for 14 percent.

Indonesia's economy is largely driven by domestic activity rather than exports, which helped to cushion it from the global crisis of 2008-09. Its main trading partners are Japan, China, Singapore and South Korea, and its most important export commodities are oil and gas, minerals, crude palm oil, electrical appliances and rubber products.

Legal system

The Indonesian legal system is a civil rather than common law system, and contains procedures that are quite unlike Australia's.

Like other civil law systems, Indonesia's does not have juries. Instead, decisions on guilt or innocence are made by panels of three judges who usually produce a single, joint judgment. Indonesia's justice system has significant challenges – including some conflicting laws and regulations – which can make the enforcement of contracts difficult. The government has made progress in recent years to improve the system.

Infrastructure

Despite recent efforts to increase investment, Indonesia scores comparatively poorly on global and regional rankings of national infrastructure.

The low score on air transport comes despite development of an extensive network of airports to ensure that all Indonesia's islands are accessible by either sea or air. As an archipelago, Indonesia is dependent on sea transport. It has 1700 sea ports. The country's rugged terrain has made the development of inland transport infrastructure difficult. Road vehicles are the predominant mode of transport in Indonesia, but road infrastructure remains below that of its regional peers, despite significant investment.

For a middle income country, Indonesia has a comparatively high rate of electrification. As of 2012, 96 per cent of the population has access to electricity. Telecommunications is a bright spot on Indonesia's infrastructure scene, increasing connectivity across Indonesia and helping stimulate other sectors of the economy. As of mid-2015, smartphone penetration in Indonesia was still low, at 30 per cent, lagging far behind regional neighbours, including China which reports 80 per cent.

Telecommunications is one of a number of priority infrastructure areas being targeted by the Indonesian government to support its economic growth targets. Others include the power and energy sectors, water and sanitation, and roads and transportation.

For more information, access the full Indonesia Country Starter Pack

1.3 Indonesia and Australia: the bilateral relationship

As Australia's closest neighbour, Indonesia presents unlimited potential as an emerging economic powerhouse with a burgeoning middle class. Yet, for all its apparent potential as a market for smart, ambitious Australian businesses to tap into, the reality is that Indonesia stands as only our 12th largest trading partner in 2014-15.

There are reasons for this. Indonesia is less developed than some of its Asian counterparts, manufacturing is less evolved, its financial system is less sophisticated and its infrastructure requires significant investment. Its legal and regulatory environments can be frustrating, and wider cultural and political issues come into play.

But on recent trends and economic projections, it will not be long before Indonesia becomes a bigger focus for Australian businesses. The structural changes in Indonesia's demographic are already driving increases in demand for consumer goods and services, particularly in education, finance, healthcare, ICT and tourism – all areas in which Australian businesses are brimming with capability and expertise.

Austrade claims more than 250 Australian companies now have a presence in Indonesia. Total investment by Australian companies in Indonesia was AUD8.4 billion in 2015, up from AUD8.1 billion the previous year. Sectors of interest includes banking and finance, mining, agribusiness, clean energy and environmental sectors, goods and services including agricultural products and education.

Australia is linked to Indonesia through a number of regional forums and agreements. Both nations are members of the G20, ASEAN Regional Forum and the Australia-New Zealand-ASEAN Free Trade Agreement. An Indonesia-Australia Closer Economic Partnership Agreement, intended to build upon existing agreements, is currently being negotiated.

For more information, access the full Indonesia Country Starter Pac

2. Getting started

Carefully plan your first moves before launching your business in Indonesia. One of the first things to do is research – lots of it. In the case of Indonesia, you will need to become informed on subjects ranging from industrial relations and tax provisions to labour regulations and a host of other variables. You should also become familiar with the culture, language and business practices.

• 2.1 What you need to consider
• 2.2 Researching Indonesia
• 2.3 Possible business structures
• 2.4 Manufacturing in Indonesia

2.1 What you need to consider

Develop a strategy before deciding on how to enter the Indonesian market. In particular, it is important to:

• Avoid going into Indonesia cold – get a foot in the door first
• Take care over who you use to help you get started
• Be directly involved in the setting-up process
• Allow plenty of time for bureaucracy, both filling in forms and waiting for approvals
• Choose a structure based on research specific to your industry and product.

Location

Thorough research is essential before choosing a location for your business. Skills shortages in various sectors and regions will be a consideration for those needing skilled workers. In certain industries (including banking, oil and gas) there are restrictions on employing expatriates, so it may be vital to choose a location with a ready supply of skilled workers.

Indonesia has launched a system of special economic zones (SEZ) which offer administrative incentives such as easier licensing processes, tax concessions and advanced infrastructure. Prioritised industries include manufacturing, maritime, transportation, banking and tourism.

Free trade zones provide business incentives and advantages relating to trade barriers, tariffs, quotas and bureaucratic requirements. Within free trade zones are bonded zones and industrial estates. Goods may be imported into a bonded zone then re-exported without payment of tariffs, unless the goods are sent into the regular customs territory of Indonesia.

Using interpreters

Indonesia's official national language is Bahasa Indonesia. But for many rural Indonesians, Bahasa is the second language after their local tongues. English is understood by many business people in the cities, but is less common in rural areas. Interpreters can be useful during business visits, particularly for discussing technical aspects. Many Australian businesses bring a local consultant with them whose role is to help build connections and facilitate business meetings, rather than the traditional interpretation.

Financing your Indonesian business venture

The main differences compared to operating in Australia may include:

• A longer cash flow cycle, which could increase the pressure on cash flow and working capital
• Being further away from clients, which can increase risk of non-payment and can make it harder to collect debts
• Getting paid in other currencies, which can expose you to foreign exchange risk
• Greater difficulty accessing finance, as Australian banks are often reluctant to accept overseas assets as security for loans
• A longer timeframe to recover the upfront costs of establishing operations, which can reduce the cash flow and working capital available for your domestic operations.

Adequate funding will be critical to your success. You may be eligible for financing from a variety of sources in Australia, including grants, venture capital and equity-sharing deals. However, banks remain the easiest and most approachable source of funding.

Risks

Key risks to consider when doing business in Indonesia include:Currency risk: the rupiah is volatile, and adverse movements could affect your business

• A weak judicial system which can make it more difficult to enforce contracts
• Prevalent corruption
• Rigidities in infrastructure and labour markets
• High tax and royalty payments
• An uncertain and changing regulatory environment.

While corruption is a significant concern, governance ratings published by the World Bank put Indonesia below the regional average on measures of corruption and the rule of law according to Transparency International.

Australian companies should get professional advice and investigate the issues in entering the market. Many well-established companies will be registered with the Indonesian Chamber of Commerce. Checking if a local company is registered helps to verify if it legally exists. Choosing the right partners and the right professional advisers, including bankers, lawyers, insurers and accountants, is a major step in mitigating risk.

For more information, access the full Indonesia Country Starter Pack

2.2 Researching Indonesia

Your market research should cover a very wide field, from import duties and other regulations to market-specific issues such as distribution channels, market size and growth, competition, demographics and local production.

Getting help

Research organisations in Indonesia, including international professional and accounting firms such as PricewaterhouseCoopers, can be a valuable source of information. Austrade provides a range of services for Australian firms, including:

• Information and advice on market entry and business expansion
• Help with location selection
• Access to local contacts and networks
• Identification of specific business opportunities and follow-up.

In addition to Austrade, the Queensland, Victorian and Western Australian state governments have representative offices in Indonesia and may be able to assist with further information

Market visits

Visit Indonesia before entering agreements with prospective agents, distributors or other business partners. Consider meeting with several potential partners to give you a basis for comparison. Plan your trip at least six weeks in advance, and arrange in-country assistance to help set up your program. This will help you see the right agents and customers who will be briefed and screened for interest and suitability.

Pre-arrange as many meetings as possible and reconfirm them a day in advance. Take business cards with you and follow up with people who have given you their cards. Within 48 hours of your appointment, send an email thanking your contact for the meeting.

Joining a business association is a good way to learn more about the local business community. Jakarta has several well-established business associations, including the Indonesia Australia Business Council (IABC) and the Indonesian Chamber of Commerce. The IABC works closely with the Australian-based Australia Indonesia Business Council (AIBC).

For more information, access the full Indonesia Country Starter Pack

2.3 Possible business structures

What type of business structure will you use? And what processes must you go through to get established? The Australian International Business Survey 2016 survey found that 64 per cent of Australian businesses operating in Indonesia chose to service the market directly from Australia. The next most popular method was to use agents and distributors – mostly in Indonesia (17 per cent), followed by setting up a foreign sales branch or subsidiary (9 per cent).

In Indonesia, there are four primary methods of setting up a business: appoint a local agent or distributor, open a representative office, open a branch or set up an Indonesian PMA. It can take a long time to set up a business. Australian companies should remain adaptable and have alternative options in case the approval process is delayed or denied.

Indonesian Limited Liability Company/ Penanaman Modal Asing (PMA)

Foreigners who want to invest or do business in Indonesia commonly choose to set up an Indonesian Limited Liability Company, commonly known as a PMA company. At least two parties must hold shares in a PMA company, which must have a minimum issued share capital of IDR 2.5 billion and a minimum planned investment of IDR 10 billion per line of business, with a higher investment required in some circumstances.

Representative office

Foreign companies can establish representative offices in Indonesia. However, they are more restricted than PMA companies and cannot conduct commercial business or generate revenue directly in Indonesia. The only permitted activities are marketing or promotion, market research and review of business opportunities. Representative offices are available for foreign companies in sectors including trading, services, oil and gas, construction and banking.

Branch

A branch office is generally allowed only in the banking sector.

Agent or distributor

A foreign company can appoint a local company as an agent or distributor to market and sell its products in Indonesia. The arrangement must be registered with the Ministry of Trade.

For more information, access the full Indonesia Country Starter Pac

2.4 Manufacturing in Indonesia

Indonesia is an attractive destination for foreign investment in manufacturing thanks to its cost-effective and abundant labour. If you plan to set up a manufacturing company or manufacture products in Indonesia there are three ways you can do so. Most Australian manufacturers establish in Indonesia as a partnership or joint venture with an Indonesian party or hire sub-contractors, with the Indonesian party in both options having equipment and staff. The third option is starting up a wholly foreign-owned (generally a PMA) manufacturer company.

For more information, access the full Indonesia Country Starter Pack

3. Sales and marketing in Indonesia

Once you have chosen your business structure and have a better understanding of setting up in Indonesia, the next step is how to get your product or services into the market. How do you sell your product? Online or through an agent? Do you set up a franchise? What are the labelling requirements?

• 3.1 Direct selling
• 3.2 Franchising
• 3.3 Online sales
• 3.4 Using agents and distributors
• 3.5 Marketing
• 3.6 Labelling requirements

3.1 Direct selling

Direct sales can be very effective in Indonesia. Growing consumerism and increasing internet usage among the younger generation have fuelled strong growth in direct sales, with the total direct sales market surpassing IDR21.9 trillion in 2016, up 10 per cent from the previous year.

Direct selling can be a cost-effective alternative to having your own base in the market, or using agents and distributors. But the do-it-yourself option is not easy. The main positives include:

• Cutting out the middlemen
• Gaining an understanding of the technical needs of buyers and end users, and an ability to customise accordingly.

On the negative side, having no physical presence in the market can make it difficult to progress. Some Indonesians are cautious about doing business with companies that have no representation there.

For more information, access the full Indonesia Country Starter Pack

3.2 Franchising

An increase in demand for international brands has led to more foreign companies entering Indonesia through franchising, particularly in the retail, food and beverage, healthcare and services sectors. However, the Indonesian Government, in an attempt to increase the participation of local firms in the franchise supply chain, made significant changes to franchising regulations (Franchise Regulation 53) in 2012. The most concerning for international franchisors is a requirement to use local components for at least 80 per cent of the raw materials, business equipment and merchandise.

For more information, access the full Indonesia Country Starter Pack

3.3 Online sales

While online retail sales in Indonesia remain relatively low compared to neighbouring countries, the local environment is changing. Joint efforts by both public and private sector are driving greater internet access across the country and making for a conducive regulatory environment. In 2016, Indonesia had 100 million internet users, equating to a penetration rate of 40% (Association of Internet Service Providers in Indonesia).

The worth of Indonesia's e-commerce industry is projected to increase two-fold in 2016, reaching $2 billion by some estimates. This is the result of increased internet penetration across the country and the rapid growth in smartphone use. In 2016, Indonesia had 55.4 million smartphone users, this is forecast almost double by 2019, growing considerably faster than China, Japan and Korea. The number of online shoppers in Indonesia is also predicted to grow significantly. In 2016, Indonesia has estimated 8.7 million shoppers online.

Lack of customer trust is a major factor in the slow uptake of online sales, with weaknesses in delivery and payment systems a major barrier. E-commerce is dominated by social commerce via online social networks rather than traditional online commerce companies like eBay and its local equivalents.

For more information, access the full Indonesia Country Starter Pack

3.4 Using agents and distributors

The roles of agent and distributor differ, so make sure you have the role of the Indonesian party clearly defined in the agreement you have with them.

Agent: Acts as a representative of the supplier, but does not take ownership of the goods. An agent is generally paid by the exporter on commission. They tend to be based in the export market and often represent numerous service or product lines. They may operate on an exclusive basis, or as one of a number of agents.

Distributor: A distributor takes ownership of the goods by buying them, then reselling them to either local retailers or consumers. In some cases, the distributor may sell to other wholesalers who onsell. Distributors may carry complementary and competing lines and usually offer after-sales service.

Choosing an agent or distributor

Ensure you can establish a close working relationship – you must be able to build high levels of trust and regular communication. Meet with the potential partner in their own market, to get to know them better and observe how much they know. Ask for trade references and consider using a credit checking agency to confirm their financial stability.

For more information, access the full Indonesia Country Starter Pack

3.5 Marketing

Within Indonesia, there are several large regional markets and many niche and micro-niche markets scattered over about 17,500 islands, where tastes and preferences vary. A one-size-fits-all marketing strategy will not work.

Management consultants McKinsey have identified the following broad consumer trends:

Brand preference: Local brand preference is high, with 60 per cent of Indonesians preferring them, particularly in food and beverage categories.

Urban dynamics: It is crucial to understand the differences across the two biggest cities in Java – Jakarta and Surabaya – but also rapidly growing smaller cities.

Getting to market: Indonesia's distribution infrastructure is fragmented geographically, with family-owned and run stores predominating in numerous consumer categories. However, modern retailing is becoming more accepted.

Going digital: Digital technology is increasingly important in reaching customers. Currently, television advertising and personal recommendations are the main sources of product information.

For more information, access the full Indonesia Country Starter Pack

3.6 Labelling requirements

Australian exporters should consult with their importers and local authorities regularly for information on changes to labelling requirements. Food products and pharmaceutical drugs have special labelling requirements, while specific production, distribution, labelling, packaging and advertising requirements apply to cosmetics and hygiene products. Special certificates are required for livestock and meat shipments, plants and plant materials, and medicines.

For more information, access the full Indonesia Country Starter Pack

4. Conducting business in Indonesia

Having chosen your strategy for establishing your business, you must consider how to conduct business in Indonesia, from understanding business etiquette to avoiding scams.

• 4.1 Indonesian culture and business etiquette
• 4.2 Building relationships with Indonesians
• 4.3 Negotiations and meetings
• 4.4 Dispute resolution and avoiding scams

4.1 Indonesian culture and business etiquette

Basic tenets of Indonesian business etiquette include:

• Avoid using the left hand, considered unclean, to pass or receive anything
• It is customary to introduce yourself to the oldest member of a group. It is acceptable to shake hands with women
• Indonesians place great emphasis on respect towards elders
• Avoid touching or reaching over a person's head, especially that of an older person
• Hands on hips or folded arms can signify anger.

Business cards

Business cards in English are acceptable, but have them translated into Bahasa Indonesia on the back. Normally, business cards are exchanged after the initial handshake with the card given and accepted by two hands or the right hand.

Forms of address

When formally addressing letters to Indonesians, all names should be written in full. In conversation, the same name is often used in both formal and informal contexts – for example “Mr Sudjana Santosa" or “Mr Sudjana". But as friendship develops, “Sudjana" would become acceptable.

Dining

See chapter 6 (Visiting Indonesia) for advice on business dinners and etiquette.

For more information, access the full Indonesia Country Starter Pack

4.2 Building relationships with Indonesians

Business partners

The strength of business relationships can determine many aspects of commercial life, including gaining credit, procurement and contracting, and the speed of bureaucratic processes.

Patron-client relationships

Business relations are often defined by a broader hierarchy. Loyalties are often intensely personal and revolve around the bapak (boss). In this system of patron-client relationships, those with influence and prestige provide for those less well placed in return for their loyalty.

Business as part of a community

The concept of “group welfare" is influential in Indonesian culture, and foreign businesses stand to gain from contributing to the welfare of those living and working in their immediate neighbourhood.

Local government and authorities

Authorities that may have to be consulted while setting up in Indonesia include:

Indonesia Investment Coordinating Board (BKPM)

Regulates and promotes domestic and foreign investment. The BKPM has “One Stop Service" centres across Indonesia and should be your first point of contact.

Ministry of Trade

Services and supports the domestic and international commercial and trading sector.

Ministry of Law and Human Rights

Has authority to approve establishment of limited liability companies and is responsible for government regulations relating to human rights and laws.

Ministry of Manpower

Oversees corporate governance, industrial relations, worker social security, regional development and employment opportunities, and grants work permits to companies to employ foreign nationals.

Directorate General of Taxes (DGT)

Collects taxes, ensures tax compliance, helps to make and implement tax laws and handles tax-related disputes.

Directorate General of Customs and Excise

Accountable for collecting state revenue associated with import activities including import duties.

Directorate General of Immigration

Controls and monitors all immigration-related matters including issuance of visas and stay permits.

Environmental Control Agency (ECA)

Responsible for environmental capacity development, conservation and related corporate governance.

For more information, access the full Indonesia Country Starter Pack

4.3 Negotiations and meetings

Negotiations can be lengthy, often taking several meetings before coming to an agreement.

How to negotiate

Be polite and humble. Try not to rush others and don't issue ultimatums. Do not cause loss of face or criticise someone publicly. In presentations, keep words to a minimum and visual displays to a maximum. Intermediaries or “facilitators" can help progress negotiations behind the scenes.

Managing business meetings

Appointments may be hard to secure. State early in the conversation who you are or who you represent and why you are visiting. Jakarta is infamous for its traffic jams, and you may get to only three appointments in a day.

For more information, access the full Indonesia Country Starter Pack

4.4 Dispute resolution and avoiding scams

Dispute resolution

Companies involved in international commercial disputes should seek legal advice in Australia or overseas. Austrade can provide referrals. A number of international arbitration commissions facilitate international dispute resolution.

Scams

Common scams targeting foreigners in Indonesia include:

Taxi scams: Jakarta has several taxi companies. Stick with the higher-end Silverbird taxi line to avoid “the scenic route".

Property investment scams: A foreign individual cannot directly own land. At best a foreigner can form a foreign investment company (PMA) or nominate an Indonesian citizen to freehold land for them. The latter is particularly risky. Scam property businesses target foreigners to acquire properties by deceit.

Credit card scams: Many major credit card companies list Indonesia as the worst country for credit card fraud.

For more information, access the full Indonesia Country Starter Pack

5. Business practicalities in Indonesia

Understanding legal regulations and the practicalities of tax law, employment law and other relevant provisions are among the main challenges for Australians conducting business in Indonesia. Seek professional advice for specific information.

• 5.1 Laws and regulations
• 5.2 Import duties, tariffs and regulations
• 5.3 Taxation
• 5.4 Audit and accountancy
• 5.5 Employing workers
• 5.6 Banking in Indonesia
• 5.7 Repatriating profits

5.1 Laws and regulations

Indonesian legislation incorporates different regulations and types of laws which sometimes conflict with each other. The judicial system is extensive with several stages of courts overseen by the Supreme Court. This often causes dispute settlements to be a lengthy process.

Investment rules

Promotion of foreign investment is a key objective of the Indonesian government. This is carried out through the Indonesia Investment Coordinating Board (BKPM). BKPM's “One Stop Service" centres aim to streamline licensing processes. Capital Investment Law No. 25/2007 is the primary legislation governing foreign direct investment in Indonesia.

Land and property rights

The legal concept of freehold land rights, as practised in Australia, is not recognised in Indonesia. The Basic Agrarian Law recognises several types of land rights. Foreign investors should particularly note the right of ownership (hak milik), an inheritable right for Indonesian citizens only.

Australian businesses will encounter three principal rights when establishing a company, commonly entered into with the owner:

Right of building (hak guna bangunan): A right to construct and own buildings, generally for 20 or 30 years and may be renewed

Right of exploitation (hak guna usaha): A right to cultivate state-owned land for agriculture and plantation purposes for a maximum of 25 years with allowance to extend to 35 years

Right of use (hak pakai): Permits the right to use and collect “results" from land for agreed use, for a maximum of 25 years.

Intellectual property

The government body responsible for registration of IP rights in Indonesia is the Directorate General of Intellectual Property Rights (DGIP). You can acquire and register IP protection for trademarks, copyright, designs and patents. Existing IP can be searched on the DGIP website's database.

For more information, access the full Indonesia Country Starter Pack

5.2 Import duties, tariffs and regulations

For Australians exporting to Indonesia, tariffs and duties are calculated on the complete shipping value, including the cost of the goods, freight and insurance. Tariffs and import regulations are frequently revised without notice.

Tariffs/import duties

The ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA) provides incentives for numerous goods imported into the country. In addition to tariffs, Value Added Tax (VAT) is levied on most imports at the rate of 10 per cent of CIF (cost, insurance and freight) + import duties (tariff). Certain goods are exempted from VAT. An additional Luxury Goods Sales Tax (LST) is imposed on certain goods. A Prepaid Income Tax Article 22 is also applied at 2.5 per cent or 7.5 per cent of CIF + import duties.

Import regulations

Companies importing goods into Indonesia must obtain an Importer Identification Number (an import licence known as API) from the Ministry of Trade (local companies) or the BKPM (foreign companies). In addition, to import certain types of products including textiles, shoes and electronic goods, an importer must possess a special import licence from the Ministry of Trade. Alcoholic drinks can be imported into Indonesia subject to restrictions.

For more information, access the full Indonesia Country Starter Pack

5.3 Taxation

Corporate income tax

A company is treated as a resident of Indonesia for tax purposes by virtue of having its establishment or domicile (place of management) in Indonesia. A foreign company carrying out business activities through a permanent establishment (PE) in Indonesia will generally have to assume the same tax obligations as a resident taxpayer.

Indonesian PEs of foreign companies have to settle their tax liabilities either by direct payments, third-party withholdings, or a combination of both. Foreign companies without a PE in Indonesia have to settle their tax liabilities for Indonesian-sourced income through withholding of the tax by the Indonesian party paying the income.

Income tax is collected on transactions such as:

• Importation of goods
• Sale of goods to the government
• Sale or purchase of certain products
• Payment of certain services.

Tax rate

A general flat rate of 25 per cent applies as Corporate Income Tax. This tax rate also applies for PE profits. After-tax profits are subject to 20 per cent withholding tax (WTH). Australian businesses may have access to a reduced WTH rate of 15 per cent through the Indonesia-Australia tax treaty.

Tax incentives

Indonesia offers various tax concession schemes and incentives for businesses, for example the 50 per cent discount on corporate tax rates for small businesses with an annual turnover less than IDR 50 billion (approximately $5 million).

Tax administration

Tax liabilities must be paid through a designated tax-payment bank (bank persepsi) then accounted for through tax returns. Corporate tax can also be paid in a prepayment system based on the previous tax year's liability. VAT is a monthly obligation.

Tax calculation

Taxable business profits are calculated on the basis of normal accounting principles, with certain adjustments. Generally, a deduction is allowed for all expenditure incurred to obtain, collect, and maintain taxable business profits.

Tax losses

Losses may be carried forward for a maximum of five years. Carrying back of losses is not allowed and tax consolidation and group relief is not available.

Withholding tax

Indonesian income tax is collected mainly through a system of WHT. Individuals and corporations, whether resident or non-resident, are subject to WHT levied on various items of income.

Personal income tax

Income tax of up to 30 per cent is levied on residents and non-residents. An Indonesian resident taxpayer is subject to tax on income from all sources worldwide.

Dividends received by resident individual taxpayers are subject to a maximum 10 per cent final income tax. Non-resident individuals are subject to WHT at 20 per cent on their Indonesia-sourced income. Concessions are available.

For more information, access the full Indonesia Country Starter Pack

5.4 Audit and accountancy

Generally, a company's books must be maintained in accordance with the Indonesian Financial Accounting Standards (SAK). Accounting books by default must be stored in Indonesia, composed in Bahasa Indonesia and maintained in Rupiah. Some businesses are permitted to use USD as their currency and compose the books in English subject to approval from the DGT, but typically have to settle their tax liabilities in Rupiah and file tax returns in Bahasa Indonesia. For corporate income tax, the assertions must be presented in USD side by side with Rupiah in the annual tax return.

Accounting period

January to December is the normal tax period however a different period may be used with Director General of Tax (DGT) approval.

Accounting basis

Companies must apply the accrual basis in their accounting practice. It differs from cash basis of accounting in that expenses are reported only when the actual transaction occurs, not when payment is made.

Financial statements

Financial statements must be composed as a competitive basis using the current year's information against the previous year. A complete set of financial statements includes a statement of financial position, income statement, cash flow statement, and statement of changes in equity.

Preservation of books and records

All taxpayers must preserve accounting books and records for at least 10 years.

Audit requirements

Entities including listed companies, finance lease companies and companies with assets worth IDR 250 billion ($2.5 million) or more, must have statutory audits by a qualified auditor.

For more information, access the full Indonesia Country Starter Pack

5.5 Employing workers

Labour market

Indonesia's labour pool is around 120 million people. As the economy has progressed beyond its predominantly agricultural base, more workers are now employed in manufacturing and service-related professional industries. The Ministry of Manpower regulates employment practices.

Human resources and employment law

The Indonesian Labour Law (known as the Manpower Law) promotes worker protection. Key areas include:

Contracts

Employment agreements can be verbal but it is best to have contracts written to minimise legal issues. Fixed-term and permanent contracts are permitted.

Working hours

Indonesia's working week is generally over five or six days, totalling 40 hours. Normal break time is a minimum of 30 minutes per four hours of work.

Welfare obligations

Employers with more than 10 employees or a monthly payroll exceeding IDR 1 million must register with the state-run worker insurance program, which provides for employee accident protection, death insurance and retirement savings. Other than the retirement plan, benefits are entirely funded by employer contributions. Another compulsory social security is health insurance.

Remuneration

Employers must comply with minimum wage rates, which vary widely between provinces. Indonesian employees are entitled to 13 months of salary or wages each year. The additional one month salary is paid prior to the annual religious celebration of each employee.

Leave and break

Employees are entitled to a minimum of 12 days' annual leave. Leave must be granted for occasions including marriage and the death of a family member. Female workers must also be granted leave for menstruation, maternity and miscarriage.

Unions

Workers are entitled to form a union. Each union must have its own by-laws and manage its own budget.

Termination

Termination of employment must be mutually agreed upon. In a disagreement, the employer may terminate the employee by filing a case to the relevant industrial relations dispute resolution institution, and must pay compensation to the employee.

Expatriate employees

Expatriates can only be employed on a temporary basis or for certain skilled or senior positions. A ratio is generally expected of 1:3 between expatriates to Indonesian employees. Hiring expatriates is allowed on the condition that regular training will be provided to local staff to enable them to eventually take the expatriate's position. The ratio does not apply for director positions. Work permits for expatriates are valid for a year or less, but can be extended.

Managing an Indonesian team

Australian businesses should adapt their management styles to the local context. Social hierarchy and loss of face are key issues. Management techniques that are confrontational and assertive should be avoided.

For more information, access the full Indonesia Country Starter Pack

5.6 Banking in Indonesia

Banking environment

Banking institutions in Indonesia are classified either as commercial or rural banks. Rural banks have restricted operational areas and are not directly involved in payment systems. There are more than 120 commercial banks in Indonesia.

Business and banking

Businesses in Indonesia are required to open bank accounts on-shore as the Indonesian Rupiah cannot be circulated or converted in the global market. There are no foreign exchange controls in the Indonesian banking system. Accordingly, investors may freely transfer funds to and from abroad. However, transfer of funds exceeding US$10,000 from and within the country should be reported to the central bank. Otoritas Jasa Keuangan (OJK) supervises foreign investment.

For more information, access the full Indonesia Country Starter Pack

5.7 Repatriating profits

The Rupiah is freely convertible, although approval from Indonesia's financial services authority, Otoritas Jasa Keuangan (OJK), is needed before carrying more than IDR 100 million out of the country. Wire transfers of IDR 100 million or more to a non-resident require a statement from the customer. Companies with total assets of at least IDR 100 billion or annual sales of at least IDR 100 billion must report the movement of financial assets between residents and non-residents not conducted through a domestic bank or financial services company. Foreign investors can transfer all current after-tax profits and certain costs.

For more information, access the full Indonesia Country Starter Pack

6. Visiting Indonesia

• 6.1 Visas
• 6.2 Currency
• 6.3 Air travel and airports
• 6.4 Ground transport
• 6.5 Hotels and dining
• 6.6 Health and welfare
• 6.7 Useful phrases and public holidays

6.1 Visas

Australian passport holders currently enjoy visa-free entry into Indonesia for stays less than 30 days, although this visa only applies for tourist / social purposes. This free visa cannot be e xtended and is allowed at most airports/seaports into Indonesia, so be sure to check prior to travelling.

Australian's wanting to travel to Indonesia for short-term business visits, currently have four options:

Visa on arrival (VSKS): These can be obtained at certain airports and seaports when you arrive. The maximum stay is 30 days, but can be extended once for an additional 30 days. Your passport must be valid for at least six months.

VKU: The business visit visa allows a single business visit for up to 60 days. This can be extended by 30 days at a time, up to 180 days. Australians can apply for this at an Indonesian embassy or consulate.

VKUBP: The multiple business visit visa allows for multiple entries into Indonesia over one year, with a maximum stay of 60 days for any entry.

An exit and entry permit is required for expatriates holding Indonesian residence cards in order to depart and re-enter Indonesia. Typically, these permits are now granted for six to 12-month periods.

For more information, access the full Indonesia Country Starter Pack

6.2 Currency

The basic monetary unit in Indonesia is the rupiah (Rp). Notes range from Rp100 to 100,000, with denominations below Rp1,000 no longer being circulated. Major foreign currencies can be exchanged for Indonesian Rupiah with banks and authorised money exchangers at airports and in all major cities. Credit cards are widely accepted in supermarkets, department stores and tourist centres.

For more information, access the full Indonesia Country Starter Pack

6.3 Air travel and airports

Jakarta is the principal gateway for entry into Indonesia, while Bali is the second, attracting mostly tourists. Indonesia overall is well serviced with domestic flights. Most flights depart from Jakarta International Airport (Soekarno-Hatta) – a 60 to 90-minute drive from the city centre. From February 2015, all domestic and international flights departing from Indonesia are required to include the airport departure tax in the price of the ticket. This means passengers are no longer required to pay separately for the tax when departing the airport.

For more information, access the full Indonesia Country Starter Pack

6.4 Ground transport

Taxi fares are metered. It will cost IDR 100,000 to 200,000 to get from Jakarta's international airport to the downtown area. The air-conditioned airport bus costs about IDR 30,000 from the airport to any of the five city zones. When using taxis, it helps to have the address of your destination written down. Overcharging by taxi drivers is not uncommon, so ask hotel staff about the average fare for a particular journey. In Jakarta, taxis from the Blue Bird Group are recommended. Outside Jakarta, metered taxis are available in larger cities and some towns. Hire cars – usually chauffeur-driven – are paid for by the hour or for each one-way trip. Bargaining is necessary.

Buses connect major business districts of Jakarta. Fares are IDR 4000 to 6000 one-way.

The bajaj (pronounced “bah-jay ") is a minicar tricycle seating two passengers. Bargain for the fare.

For more information, access the full Indonesia Country Starter Pack

6.5 Hotels and dining

Staying in Jakarta

Jakarta is a large city with traffic jams, so know where you are conducting business and choose a hotel in the vicinity. The true centre of Jakarta is Merdeka Square. The city is vast, with areas that are mini-centres in their own right. Jalan Thamrin, connecting with Jalan Sudirman to the south, is the main road through the city. But the area south of Merdeka Square is probably the most important for business travellers. Dubbed the Golden Triangle, it is considered Jakarta's central business district, housing major banks, multinational businesses, shopping malls, embassies and high-end hotels.

Business dining, entertaining

Business entertaining can be crucial to relationship-building. If you are unable to accept an invitation, make your apologies meaningfully and suggest another date. Detailed business issues are best left to the office. Use the meal as an opportunity to broaden conversation and develop your personal relationship.

At business dinners, wait for your host to invite you to drink or eat. Forks and spoons are the main cutlery items. Use the right hand whenever eating or handling food as the left hand is considered unclean. It is polite to leave some food on your plate. Most Indonesians are Muslims and may not drink alcohol. However, most will not object to you drinking alcohol. Do not offer food or drink during the Islamic month of fasting, Ramadan.

Tipping

Major hotels usually add a 10 per cent service charge to bills, otherwise a tip of 5 to 10 per cent of the bill is appropriate. Airport porters expect IDR 5000-10,000 per bag for luggage carried. A basic IDR 10,000 tip is sufficient for a taxi driver. Hire-car drivers would normally expect more.

For more information, access the full Indonesia Country Starter Pack

6.6 Health and welfare

Health insurance

It is strongly recommended that Australian travellers take out comprehensive travel insurance that will cover any overseas medical costs.

Health

At least eight weeks before you depart, make a doctor's appointment for a basic health check-up, and to discuss your travel plans and any implications for your health, particularly if you have an existing medical condition.

Personal Safety

Always treat locals with respect – and always stay alert. The Australian Government advises Australians to exercise a high degree of caution when travelling in Indonesia (including Jakarta, Bali and Lombok) due to the high threat of terrorist attack.

Civil unrest/political tension

It is advisable that those travelling or planning to travel to Indonesia should monitor local media and avoid all protests, demonstrations and rallies as they can turn violent with little notice. While in Indonesia, is important to maintain a high level of vigilance and security awareness.

Penalties for crimes and drug possession

Penalties for drug offences are severe and include the death penalty. Penalties for possession of even small amounts of recreational drugs include heavy fines and imprisonment. Police target illegal drug use and possession across Indonesia, in particular popular places and venues in Bali and Jakarta.

Local laws

While in Indonesia, local law makes it compulsory for tourists to carry identification at all times.

Gambling in Indonesia remains illegal. Tourists have fallen victim to organised gambling gangs, particularly in Bali, resulting in the loss of large sums of money and threats of violence if travellers are unable to pay the debt.

For more information, access the full Indonesia Country Starter Pack

6.7 Useful phrases and public holidays

For more information, access the full Indonesia Country Starter Pack

7. Engage with us

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Helpful links

Australian Embassy, Indonesia

Jalan H.R. Rasuna Said Kav C 15-16
Jakarta Selatan 12940
Tel: +62 21 2550 5555
Fax: +62 21 522 7101, 2550 5467
Web: www.indonesia.embassy.gov.au/jaktindonesian/home.html

Embassy of the Republic of Indonesia

8 Darwin Avenue
Yarralumla ACT 2600
Tel: +61 2 6250 8600
Fax: +61 2 6273 6017
Web: www.kemlu.go.id/canberra

Bank Indonesia

www.bi.go.id/web/en

Directorate General of Customs and Excise

www.beacukai.go.id/wwwbcgoid/index.html

Directorate General of Immigration

www.imigrasi.go.id/

Indonesian Attorney General

www.kejaksaan.go.id/index.php

Indonesia Investment Coordinating Board (BKPM)

www5.bkpm.go.id

Indonesian Statistics Office

www.bps.go.id/eng/

Ministry of Manpower

www.depnakertrans.go.id/?

Directorate General of Taxation

www.pajak.go.id/?lang=en

Trade Indonesia

www.tradeindonesia.com

Asian Development Bank

www.adb.org

Australia Indonesia Business Council

www.aibc.com.au/

Austrade

www.austrade.gov.au/industrycountry

Digitalbusiness.gov.au

www.digitalbusiness.gov.au

Export Finance and Insurance Corporation

www.efic.gov.au/

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