On 28 June 2011, the Indonesian Government brought into force Law No. 7 of 2011 ("Currency Law").

The Currency Law contains a general requirement that Indonesian Rupiah is used to settle financial obligations and other payment transactions taking place in Indonesia, unless certain limited exemptions apply. The Currency Law seeks to promote the use of Indonesian Rupiah in domestic transactions conducted in Indonesia.

Use of Rupiah

Article 21(1) of the Currency Law provides that Rupiah must be used for:

  • each transaction involving payment;
  • settlement of other financial obligations; and/or
  • other financial transactions,

in each case conducted within Indonesia.

In our view, the Currency Law will apply retrospectively to all transactions entered into before, but where payment is settled after, its entry into force on 28 June 2011.

Criminal sanctions

Significantly, failure to comply with this requirement is expressed to attract criminal sanctions of up to 1 year imprisonment and a fine of Rp 200 million (c. USD 23,000) for individuals, and a fine of up to Rp 267 million (c. USD 31,000) for corporate offenders, as well as the prospect of annulment of business licences and seizure of assets. Where corporate offenders do not pay the fine, the Courts are empowered to order confiscation of assets of the corporation or its management. This potential criminal sanction for non-compliance is in contrast with the legislative requirement that Bahasa Indonesia be used for agreements with Indonesian parties, where there is no sanction specified for breach of that requirement.

Exemptions

There are certain broadly worded exemptions to this general requirement namely:

  • transactions relating to the implementation of state budget;
  • the receipt or grant of overseas grants ("hibah");
  • international trade transactions;
  • bank deposits denominated in foreign currencies; and
  • international financing transactions.

However, the Currency Law is silent as to the exact scope of these exemptions. Therefore, it is at present difficult to say with precision how the concept of "international trade transactions" or "international financing transactions" will be applied in practice. Under the "international trade transactions" exemption, a payment made by or to an overseas company may be exempted from the requirement that it be made in Rupiah, but may not be exempted if conducted through an Indonesian subsidiary of that overseas company. Similarly, under the "international financing transactions" exemption, a loan paid by an Indonesian company to an Indonesian subsidiary of an international bank may not fall within the exemption. Given the broad wording used in the legislation for these criminal offences – pending the issue of implementing regulations (expected by 28 June 2012) – it is advisable to consider each transaction carefully to determine whether they can be said to be "international" in nature. The broad description of these exemptions does, however, help in arguing that cross-border payments out of Indonesia for trade or financing purposes should be exempted.

Acceptance of Rupiah

Furthermore, Article 23 of the Currency Law prohibits anyone from refusing to accept a Rupiah payment where such payment relates to the payment or settlement of a Rupiah obligation and/or other financial transactions that take place within Indonesia, unless:

  • there is any doubt as to the authenticity of the Rupiah; or
  • the relevant parties have agreed in writing to make such payment or settle the obligation in a foreign currency.

The wording in Article 23 – read literally – suggests that a payee can refuse payment in Rupiah if there is a prior written agreement that such payment can be made in a foreign currency, even if the transaction is conducted in Indonesia. In its broadest sense, this provision might be read as supporting an argument that parties can "contract out" of the general requirement to use Rupiah for domestic Indonesian transactions by implication, even if the transactions do not fall within the exemptions in Article 21. Given the fact that this broad interpretation may defeat the purpose of promoting the use of Rupiah in domestic transactions, it remains to be seen whether a more restrictive view may be adopted by the authorities. There is also a fairly strong argument that, by its terms, the "contracting out" exemption only applies to the basic prohibition in Article 23.

Observations

Implementing regulations providing further details are required to be issued by 28 June 2012. In the meantime, there remains a high degree of uncertainty as to the implications of the Currency Law.

Importantly, it should also be noted that other Bank Indonesia regulations in fact prohibit the payment of Rupiah to parties outside Indonesia in almost all cases. This inconsistency with the general principle in the Currency Law has not been catered for in the Currency Law.

In order to comply with the Currency Law as it now stands, existing contracts should be reviewed and, where the currency of payment (other than Rupiah) has not been previously agreed in writing, a new provision may have to be incorporated expressly to provide for payment in the desired non-Rupiah currency. For new transactions, companies should also consider ways in which the international flavour of the transaction can be enhanced, including:

  • executing contracts and settling payment obligations outside of Indonesia;
  • making sure contracts are not governed by Indonesian law; and
  • making sure one or more parties to the transaction are non-Indonesian entities.