On 5 October, the Indonesian House of Representatives (DPR) approved the job creation law (RUU Cipta Kerja) - commonly known as the "Omnibus Law".
We should note that the president has not yet enacted the Omnibus Law. It has not come into effect as of the date of this client alert. The DPR has 7 days to deliver the approved Omnibus Law to the president for enactment.
We will issue subsequent client alerts that cover specific key changes introduced by the Omnibus Law.
Why enact the Omnibus Law?
The Omnibus Law is aimed to attract investment, create new jobs, and stimulate the economy by, among other things, simplifying the licensing process and harmonizing various laws and regulations, and making policy decisions faster for the central government to respond to global or other changes or challenges.
What does the Omnibus Law do?
The Omnibus Law is a breakthrough in itself, as it has amended more than 75 current laws, and which will require the central government to issue more than 30 government regulations and other implementing regulations which must be issued, according to the Omnibus Law, within 3 months after it is enacted.
We note that the Omnibus Law:
- Focuses on increasing the ease of doing business in Indonesia (e.g., simplifying licensing processes, simplifying land acquisition processes, formalizing economic zones, providing more incentives to free-trade zones, creating a land bank supervisory authority).
Some notable changes to briefly mention is that the Omnibus Law introduces a new concept of risk-based business. The business activities are divided into three categories, i.e. low, medium and high risks. All categories require the business actors to obtain business identity number, plus a standard certification is required for a medium-risk business and a business license is required for a high-risk business.
- Reiterates that the Capital Investment Law and investment list will be the main reference for all capital investment activities in Indonesia.
The Omnibus Law provides that capital investment (including foreign investment) is open except for investment in business lines that are closed for capital investment as stated in it or those that can only be carried out by the central government; the central government1 through a presidential decree plans to issue a positive list that replaces the existing negative list.
One of the fundamental changes under the Omnibus Law is the removal, in general, of the relevant requirements and restrictions for foreign investment that are currently stipulated in various laws (undang-undang) governing several business sectors that are amended by the Omnibus Law.
We note that one sector in which the foreign ownership restriction has not been removed from the relevant law is the commercial aviation sector. Where such requirements and restrictions are removed by the Omnibus Law, the central government should have more freedom to direct and implement the foreign investment policy in those sectors.
With respect to the positive list, it remains to be seen: (a) what the criteria of the sectors that will be included in the positive list but we suspect the list will include large-size investment, investment in labor intensive business sectors, investment in high-tech business sectors, and investment in digital-based business sectors, (b) what investment requirements will be imposed by the central government for the sectors set out in the priority list, and (c) how the list will deal with the foreign ownership restrictions (including local player requirements) currently imposed on many sectors, e.g., herbal pharmaceutical, hospital, and transportation.
- Confirms that the business licenses will be generally issued by the central government and if the issuance of the business licenses are given to the local governments, such issuance shall be subject to the norms, standards, procedures and criteria determined by the central government.
- Introduces key amendments to several sectors, notably mining, power, forestry, public housing, healthcare (particularly requirements on medical facilities) and postal services.
- Among other changes, simplifies environmental assessment requirements and licensing procedures, dispenses with statement of environmental management and monitoring capability (SPPL), integrates environmental permits and business licenses, removes concept of strict liability, removes limitations around minimum forest cover for river basins and islands, creates scope for greater government discretion in permitting forest.
- Introduces key amendments to the Labor Law, particularly on definite period employment, outsourcing, overtime, minimum wage, termination of employment and manpower social security.
- Amends several tax provisions to increase the ease of doing business and to provide more legal certainty, among other things by exempting the tax on dividends obtained by individual resident taxpayers that are re-invested in Indonesia, lowering the withholding tax rate on interest paid to non-resident taxpayers, providing an exemption from the world-wide income regime for expatriates with certain skills, relaxation of the provisions to claim input VAT (especially for newly established taxpayers), and lowering the administrative penalty imposed for administrative errors by taxpayers (this may increase the voluntary compliance of the taxpayer).
- Introduces Indonesia's sovereign wealth fund (which will be called Lembaga Pengelola Investasi) that is meant to enhance the government's assets and investments through cooperation with third parties.
- Provides several incentives to micro and small enterprises, e.g., simplified business registration processes, they being allowed to establish one-shareholder limited liability companies.
As it currently stands, most of the provisions of the Omnibus Law refer to the enactment of implementing regulations (e.g., government regulations and presidential regulations) as the implementing instruments of the key changes introduced by the Omnibus Law. The Omnibus Law also mandates that the relevant existing implementing regulations will remain valid provided that they do not contravene the Omnibus Law and they are amended within 3 months after the Omnibus Law is enacted.
Readers should be aware of the possibility of certain provisions of the Omnibus Law being challenged before the Indonesian Constitutional Court.