Corporate & Trade
Ministry of Trade ("MOT") Gives More Clarity on Local Content Requirement under Shopping Centers and Modern Stores Regulation
On 12 June 2014, the Ministry of Trade issued Decree of the Director General of Domestic Trade No. 65/PDN/KEP/6/2014 on Implementation Guidelines on Local Content Requirement for Shopping Centers and Modern Stores ("Decree 65").
Decree 65 follows on from Regulation No. 70/M-DAG/PER/12/2013 on Guidelines for Structuring and Development of Traditional Markets, Shopping Centers and Modern Stores ("Regulation 70"), which was issued on 12 December 2013 and has been effective since 20 June 2014 (see our January 2014 client alert).
While Decree 65 provides some clarity as to when exemptions will be given from the 80% local product sales requirement ("Local Content Requirement"), stipulated in Regulation 70, as Decree 65 is not comprehensive, it has not dealt with all issues (particularly for department stores that sell much imported product) and reinforces the basic premise, contrary some would say to free trade agreements, that products should be manufactured in Indonesia.
The main aim of Decree 65 is to give more clarity as to who needs to comply with the Local Content Requirement, how exemptions can be obtained and what requirements may need to be satisfied for an exemption.
Who will be subject to the local content requirement?
Decree 65 provides that the Local Content Requirement applies to (i) business entrepreneurs who own modern stores (namely minimarkets, supermarkets, department stores and hypermarkets) and (ii) business entrepreneurs (tenants) who own and/or lease stores in shopping centers.
Decree 65 gives more clarity on the parties that are subject to the Local Content Requirements. Although Decree 65 does not state that shopping centers are subject to the Local Content Requirement notwithstanding Regulation 70 provides otherwise. This may have been as a result of lobbying that shopping centers themselves do not sell goods nor can they comply. However Regulation 70 in the hierarchy of laws takes precedent so it remains to be seen if the MOT will refer to Regulation 70 and require shopping centers to fulfill the Local Content Requirement.
Department stores, most of which sell foreign produced goods, are still covered by Decree 65.
Corporate & Trade
2 Ministry of Trade ("MOT") Gives More Clarity on Local Content Requirement under Shopping Centers and Modern Stores Regulation July
Circumstances for an Exemption
In certain cases, the MOT will grant an exemption allowing businesses to sell
less than 80% of domestic products after considering a recommendation from
the Communication Forum of Structuring and Development of Traditional
Markets, Shopping Centers and Modern Stores.
Decree 65 sets out the circumstances in which exemptions can be granted
from the Local Content Requirement, i.e.:
a. the products cannot be produced in Indonesia;
b. the products are premium products that do not compete with similar local
c. the products originate from certain countries and are designated for
citizens of those countries that live abroad.
As Decree 65 does not provide a definition of "premium products", it is not
clear what will be considered as premium products. However this is a
welcome recognition that certain branded products, primarily sold in
department stores, may be exempted.
This will require department store operators to make an exemption application
- which hopefully will be approved on the basis that many imported products
will not compete with locally produced products given the market segment.
Decree 65 provides the procedures to obtain an exemption from the Local
Amongst other matters, however the applicant must submit a development
plan for Indonesian products and a segmentation and expansion market plan
along with data on the composition of the products that are produced in
Indonesia. This is curious as most applicants, being minimarkets,
supermarkets, department stores and hypermarkets, will not engage in
development or manufacture of Indonesian products.
While implementation remains to be seen, it may that:
a. the MOT's intention is for business entrepreneurs to encourage local
manufacturers to produce the products locally (even where the business
entrepreneurs have obtained an exemption). This is in line with the
Government's drive to encourage foreign entities to set up subsidiaries
and produce locally.
b. in any exemption approval that is granted, the MOT will specify a certain
number of years within which the business entrepreneur must increase
local sourcing and meet the Local Content Requirement.
This clearly will not be possible for imported products which are premium in
nature. Consequently it remains to be seen in practice how these regulations
are fully implemented or indeed enforced.
For further information please contact
Foreign Legal Consultant, HHP
+62 21 2960 8618
+62 21 2960 8547
+62 21 2960 8515
Fikha Triendriana Ekha
+62 21 2960 8529
Hadiputranto, Hadinoto & Partners
The Indonesia Stock Exchange
Building, Tower II, 21st Floor
Sudirman Central Business District
Jl. Jenderal Sudirman Kav. 52-53
Tel: +62 21 2960 8888
Fax: +62 21 2960 8999
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