The start of 2019 saw a renewed attempt by the Government to compel exporters of natural resources-based commodities to repatriate their export earnings and deposit them in the Indonesian financial system as part of a series of measures that were adopted at the time to bolster the rupiah against the various headwinds buffeting emerging-market currencies. The new rules on the repatriation of export proceeds in the natural-resources sector (“Export Proceeds”) are set out in Government Regulation No. 1 of 2019 (“GR 1/2019”), which entered into effect on 10 January 2019 (see ABNR Legal Update “Repatriation of Export Earnings to Indonesia: New Regulation Signals Stricter Approach” [click here]). After a gap of almost six months, the Minister of Finance has now established sanctions for non-compliance with GR 1/2018 through the issuance of Regulation No. 98/PMK.04/2019 - “MOF Reg. 98/2019”), which entered into effect on 1 July 2019.
GR 1/2019 vests the authority to supervise compliance with its requirements in Bank Indonesia. In line with this authority, the central bank has issued Regulation No. 21/3/PBI/2019 (“PBI 21/2019”) governing the technical, banking-related aspects of GR 1/2019’s implementation. While most of the provisions of PBI 21/2019 lie outside the scope of a legal update, a number of them do provide additional clarity as to certain key terms used in GR 1/2019, as further discussed below.
B. Key Requirements under GR 1/2019
The key obligations imposed on exporters by GR 1/2019, as reiterated in MOF Reg. 98/2019, may be summarized as follows:
1. Forex-denominated Export Proceeds in the (a) mining; (b) plantation; (c) forestry; and (d) fisheries sectors must be deposited in the Indonesian financial system (there is no requirement for them to be converted into rupiah nor a minimum period stipulated during which they must remain parked in Indonesia).
2. Repatriated Export Proceeds must be deposited in the Indonesian financial system using a special account (“Special Account”) held with a bank that is licensed by the Indonesian Financial Services Authority (OJK) to engage in foreign-exchange operations (“Forex Bank”).
Additional information on the technical requirements / criteria for a Forex Bank and a Special Account is provided by PBI 21/2019:- (a) besides an OJK-licensed Indonesian bank, a Forex Bank may also take the form of the Indonesian branch of a foreign bank but not a foreign branch of a bank that has its head office in Indonesia, (b) a Special Account may be a rupiah or foreign currency account; may be in the form of a current account, savings account or “other account that may be used for conducting transactions;” and more than one Special Account may be maintained by an exporter, whether with the same Forex Bank or with a number of different Forex Banks.
3. Export Proceeds should be deposited in a Special Account within not more than three months subsequent to the filing of the relevant customs export notification (pemberitahuan pabean ekspor).
4. The funds deposited in a Special Account may only be used for the following purposes:
a. payment of customs and other duties related to exports;
b. loan-related payments;
c. payments for imports;
d. distribution of profits/dividends; and
e. such other purposes as are prescribed by the Investment Law. Article 8(3) Investment Law provides that an investor may transfer or repatriate foreign currency to overseas destinations in the case of: (a) capital; (b) profits, bank interest, dividends and other income; (c) the purchase of raw and auxiliary materials, semi-finished and finished products; and the replacement of capital goods required for the sustainability of an investment; (d) investment financing; (e) loan repayment; (f) royalties or other expenses; (g) employee salaries; (h) proceeds of the sale or liquidation of an investment; (i) compensation for losses; (j) compensation in the case of nationalization; (k) payments related to technical assistance; technical and management services; a project contract; and intellectual-property rights; and (l) the proceeds of asset sales.
5. If Export Proceeds are to be received using an escrow account, that account must be held with an Indonesian Forex Bank. If an Exporter has an existing escrow account overseas for such purpose, then it must be replaced by an escrow account at a Forex Bank in Indonesia.
C. Sanctions for Non-Compliant Exporters under MOF Reg. 98/2019
1. Should an exporter fail to deposit Export Proceeds in a Special Account within three months subsequent to the filing of the relevant customs export notification, an administrative fine of 0.5 percent of the value of the Export Proceeds that have not been so deposited shall be levied. PBI 21/2019 explains that “export value” refers to the free-on-board (FOB) value that is stated on the customs export notification.
2. Should an exporter use Export Proceeds deposited in a Special Account for purposes other than an approved purpose (as listed in Section B.4 above), an administrative fine of 0.25 percent of the value of the Export Proceeds that are used for unauthorized purposes shall be levied.
3. In a case where Export Proceeds are to be received via an escrow account, should an exporter fail to use an escrow account in Indonesia for such purpose or fail to replace an existing overseas escrow account with an escrow account in Indonesia, the provision of customs services in the export field to such exporter shall be suspended until such time as it fulfills its obligation to use a domestic escrow account.
The authority to calculate and levy the aforesaid administrative fines, and to suspend customs services, is vested in the head of the relevant Customs Office based on the findings of supervision conducted by Bank Indonesia.
D. ABNR Commentary
A key problem with GR 1/2019 (as further elaborated by MOF Reg. 98/2019 and PBI 21/2019) is that no exceptions are provided to take account of long-standing business practices and commercial arrangements. Particular concern has been voiced by providers of commodity-based financing, where typically offshore accounts are used to receive Export Proceeds under foreign law-governed security arrangements. In the light of the repatriation policy established by GR 1/2019, such a structure will no longer be a viable option. Consequently, we expect to see Indonesian Forex Banks increasingly taking on the role of onshore security agents on behalf of lenders so as to ensure enforceability in respect of collateralized onshore bank accounts.
Another issue relates to Indonesia’s civil system of hierarchical legislation. Under MOF Reg. 98/2018 Article 3(3), a more detailed description of the precise types or categories of natural-resources exports that are subject to MOF Reg. 98/2019 is to be provided by a directive of the Director General of Customs & Excise. However, such directive has yet to be issued. We contacted a senior official in the relevant unit of the Directorate General to enquire as to when it might be issued. However, he was unable to provide us with a firm timeline. Unfortunately, such delays in the issuing of essential subsidiary legislation are quite common across all ministries and sectors, thereby giving rise to a considerable degree of legal uncertainty.