Client Update Rupiah requirement on transactions in Indonesia update April 2015 On 31 March 2015, the Indonesian central bank (Bank Indonesia) issued Bank Indonesia Regulation No. 17/3/PBI/2015 on the Obligation to Use Rupiah in the Territories of Indonesia (the Regulation), which further implements the provision restricting the use of foreign currency in transactions within Indonesian territories as set out in Article 21 of Law No. 7 of 2011 on Currency (the Currency Law). It additionally regulates non-cash transactions, which had not been expressly addressed in the Currency Law. Although the Currency Law and the Regulation require certain transactions conducted within Indonesia to now use rupiah, there are certain key exemptions. These include: • international trade transactions; • international financing transactions where either the lender or the borrower is located outside of Indonesia; • foreign currency savings/deposits in banks; and • an additional exempted category under the Regulation, which are transactions in foreign currency made in accordance with applicable laws. Obligations imposed under the regulation The key obligations/restrictions imposed on transactions within Indonesian territories, subject to certain exemptions are: • Rupiah must be used for cash and noncash transactions within Indonesia; • Rupiah must not be refused for payment, fulfilment of obligations, and/or other financial transactions; and • Prices for goods and/or services must be stated only in rupiah. 1 Requirement to use the rupiah for certain transactions within Indonesian Territories 1.1 Extent of the requirement Under Article 2 of the Regulation, the following transactions need to be made in rupiah (subject to certain exclusions as set out in paragraph 1.2): • Any transaction that is intended for payment; • Completion of other obligations that must be made with money; and/or • Other financial transactions including the transfer of money from customers to banks. While the Currency Law was silent about whether the restrictions apply to both non-cash as well as cash transactions and the Ministry of Finance also confirmed that it only applied to cash transactions1 , the Regulation expressly states that its provisions apply to both. Noncash transactions include any transaction that use non-cash instruments (such as payment through checks, bilyet giro, credit card, debit card, ATM cards, and electronic money) and are made through a non-cash mechanism (such as fund transfers). 1.2 Exempted transactions Under the Regulation, the following transactions are allowed to be made in foreign currency: 1. Certain transactions related to the implementation of the State Budget, such as payment of offshore loans or onshore loans in foreign currency, expenditure relating to foreign goods and capital, state revenue originating from the sale of government bonds in foreign currency, and other transactions made in order to implement the State revenue and expenditures; 2. Receipt or provision of grants or donations into and outside of Indonesia, where one of 1 Socialization of the Currency Law by the Indonesian Ministry of Finance dated 6 December 2011. the parties is located outside of Indonesia; and 3. International trade transactions, which include: • export/import of goods into and outside of the Indonesian customs area (but not including activities related to such export/ import of goods, such as docking of ships at ports, loading/discharging of containers, temporary storage of containers at ports, and airplane parking at airports); and • cross border trade in services, including cross border supply (for example, online purchases and call centres) and consumption abroad (for example, services abroad that serve Indonesian customers, such as an Indonesian citizen studying or being treated medically at a hospital abroad). 4. International financing transactions, where either the lender or the borrower is located outside of Indonesia. However, if the lender is a bank (as defined in the Indonesian Banking Law) in Indonesia, the bank must still comply with the restrictions under regulations regarding foreign exchange (forex) transactions against rupiah between banks and foreign parties. It is worth noting that Bank Indonesia Regulation No. 16/17/PBI/2014 on Forex Transactions Against Rupiah Between Banks and Foreign Parties dated 17 September 2014 (the Forex Transaction Regulation) regulates, among other things, that: • Forex transactions against rupiah that meet the stipulated nominal threshold must be based on an underlying transaction in the form of domestic or international trade in goods or services or investment; • Banks are restricted from the following transactions with foreign parties2 : 2 ‘Foreign Party’ is defined by the Forex Transaction Regulation as any foreign citizen, foreign legal entity or institution, which does not include foreign branch banks in Indonesia, foreign investment companies, or (i) providing credit or financing for foreign parties in rupiah or foreign currency (with certain exemptions: credit or financing in the form of non-cash or guarantee related to investment activities in Indonesia that meet certain requirements3 ; syndicate credit or financing that meet certain requirements4 ; credit card; credit or financing for consumption domestically; intraday overdraft in rupiah or foreign currency; overdraft in rupiah or foreign currency due to administrative costs, takeover of receivables of an agency appointed by the government to manage the assets of the bank for the purposes of Indonesia banking restructuring by a foreign party whereby the financing is guaranteed by a Prime Bank5 ); (ii) placement of funds in rupiah, which is the investment of the bank’s funds into another bank, in the form of giro, interbank call money, time deposit, deposit certificate, credit or financing, and other similar types of funds placements; (iii) purchase of securities in rupiah issued by foreign parties (with certain foreign legal entities or institutions that are non-profit; an Indonesian citizen that has permanent residence overseas and is not domiciled in Indonesia; an office of an Indonesian-headquartered bank that is located overseas; and an office of an Indonesian legal business entity that is located overseas 3 The Forex Transaction Regulation requires either that: (i) a counter guaranty must be obtained from a Prime Bank (as defined in footnote 5) that is not a branch office of the bank located overseas or a branch office of a foreign bank located in Indonesia or overseas, or (ii) there is a guaranty of deposit for 100 per cent of the value of the guaranty provided. 4 The credit or financing must: (i) involve a Prime Bank (as defined in footnote 5) as the lead bank, (ii) be provided for project financing in the real sector for productive business located in Indonesia, and (iii) the foreign bank’s contribution as a syndicate member is larger than the contribution of the bank in Indonesia. 5 Prime Bank is defined in the Forex Transaction Regulation as a bank having a certain investment rate from a rating agency and has a total asset that is within the top 200 globally in the Banker’s Almanac. exemptions including purchase of securities related to export or import of goods into/out of Indonesia and domestic trade); (iv) interoffice receivables in rupiah (ie all receivables owned by the bank to its main office or branch located outside Indonesia for the interest of the bank or the customer); (v) interoffice receivables in foreign currency for the purposes of providing credit or financing in rupiah; (vi) placement of capital in rupiah (ie investment of the bank’s funds in the form of shares in a bank or other companies in the financial sector); and (vii) foreign exchange transactions against rupiah if such transaction is or could potentially be related to structured products. • In addition to the above, banks are prohibited to transfer rupiah overseas. Additionally, there are limitations applicable to the transfer of rupiah to foreign parties.6 5. Foreign currency deposits/savings in banks; 6. In addition to the above exemptions that were set out in the Currency Law, the Regulation added other categories of transactions that are allowed by law to use foreign currency: • Business activities in foreign currency that are carried out by banks (which include branch offices of foreign banks in Indonesia) in accordance with the laws on conventional and sharia banking, including 6 (i) Rupiah may be transferred to an account of a foreign party or joint account between a foreign party and non-foreign party in a domestic bank with a nominal amount up to the equivalent of USD 1 million or between rupiah accounts belonging to the same foreign party; transfer of the rupiah; (ii) transfer of rupiah with a nominal amount above USD 1 million shall be based on an underlying transaction, except for a transfer of rupiah that is conducted in regard to the settlement of a rollover transaction, early termination transaction or termination of a transaction (unwind). Further, the bank that receives the transfer of rupiah shall verify the status of the party that receives the transfer of rupiah. credit in foreign currency for export and other activities, interbank money markets in foreign currency, bonds and subordinated debt in foreign currency, trading of securities in foreign currency, as well as other banking transactions in foreign currency as regulated in the laws on conventional and sharia banking; • Government-issued securities transactions using foreign currency in the primary or secondary market; and • Other transactions in foreign currency that are conducted in accordance with applicable laws. The Elucidation of the Regulation expressly identifies the law on Bank Indonesia, the law on investment, and the law on the Indonesian financing export agency as laws that regulate ‘other transactions in foreign currency’. Under Article 8 (3) of Law No. 25 of 2007 on Investment (the Investment Law), an investor has the right to transfer or repatriate funds in foreign currency for certain transactions as set out below. As mentioned above, the Currency Law does not include the exemption of ‘other transactions in foreign currency that are conducted in accordance with the laws’ and further provides that any laws and regulations enacted prior to it would still apply unless it contradicts the Currency Law. Meanwhile, Article 8 (4) of the Investment Law also further stipulates that the right to transfer and repatriate must be done in accordance with the laws and regulations. On the basis that the Currency Law as implemented by the Regulation (which expressly covers non-cash transactions) is considered as the law which specifically regulates currency matters, including those contained in the Investment Law, a reading of these provisions can be interpreted to mean that the exemption to ‘other transactions in foreign currency that are conducted in accordance with applicable laws’ would still apply for transactions that are non-cash. Accordingly, the exemption would extend to certain non-cash transactions carried out by the investors7 , which under the Investment Law are expressly permitted to be made in foreign currency. These include transactions in foreign currency by the investors for the transfer and repatriation of funds in relation to: (i) capital, (ii) profit, bank interest, dividend, and other revenue, (iii) funds necessary for the purchase of materials or goods, or funds necessary to replace capital goods for investment, (iv) additional funds needed to finance the investment, (v) funds for repayment of loan, (vi) royalty or cost needed to be paid, (viii) income of foreigners working in the investment company, (ix) compensation for losses and for takeovers, (x) payments made for technical support, payments for technical and management services, payments for project contracts, and payments for intellectual property rights, and (xi) proceeds of the sale of assets. In light of points (i) and (iv) above, which permit the transfer of foreign currency for capital, as well as additional funds to finance an investment, payment for the acquisition or purchase of shares by an investor should also be allowed in foreign currency, provided that it is done as a noncash transfer. 2 Prohibition to refuse rupiah for payments, fulfilment of obligations, and/or other financial transactions 2.1 Extent of the requirement Under Article 10 of the Regulation, every individual or corporation is prohibited from 7 Article 1 of the Investment Law defines ‘investor’ as: an individual or business entity that conducts capital investment, which can be a domestic investor or a foreign investor. Meanwhile, a foreign investor is a foreign individual, foreign business entity, and/or foreign government that conducts capital investment in Indonesia. refusing to accept rupiah as a form of payment, to fulfil some obligation that needs to be made in rupiah, and/or for other financial transactions within Indonesia. 2.2 Exempted transactions or situations An individual would be allowed to refuse payment in rupiah, if: • the transaction is exempted from the requirement to use rupiah (as stated in paragraph 1.2 above), provided that the payment or the fulfilment of the obligation in foreign currency has been agreed to in writing; • the transaction relates to a strategic infrastructure project (as determined by a statement from the authorised ministry/ institution), provided that payment or the fulfilment of the obligation in foreign currency has been agreed to in writing and approval is obtained from Bank Indonesia; and • there is doubt as to the authenticity of the rupiah, if received in the form of cash. 3 Requirement to state the price for goods and services only in rupiah 3.1 Extent of restriction Under Article 11 of the Regulation, business entities are required to state the prices of their goods and/or services only in rupiah. 3.2 Exempted transactions Prices can still be stipulated in foreign currency for the following transactions, provided that they are agreed to in writing: • transactions that are exempted from the requirement to use rupiah (as stated in paragraph 1.2 above); and • transactions related to strategic infrastructure projects (as determined by a statement from the authorised ministry/ institution), provided approval is obtained from Bank Indonesia. Transitional period for non-cash transactions The Regulation stipulates that, particularly for non-cash transactions that are subject to the requirement under the Regulation, the obligation to use rupiah would only take effect on 1 July 2015. The Regulation also provides that any existing written agreements relating to non-cash transactions in foreign currency that have been entered into before 1 July 2015 are still effective until said agreement terminates. However, even though said agreements can still be carried out using foreign currency, the Regulation stipulates that any further extension and/or amendment of said agreements must be adjusted to comply with this Regulation. The extensions and/or amendments in respect of Exempted Transactions as stated in paragraph 1.2 above are also exempted from the obligations to use rupiah. Contacts Allens is an independent partnership operating in alliance with Linklaters LLP. Linklaters LLP is a limited liability partnership registered in England and Wales with registered number OC326345. The term partner in relation to Linklaters LLP is used to refer to a member of the LLP or an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP and of the non-members who are designated as partners and their professional qualifications is open to inspection at its registered office, One Silk Street, London EC2Y 8HQ, England or on www.linklaters.com and such persons are either solicitors, registered foreign lawyers or European lawyers. 19181 Sophie Mathur Partner Linklaters Ph +65 6692 5703 Sophie.Mathur@linklaters.com Yolanda Hutapea Partner Widyawan & Partners Ph +62 21 2995 1596 Yolanda.Hutapea@widyawanpartners.com John Maxwell Partner Linklaters Ph +81 3 6212 1227 John.Maxwell@linklaters.com Implication of violation Sanctions under the Regulation are as follows: • Violation of the requirement to use rupiah in cash transactions under Article 3 (1) and refusal to accept rupiah payment where required under Article 10 of the Regulation are subject to criminal sanctions of a maximum of one year imprisonment and penalty of IDR 200,000,000. • Violation of the requirement to use rupiah in non-cash transactions can be subject to administrative sanctions, ie written warning, obligation to pay the larger of 1 per cent of the transaction amount up to a maximum of IDR 1,000,000,000, and/or prohibition to participate in further payment activities. Additionally, Bank Indonesia can also recommend that these violations be followed up by other appropriate authorities. • Violation of the requirement to state the price of goods and services in rupiah and for not submitting any report, information, and/or data as requested by Bank Indonesia, will be subject to written warning. Additionally, Bank Indonesia can also recommend that these violations be followed up by other appropriate authorities. Nevertheless, enforcement of these provisions will depend on how effective the monitoring mechanism will be. Article 13 of the Regulation provides that Bank Indonesia will ensure compliance under this Regulation by: • Requesting reports, information, data, and/ or supporting documents, on its own or by involving other related institutions; • Conducting direct monitoring of each party. (Based on the existing regulation, it remains unclear as to how this will be implemented); and • Appointing another party to conduct research for purposes of monitoring compliance. Further implementation According to Article 22 of the Regulation, Bank Indonesia will issue a circular letter in implementation of this Regulation.