Government Regulation (GR) 1/2019, which took effect on 10 January 2019, requires exporters in the natural resources sector to repatriate their forex-denominated export earnings to Indonesia.(1)
While this requirement is not new, firmer action to enforce it has been on the cards since it was announced as a key part of the government's 16th economic reform package in November 2018. Overall, GR 1/2019 is clearly intended to bolster Indonesia's balance of payments situation, which has worsened considerably over the past year.
The government appears to be serious about enforcing GR 1/2019, which permits:
- the levying of fines;
- the imposition of export bans; and
- the revocation of business licences in cases of non-compliance.
On 23 January 2019 Finance Minister Sri Mulyani Indrawati stated: "This is mandatory, meaning it must be complied with. There will be consequences for those who fail to comply."
In reality, all exporters were required to repatriate forex-denominated export earnings prior to GR 1/2019 under Bank Indonesia Regulation 16/10/PBI/2014 (PBI 16), which was issued on 14 May 2014.(2) This regulation, which remains in effect, is discussed in greater detail below.
In addition to PBI 16, a number of sectoral regulations at the state ministry/agency level impose various obligations that have a direct or indirect bearing on the repatriation of export earnings, including:
- Minister of Mines and Energy Directive 1952/84/MEM/2018, which requires exporters of minerals and coal to use domestic letters of credit and repatriate all forex-denominated export earnings to Indonesia;(3) and
- Minister of Trade Regulation 94/2018 (as amended), which stipulates that exporters of a range of commodities in the mineral, coal, oil and gas and palm oil sectors must use domestic letters of credit.(4)
These regulations have not been revoked by GR 1/2019 and thus remain in effect.
Forex-denominated export proceeds in the mining, plantation, forestry and fisheries sectors must be deposited in the Indonesian financial system.
However, GR 1/2019 does not require export proceeds to be converted into rupiah. Further, it does not stipulate a minimum period during which proceeds must remain parked in Indonesia.
'Export proceeds' are defined as foreign exchange-denominated proceeds from the exportation of goods that derive from the "exploitation, management and/or processing of natural resources".
The precise types or categories of export that are subject to GR 1/2019 are to be subsequently prescribed by way of a minister of finance regulation.
GR 1/2019 applies to exporters in the form of entities and natural persons which are domiciled, or plan to be domiciled, in Indonesia for at least one year.
GR 1/2019 provides no exemptions for existing export contracts or arrangements.
Export proceeds must be deposited in a special account held with a bank that is licensed by the Financial Services Authority (OJK) to engage in foreign-exchange operations (a forex bank). The definition of 'forex banks' set out in GR 1/2019 expressly excludes overseas offices of banks that are headquartered in Indonesia.
As regards timelines, export proceeds should be deposited in a special account within three months from the filing of the relevant customs export notification.
Bank Indonesia is expected to issue more specific provisions governing the repatriation of export proceeds.
The funds deposited in a special account may be used for the following purposes:
- the payment of customs and other duties relating to exports;
- loan-related payments;
- import payments;
- the distribution of profits or dividends; and
- other purposes, as set out in the Investment Law.(5)
Article 8(3) of the Investment Law provides that an investor may transfer or repatriate foreign currency to overseas destinations in the case of:
- profits, bank interest, dividends and other income;
- 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;
- investment financing;
- loan repayments;
- royalties or other expenses;
- employee salaries;
- proceeds of the sale or liquidation of an investment;
- compensation for losses;
- compensation in the case of nationalisation;
- payments relating to technical assistance, technical and management services, project contracts and IP rights; and
- the proceeds of asset sales.
If export proceeds are to be received using an escrow account, that account must be held with a forex bank. If an exporter has an existing escrow account overseas for such purpose, it must be replaced by an escrow account at a forex bank in Indonesia within 90 days of GR 1/2019 coming into effect.
For the purposes of GR 1/2019, the Ministry of Finance has supervisory authority over export activities in the relevant sectors. Bank Indonesia has been assigned authority to supervise the repatriation and use of export proceeds. Finally, the OJK is responsible for overseeing the use of escrow accounts.
Reports on the supervision undertaken by Bank Indonesia and the OJK will be submitted to the Ministry of Finance.
Non-compliant exporters are liable to administrative fines, an export ban and the revocation of their business licence, depending on the gravity of the non-compliance. Further provisions governing fine amounts will be issued by way of a minister of finance regulation.
The minister of finance and Bank Indonesia had to issue ancillary or implementing regulations for GR 1/2019 within seven days of it coming into effect.
The principal regulation on the repatriation of export proceeds prior to GR 1/2019 was PBI 16, which remains in effect. However, the enforcement of PBI 16 has been inconsistent. By contrast, the government appears to be serious about enforcing GR 1/2019.
A key weakness of PBI 16 is that it does not specifically state that all export proceeds must be "deposited in the Indonesian financial system". Instead, it states that export proceeds must be "received" through an Indonesian forex bank.
By contrast, GR 1/2019, which expressly requires export proceeds to be deposited in the Indonesian financial system, is more tightly drafted and leaves less room for differing interpretations.
Further, the special account requirement in GR 1/2019 should help Bank Indonesia to overcome the problems that it has experienced in monitoring and tracking repatriated export proceeds.
Under Indonesia's hierarchical system of legislation, a government regulation normally provides only the outline of a new scheme or framework. This also applies in the case of GR 1/2019, which required Bank Indonesia and the minister of finance to issue more detailed ancillary or implementing regulations within seven days of it coming into effect. However, in reality, time-bound targets for the issuance of subsidiary regulations are frequently overrun.
Given the importance of GR 1/2019 to exporters, as well as media statements by senior officials that the implementing regulations for GR 1/2019 will introduce enhanced tax benefits for repatriated export proceeds (over and above those currently available), developments in this regard are expected.
For further information on this topic please contact Giffy Pardede or Mahatma Hadhi at Ali Budiardjo, Nugroho, Reksodiputro by telephone (+62 21 250 5125) or email ([email protected] or [email protected]). The Ali Budiardjo, Nugroho, Reksodiputro website can be accessed at www.abnrlaw.com.
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