in association with Hiswara Bunjamin & Tandjung
The Governor of Bank Indonesia ("BI"), the Indonesian central bank, has foreshadowed that BI is likely, by the end of September 2011, to issue a new Bank Indonesia regulation ("Regulation") requiring (i) Indonesian exporters, and (ii) Indonesian debtors receiving offshore loans (in a foreign currency) to deposit the proceeds in a domestic bank in Indonesia. It appears that offshore loans may also include the issue of offshore bonds or notes.
BI will work with the Directorate of Customs, Directorate of Tax and Central Bureau of Statistics in issuing and monitoring the implementation of the Regulation.
The purpose of the Regulation appears to be focused on strengthening the domestic liquidity of foreign currency within Indonesia and to enhance the authorities' ability to keep track of the exact value of foreign exchange received from export proceeds and offshore loans.
Although the Regulation itself is yet to be published (as at the date of this note), some preliminary details are emerging from recent press reports:
- BI will not require the export proceeds and the offshore loans to be converted into Rupiah.
- BI will allow the export proceeds and the offshore loans to be deposited in any bank operating in Indonesia (including branches of foreign banks).
- Whilst requiring the funds to enter the domestic financial system, BI will not require the funds to remain in Indonesia for a specified period of time.
- The Regulation is reportedly planned to be issued at the end of September 2011 and to be effective as of 1 October 2011.
- Sanctions for non-compliance will comprise a penalty of 0.5% of export earnings or offshore loans that are not deposited in a domestic bank in Indonesia, or a minimum of Rp10 million and a maximum of Rp100 million per transaction. More materially, non-compliance by exporters may impact on their ability to continue with their export activities as the Customs Office will not process the relevant export documentation and, where the penalty is not then paid, may revoke the exporters' Customs Registration Number
- Proceeds must be deposited in a domestic bank within 3 months of delivery of goods (temporarily, until end 2012, this period is extended to within 6 months of delivery of goods).
- Other transitional features are as follows:
- sanctions for non-compliance will be imposed from 2 January 2012 onwards; and
- until end of 2012, exemptions will apply to exporters who are obliged to deposit export earnings overseas due to existing agreements with creditors or purchasers. However, to qualify for this exemption these obligations must be reported to BI and a copy of the relevant agreement provided. From 2013, this exemption will be unavailable to exporters and exporters are expected to make adjustments to the relevant agreements prior to December 2012.
Additional burdens will fall on domestic banks in supporting the new system. They will be required to verify data and documents of the exporter, to check the accuracy of the funds transfer and then report to BI.
As the Regulation is yet to be issued, our comments below are preliminary at this stage:
- It appears that there are at least two main competing policy aims in play: (a) the desire to strengthen Indonesia’s domestic liquidity of foreign currency by requiring, in particular, Indonesia’s sizeable export proceeds to be brought into the domestic financial system; and (b) respecting Indonesia’s long-standing general policy of free foreign exchange movement.
- Nothing we have seen so far (from publicly available sources) suggests that BI will require the foreign currency brought into Indonesia to be converted into Rupiah or for the foreign currency to be kept in Indonesia for a specified period of time. This suggests that, subject to the exact terms of the Regulation when it is issued, the foreign currency can be brought into a bank account held with a domestic bank on one day and transferred out of Indonesia the very next day. If this is indeed the case, it remains to be seen the extent to which the Regulation would in fact help strengthen Indonesia’s domestic liquidity of foreign exchange.
- This situation appears to be consistent with the philosophy behind recent payment rules for procurement of goods and services in the upstream oil and gas industry under which payments by PSC contractors to suppliers must be made through bank accounts in Indonesia held with state-controlled banks.
- In any event, the detailed mechanisms expected in the Regulation will be important in order to assess in more detail its eventual impact (which may be intended or otherwise). We are monitoring developments to see if the mechanisms in the Regulation (when issued) may have unintended consequences, which may inhibit transaction execution or increase transaction implementation costs. We are also monitoring its potential impact across various practice areas and business sectors, including any potential impact on offshore cash security structures which are common in Indonesian offshore financing transactions. How the new requirements under the Regulation will impact on the export of minerals and oil and gas by Indonesian producers operating under contractual terms already agreed with the Government will also require careful consideration in each case.
- As always in Indonesia, there is the possibility that the proposed changes may not be implemented effectively. Recent comments attributed to BI in the press suggest, however, that thinking on the shape of the new rules is quite advanced. We await further developments.