Special Economic Zone

To accelerate economic development, the Indonesian Government has launched a breakthrough by encouraging a new economic growth centre with high competitiveness through the Special Economic Zone (SEZ). SEZ has been developed in various regions in Indonesia, based on the accessibility of the region to global markets and the demographic potential. The government aims to attract more investment, manage the industry, export-import and other economic activities with high-scale economic value and global competitiveness through SEZ.

By 2019, the Indonesian government has targeted to create 17 SEZs. The SEZs to be developed is planned to be divided into 2 major sectors. Firstly, 10 regions are planned for the tourism sector which is developing rapidly in recent years and has been selected as one of the priority sectors for the period of 2015-2019. While 7 other areas for various sectors, ranging from the mineral industry to the fishing industry.

Source: investindonesia.go.id

Currently, there are 12 SEZs in Indonesia, in which each of SEZs is developed for specific sectors. The existing SEZs are:

1. Sei Mangkei in North Sumatera Province, for CPO and rubber industry, fertilizer industry, logistics, and tourism (already operated since January 2015)

2. Tanjung Api-Api in South Sumatera Province, for CPO, rubber, and petrochemical industry (under development)

3. Tanjung Lesung in Banten Province, for tourism (already operated since February 2015)

4. Maloy Batuta in East Kalimantan Province, for CPO, wood, coal, and mineral industry (under development)

5. Bitung in North Sulawesi Province, for fishery and agro-industry, and logistics (will be operated in 2019)

6. Palu in Central Sulawesi Province, for smelters, agro-industry, and logistics (already operated since Agustus 2017)

7. Mandalika in West Nusa Tenggara Province, for tourism (already operated since September 2017)

8. Morotai in Maluku Province, for tourism, manufacturing industry, and logistics (under development)

9. Arun Lhokseumawe in Aceh Province, for oil and gas industry, petrochemical, agro-industry, logistics, and paper industry (under development)

10. Tanjung Kelayang in Bangka Belitung Islands Province, for tourism (will be operated in 2019)

11. Sorong in West Papua Province, for tourism, industrial shipyards, fisheries processing industry, mining industry, and logistics (under development)

12. Galang Batang in Riau Islands Province, for mineral processing industry, energy, and logistics (under development)

However, seven new special zones will be launched across the country through 2020, including a digital park in Batam island and an export-oriented zone for electronics, automotive and basic chemical industries in Central Java.

Are the SEZs open to foreign investment? What benefit you will get by investing in SEZ?

SEZs offer investors access to preferential regulatory infrastructure and taxation in an attempt to channel investment into specific locations.

How can investors get access?

The investing company must be:

1) Registered as a business entity by the relevant government authority that develops or manages a SEZ,

2) Have a new investment with new investment plan,

3) Must be involved in the chain of ‘main’ activities – as determined by the National Council for Special Economic Zones, in the SEZs.

Some of the available tax facilities include the following:

1. Tax Holiday for primary industry through corporate income tax reduction. Investments worth between Rp 100 billion and Rp 500 billion can now benefit from a 50 percent income tax reduction for five years. Investments worth between Rp 20 billion and Rp 100 billion in SEZs are also eligible for the same incentive, whereas investments over Rp 100 billion in SEZs can be fully exempted from income tax for between five and 20 years.

2. Tax allowance for other industries through a) A reduction in net taxable income of up to 30 percent of the amount invested in the form of fixed assets, pro-rated at five percent for six years of commercial production; b) Accelerated depreciation and/or amortization; c) Extension of tax loss carryforward from five years to up to 10 years, and d) A reduction in withholding tax on dividends paid to non-residents to 10 percent, or applicable treaty rate.

3. Value added tax (VAT) and sales tax exemption on luxury goods – 1) imported; 2) delivered among companies in SEZ, and 3) those delivered among companies in other SEZs.

4. Customs exemption is available on: a) All goods entering the SEZs; and b) Goods exiting from the SEZs to foreign countries, except leather, woods, cocoa beans, crude palm oil and its derivatives, and minerals. Goods exiting from the SEZs to the domestic market, however, are subject to customs duty, except those that fulfil the minimum local content requirement of 40 percent.

5. Import duties and excise: a) Deferred import duties for imported goods; and b) Exempted excise for imported goods. Import duty on goods delivered to the domestic market is subject to free trade agreement (FTA) tariff rates.

Besides tax incentives, Indonesia’s SEZs offer easy licensing and labour-related incentives to investors that include low wages that keep production costs low, immigration facilities, and labour market flexibility. Immigration facilities include visa on arrival for 30 days, extendable five times; option to transfer visit visa into temporary stay permit; and option to transfer temporary stay permit into permanent stay permit for individuals working in SEZs and their families. Furthermore, foreign investors investing in the SEZs are allowed to have the building right on land (Hak Guna Bangunan), which is extendable up to 80 years; own property in the SEZs; and those who own property have the option to apply for the permanent stay permit in Indonesia.

Is there any visa facilitation scheme for foreign investors? Yes, there is a visa facilitation scheme applicable to investors in the SEZ. Immigration officials can grant approval of Limited Stay Visa (VITAS) to foreigners who live in the SEZ for people coming as: a) Investors, b) Working as an expert, c) Spouse of Limited Stay Permit holders, d) Parents of child under 18 years old, or e) Foreign homeowner and/or elderly in accordance with existing regulation. Officials at the Overseas Indonesian Representative can grant a Limited Stay Visa (VITAS) for 2 years for investors after receiving approval from the immigration officer at One-Stop Service (Pelayanan Terpadu Satu Pintu) in SEZ.

In the framework of assessment or business development in the SEZ, Authorized Overseas Indonesian Representatives are allowed to provide a Multiple-Trip Visa which is applicable for 1 year for foreigners with a period of stay of 60 days. In regards to the provision of short-term work for the development of SEZs, foreigners with access to Visa-Free Temporary Visit (Bebas Visa Kunjungan Singkat or BVKS) can be given Visa on Arrival for a period of 7 days.

In summary, the SEZs are a form of infrastructure for investment that has the best facilities in Indonesia, in which the government intentionally designs them to be attractive. The government has provided easier rules for payments of export, import, luxury and value-added tax within SEZs, while regulations on foreign workers are also more relaxed compared to outside of the zones. If you have any questions or would like to know more, please contact us here.

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Mona

Sources:

1. Invest Indonesia, https://www9.investindonesia.go.id/en/why-invest/economic-zone

2. Reuters, https://www.reuters.com/article/us-indonesia-economy/indonesia-to-relax-rules-launch-more-special-economic-zones-to-attract-investment-idUSKBN1WP0XX

3. Asean Briefing, https://www.aseanbriefing.com/news/2018/08/24/indonesias-growing-special-economic-zones-opportunities-and-challenges.html