Like many Presidents before him, President Joko Widodo struggled to progress his agenda through parliament during his first term. Unwilling to have his reformist agenda derailed by parliament, President Jokowi announced that instead of revising individual laws his Government would push to pass an Omnibus Law that would include all the contentious laws that needed revising to promote President Jokowi’s reformist agenda.
By any standards, this was a hugely ambitious and high-risk agenda and not without its critics both at home and abroad. The Omnibus Law, officially known as the Job Creation Law aimed to partially revise 72 laws including sensitive issues such as workers’ rights and severance pay, environmental standards and foreign investment in Indonesia that have been stuck in parliament for close to a decade. After several intense weeks of Parliamentary deliberation and protests, Parliament speedily passed the Job Creation Law in October 2020 with it officially coming into effect on November 2, 2020. Implementation of the law started in February 2021, with the President signing 41 implementing regulations.
The Job Creation Law will overhaul Indonesia’s investment climate and make it more attractive for foreign companies to enter. Some of the key highlights include:
Improving the investment ecosystem:
- The Negative Investment List has been replaced with a new Priority List – which reduces the number of sectors closed to foreign investment. The most notable is 100% foreign ownership of sales and distribution companies is now permitted.
- Changes the licensing approach from license-based to risk-based
- Simplifies the Business Licences for most sectors
Overhauls manpower regulations:
- Permits companies to hire staff on fixed-term contracts for a maximum of 5 years
- Severance pay is now based on a formula determine
- Easier to terminate employment contracts as employers no longer need court approval
- Makes it easier to hire foreign workers
- Corporation Tax will be reduced to 20% in 2022
- Dividend distribution exempt from income tax
- Resident expatriates are exempt from paying income tax for the first four years of being an Indonesian taxpayer providing the expatriate possess certain expert skills.
- Expand economic zones to cover education and health
There is no doubt that the Job Creation Law will greatly improve Indonesia’s investment climate and ease of doing business. We are already seeing a surge in foreign companies interested to set up operations in Indonesia since the Priority List was issued and this will only increase as improvements in the investment climate boost Indonesia’s economic growth.
Do you want to grow your business and trade with Indonesia? Matthias.Brienen@larive.com / +31 (0) 30 693 32 21