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Experts Highlight Four Regional-Regulation Issues Believed to Be Deterring Investment

The government is redoubling its efforts to improve the investment climate in Indonesia, and this can be seen in the issuance of 12 economic policy packages during the course of the last year. Despite these efforts though, President Joko Widodo has admitted that efforts to improve the investment climate initiated by central government will prove difficult to realize if they are ultimately hampered by inefficient regional-government regulations.

This view was expressed by speakers at an event organized by the Supervisory Committee for the Implementation of Regional Autonomy (Komite Pemantauan Pelaksanaan Otonomi Daerah – KPPOD), which was held in Jakarta on Tuesday, 3 May 2016. During the event, KPPOD Chair, P. Agung Pambudhi, asserted that regional governments should take various factors into consideration before issuing any regulations, while maintaining that it was essential that all regional governments commit themselves fully to the central government’s stated goal of  improving the country’s sluggish investment climate.

“Regional governments must not ignore the various economic impacts which could result from to the issuance of any regulations,” asserted Mr. Pambudhi.

According to the KPPOD, it is inevitable that regional governments will aim to increase their regional revenues (pendapatan asli daerah – PAD), which are mainly generated through the imposition of regional taxes and levies. However, this objective should not result in additional burdens being placed upon businesses or investors. Instead, regional governments should come up with various innovative solutions which don’t rely solely on these two sources of revenue.

Based on the results of research initiated by KPPOD in 2015, at least 262 regional regulations, out of a total of 507, are seen as having the potential to hamper investment inflows. Commenting on the results, Mohammad Yudah Prawira, a KPPOD researcher, asserted that 232 regulations urgently needed to be either revoked or revised, as they are likely to result in either unlawful or overly burdonsome taxes or levies being imposed by regional government.

The KPPOD has also revealed four main areas relating to regional regulations which could potentially hamper investment.The first area of concern is regional tax regulations. Currently, at least 44 regional regulations out of a total of 154 are believed to be deterring investment. The main issues surrounding regional tax regulations are timeframes, costs, procedures, and determination of tariffs.

By way of example, Mr. Prawira pointed to Article 3 (4) of Surabaya Regional Government Regulation No. 4 of 2011 on Regional Tax, which deals with boarding house accommodation (rumah kos). Under the regulation, such accommodation is classified in the same way as hotels are, meaning that it is to be subject to a tax rate of IDR 750,000 per room. This directly contradicts Article 32 (3) of Law No. 28 of 2009 on Regional Taxation and Levies, which exempts the leasing of apartment units, condominiums, and other similar housing facilities from the list of taxable accommodation businesses.

“In this context, why does basic housing accommodation now constitute a taxable object [under the above regional regulation]?” Mr. Prawira queried.

The second area of concern is regional regulations which deal with levies. Currently, at least 166 troubled regional regulations out of a total of 290 regional regulations under review concern this issue. Generally speaking, regional regulations which impose levies hinder start-ups which are looking to secure relevant licenses, such as disturbance permits (hinder ordonnantie – HO), which are required before an entity can officially begin operating as a business.

During his address, Mr. Prawira pointed to Bandung Regional Regulation No. 19 of 2012 on the Organizing of Levies for Building Construction Permits and the Map Issuance Levy, which sets out a complex series of requirements which have to be met in order to secure a disturbance permit. This is in stark comparison with Ministry of Domestic Affairs Regulation No. 27 of 2009 on Guidelines for the Issuance of Disturbance Permits at the Regional Level.

The Ministry of Domestic Affairs Regulation only requires that applicants enclose a copy of a valid personal ID card (for individuals) or articles of association (for companies), as well as the status of the land-rights title in question and a completed application form. However, the Bandung Regional Regulation specifies a number of additional requirements, including a copy of a building construction permit, written approval from surrounding neighbors, and so forth.

A third area of concern seen as having the potential to hamper investment involves regional employment regulations. Currently, companies are required to recruit at least 60% of their workforces from the residents of the local area in which the company in question is domiciled, which is viewed as being a significant burden on businesses. However, this obligation essentially contradicts Article 5 of Law No. 13 of 2003 on Labor, which mandates for equal-opportunity employment without discrimination (the so-called free internal-trade principle).

And finally, a fourth area of concern involves regional corporate-social-responsibility (CSR) regulations. CSR has already been regulated under a number of central government level regulations, including Law No. 40 of 2007 on Limited Liability Companies, Law No. 25 of 2007 on Capital Investment, and so forth.

Of the 50 regional CSR regulations which were reviewed, seven regional regulations expressly stipulated percentages relating to CSR funds, as follows: Bekasi Regional Regulation No. 6 of 2015 (3% of a company’s net profits), North Barito Regional Regulation No. 3 of 2015 (3% of a company’s net profits), East Tanjung Jabung Regional Regulation No. 13 of 2016 (6% of a company’s net profits), West Kotawaringin Regional Regulation No. 1 of 2012 (1% – 3% of a company’s net profits), Mojokerto Regional Regulation No. 7 of 2012 (1% – 3% of a company’s net profits), East Kalimantan Regional Regulation No. 3 of 2013 (3% of a company’s net profits), and Cimahi Regional Regulation No. 10 of 2013 (2% of a company’s net profits).

According to Mr. Prawira, all of the above regional regulations contradict the provisions set out in Government Regulation No. 47 of 2012 on the Social and Environmental Responsibility of Limited Liability Companies, which stipulates that the amount of CSR funds which private businesses are obliged to set aside simply be considered reasonable.

Pursuing this point further, KPPOD Executive Director, Robert Endi Jaweng, criticized the poor performance of the Ministry of Domestic Affairs as regards the supervision of regional regulations through a process of executive review. Mr. Jaweng firmly believes that more effective oversight by the central government would ultimately have prevented the currently confusing situation from having arisen in the first place.

“The central government has the authority to repeal any regional regulation. However, as far as I know, not a single regional regulation has been repealed to date,” asserted Mr. Jaweng.


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