14 October, 2015
On 10 July 2015, the Minister of Manpower in Indonesia (the "MoM") implemented a new regulation (“MoMR 16/2015”) on the utilisation of foreign manpower. MoMR 16/2015 has been criticised from certain angles as a heavy-handed attempt by the MoM to address the recent influx of foreigners into Indonesia.
Although a controversial proposal requiring expatriate workers in Indonesia to demonstrate their proficiency with the national language, Bahasa Indonesia, as a pre-condition to obtaining or renewing their work permits (“IMTAs”) was dropped by the MoM at the last minute, MoMR 16/2015:
1) limits the scope of business visas;
2) requires expatriates coming to Indonesia, even temporarily, for work related purposes to obtain IMTAs; and
3) requires non-resident foreign commissioners and directors of Indonesian companies who are not physically working in Indonesia to obtain IMTAs.
The requirements set out in 2) and 3) above (the “IMTA Requirement”) are expected to create significant issues for expatriates and their employers in Indonesia, in particular in sectors which have a need for occasional expatriate expertise such as energy, mining and oil & gas.
Background
The MoM’s tightening of the IMTA Requirement may have been motivated, at least in part, by the MoM’s concern over the perceived prolonged misuse of business visas by foreigners working in Indonesia.
Business visas were originally intended to cover expatriate visits to Indonesia, for not more than 60 days and for the purpose of attending meetings, seminars and arranging purchases of goods and products manufactured or produced in Indonesia, but not for the purpose of performing services or selling goods or products manufactured or produced outside of Indonesia (Article 8(2) of the Immigration Act 2011 and its elucidation).
As it has become more difficult and expensive, over time, to obtain work permits however many companies, both foreign-owned and locally-owned, operating in Indonesia have increasingly relied upon business visas for the purpose of bringing expatriate workers to Indonesia for work assignments (short term or otherwise) even though the activities to be performed by the relevant expatriate workers go far beyond that which is actually allowed for business visa holders. Further, foreign services providers, looking for short term consultancy type projects in Indonesia, have not generally wanted to incur the considerable costs and endure the high regulatory burdens associated with establishing and maintaining a foreign capital investment company (Perusahaan Penanaman Modal Asing or “PMA” company) in Indonesia and using that PMA company to employ expatriate workers on an extended basis.
At the same time, Indonesia’s onerous income tax rules for individuals, which: (i) deem work permit holders, who must also have temporary stay permits (“KITAS”), to be resident in Indonesia for tax purposes; and (ii) subject the world wide income of deemed residents to Indonesian tax, have caused many expatriates to be reluctant to obtain work permits.
The Indonesian government’s concern about the misuse of business visas has, most likely, been heightened, in recent times, by increasingly nationalistic sentiment which has put pressure on the government to reduce the number of expatriates working in Indonesia in a bid to create more employment opportunities for Indonesians.
Finally, the government may see the need to restrict the use of business visas in anticipation of the much-vaunted ASEAN free trade zone, which is expected to come into effect by the end of 2015 and which the government fears may result in a significant increase in the number of workers from other ASEAN countries.
Commentary
The main features of MoMR 16/2015 are summarised and discussed below.
1) Expanded definition of temporary work
1.1. Outline: Under MoMR 16/2015, the definition of “temporary work” has been expanded to include:
a) providing guidance, counseling, and courses in the implementation and innovation of industrial technology to improve the quality and design of industrial products as well as co-operation in marketing for Indonesia abroad;
b) commercial movie making as permitted by the relevant authorities;
c) lecturing;
d) attending a meeting held by the principal office or representative office in Indonesia;
e) conducting audits, production quality control, or inspection of branch offices in Indonesia;
f) foreign workers undergoing probation;
g) “one time” work; and
h) any work related to machinery installation, electrical installation, after sales service, or products subject to business trial (Article 16 of MoMR 16/2015).
Any expatriate coming to Indonesia, for the purpose of carrying out temporary work, is required to obtain a temporary work permit.
As a temporary work permit may only be obtained on the basis of an application from and the support of an Indonesian sponsoring entity, this necessarily implies that the Indonesian entity for which the temporary work is to be performed must ensure that the expatriate carrying out the temporary work is included in the Indonesian entity’s foreign manpower utilisation plans (“RPTKAs”) which must be approved by the Department of Manpower (the “DoM”).
1.2. Assessment: The expanded definition of “temporary work”, and the consequent need for expatriates, performing temporary work in Indonesia, to obtain temporary work permits, will likely give rise to significant compliance difficulties. This is because temporary work now includes many, if not most, of those activities that have, traditionally, been performed by expatriates in reliance upon business visas even if this involved (as it often did) a liberal interpretation of the intended scope of the permitted activities under business visas.
The designations of: (i) attending a meeting held by the principal office or representative office in Indonesia; (ii) conducting audits, production quality control, or inspection of branch offices in Indonesia; (iii) “one time work”; and (iv) any work related to machinery installation, electrical installation, after sales service, or products subject to business trial, as “temporary work” are particularly concerning for a number of reasons including:
a) Multinational companies, with a presence in Indonesia, routinely have people from headquarters and regional offices outside of Indonesia come to Indonesia to attend meetings conducted by their Indonesian offices. In some instances, this will involve trips to Indonesia by many people every month.
b) The head offices of multinational companies may need to send, on a regular basis, staff to Indonesia to carry out audits, production quality control and inspection of branch offices in Indonesia.
c) Although no further clarification is offered as to what exactly constitutes “one time work”, it sounds very much like a “catch all” term intended to cover one-off, non-recurring short term consulting and project support assignments frequently relied upon by companies to gain access to the expatriate assistance they need, from time to time, and without having to incur the expense of employing expatriates on a permanent basis.
The time and cost involved in managing the temporary work permit process for large numbers of expatriates engaged in temporary work will, inevitably, mean that: (i) many Indonesian entities will ignore the new IMTA Requirement; and (ii) expatriates carrying out temporary work will be forced to either: (a) keep using business visas despite being in breach of MoM 16/2015; or (b) rely on even less defensible alternatives than business visas such as tourist visas. This then exposes expatriates carrying out temporary work, as well as the Indonesian entities for which the temporary work is being carried out, to an unacceptable risk of sanctions, arrest and deportation.
Further, although this remains to be seen in practice, it is likely that Indonesia will become increasingly reluctant to issue business visas at all following the implementation of MoM 16/2015 as the clear intention behind MoM 16/2015 is to reduce the number of expatriates coming to Indonesia on the basis of business visas. As few companies will want to sponsor temporary work permits, this is also likely to force many expatriates to resort to using tourist visas despite the obvious risks associated with so doing.
2) Increase in minimum Indonesian to foreign worker ratio
2.1. Outline: The number of local workers that must be employed, by an Indonesian company, for every expatriate employed has been increased to 10:1 (Article 3(1) of MoMR 16/2015) from:
a) 1:1 as per the common interpretation of the predecessor regulation to MoMR 16/2015 (i.e., MoMR 12/2013) which required an expatriate to confirm, in writing, his willingness to transfer knowledge to an appointed Indonesian colleague (i.e., one Indonesian employee only); or
b) 3:1 as per the unofficial policy of the Investment Co-ordination Board in the case of PMA companies.
Although the new 10:1 requirement apparently applies to the expatriate head of a foreign representative office,
it does not apply to expatriates who are:
a) board of directors members or board of commissioners members in the case of Indonesian companies;
b) advisory board, executive board or supervisory board members in the case of Indonesian foundations (i.e., “yayasans”);
c) employed to carry out “emergency” or “urgent” work;
d) employed to carry out temporary work; or
e) employed to carry out “impresariat work” (i.e., work in the entertainment industry or work related to sports and the arts (Article 3(2) of MoMR 16/2015).
No guidance is provided as to what constitutes “emergency” work or “urgent” work.
2.2. Assessment: The extent of the endemic problem of unemployment and underemployment, in Indonesia, is well known and it is understandable the government wants to do something about the same. However, the dramatic increase in the minimum required ratio of local workers to expatriates seems more likely to result in a decrease in the employment opportunities for local workers as the cost of complying with the 10:1 ratio is likely to be prohibitively expensive for many smaller businesses. This much increased compliance cost may well provide just another reason for foreign companies to reconsider investing in Indonesia.
3) Extension of the IMTA Requirement to off-shore board members
3.1. Outline: The IMTA Requirement has been extended to off-shore (i.e., non-resident) expatriates who are:
a) members of the board of directors of an Indonesian company;
b) members of the board of commissioners of an Indonesian company;
c) members of the advisory board of an Indonesian foundation;
d) members of the executive board of an Indonesian foundation; and
e) members of the supervisory board of an Indonesian foundation (Article 37 of MoMR 16/2015).
In other words, expatriates who: (i) reside outside Indonesia; and (ii) have board positions with Indonesian companies or foundations will now be obliged to obtain a work permit even though they are not physically working in Indonesia and have no intention to do so. By implication, the Indonesian sponsoring entities will be obliged to include such off-shore, expatriate board members in their RPTKAs.
As work permits have, traditionally, only been required for expatriates who are actually employees of an Indonesian company and physically working in Indonesia, it might have been reasonably expected that the DoM would, at least, confine this onerous extension of the IMTA Requirement to those non-resident expatriate board members who actually have employment contracts with an Indonesian company or foundation. In this regard, it is important to note that directors and commissioners of Indonesian companies are not automatically regarded, for Indonesian law purposes, as “employees” of the relevant Indonesian companies but, rather, are regarded as “organs of company management” unless they have an employment agreement in which event they are regarded as being both: (i) organs of company management; and (ii) employees. Unfortunately, the current understanding is that the DoM intends to strictly interpret and apply Article 37 of MoMR 16/2015 in the following manner:
a) the DoM does not accept that only those off-shore board members, who are also employees of the relevant Indonesian company or foundation, are required to have work permits. In other words, all off-shore board members are required to obtain work permits and regardless of whether or not they are employees of the relevant Indonesian company or foundation; and
b) having regard to: a) above, even those off-shore board members who are actually employees of a foreign holding company/foundation or affiliated company/foundation of the relevant Indonesian company/foundation will be obliged to obtain work permits.
It will probably not be necessary, however, for off-shore board members, holding work permits, to obtain a KITAS (i.e., temporary stay permit). This is important because the holding of a KITAS has traditionally been regarded as giving rise to a presumption that the holder is resident in Indonesia for tax purposes such that, unless the presumption can be rebutted in some way, the resident’s worldwide income will be subject to Indonesian tax.
As a KITAS is a required supporting document, in the case of foreigners applying for taxpayer numbers (“NPWPs”), the probable absence of any KITAS requirement (if confirmed) presumably means that offshore board members, holding work permits, are not required to obtain NPWPs although this is yet to be definitively confirmed by the Director General of Taxation (the “DGT”).
According to the DoM, the Immigration Office will supposedly issue a statement letter clarifying that off-shore board members, holding work permits, are not automatically deemed to be residents of Indonesia merely by virtue of holding work permits.
3.2. Assessment: The extension of the IMTA Requirement to off-shore board members of Indonesian companies and foundations will potentially create a serious impediment to business and foreign investment.
Many off-shore board members of Indonesian companies provide invaluable experience, international business/commercial/financial/government contacts and technical knowledge to these companies. The new IMTA Requirement may discourage otherwise eligible candidates from joining or continuing on the boards of Indonesian companies. The resulting loss in experience, international business/commercial/financial /government contacts and technical knowledge will not be easily overcome and will likely reduce the competitiveness of the affected companies.
The probable absence of any KITAS requirement (if confirmed) may go some way to addressing the concern of most off-shore board members that, once they have work permits, they will be treated as residents of Indonesia for tax purposes, thereby potentially exposing their worldwide income to liability for Indonesian tax. This position would also be consistent with the Income Tax Law which provides that, in order to be subject to Indonesian tax on personal income, one has to either: (i) reside in Indonesia; or (ii) be in Indonesia for a minimum of 183 days. Nevertheless, some off-shore board members will surely be of the view that it makes no sense whatsoever to take the risk of exposing themselves to Indonesian tax. Further, in order to convincingly and thoroughly address the potential tax issue facing offshore board members, there will need to be a level of co-ordination and co- operation among the DoM, the Immigration Office and the DGT which has been rarely witnessed in the past.
4) Basic requirements for expatriates
4.1. Outline: The basic requirements for expatriates wishing to work/working in Indonesia are now as follows:
a) having an educational background that correlates with the requirements of the proposed job position;
b) having a certificate of competency o having a minimum of 5 years’ prior work experience relevant to the proposed job position;
c) providing a statement letter confirming acceptance of his/her obligation to conduct transfer of knowledge to assigned Indonesian colleagues as evidenced by reports of education and training of Indonesian colleagues undertaken;
d) having an NPWP in the case of expatriates who will work for more than 6 months in Indonesia (although, hopefully, not in the case of off-shore expatriate board members);
e) having an insurance policy issued by an Indonesian insurance company; and
f) being a registered member of the National Social Security Program in the case of expatriates who will work for more than 6 months in Indonesia (together, “BEE Requirements”) (Article 36 of MoMR 16/2015).
As discussed in the introduction to this briefing note, the BEE Requirements do not include passing a Bahasa
Indonesia language proficiency test as had been previously mooted.
None of the BEE Requirements are applicable to expatriates who are employed for “emergency” and “urgent” purposes, whatever the same may be.
BEE Requirements a), b), c), d) and f) above are not applicable to expatriates: (i) carrying out temporary work; or (ii) engaged in “impresariat” (i.e., entertainment and arts related) activities.
BEE Requirements a), b) and c) above are not applicable to expatriates who are: (i) board of directors members or board of commissioners members in the case of Indonesian companies; or (ii) advisory board members, executive board members or supervisory board members in the case of Indonesian foundations (i.e., yayasans).
5) Effective date
The effective date of MoMR 16/2015 was 29 June 2015 which means, in theory, that it is already applicable to expatriates working or wanting to work in Indonesia. The DoM has, however, informally indicated that “some time for socialisation” is necessary before MoMR 16/2015 can be fully implemented.
Summary and conclusions
MoMR 16/2015 has been criticised from certain angles as being heavy-handed and will likely result in considerable compliance issues for Indonesian employers, foreign expatriates and multinationals alike.
A more pragmatic approach may have been to expand the permitted activities that may be carried on by expatriates in reliance upon business visas. Such an alternative approach would be more consistent with the present reality that the existing business visa permitted activities are unduly restrictive when Indonesia actually needs to be making itself more attractive, not less attractive, to potential foreign investors and their expatriate employees.
It is expected that there will be much push-back against MoMR 16/2015 and the expansion of the IMTA Requirement will likely become a prime lobbying issue for foreign chambers of commerce and industry groups supported by foreign multinationals operating in Indonesia.
For further information, please contact:
Joel Shen, Stephenson Harwood (Singapore) Alliance
joel.shen@shlegal.com
