Free economic zones in Indonesia

Strategically located between two continents and an ocean, Indonesia is a major hub of global traffic and an intersection of international economic activity. The Indonesian government has made the development of the country's special economic zones (SEZs) a priority policy with the goal of attracting more than US$50 billion of foreign investment over the next decade, especially for SEZ-oriented manufacturing.

As of 2022, there are 19 SEZs in Indonesia, of which 12 are in operation and the rest are under construction. Eight are intended for tourism, and the rest — for production and processing.

The concept of SEZs in Indonesia was announced only in 2014, when President Joko Widodo came to power. Building on the success of free trade zones in the country, SEZs were created to further increase foreign investment in the country. Thus, the first SEZs in Indonesia have been operating only since 2015, and most of them began operating only in 2019.

The main concept of the Indonesian SEZ is the preparation of territories with access to the world market (access to a seaport and/or airport). The areas are designed to maximize industrial activities, exports, imports and other related activities of high economic value. In addition, these regions are provided with certain opportunities and incentives to increase competitiveness among neighboring countries.

Indonesia's SEZs were created to maximize the use of surrounding resources. Companies wishing to join a country's SEZ must strategically choose their location based on available infrastructure and natural resources.

Furthermore, foreign investors should be aware of the Indonesian government's development plans, which often determine which industries receive the most support and incentives. By creating the SEZ, the government sought to diversify its activities beyond the island of Java and spread it throughout the country. As of 2021, Indonesia's SEZs have attracted just over US$5 billion in investment and employed over 28,000 people.

Having this long-term perspective will allow foreign businesses to benefit from Indonesia's unique advantages, such as its competitive labor costs, huge domestic market and potential expansion of land in SEZs — an issue that is limiting business in other ASEAN markets such as Malaysia and Singapore.

The most promising SEZs in Indonesia

Nongsa SEZ

Indonesia is set to open two new SEZs in Batam after President Joko Widodo recently approved the decision, including the Nongsa Digital Park. The digital park will focus on research and development, education and creative industries, as well as technology and tourism. The park originally opened in 2018 following bilateral negotiations between Indonesia and Singapore to create an "IT hub and digital bridge" between two countries. Currently, the 155.43-hectare park is home to more than 100 technology companies, mostly from Singapore.

As a SEZ, the park aims to attract more international investors beyond the largely Singapore-based contingent currently active in the area. His goal — receive 16 trillion rupees (US$1.1 billion) in investment and create 16,500 new jobs. To achieve this goal, the park hopes to become a hub for data centers — an industry that research firm Technavio forecasts will grow by US$10.57 billion between 2019 and 2023 in Southeast Asia.

The park will be at the forefront of Indonesia's booming digital economy, whose gross merchandise value (GMV) by 2025, according to a report by Google, Temasek and Bain & Company, will amount to 146 billion US dollars — the largest amount in ASEAN. This growth will be driven primarily by e-commerce, which is expected to reach $104 billion in gross sales by the same year.

Batam Island

Batam Island has been a free trade zone since 2009 along with neighboring Bintan and Karimun islands, and its first SEZs were created in 2017. Together these three islands are known as the BBK Free Trade Zone.

Due to its proximity to Singapore (only 20 km), about 70% of Batam's foreign investors are from Singapore, using the island as an alternative manufacturing hub. Singaporean companies contributed about 42% of the US$2.5 billion in foreign investment Batam received between 2015 and 2020, according to Badan Pengusahaan Batam (BP Batam), the local investment and development body. The island produces a variety of goods, ranging from computer chips. precast concrete industry and is home to multinational companies such as Caterpillar, Ciba Vision and Schneider Electric.

SEZ "Batam Aero Technic"

Batam Aero Technic (BAT) — another new SEZ announced by President Joko Widodo along with the Nongso Digital Park. With the updated status of the SEZ, Batam Aero Technic plans to expand its activities from maintenance, repair and overhaul (MRO) of passenger aircraft to logistics and distribution, manufacturing and processing, and technology development.

BAT hopes to tap into the US$1 billion that local airlines spend on MRO and the US$100 billion that airlines in Asia-Pacific will spend by 2025.

Other auxiliary industries currently developing in the SEZ are represented in the form of logistics, for example, warehousing of equipment and components. In addition, BAT is committed to producing interior items ranging from headrests to galleys, airplane toilets, seats, carpets and headrests.

The 30-hectare facility is owned by Lion Air Group, the holding company that owns Indonesia's largest private airline, Lion Air. In 2013, the airline completed its largest ever single order for 234 Airbus A320 aircraft, valued at US$22.4 billion.

Batam Aero Technic plans to receive investments of Rp 7.2 trillion (USD 500 million) and create about 10,000 new jobs with the upgraded SEZ status. Indonesia has the world's second fastest growing airline industry after China, and the country's air passenger market is expected to become the world's fourth largest by 2039.

Sei Mangkay SEZ

Since its establishment in 2015, the Sei Mangkai SEZ has exported more than 26 trillion rupiah (US$1.7 billion) worth of goods, mainly palm oil and palm oil products. North Sumatra province is one of the country's leading palm oil producing regions.

PT Unilever Oleochemical Indonesia (PT UOI) — a subsidiary of the multinational consumer goods company Unilever — is the largest tenant of the Sei Mangke SEZ. The company operates on 27 hectares of land, producing various palm oil by-products such as surfactants, fatty acids and glycerin, which are raw materials needed for the production of household products (detergents). In 2021, the company also invested a further US$150 million to expand its operations in the SEZ and once completed, PT UOI will have the largest palm oil processing plant in the Sei Mangkai SEZ. In addition, Sei Mangkei aims to create the largest integrated palm oil processing enterprise.

Oil palm, grown only in the tropics, produces high-quality oil that is used as a common ingredient in cosmetics and household products such as detergents, margarine, soap, chocolate, cakes, cleaning products and biofuels, among others.

Palm oil is by far the most consumed and traded edible oil in the world. Production of 77 million tons of palm oil is expected this year, with Indonesia accounting for about 60% of the global share of supplies, according to the USDA. Malaysia ranks second with a 25% share of supplies.

The Indonesian government also plans to build a railway from the Sei Mangkai SEZ to the port of Kuala Tanjung. Currently, trucks from the SEZ transport goods to the port some 50 km by road. The port's current capacity is 600,000 twenty-foot equivalent units (TEU), but it is expected to be upgraded to handle more than 12 million TEU by 2039.

Kendal SEZ

Kendal SEZ only received SEZ status in 2019, but it has managed to attract more than 70 enterprises from Indonesia, Singapore, Malaysia, Japan, South Korea and China.

Before Kendal was converted into an SEZ, it was an industrial park. In fact, this is the only industrial park on the island of Java that has been awarded SEZ status.

Kendal SEZ is intended for export-oriented production — from cars to electronics, textiles and fashion. Of the 66 tenants created in the Kendal SEZ, 16 are fully operational and the rest are under construction. PT MasterKidz Indonesia, a subsidiary of Hong Kong toy maker MasterKidz, is one such company operating at full capacity and has committed to invest more than 400 billion rupiah (US$26.5 million), one of the largest investments in the SEZ. Another company, textile manufacturer Dae Young Textile, has committed to invest 81 billion rupees (US$5.3 million). Meanwhile, PT Sasakura Indonesia, a joint venture of Japanese engineering company Sasakura Engineering Co., Ltd. and Indonesian engineering company PT Wasamitra Engineering, has committed to invest 350 billion rupiah (US$23.2 million) in steel production.

The government projects that the Kendal SEZ will attract 72 trillion rupees (US$4.7 billion) by 2025 and employ 20,000 people.

The province of Central Java is positioned as one of the industrial centers of Indonesia. 30% of the country's manufacturing is already located in the province, mostly in labor-intensive industries such as textiles, attracting some of the world's largest clothing companies such as Nike, Uniqlo and Adidas. From January to September 2021, the province received foreign investment worth US$980 million.

As wages continue to rise in Jakarta, a growing number of foreign businesses see an opportunity to attract a more cost-effective workforce in Central Java, which has a population of 34 million — more than all of Malaysia — and the provincial minimum wage. The province is also supported by 11 seaports, four international airports and more than six industrial zones.

Tax benefits

The Indonesian government has vowed to make special economic zones (SEZs) a policy priority to attract foreign investment, boost industrial activity and promote job creation. This strategy has been further developed through various tax incentive programs of the Indonesian Ministry of Finance.

These tax benefits include exemptions from income tax, value added tax (VAT), import duties, luxury sales tax and excise taxes.

Corporate income tax benefit

Taxpayers investing 100 billion rupees (7 million US dollars) are also eligible to receive several benefits:

• 30% reduction in net profit from the total amount of investment in fixed assets, which decreased over six years by 5% per year.
• Accelerated depreciation up to 100% of tangible and intangible assets.
• Withholding tax rate of 10% or treaty rate (whichever is lower) for dividend payments paid to non-resident recipients.
• Tax losses are carried forward for up to 10 years.

Import and excise duties

Import duties, import taxes and excise taxes are exempt from the following dutiable/taxable goods:

• Inputs of production used for the construction or development of the SEZ, for a period of 5 years.
• For input of consumed raw materials for the service sector (for tourism SEZ).
• Introduction of goods for sale in stores and shopping centers (for tourism SEZ).

VAT and sales tax on luxury goods

VAT is not charged for the following activities:

• Import by an economic entity of taxable material goods into the FEZ.
• Delivery of taxable tangible goods from another Indonesian free trade zone, customs zone or bonded warehouse to a business entity.
• Supply of taxable services or goods, including land or buildings, by an economic entity in a SEZ to another economic entity in the same or another SEZ.
• Import of consumer goods into the tourist SEZ.

VAT exemption also applies to raw materials required for the production of taxable services or goods associated with ship and aircraft maintenance, repair and overhaul (MRO) activities.

In accordance with the “Omnibus Job Creation Law” Investments in foreign technology startups located within the SEZ are exempt from the minimum investment threshold of IDR 10 billion (USD 700,000), excluding land and buildings.

SEZs have minimum requirements for export processing. New activities in the education and health sectors (for which licensing services remain the responsibility of the central government) will be zoned and determined by the SEZ administrator. The law removed restrictions on the import of goods into the SEZ, but retained restrictions on specific prohibited goods in accompanying laws and regulations.

Indonesian law also provides for several other types of zones that enjoy special tax and administrative benefits. These include industrial zones/industrial zones (Kawasan Industry), cargo warehousing zones (Tempat Penimbunan Berikat) and integrated economic development zones (Kawasan Pengembangan Economy Terpadu). Indonesia is home to 135 industrial zones, which are home to thousands of industrial and manufacturing companies. Ministry of Finance Regulation No. 105/2016 provides several different tax and customs benefits available to companies operating within an industrial zone, including corporate income tax reductions, tax breaks, VAT exemptions and import duty exemptions, depending on the type of industrial zone. Bonded warehouse areas include bonded warehouses, customs zones, customs exhibition areas, duty free shops, customs auction areas, customs processing zones and customs logistics centers.

Companies operating in these areas enjoy exemptions from certain import taxes, luxury goods taxes and value added taxes based on different criteria for each type of location. More recently, customs logistics centers (BLCs) have been introduced to provide larger inventories, longer temporary storage (up to three years) and more transactions in one area. The Ministry of Finance has issued Regulation No. 28/2018, providing additional guidance on BLC types and reducing the approval time for BLC applications. By October 2019, Indonesia had appointed 106 BLCs in 159 locations and plans to approve many more in eastern Indonesia. In 2021, the Ministry of Finance and the Directorate General of Customs and Excise (DGCE) updated the regulations (MoF Decree No. 65/2021, which was partially updated by Treasury Decree No. 168/2022 and DGCE Decree No. 9/2021). simplify the process of licensing bonded zones. The rules are designed to reduce processing time and the number of licenses required to open a bonded zone.

Supplies from FTZs and SEZs to other locations in Indonesia's customs zone are treated similarly to exports and are subject to taxes and duties. Bonded zones have a domestic sales quota of 50% of the original export sales, sales to other bonded zones, sales to FTZs and sales to other economic zones (unless otherwise permitted by the Indonesian government). Sales to other special economic regions are permitted only for further processing into means of production, as well as to companies licensed by the organizer of the economic zone, for goods related to their activities.