Indonesian Legal Review: Currency

Legal Updates
Indonesian Legal Review: Currency
19 July 2016

By Ade B. Adamy Perhaps the most talked-about regulation in 2015 was Bank Indonesia's regulation and circular letter on the mandatory use of Rupiah. These were Bank Indonesia Regulation No. 17/3/PBI/2015 regarding the Mandatory Use of Rupiah within the Republic of Indonesia (BI Reg 17/2015) and Bank Indonesia Circular Letter No. 17/11/DKSP regarding the Mandatory Use of Rupiah within the Territory of the Republic of Indonesia (CL 17), which implemented BI Reg 17/2015. BI Reg 17/2015 and CL 17 are collectively referred to here as BI Regulations on Rupiah. Bank Indonesia (BI) has the authority to regulate monetary affairs in Indonesia, including the obligation to use Rupiah in transactions in Indonesia, as the monetary and payment system authority based on Law No. 23 of 1999 regarding Bank Indonesia, last amended by Law No. 6 of 2009 (the BI Law). Before the BI Regulations on Rupiah were issued, the Currency Law, Law No. 7 regarding Currency, already required the mandatory use of Rupiah for cash transactions. The BI Regulations on Rupiah extended this concept also to apply to non-cash transactions and set out more detailed requirements on the mandatory use of Rupiah than what was already regulated by the Currency Law. BI believed that the depreciation of the Rupiah was in significant part caused by events outside Indonesia that were beyond Indonesia's control. BI also believed that many local transactions were conducted in US Dollars, thus creating an unnecessary demand for that currency. Thus, the purpose of the BI Regulations on Rupiah was to stabilize the Rupiah exchange rate in the face of the ongoing depreciation of the Rupiah. BI justified these new rules on the basis of national sovereignty and the integrity of the Rupiah – every country has the right to require the use of its own currency for domestic transactions. The BI Regulations on Rupiah are based on the territorial principle that every transaction conducted in Indonesia, whether performed by Indonesian citizens or non-citizens, and whether cash or non-cash transactions, should be in Rupiah. Whether BI went too far in some cases and adversely affected international transactions remains to be seen. BI is addressing on a case-by-case basis particular issues that may not be clearly covered by a number of exemptions in the BI Regulations on Rupiah. Exemptions There are several types of transactions that are exempted from the mandatory use of Rupiah, such as transactions related to the state budget, grants and bank deposits. Other exempt transactions include the following: A. International Trade Transactions: These consist of: (i)         trade transactions involving the export and import of goods and (ii)        trade transactions related to services that cross Indonesia's borders conducted by way of:

(a)        cross-border supplies, which include the assignment of experts with particular skills to work in Indonesia by their home office employees abroad and

(b)        consumption of goods and services and paid for from Indonesia.

B. International Financing Transactions C. Transactions in Foreign Exchange Conducted Pursuant to Law: This category includes transactions based on the Capital Investment Law, Law No. 25 of 2007 regarding Capital Investment, and the Fund Transfer Law, Law No. 3 of 2011 regarding Fund Transfer. Article 8(3) of the Capital Investment Law provides that capital investors have the right to transfer and repatriate foreign currency for the following, among others: (i)         capital (ii)        profit, bank interest, dividends and other income (iii)       funds required for the purchase of raw and supporting materials, semi-finished goods, finished goods and the replacement of capital goods to sustain capital investment (iv)       additional funds required for the funding of capital investment (v)        loan repayments (vi)       royalties or other fees payable abroad (vii)      compensation to foreign individuals working for capital investment companies, under certain circumstances (viii)     proceeds from any sale or the liquidation of the capital investment (ix)       compensation for losses (x)        compensation for an expropriation (xi)       technical assistance payments, management service fees, payments made under a project contract, and payments for intellectual property rights and (xii)      proceeds from asset sales. D.        Strategic Infrastructure Projects: Transactions that are related to strategic infrastructure projects and obtain BI approval can use foreign currency, if they meet the following conditions: (i)         the project must obtain a Government of Indonesia (GOI) or regional government declaration by a letter from the relevant ministry or institution to the project owner that confirms the project is a strategic infrastructure project and (ii)        the project must obtain BI's approval as an exemption. Investors have raised concerns that these requirements assume investors have formed Indonesian entities or advanced funds and such steps will not be taken without obtaining the exemption first. BI has this concern under consideration. E.         Ad Hoc Exemptions: If investors with certain business characteristics have issues in implementing the BI Regulations on Rupiah, they may apply to BI for an exemption. Unfortunately, the BI Regulations on Rupiah do not specify the meaning of “certain business characteristics” but state that BI will consider the following: (i)         whether the business actor is ready to implement the mandatory use of Rupiah, such as whether a change in its system or business process will be required (ii)        whether the continuity of the business activity will be adversely affected, for example, if the transition period is insufficient for that business to require the mandatory use of Rupiah (iii)       whether the investment activity requires financing in foreign currency for a certain period, such that the immediate implementation of the mandatory use of Rupiah would interfere with the implementation of the investment and (iv)       whether the mandatory use of Rupiah would have a significant impact on national economy growth. In issuing its approval, BI will also consider whether the business actor’s compliance with the BI Regulations on Rupiah would adversely affect exchange earnings from exports and the implementation of the prudential principle in the management of foreign debt for non-bank corporations. Price Quotations Price quotations or price clauses in an agreement for any transaction in Indonesia must be in Rupiah and a dual quotation (i.e., one made concurrently in both Rupiah and in a foreign currency) is prohibited. However, BI has confirmed that an agreement that stipulates a price in Rupiah that is subject to exchange rate movements is not prohibited. With regard to this issue, BI’s Guidelines on Questions and Answers on the Mandatory Use of Rupiah in the Territory of Indonesia issued in September 2015 have confirmed this view and further stated that the parties can agree to a formula that has a foreign currency component. Transitional Provisions The BI Regulations on Rupiah provide that any written agreement regarding payment in foreign currency for a non-cash transaction made before July 1, 2015 is effective until the expiration of the written agreement. The extension or any amendment to such written agreement (among others, the change of the parties, the price of goods or services, or the object of the agreement) made after July 1, 2015 is subject to the BI Regulations on Rupiah. A written agreement that is a derivative or an implementation of a main agreement made after July 1, 2015 is treated as an independent agreement and is subject to the provisions in the BI Regulations on Rupiah. The Oil and Gas Sector SKK Migas and BI have arranged to separately agree on the types of transactions in the oil and gas sector that are covered by the BI Regulations on Rupiah. This article is from SSEK’s Indonesian Legal Review, which looks at recent legal and regulatory developments in almost 50 sectors, from Airports to Tourism. For more information, click Indonesian Legal Review. This publication is intended for informational purposes only and does not constitute legal advice. Any reliance on the material contained herein is at the user’s own risk. You should contact a lawyer in your jurisdiction if you require legal advice. All SSEK publications are copyrighted and may not be reproduced without the express written consent of SSEK.

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