Repatriating export earnings
The Jakarta Post
The government finally issued last week a ruling requiring natural-resource based companies in Indonesia to repatriate export earnings and put them into the domestic financial system with the main objective of helping the domestic foreign exchange (forex) market cope with highly volatile capital flows.
The regulation, which has been on and off since 2011, is part of the 16th economic reform package (the 17th according to The Jakarta Post file). The rule may only be fully effective early next year, given the time needed to design its implementation directives to minimize loopholes and prevent excessive red tape.
We fully agree with the government’s affirmation that the new forex regulation does not breach the fundamentals of Indonesia’s open capital-account regime, which has so far been one of the main attractions for foreign investment.
Exporters are required only to repatriate their export earnings and put them into special accounts at domestic banks. They are not obliged to convert their export earnings into rupiah and they are still free to use their forex earnings for foreign borrowings, imports and other business activities in line with the Investment Law.
The government sweetens the rule with fiscal incentives. While interest income on deposits is subject to the final income tax of 20 percent, the interest income from export earnings that are converted into one-month rupiah deposits are subject only to a 7.5 percent tax and those in three-month deposits to a 5 percent tax. Forex earnings that are converted into rupiah time deposits of six months or longer are exempted from tax.
Interest income on export earnings that are not converted into rupiah (held in US dollars) are subject to taxes of 10 percent for one-month deposits, 7.5 percent for three-month deposits and 2.5 percent for six-month deposits. Interest income on forex deposits of six months or longer is exempted from tax.
The beauty of the forex ruling is the fact that the requirement to repatriate export earnings is imposed only on exporting companies operating in mining, forestry, plantations or fisheries. Manufacturing exporters depend a lot on imported materials and components and are often net importers themselves. But exporters of natural-resource based products, which account for more than 50 percent of total export earnings, are net exporters.
The regulation, if properly enforced, will not only strengthen the base of the domestic forex market, thereby preventing high volatility in the rupiah exchange rate, but also will help the government clamp down on undeclared offshore profits and tax evasion.
Two days before the announcement of the new forex ruling, Bank Indonesia decided to raise again its policy rate by 25 basis points to 6 percent. Back in September, the government launched a set of measures to restrict imports of tertiary consumer goods and fuel imports (the main driver of the trade deficit) by using more palm oil-based biodiesel.
We hope all these measures will help the country cope with the monetary tightening policy of the US Federal Reserve, which plans to raise its policy rate three more times next year.
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