We all know setting up a business in Indonesia as a foreigner is expensive and time consuming, right? Obviously, that depends on who you ask.
The short answer to that is a simple ‘no’. In fact, setting up a business in Indonesia is getting easier. Problem is, you’ve got to follow some rules.
It is quite surprising how many potential foreign investors we’ve come across that have chosen not to do business in Indonesia because they either don’t have a clear understanding of the process or they simply don’t want to comply.
Making the Right Choice
One person says this and another says that. Some charge high fees, others offer unrealistic time frames. Some don’t seem to listen, some lean towards cookie cutter answers, and some are just long-term expats who just happen to know everything about everything, especially after a tray of cold Bintangs.
As with most industries, consistency seems to be hard to find and apparently is where the confusion begins. Let’s say you’re interested in expanding your business portfolio to Indonesia – or you want to start a new business idea – where do you start?
Research, of course, is critical and there are lots of ways to find the information you need. Most folks will start with a simple Google search for ‘Market Entry services in Indonesia’. This will return a list of more than a dozen companies in Jakarta and the services they offer.
That’s a positive start.
The question then becomes which one do you choose? Which one do you feel most comfortable with? Which one gives you the most value in the relationship? And with value, I’m not necessarily talking about prices and fees. I’m talking more about value in the customer journey and delivery.
We spend quite a lot of time looking at and trying to improve the customer experience, as well as its “moments of truth”. It’s an important part of our company ethos of “doing good, then doing well”. And what we feel underpins all of the stages of the customer experience is authenticity.
It’s through being authentic that we’re able to truly engage, listen, and offer honest and pertinent advice. For us at Seven Stones, being authentic means doing it right!
It makes all the sense in the world for example, to develop an investment roadmap before you start spending serious money on anything else. This roadmap should determine every aspect of the market entry process and may well highlight important areas you haven’t even considered yet.
Roadmaps will typically look at what you want to do, where and when you want to do it, and how you want to get there. Underlying these basic questions though is how you do that in Indonesia.
Of course, you need to consider legalities, licenses, and tax implications. But don’t overlook the human resource element either, especially as the much-anticipated Omnibus Law is expected to address things like minimum wages, termination, severance pay, health insurance, and working hours, which will directly impact your business and may influence your investment options.
The short-term holiday rental market is on the rise and we have had many people either actively engaged in or looking into how they can tap in to this lucrative business. However, there are some things you need to be aware of before you start spending money on those fancy properties in Bali, and at the top of the list are taxes and visas.
If you set up an Airbnb operation as a single, private individual, the correct tax exposure is 10 percent to the Provincial Government, 0.5 percent on turnover, and a further 20 percent Income Tax when the Pondok Wisata holder hands over any money earned to the “beneficial owner” – and then we have to start talking about holding a visa in compliance with the activities.
The tax office calls this Badan Usaha Tetap (BUT) so if, as an expat, you’ve leased a long-term villa in Bali and operate under a Pondok Wisata structure, the holder of the lease (that’s you) needs to have an agreement with the Pondok Wisata holder (that’s who owns the property) clarifying this structure.
Follow the Rules
We’ve had people come into our Bali office who don’t like the idea of paying their taxes. They’ve been doing illegal business for a few years and they think they can just continue as if it’s still 1999. Truth is, you can’t. Believe it or not, the tax office has caught up and they’re high-tech. They already know who’s avoiding taxes and if you don’t make the effort to comply with new regulations, you’re likely to get burnt. They can (and do) for example, demand tax audits going back several years, in which case you’re going to have to deal with a hefty bill for lost or unpaid taxes. Either that or the holder of the Pondok Wisata will be taxed on the income. Ouch!
And anyway, as an expat, you have to have a KITAS to hold a long-lease on a property. If you don’t, you’re breaking the law because a Tourist or Business Visa doesn’t make the cut. Double ouch!
PMA or PMDN
Setting up a PT PMA or PT PMDN is the way to go here because in both cases the business, you, and your earnings are in full compliance.
Now, if you go into Airbnb as a legal business entity, things are very different and there are solid benefits. There are two options: a PT PMA or a PT PMDN. For a PT Income Tax is calculated at 0.5 percent of turnover if it’s below Rp4.8 billion, and once the owner (or financier) has taken out their dividend the tax is 10 percent. Makes sense to follow the rules right?
Keeping A Finger on the Pulse
We keep our clients and ourselves up-to-date with the latest government initiatives that effect investments in Indonesia. This includes insights into things like Airbnb and the Omnibus Law, but we’re also trend spotters. The biggest trend right now is green.
We’re big fans of eco-conscious and sustainable enterprises and we’re happy to see the government’s latest “green drive” is going some way to accommodate investments and innovations into things like waste and water management, alternative energy, and holistic approaches to quality tourism.
But, here’s the rub: developing roadmaps could also result in a client deciding not to move forward and set up a business! It’s unusual, but it does happen. And in those rare cases, we’re still happy we were able to help them come to the right decision (for them) even though we didn’t sell any of the long list of services we offer. Why? Because it’s simply the right thing to do!
For more detailed information on market entry services and how Seven Stones Indonesia can help build bridges for cross border investments, please touch base at: [email protected]
Andy writes about tourism, real estate, environmental initiatives and business opportunities in Indonesia across a number of platforms including Seven Stones Indonesia, Medium, Linkedin and Gapura Bali.
Image source: Daria-Nepriakhina-on-Unsplash