Indonesian Insights

Written by Ira Eddymurthy and P Patricia Adams

To build international and national confidence in the Rupiah, Indonesia implemented Law No. 7 of 2011 on Currency on May 31, 2011. It will ensure the dominance of the Rupiah by requiring that all payments be made in that currency.

The most important section of the currency legislation is Article 21(1), which states that the Rupiah must be used for all transactions below, once it takes place in Indonesia:

• All payment transactions;
• Obligation settlements that uses money; and
• Other financial transactions.

Within the jurisdiction

One should note that the legislation is only applicable if these transactions take place in Indonesia. Therefore, if a company contracts with an Indonesian to complete a transaction outside of Indonesia, for payment in a foreign currency, the understanding is that this transaction will not be covered by this legislation. Consequently, companies should not concern if their business transactions are conducted outside of Indonesia. As such, the legislation will most likely affect foreign entities with a presence in Indonesia transacting business within the jurisdiction. Parties wishing to use foreign currencies must ensure that the transaction is not performed in Indonesia or that it falls within one of the exceptions in Article 21(2).

The grey areas

While section 21 outlines that payment transactions and obligation settlements must be done in Rupiah, what is unclear is the scope and definition of “other financial transactions” under Article 21(1). This is a grey area, because “other financial transactions” can be as wide or as small as the Government sees fit. It could also lead to inconsistency in the application of the legislation. For example, production sharing contracts (PSC) or power purchase agreements (PPA) do not fall within any of the transactions outline in Article 21(1), so they would have to fall under “other financial transactions” which would require the use of the Rupiah when payment is made. Whether this will be the case, however remains to be seen, because parties to PSC and PPA agreements can decide that these type of agreements do not fall within “other financial transactions”, and therefore they are not precluded from using a foreign currency.

Another issue has to do with Article 23. Article 23(1) provides that persons are not allowed to refuse the Rupiah as payment or settlement of liabilities or for other financial transactions conducted within the jurisdiction, unless there is doubt as to its authenticity. Article 23(2) further provides an exemption, stating that Article 23(1) does not apply for payment or settlement of liabilities in foreign currencies agreed in writing. Uncertainty is created because Article 23(2) does not elaborate on the “agree[ments] in writing” that are exempted. Is it the agreements referred to in Article 21(2)? On a natural reading of the entire legislation, one might assume that Article 23(2) applies only to those agreements exempted by Article21(2), simply because those are the only instances contemplated by the drafter. However, caution must be used when applying this Article.

Another grey can be found in the application of the law to the Hotel and Tourism Industry. It has been the practice for hotels in Indonesia to receive payment in a foreign currency for rooms and services provided to guests. With the new legislation, this practice will have to cease, much to the dismay of the Hoteliers, as they believe that the Currency Law will restrict and constrict the industry at a time when it is growing. The big issue here is whether transactions conducted in this industry fall within the “international financial transactions” exception, because the guest is often from overseas.

We can only anticipate that the Government will elaborate on these issues later, in fact, Article 47 requires implementing regulations within a year of the promulgation date of the Currency Law. Hopefully, we will not have to wait a year.

Pre-existing contracts

A dilemma arises in those circumstances where a contract already exists providing for payment in a foreign currency for goods sold or received in Indonesia or services provided in Indonesia. In such instances, the company must follow the legislation by paying in Rupiah. On the other hand, to do so, may result in a breach of the contract. Companies should consider varying the terms of such contracts, in order to reconcile it with the new legislation. A simple addendum to the contract will suffice, provided all parties to the contract agree to the changes, preferably in writing.

A similar issue will be faced by banks operating in Indonesia, which are used to charging fees for cash management services in United States Dollars (USD). The can decide to do one of two things:

1. Request the equivalent in Rupiah, without changing the terms and conditions of the contract; or
2. Amend the contract and replace all references to USD with Rupiah.

If (1) is the desired action, it is likely that these banks will have to contact their customers outlining the new legislation and requiring payment in Rupiah. The impact of this is that, the customer will have to bear the burden of a fluctuating exchange rate. Due to the fact that the Rupiah is not pegged to the USD the exchange rate changes daily. Therefore, if the banks do not amend their contracts and continue to charge their fees in USD on the agreement that the customer only has to pay the equivalent in Rupiah, that customer might find that each month or year (depending on the fee payment schedule), the cost in Rupiah changes. This will be particularly frustrating for foreign investors.

The same applies to the Batam and Riau Islands, where the practice has been to receive payment for goods and services in Singapore Dollars (SGD). The proximity of the islands to Singapore makes the SGD a convenient currency for trade purposes. However, even though the Riau Islands is a special economic region, they are not exempted from the Currency Law. It remains to be seen if this will reduce or cripple trade in these islands.

Some things will not change

While there will be many changes to get accustomed to, some things will remain the same. Section 21(2) of the new legislation exempts a number of transactions, which are:

• Certain transactions related to the State budget;
• Income and grants from and to foreign countries;
• International trade transactions;
• Foreign currency saving in a bank; and
• International financial transactions.

As such, the new legislation will have little to no impact on the financial market. International trade and financial transactions can still be conducted in foreign currencies. Also, Indonesian residents and non-residents are allowed to keep their savings in foreign currencies. It is worth noting, however, that even though foreign currency accounts are allowed, payments received and made must be done in Rupiah, so it would be good practice to use a Rupiah account as the active account, in order to reduce losing money due to fluctuating exchange rates.

In addition, persons seconded to Indonesia by their company to a branch in Indonesia, will still be paid in the currency of their home country, even though the services are being rendered in Indonesia.Therefore, an Australian seconded to his company’s branch office in Jakarta can receive payment in Australian Dollars.

It is worth noting that marketing in USD is allowed in Indonesia. The law is only activated at the time of payment or settlement of monetary obligation. Therefore,  persons can continue to advertise and market their goods and services in USD. This is not prohibited; what is prohibited is receiving payment in USD. One wonders if this lacuna will serve to undermine the aim of the legislation.

The general view in the business community is that persons might try to get around the legislation, for example, by incorporating offshore companies and contracting with Indonesian entities for consulting services.

One way in which Parties have been getting around the legislation is through the improper use of Article 23 (2). Discussed above, is the uncertainty created by Article 23, in particular 23(2). Due to the fact that there is no expressed and apparent link between Article 21(2) and Article 23(2), persons have been applying Article 23(2) not only to the exempted transactions in Article 21(2), but to all transactions where an agreement was made in writing to use a foreign currency. Consequently, it matters not if the transaction falls within Article 21(1) and requires payment in Rupiah, the Parties will claim that they agreed to use USD and therefore Article 23(2) applies and they can receive payment in USD and not Rupiah. This may not have been the intention of the legislators and to follow this practice undermines the aim of the legislation, which is to build international and national confidence in the Rupiah.

International confidence in the Rupiah will not be built if it appears that there is no national confidence in the currency, which is what the improper use of Article 23(2) suggests. Circumventing the legislation this way is dangerous and not a practice that should be cultivated. It is expected that the Government will not sit idly by and allow this practice to continue. We therefore anticipate clarification from the Government soon.

Penalties

Under the legislation, both the payee and payer can be fined and/or imprisoned for failing to comply. Refusing to accept the Rupiah is a serious crime under the legislation and a maximum fine of RP 200,000,000 will apply. The same penalty applies if a foreign currency is used for payment in Indonesia. Companies must ensure that they conduct their transactions in Rupiah, if the goods are bought or sold in Indonesia or the services are provided in Indonesia.

Foreign exchange controls

Indonesia has no foreign exchange restrictions, so the one question on everyone’s mind is whether this legislation amounts to foreign exchange control. The new Currency Law is not a control mechanism.

The new legislation is not intended to deter foreign investment and foreign companies are encourage to continue investing in Indonesia. Ultimately, the legislation seeks to ensure the supremacy of the Rupiah and positions Indonesia for economic growth.

Practical advice

Pending issuance of the implementing regulations under the Currency Law, we believe businesses can continue following their current practices with regard to currency in which payments need to be made with one exception: if a recipient of a payment requests that it be made in Rupiah, such payment should be made in Rupiah at an exchange rate to be agreed by the parties (assuming the underlying contract is not in Rupiah). If the parties can not agree on the exchange rate, the Bank Indonesia middle rate can be suggested.

It is worth noting that Indonesia has recently adopted the Transfer Fund Law which allows the transfer of any foreign currency to and from Indonesia. Therefore, we can assume that the requirements under the Currency Law do not apply if payments are done by way of transfer.