Raw Mineral Export Duty Dramatically Reduced to Incentivize Smelter Construction

On July 25, 2014, the Minister of Finance (MOF) dramatically reduced export duties on unrefined metal minerals for companies that are taking concrete action toward building smelting facilities.

MOF Regulation No. 153/PMK.011/2014 (“MOF 153/2014”) was drafted to address concerns raised by mining companies who are required to build smelting facilities while at the same time paying escalating export duty. Companies had argued that paying high export duty both undermined the profitability of their operations and drained potential funding for smelter investment.

♦ Past Export Provisions

Under the current set of regulations on mineral export,¹ metal minerals must be refined to a very high standard before they can be exported, but eight specific mining products (concentrates of copper, zinc, lead, and manganese, iron sand, iron ore, anode slime and copper telluride) are allowed to be exported with minimal processing. Mining companies who continue to export unrefined minerals must demonstrate their progress in developing a smelting facility to the Ministry of Energy and Mineral Resources (MEMR) and Ministry of Trade (MOT), and must also pay progressive export duties, with tariffs increasing from 20-25% in the first semester of 2014 to 60% on December 31, 2016,² after which all export must cease.

♦ Export Duty Reduced to 7.5%, 5% and 0% for Companies Developing Smelters

Under MOF 153/2014, export duty will be dramatically reduced in accordance with the stage of
project development:³

- Stage 1 = 7.5% export duty for progress up to 7.5%, including deposit of a “seriousness guarantee” of 5% of the project value

- Stage 2 = 5% export duty for progress of 7.5% - 30%

- Stage 3 = 0% export duty for progress beyond 30%

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August 15, 2014,



Government Requires Construction Plan and Guarantee Funds in Order to Export Unrefined Metal Minerals

On April 17, 2014, the Minister of Energy and Mineral Resources (“MEMR”) issued Regulation No. 11 of 2014 on Procedures and Requirements for Granting Recommendations for Overseas Sales of Processed and Refined Mineral Products (“Regulation”) to implement Government Regulation No. 1 of 2014 and MEMR Regulation No. 1/2014 provisions on exporting mineral mining products.

The most powerful aspect of the Regulation is that it makes Export Approval recommendations for partially processed metal minerals¹ contingent upon applicants taking concrete action toward developing domestic refining facilities, including depositing funds as a “guarantee of seriousness” to follow through on smelter construction. It also reaffirms that partially processed metal minerals can only be exported until January 12, 2017, after which all metal minerals must be refined to meet legal purity standards.

♦ Obligated Parties and Mineral Products

All companies that intend to export mineral mining products must obtain recognition as a Registered Exporter (Exportir Terdaftar – ET) from the Ministry of Trade (“MOT”) and submit their shipments for survey by a  licensed surveyor (see MEMR 1/2014). For companies that are allowed to export “processed” (i.e., not refined to stipulated standards) metal minerals (concentrates of copper, iron, tin, manganese, lead, and zinc) and byproducts (anode slime and copper telluride), Export Approval (Persetujuan Export – PE) from the MOT is  also required for each proposed shipment. Export Approval is contingent upon a recommendation from the MEMR, while a recommendation for ET status is required from the institution that issued the exporter’s business license (generally, MEMR, except for refining companies holding an Industrial Business License (IUI) from the Ministry of Industry (“MOI”)²).

♦ Registered Exporter

To obtain a recommendation for Registered Exporter status, applicants³ must apply to the Director General of  Minerals and Coal (“DGMC”) with copies of the clear and clean certificate, surveyor’s report, purchase agreement with overseas buyer, and other relevant documents. Applicants intending to export “processed” metal minerals and byproducts must also submit a statement certifying their intention to construct a domestic refining facility and a copy of the construction cooperation agreement if the smelter will be built in partnership with other parties.

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♦ Export Approval

To obtain a recommendation for Export Approval for “processed” metal minerals and byproducts, applicants⁴ must apply to the DGMC with copies of Registered Exporter status, approved plan for construction of a domestic refining facility, proof of deposit of a “seriousness guarantee” to construct the refining facility, environmental performance documents (e.g., environmental compliance, air and water quality tests, reclamation plan, and reclamation guarantee), proof of payment of Non-Tax State Revenue (PNBP), annual work and budget plan (RKAB), and specific information on the intended export.

Export Approval recommendations are valid for six months and can be extended for six months at a time.

♦ Approval of Smelter Construction Plan

In order to obtain a recommendation for Export Approval , holders of Production Operation IUP, Production Operation specifically for Processing and/or Refining, Contract of Work and Industrial Business License must submit their domestic smelting facility construction plan for evaluation by a technical team of the DGMC. Without an approved construction plan, the applicant cannot obtain Export Approval, and to extend a valid Export Approval recommendation beyond the initial six months period, the DGMC must be satisfied with the applicant’s environmental performance and progress in realizing the construction plan. Progress will be reviewed every six months.

♦ Seriousness Guarantee (and release)

To obtain a recommendation for Export Approval, holders of Production Operation IUP, Production Operation  IUP specifically for Processing and/or Refining, and Contract of Work must deposit funds into an escrow account at a State-owned bank as a “guarantee of seriousness” to build a domestic refining facility. The guarantee funds are calculated as 5% of the total investment (if new) or of the residual unrealized investment value (if the project is already underway). The funds may be released in annual increments in accordance with  the progress of construction, but only if progress meets at least 60% of targets every 6 months. Repeated failure to meet construction targets can result in the government appropriating the guarantee funds for the State Treasury.

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New Negative Investment List

The long-awaited revision of the 2010 Negative Investment List (2010 Daftar Negatif Investasi, or “2010 DNI”) was issued through Presidential Regulation No. 39 of 2014 on List of Business Fields Closed to Investment and Business Fields Open, with Conditions, to Investment, dated April 23, 2014 (“2014 DNI”), effective as of April 24, 2014. According to the Government, the 2014 DNI is intended to enhance investment in Indonesia and implement Indonesia’s commitment to the ASEAN Economic Community.

♦  The 2014 DNI

The 2014 DNI is grouped into (i) business fields closed to investment, and (ii) business fields open to investment, but subject to certain conditions, such as limitations on foreign shareholding or specifications regarding the type or scale of business that can conduct particular business activities.

Applicability and Grandfather Clause The 2014 DNI revokes the 2010 DNI. Regulations issued to implement the 2010 DNI remain valid as long as they do not conflict.

The 2014 DNI includes a grandfather clause in Article 9, stating that limitations on whether a business is closed or open with conditions (Articles 1 and 2) do not apply to investments approved before the issuance of the new DNI, unless the new DNI is more favorable to the particular investment.

In case of change of shareholding resulting from merger, acquisition or consolidation, Article 6 of the 2014 DNI provides that surviving and acquiring companies can continue to comply with whatever foreign shareholding limits were approved in their original BKPM approval, while new consolidated companies must follow the limitations that prevail at the time the consolidated entity is formed.

Despite the grandfather clause, sectoral laws and regulations can render the grandfather clause dysfunctional. Of particular note, the 2010 Horticulture Law set a maximum 30% limit on foreign capital in horticulture businesses (Article 100(3)) and required existing foreign investors to divest their shares down to 30% within 4 years after the enactment of the law (Article 131(2)). The deadline is approaching on November 24, 2014. Our recent consultation with BKPM indicates that, despite the DNI’s grandfather clause, all existing horticulture companies are required to comply with the divestment requirement; in other words, they will not be grandfathered. We understand that BKPM has suggested to the Agriculture ministry to create a divestment mechanism similar to the stepwise approach applied in the mining industry to make it more practical and less burdensome for horticulture companies; but to date, no mechanism has been announced.

♦  Changes and New Business Fields in the 2014 DNI 

The following is a comparison of maximum foreign shareholding permitted under the 2010 and 2014 DNI’s.

2014-06-09 14_04_29-Document2 - Microsoft Word

♦  Limit on Distributorship: Problem for Wholesale Trading Companies

As indicated above, distributorship (no specific KBLI), which was not listed in the 2010 DNI, is now restricted to 33% foreign shareholding. According to BKPM, wholesale trading (perdagangan besar) is differentiated into (1) export (no foreign shareholding limitation), (2) import (no foreign shareholding limitation), and (3) distributorship (maximum 33% foreign shareholding). This apparently bars majority foreign-owned importers and exporters from carrying on any distributor roles or activities, but what precisely constitutes “distribution” has not been sufficiently explained. For example, does “distribution” refer specifically to transportation, or are wholesalers allowed to deliver their goods to buyers? It is also unresolved at this time whether “distribution” involves transfer of title to goods and the extent to which wholesalers can control third party distribution of their goods for quality control and safety purposes.

We understand that BKPM continues to receive inquiries and feedback from the public and that the question of distributorship will be further discussed between BKPM and the Ministry of Trade (“MoT”), given the substantial confusion surrounding this issue.

♦  Incentives for ASEAN Investors

The 2014 DNI provides several incentives for ASEAN investors, opening up more markets in advertising (51% foreign ownership) and market research, certain healthcare fields (up to 70% ownership of specialist/subspecialist hospitals, specialist clinics, and dental clinics located in most capital cities of eastern Indonesia), and international cargo and passenger shipping (60%), among others.

We understand that the concept of “ASEAN investor” would apply to companies registered in ASEAN countries, regardless of origin of shareholding. Thus, a Singapore-based company owned by Japanese investors would be eligible to enjoy the ASEAN investors’ incentives.

♦  Implications for Public Companies

As with the 2010 DNI, the 2014 DNI explicitly provides in Article 5 that Articles 1 and 2 (whether a business is closed or open with conditions) do not apply to indirect or portfolio investment transactions made through domestic capital markets. Unfortunately, this provision fails to address a number of practical issues, such as whether all listed companies are exempted from the DNI, or only publicly traded shares are exempted. Our recent consultation with BKPM indicates that the exemption is not absolute, and that certain circumstances may trigger DNI application to listed companies, although in practice this is rare. BKPM officers noted that it is unlikely that the DNI will be applied to a listed company unless the company itself informs or submits documents that display foreign shareholding to BKPM.

♦  Potential Conflict of DNI and Sectoral/Regional Regulations

Although the 2014 DNI clearly states that business fields not listed are unconditionally open for investment (Article 3), in reality there are several lines of business not listed in the DNI that have to comply with requirements and restrictions under other regulations.

Apart from the horticulture industry as highlighted earlier, in mining, for example, there are maximum foreign shareholding limits and divestment schedules stipulated in Regulations of the Minister of Energy & Mineral Resources (MEMR), which are not reflected in the DNI and which accelerate upon change of shareholder. Because BKPM requires a recommendation from MEMR before it can approve a transfer of shares in a mining company, MEMR is able to impose the shareholding limitation by virtue of its power to issue or withhold the recommendation.

As with the previous DNI, investors need to be mindful of sectoral or regional regulations that may impose additional requirements or limitations despite the 2014 DNI’s assurance in Article 3.



Additional Sectors Covered under 2014 Sectoral Minimum Wage for DKI Jakarta

The Governor of DKI Jakarta Province stipulated new sectoral minimum wages (“UMSP”) in Governor Regulation No. 54 of 2014 dated April 17, 2014, and Governor Regulation No. 62 of 2014 dated April 28, 2014, on Provincial Sectoral Minimum Wage (together, the “UMSP Regulation”). The UMSP Regulation stipulates 16 industries and sectors that have to comply with the UMSP:

1. Cosmetic materials and products industry*
2. Automotive industry
3. Can packaging industry*
4. Pharmaceutical industry
5. Radio, television, voice and picture recording devices industry*
6. Household electrical appliance industry*
7. Hospital services*
8. Construction and public works
9. Chemicals, energy, and mining
10. Metals, electronics, and machinery
11. Insurance and banking
12. Food and beverages
13. Textiles, clothing, and leather
14. Tourism
15. Telecommunications
16. Retail
*newly added for 2014

The UMSP Regulation stipulates 2 types of UMSP: monthly and daily. The lowest monthly UMSP applies to the cosmetic materials and products industry, with a UMSP of Rp2,525,000, and the highest monthly UMSP applies to the automotive industry sub sector of four wheel vehicles, two wheel vehicles, and transportation and heavy vehicles industry, with a UMSP of Rp2,915,000. The lowest daily UMSP applies to the construction and general contractor industry, with the lowest UMSP applied to workers (knek), mower men (tukang babat rumput) and plumbers (tukang pasang pipa) with a UMSP of Rp102,920 per day, while the highest daily UMSP applies to Supervisors and operators of heavy equipment, with a UMSP of Rp157,901 per day.

It is mandatory for every employer in DKI Jakarta Province that engages in the foregoing sectors to comply with the UMSP for all employees whose tenure is less than 1 year, in accordance with Article 90 of the Labor Law and the UMSP Regulation. If the tenure is more than 1 year, the monthly or daily salary shall be determined through bipartite negotiation between the employee or authorized labor union and the employer.

Jakarta
May 21, 2014



New MOLHR Procedures for Raticication of Legal Entities, Amendment of AoA and Company Data

On March 26, 2014, the Minister of Law and Human Rights (“MOLHR”) issued regulation No. 4 of 2014 (“Regulation”) on Procedures for Applications for Ratification of Legal Entities and Approval and Notification of Amendments of Limited Liability Companies’ Articles of Association, which revokes the previous regulation issued in 2011.

Company filings must now be submitted electronically to the MOLHR through the Legal Entity Administration System (Sistem Administrasi Badan Hukum – “SABH”, formerly called Sisminbakum), although hardcopy submission is permitted in situations where an internet connection is not available.

Following are the highlights of the updated procedures.

 Approval of Company Name
To reserve the name of a new company, a nonrefundable administration fee must be paid to an appointed bank before submitting the Company Name Submission Form (previously, the fee was paid only after the company name was approved). Once the fee is paid, the company has 60 days to submit its application through the SABH for approval by the MOLHR. Once the name is approved, the name will be reserved for the company for 60 days thereafter.

 Ratification of Legal Entities
To validate the company as a legal entity, within 60 days after execution of the Deed of Establishment, a Company Incorporation Form must be submitted through the SABH, along with an electronic statement letter from the applicant attesting to the sufficiency of all supporting documents.

Once the MOLHR issues a decree ratifying the legal entity, the decree can be printed directly from the system (using 80 gram F4/folio white paper) by a Notary Public, who must sign and chop the decree with their Notary stamp, including the phrase, “Keputusan Menteri ini dicetak dari SABH” (This Decree is printed from SABH).

Amendments of a company’s Articles of Association (AOA) and certain company data must be submitted for approval or notification through the SABH using an Amendment Form. The Regulation unifies the application forms for both approval and notification triggered by amendment of AOA provisions or company data.

As under the previous regulation, the following AOA amendments must obtain approval from the MOLHR:

  • Company name or domicile
  • Company purpose, objectives and business activities
  • Lifespan of the company (for companies established for a limited period of time)
  • Authorized capital
  • Reduction of issued and paid-up capital
  • Change of status – going public or delisting

If an amendment is approved by the company’s shareholders in the form of a Unanimous Written Resolution of the Shareholders, the resolution must be drawn up in a notarial deed within 30 days, as only a notarial deed can be submitted to the MOLHR to validate an amendment of the AOA.

Other types of amendments and changes of company information only need to be notified to the MOLHR:

  • Names and composition of shareholders
  • Names and composition of Board of Directors
  • Company address
  • Dissolution of company or expiration of company lifespan
  • Termination of legal entity status due to liquidation/bankruptcy
  • Merger, consolidation, acquisition and separation which are not followed by amendment(s) to the company’s AOA

Of note, the Regulation adds deeds of consolidation and acquisition to the list of supporting documents that must be attached when submitting an amendment of the company’s AOA or company data, whereas the previous regulation only required deeds in case of merger.



Enactment Of New Trade Law

The House of Representatives (Dewan Perwakilan Rakyat – “DPR”) passed the long-awaited Bill on Trade on February 11, 2014. For the previous 80 years, Indonesia had relied on the Bedrijfsreglementerings Ordonnantie 1934 from the Dutch colonial period, along with a set of ministerial implementing regulations.
Following are highlights of the key provisions.

IMPORT AND EXPORT

The Trade Law reaffirms the import and export requirements previously scattered across various regulations, including the requirements to obtain Importer Identification Number (Angka Pengenal Importir – API) and Registered Exporter (Exportir Terdaftar – ET) status.

Any goods may be imported or exported unless specifically prohibited, restricted, or stipulated otherwise by law. The Government can restrict import or export of goods to (a) protect national safety or public interest, including social, cultural, and moral welfare; (b) protect intellectual property rights; or (c) protect the health and safety of humans, animals, fish, plants and the environment.

The Government may limit export in order to (see Art. 54):

a. ensure fulfillment of domestic needs
b. ensure availability of raw materials for domestic processing industries
c. protect sustainability of natural resources
d. increase economic value of raw materials and natural resources
e. anticipate price fluctuations of export commodities on the international market
f. maintain domestic price stability of certain commodities

As for imports, the Government may limit importation of particular goods to expedite the growth of, establish, and protect domestic industries or to maintain the balance of payments and balance of trade. In general, importers can only import new goods, except for certain used capital goods under specific circumstances and with permission from the Minister of Trade.

STANDARDIZATION

All goods traded on the domestic market must bear labels in Indonesian language and must satisfy Indonesian National Standards (Standar Nasional Indonesia“SNI”) requirements (or other mandatory technical requirements) by affixing the SNI sign or a conformity sign/certificate recognized by the Government.

Standardization also applies to services, including business services; distribution; communications; education; environmental services; financial services; construction and technical services; health and social services; tourism, recreation, cultural, and sports services; transportation; and other services. Service providers must comply with SNI requirements.

E-COMMERCE

Electronic trading transactions must observe and comply with the Electronic Information and Transaction Law, and enterprises that trade goods or services by way of e-commerce must provide complete and accurate information on the traded goods/services, comprising at least the enterprise’s identity and legality as producer or distributor; technical specifications of goods; technical specifications or qualifications of services; price and terms of payment; and terms of delivery. Enterprises that fail to provide complete and accurate information may have their trading license revoked.

INTERNATIONAL TRADE AGREEMENTS

Under Law No. 24 of 2000 on International Agreements, the Minister of Foreign Affairs must consult with the DPR for preparation and ratification of international agreements impacting the public interest. Article 10 of Law 24/2000 stipulates that ratification of an international agreement must be done through a law (Undang-undang) passed by the DPR if the agreement relates to (a) politics, peace, defense, or national security; (b) change or stipulation of the territory of the Republic of Indonesia; (c) state sovereignty; (d) human rights and environment; (e) a new principle of law (kaidah hukum baru); or (f) foreign loans or grants. Law 24/2000 does not specifically mention international trade agreements.

The Trade Law creates a significant role for the DPR, which now has rights of consultation and approval over trade agreements that impact the national interest and must refuse to ratify agreements that put the national interest at risk. If the agreement causes a “systemic impact” on the citizens’ livelihood, relates to the State’s financial burden, or requires amendments to or enactment of laws, then the agreement must be ratified through a Law (which requires approval by the DPR and signature by the President). In the absence of such systemic impact, ratification is permitted by means of a Presidential Regulation. This protocol is consistent with Law 24/2000.

The Trade Law does not define or elaborate on systemic impact or national interest risk. It is also unclear from the wording of the relevant article whether the consultation with the DPR is mandatory or optional and whether it is required for all, or just some, international trade agreements.

NATIONAL TRADE COMMITTEE

The Trade Law establishes a National Trade Committee (Komite Perdagangan Nasional“KPN”), which will be established by the President and headed by the Minister of Trade. Membership of the KPN comprises elements from the Government; institutions responsible for investigating antidumping and reward measures; institutions responsible for investigating trade security measures; institutions responsible for providing recommendations on consumer protection; the business community; and academicians or experts in trade.

The KPN will assist the Government by providing input on trade policy and regulations, trade funding, antidumping, reward and trade security measures, and domestic and international trade issues; monitoring trade policy in partner countries; and helping to formulate the Government’s position in international trade negotiations, among other functions.

DIRECT SELLING AND MULTI-LEVEL MARKETING

The Trade Law specifically bans pyramid scheme—also known as multi-level marketing or MLM—distribution systems, with criminal penalties for violators. There are also provisions on direct selling, which is the sale of goods directly to end users without a fixed retail location. Goods subject to exclusive distribution rights using the direct selling method can only be marketed by official sellers registered as members of direct selling companies. [Direct selling is governed under Minister of Trade (“MOT”) Regulation No. 32/M-DAG/PER/8/2008 as amended by MOT Regulation No. 47/M-DAG/PER/9/2009.]

SANCTIONS

Apart from administrative sanctions, the Trade Law provides stiff criminal sanctions for violations of certain requirements and restrictions. Maximum penalties include:

- Indonesian language label requirement: five years imprisonment and/or fine up to five billion Rupiah
- Pyramid scheme: ten years imprisonment and/or fine up to ten billion Rupiah
- Carrying on trade activities without proper licenses: four years imprisonment and/or fine up to ten billion Rupiah
- Stockpiling: five years imprisonment and/or fine up to fifty billion Rupiah
- Manipulation of data or information on staple or important goods: four years imprisonment and/or fine up to ten billion Rupiah
- Trading unregistered security, safety, health and environment-related goods: one year imprisonment and/or fine up to five billion Rupiah
- Trading prohibited goods: five years imprisonment and/or fine up to five billion Rupiah
- Importing used goods: five years imprisonment and/or fine up to five billion Rupiah
- Export or import of prohibited goods: five years imprisonment and/or fine up to five billion Rupiah
- Provision of services not in compliance with SNI, technical or qualification requirements: five years imprisonment and/or fine up to five billion Rupiah
- Trading goods or services through e-commerce not in line with provided information: twelve years imprisonment and/or fine up to twelve billion Rupiah
- Holding trade shows involving foreign participants or products without a license from MOT: three years imprisonment and/or fine up to five billion Rupiah

Full implementation of the Trade Law will require implementing instruments in the form of Government Regulations, Presidential Decrees, and Ministerial Regulations, as specified in the relevant provisions of the Law.



New Provisions on Expatriate Working Permits

On December 30, 2013, the Minister of Manpower and Transmigration of the Republic of Indonesia (“MOMT”) enacted MOMT Regulation No. 12 of 2013 on Procedure for Employing Expatriate Workers (“Regulation No. 12/2013”), which replaced the previous regulation on the same subject (“Regulation No. 02/2008”). Regulation No. 12/2013 does not make major amendments to the expatriate working permit requirements contained in Regulation No. 02/2008. However, there are some changes and additions to the types of work expatriates may perform and requirements to obtain working permits in Indonesia.

Under Regulation No. 12/2013, employers may now employ expatriates not only under limited term or emergency contracts, but also on a temporary basis, either for a one-time project, or related to machinery and electrical installation, after sales services, or market assessment of trial products. The maximum period for temporary work is 6 months, which cannot be extended.

One of the new requirements under Regulation No. 12/2013 is that expatriates must possess both relevant education and professional certification or five years relevant experience. Under Regulation No. 02/2008, the requirement was for education or professional certification/experience.

Similar to the previous expatriate working permit requirements stated in Regulation No. 02/2008, to employ an expatriate in Indonesia, the employer must obtain an approved expatriate recruitment plan (RPTKA), visa recommendation (TA-01) and expatriate recruitment permit (IMTA). To obtain RPTKA, TA-01 or IMTA, including extension periods, the employer may apply in writing or through an online system to the Director of Expatriate Worker Utilization Control (Direktur Pengendalian Penggunaan Tenaga Kerja Asing – “Director”). If the requirements are complete, the Director is supposed to issue the permits within four working days (for each permit). Extensions of RPTKA and IMTA can be processed by regional officials, depending on the geographic scope of the work.

For expatriates married to Indonesian citizens, the TA-01 for limited stay visa is no longer required.
The RPTKA can be granted for up to five years and may be extended for the same period. The IMTA is granted for one year, and extensions can be granted for one year at a time. For expatriate directors and commissioners of companies, IMTA may be extended for two years at a time.

Regulation No. 12/2013 also regulates what types of employers may employ expatriate workers. Employers in the form of government institution, international agency, foreign representative, foreign chamber of commerce, foreign representative office, foreign representative news office, foreign private company, legal entity, social, religious, educational and cultural institutions, and performing arts businesses may employ foreign workers, while employers in the form of civil partnership, firm, limited partnership (CV), and business enterprise (UD) are prohibited from employing expatriates, unless otherwise permitted by law.
Other requirements for employers and expatriates remain as under the prevailing manpower and immigration laws and regulations.

Please contact Johannes C. Sahetapy-Engel at jsahetapyengel@aksetlaw.com or Rizki H. Nugraha at rnugraha@aksetlaw.com if you need more information.



Government Allows Export of Some Minerals until 2017; Progressive Export Duty Imposed

Following the closing date for export of unprocessed minerals and the obligation of IUP holders and Contract of Work companies in the production phase to domestically “add value” to mining products by 12 January 2014, the Government has issued four regulations: (i) Government Regulation No. 1 of 2014 (“GR 1”), (ii) Minister of Energy and Mineral Resources Regulation No. 1 of 2014 (“MEMR 1”), Minister of Finance Regulation No. 6/PMK.011/2014 (“MOF 6”), and Minister of Trade Regulation No. 4/M-DAG/PER/1/2014 (“MOT 4”). The regulations allow certain key industry players to keep operating, while incentivizing the sector as a whole to make meaningful progress toward developing a minerals processing infrastructure.

Export May Continue

As a group, the regulations amend the mineral export policy originally stipulated under GR No. 23/2010 on Implementation of Mineral and Coal Mining Business Activities and its implementing regulations: (i) Contract of Work and IUP companies that partially process metal minerals may export certain processed minerals in limited quantities until January 2017, (ii) companies that purify metal minerals to stipulated standards may export in unlimited amounts, and (iii) companies that process non-metal minerals and rocks can also export in unlimited amounts if they process to legal standards.

Copper, Iron Can Still Be Exported; Nickel, Bauxite Cannot

To accommodate the need of some companies to carry on production, and mitigate the potential impact on employees of an outright export ban, MEMR 1 allows export of certain processed (as opposed to “purified”) minerals until 2017 for IUP OP and Contract of Work companies that meet requirements and obtain MEMR recommendation.

MEMR 1 revokes MEMR Regulation No. 7 of 2012 (which was annulled last year by the Supreme Court) and imposes a 2017 sunset date for exportation of processed metal minerals. The key lies in the distinction between purification and processing: while most minerals must be purified to very high standards in order to be exported, eight specific mining products can be exported with minimal processing, for three more years.

The standards for “processing” and “purification” are listed in the Appendices of MEMR 1. Concentrates and processed copper, iron sand, iron ore, zinc, lead, manganese, anode slime (lumpur anoda) and telluride copper (tembaga telurid) may be exported in certain amounts, provided that insufficient domestic refining facilities are available to reach the minimum level of purification. Other important minerals, namely nickel, bauxite, tin, gold, silver, and chromium, do not receive any such exemption—export is forbidden unless they are purified to the standards listed in the Appendices.

Progressive Export Duty, 20-60%

On the few substances that may still be exported with minimal processing, the Government has imposed a progressive export duty (bea keluar) under MOF 6. The tariffs are imposed gradually per semester, and vary among substances, ranging from 20% in the first semester of 2014 to 60% on 31 December 2016. The Government expects all metal minerals to be domestically purified by January 2017.

Export Approval Granted for Certain Processed Products after Survey

MOT 4 replaces the previous regulation from the Minister of Trade, which prescribed procedures for mining companies to obtain Export Approval (SP Ekspor) and Registered Exporter (ET) status in order to continue exporting mining products. As under the previous regulation, Registered Exporter status is granted to companies for three years, while each shipment must obtain Export Approval based on a recommendation from the Directorate General of Minerals and Coal and a technical assessment of the shipment by a licensed Surveyor. Registered Exporters and licensed Surveyors must file monthly reports on the realization of mineral exports. Companies that falsify documents, fail to report, or make shipments that differ from the Export Approval in terms of type or amount of mining products exported are subject to revocation of Registered Exporter status and are prohibited from reapplying for Registered Exporter status for a period of one year.

Industry Reacts

Members of the business community plan to request government review of the policies, particularly the amount of the export duty, on the basis that the new regulations are unduly burdensome and unfairly allow producers of certain minerals to continue exporting while other producers are effectively shut down until they can secure proper processing arrangements. The new policy, while intended to incentivize the fulfillment of domestic processing and refining by 2017, is perceived as counterproductive by companies that need more revenue from mineral sales to fund the construction of the required smelters and processing facilities.

22 January 2014,
ARFIDEA KADRI SAHETAPY-ENGEL TISNADISASTRA



MEMR Issues Guidelines On Mining Permits For Transportation And Sale, Processing And Refining

The Minister of Energy and Mineral Resources (“MEMR”) promulgated Regulation No. 32 of 2013 on Procedure for Granting Special Permits in the Field of Mineral and Coal Mining (“Regulation”) on November 19, 2013. This Regulation sets guidelines on how to acquire the Special Permits, which are not clearly regulated by Law No. 4 of 2009 on Mineral and Coal and Mining (“Mining Law”) and Government Regulation No. 23 of 2010 on Implementation of Mineral and Coal Mining Business Activities, as amended.

The Regulation recognizes four types of Special Permit:

  •  Temporary Permit for Transportation and Sale 

This permit may be granted to holders of Exploration Mining Business Permit (“IUP”)/Special Mining Business Permit (“IUPK”) that wish to transport and sell minerals or coal that are unearthed during the course of exploration and feasibility study. This permit is granted by the authority that issued the underlying IUP/IUPK; it can only be granted once, and it cannot be extended. The holder can only transport and sell the unearthed minerals or coal within the same island, and it cannot export to foreign countries.

  • Production Operation IUP for Sale

This permit may be granted to Business Entities not engaged in mining business, such as building construction and infrastructure companies, that unearth minerals or coal in the course of conducting their primary activities. Similar to the Temporary Permit for Transportation and Sale, holders are entitled to transport and sell excavated minerals or coal domestically within one island, and the permit can only be granted one time and cannot be extended. Companies that intend to use excavated rocks or non-metal minerals solely for their own purposes (e.g., for road building) must still obtain a Production Operation IUP for Sale.

This permit cannot be used to sell minerals or coal that are discovered within the territory of an existing mining area, because the rights to those minerals or coal are retained by the IUP/IUPK or Contract of Work holder.

The issuing authority of this permit correlates to the location of the unearthed minerals or coal. If they are located across provinces or immediately adjacent to another country, the MEMR is the issuing authority. If across regencies/cities within the same province or within a single regency, the relevant governor or regent/mayor, respectively, shall act as the issuing authority.

  • Production Operation IUP specifically for Transportation and Sale 

This permit, which may be granted for three to five years, allows holders to transport and sell mineral or coal mining commodities from holders of Production Operation IUP/IUPK, Production Operation IUP specifically for processing and/or refining, People’s Mining Permit (IPR), and certain other holders of Production Operation IUP specifically for transportation and sale. This permit can be extended for three years at a time.

Permits for transportation and sale of mineral or coal mining commodities across regencies/cities within the same province or within a single regency/city are issued by the relevant governor or regent/mayor, respectively, while permits for transportation and sale across provinces or outside of Indonesia are granted by the MEMR. As with other types of IUPs, foreign investment (PMA) companies must apply directly to the MEMR.

Holders of this permit may trade among themselves, but only to holders whose permits are issued by a higher-level authority. For example, companies whose permits are issued by a governor can only sell to companies whose permits are issued by the Minister, and companies whose permits are issued by the MEMR cannot trade among themselves.

  • Production Operation IUP specifically for Processing and/or Refining

This permit, which may be granted for twenty years, enables holders to process and refine mining products in order to meet the needs of the market and regulatory requirements on mineral processing. Holders can transport and sell processed/refined products, as well as the byproducts of their industrial process.
The period of this permit includes two years for construction of facilities, and it can be extended for up to ten years at a time. Prospective holders must first acquire a Principal License for processing and/or refining, which gives the holder three years (extendable by one year) in which to conduct a feasibility study, prepare cooperation agreements with suppliers and customers, and acquire ancillary licenses.

PMA companies must obtain their permit directly from the MEMR. Likewise, companies who intend to process and/or refine a mining commodity originating from an importer of a mining commodity, a holder of Production Operation IUPK, a holder of Production Operation IUP issued by the MEMR, or a holder of Production Operation IUP whose mining area is located in another province must obtain their permit directly from the MEMR. By contrast, companies who intend to process and/or refine mining commodities originating from a holder of Production Operation IUP issued by a governor or a holder of Production Operation IUP located across regencies/cities in the same province apply to the relevant governor. For companies that will process mining commodities from the same regency/city from holders of Production Operation IUP issued by the regent/mayor, they must obtain their permit from the relevant regent/mayor, unless they intend to expand their raw materials sources to include supplies from different provinces.

The Regulation incorporates several provisions on administrative sanctions in order to deter the relevant actors from violating the Regulation, ranging from temporary suspension of the violator’s permit to permanent revocation.

January 15, 2014
ARFIDEA KADRI SAHETAPY-ENGEL TISNADISASTRA



SUPREME COURT ANNULS MEMR No. 7/2012: IMPLICATIONS FOR DOMESTIC MINERAL PROCESSING AND REFINING

Indonesia’s Supreme Court recently published Decision No. 13 P/HUM/2012, dated April 3, 2013, (“Decision”), ordering the Minister of Energy and Mineral Resources (“MEMR”) to revoke MEMR Regulation No. 7 of 2012 regarding Increasing the Added Value of Minerals through Processing and Refining Activities (“MEMR No. 7/2012” or “Regulation”). The Court annulled specific provisions of the Regulation in two separate decisions in 2012,¹ but now it must be revoked in its entirety.

The Court annulled the Regulation on the basis that it was not in line with Law Number 4 of 2009 on Mineral and Coal Mining (“Mining Law”), particularly with respect to the commencement of the raw mineral export ban (May 6, 2012), which was deemed to violate Article 170 of the Mining Law, which requires that minerals be refined domestically no later than January 2014.

As a result of the Decision, the Regulation is null and void, along with its amendments (MEMR Reg. No. 11/2012 and Reg. No. 20/2013) and annexes, meaning there are no longer any minimum legal standards for purification and processing.

Nevertheless, mining companies (both IUP holders and Contract of Work companies in the
production phase) still have a legal obligation under the Mining Law to “add value” to mining products domestically by January 12, 2014.

Pairing with the Regulation, the Ministers of Trade and Finance had issued companion regulations² to MEMR No. 7/2012 relating to the authorization and taxation of raw mineral exports. Those regulations were not annulled by the Court, but the provisions of MEMR No. 11/2012 authorizing mining companies to continue exporting subject to certain recommendations and approvals have been stricken. As a result, it is no longer clear whether mining companies can continue to export unprocessed minerals after January 12, 2014.

We believe that export approvals that have already been granted will be allowed to proceed as planned, and Contract of Work companies may receive additional time to complete construction of processing plants, subject to MEMR approval of plant feasibility study reports and the ongoing renegotiation of particular provisions in the Contracts of Work.

Considering the needs of the mining industry to carry on production in spite of the imminent arrival of the domestic processing deadline, and the dramatic impact suspension of business would have on employees and the communities surrounding mining areas, it is anticipated that the Government will issue a new regulation soon, which may extend raw minerals export up to 2017 for Contract of Work

¹Supreme Court Decision No. 09 P/HUM/2012 and Decision No. 10 P/HUM/2012, both awarded on September 12, 2012.
The cases were brought by the Indonesian Nickel Association and the Association of Indonesian Regency Governments,
respectively.

²Minister of Trade Regulation No. 29/M-DAG/PER/5/2012, Minister of Trade Regulation No. 33/M-DAG/PER/5/2012,
Minister of Trade Circular No. 04/M-DAG/ED/12/2013, and Minister of Finance Regulation No. 75/PMK.11/2012.

companies that meet requirements and demonstrate progress toward building processing and refining facilities.

December 23, 2013
ARFIDEA KADRI SAHETAPY-ENGEL TISNADISASTRA