(in association with Stephenson Harwood LLP)

EXPORT PROCEEDS REPATRIATION & USE – FURTHER

TIGHTENING THE SCREWS ON EXPORTERS12345

INTRODUCTION

Indonesia has introduced significant negative incentives for local exporters of certain
products, including mineral products, to repatriate 100% of their export proceeds and to then
use those export proceeds for certain specified purposes only.

The negative incentives are in the form of financial penalties and other sanctions for failing to
repatriate export proceeds or for subsequently misusing repatriated export proceeds.

The resort to penalties and sanctions, in an endeavor to ensure 100% repatriation of export
proceeds and no subsequent misuse of repatriated export proceeds, may be seen as just the
latest evidence of the Government’s concern about the size of the current account deficit and
the consequent need to take urgent action to reduce that deficit.

It remains to be seen, however, whether or not further “tightening the screws” on exporters,
in terms of export proceeds, will have any meaningful impact on the current account deficit.

In this article, the writer will review the new negative incentives for exporters in the context
of the Government’s focus on the energy, mining and resources sectors as important
contributors to the current account deficit.

BACKGROUND

Since at least 2009 the Government has sought to ensure that proceeds from the export of
Indonesia’s natural resource products, including mineral products, are repatriated to
Indonesia. Some only of these earlier initiatives are (i) numerous Minister of Trade (“MoT”)
regulations including, most recently, MoT Regulation No. 94 of 2018 re Provisions on the
Use of Letters of Credit for the Export of Certain Products (“MoTR 94/2018”) (together,
“MoT Regulations”) and (ii) numerous Bank Indonesia (“BI”) regulations including, most
recently, BI Regulation No. 17 of 2015 re Receipt of Foreign Exchange Export Proceeds and
Withdrawal of Foreign Exchange External (“BIR 17/2015”) (together, “BI Regulations”).

The MoT Regulations were and, in the case only of MoTR 94/2018, continue to be directed at
requiring exporters of certain natural resource products, including mineral products, to
arrange payment for their export sales by means of letters of credit opened by foreign buyers
with Indonesian banks and collected through Indonesian banks.
1
Bill Sullivan, Senior Foreign Counsel with Christian Teo & Partners and Senior Adviser to Stephenson Harwood LLP.
2
Bill Sullivan is the author of “Mining Law & Regulatory Practice in Indonesia – A Primary Reference Source” (Wiley,
New York & Singapore 2013), the first internationally published, comprehensive book on Indonesia’s 2009 Mining Law
and its implementing regulations.
3
Copyright in this article belongs to Bill Sullivan and Petromindo.
4
This article may not be reproduced for commercial purposes without the prior written consent of both Bill Sullivan and
Petromindo.
5
This article appeared in the July – August 2019 edition of Coal Asia Magazine.
The BI Regulations were and, in the case only of BIR 17/2015, continue to be directed at
requiring exporters of certain natural resource products, including mineral products, to
receive their export proceeds through a domestic foreign exchange bank and report the
receipt of those export proceeds to BI.

These MoT and BI initiatives had and continue to have their origins in concerns about the
need to (i) protect Indonesia’s foreign exchange reserves and (ii) overcome income tax
avoidance/evasion by Indonesian exporters of natural resource products.

More recently, however, the Government has become much more concerned about
Indonesia’s current account position (i.e., the sum of the balance of trade or exports minus
imports of both goods and services plus net factor income plus next transfer payments)
(“Current Account”) which has shown a very substantial deficit (“Current Account
Deficit”) for several years now. Although the size of the Current Account Deficit fell in the
second quarter of 2019, the Current Account Deficit continues to be a major worry for the
Government as the existence of a large Current Account Deficit is typically viewed
negatively by international investors which tend to see a large Current Account Deficit as
evidence of poor government policy making. To the extent Indonesia’s large Current Account
Deficit becomes a significant source of concern for international investors, it exposes
Indonesia to the risk of large capital outflows, a weak currency and imported inflation.

Various reasons have been advanced for the persistent Current Account Deficit but
Indonesia’s unfortunate position, as a growing net oil importer in a time of rising oil prices, is
almost certainly one of the main reasons.

Eliminating or, at least, substantially reducing the Current Account Deficit has become an
increasingly important focus of the Government. According to reports in the popular press in
early July, the President openly criticized the Minister of Energy & Mineral Resources and
the Minister of State-Owned Enterprises, at a recent cabinet meeting, for not doing enough to
manage the Current Account Deficit by means of reducing Indonesia’s oil imports. This has
led to speculation that both Ministers may lose their positions as part of the President’s
appointment of a new cabinet when he begins his second term of office in October. If this
proves to be correct, it will be a very strong sign of just how concerned the Government in
general and the President in particular is about the persistent Current Account Deficit.

While economists disagree on the short-term value or otherwise of reducing imports, as a

partial solution to the Current Account Deficit, there is consensus that increasing exports is
the key to successfully managing the Current Account in the medium to long term.

Indonesia, however, only receives the full Current Account benefit of increasing exports if
the proceeds from those exports are repatriated to Indonesia. If, instead, all or a substantial
part of the export proceeds are kept overseas, rather than being repatriated to Indonesia, any
success Indonesia has in increasing exports will not be fully reflected in an improving
Current Account position.

Increasing the proceeds actually received by Indonesia from the export of natural resources,
including mineral products, was an important part of the 16th Economic Reform Policy
Package announced by the Coordinating Ministry of Economic Affairs in November 2018.
This was followed soon after by the issuance, in January 2019, of Government Regulation

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No. 1 of 2019 re Export Proceeds from Exploration, Management and/or Processing of
Natural Resources (“GR1/2019”).

Supervision of the implementation of GR 1/2019 is shared jointly by the Ministry of Finance

(“MoF”), BI and the Financial Services Authority (“OJK”).

The Government has now introduced additional measures to ensure compliance with GR
1/2019. These additional measures are set out in MoF Regulation No. 98 of 2019 re
Administrative Sanctions for Violation of the Obligation to Repatriate Foreign Exchange
from Export of Natural Resources (“MoFR 98/2019”).

Readers interested in knowing more about the Government’s previous efforts to ensure the
repatriation of export sales proceeds and manage the Current Account Deficit are referred to
the writer’s earlier articles on these issues being (i) “New Mineral and O&G Export L/C
Requirements – Exercising Market Power and Trying to Cover the O&G Revenue Shortfall”,
Coal Asia Magazine, February – March 2015, Petromindo and (ii) “New Challenge to Energy
& Mining Policies – Current Account Deficit Woes”, Coal Asia Magazine, October –
November 2018, Petromindo.

ANALYSIS & DISCUSSION

1. Overview of GR 1/2019 and MoFR 98/2019

GR 1/2019 provides that, subject to a couple of minor exceptions, proceeds from the
export of products resulting from the exploration for, management and processing of
certain natural resources (“Natural Resource Products”) (“DHE SDA”) must be:

(a) deposited in a special DHE SDA account opened by the exporter with an
Indonesian foreign exchange bank (“Forex Bank”) (“DHE SDA Account”)
(“DHE SDA Account Requirement”);

(b) not later than three months after the filing and registration by the exporter of a
declaration (“PEB”) in respect of the relevant natural resource product export
transaction; and

(c) only used for certain specific purposes (“Permitted Uses Restriction”).

The only exceptions to the DHE SDA Account Requirement are in respect of DHE
SDA (i) generated by the Government itself and collected through BI or (ii) in the
form of cash received by an exporter domestically and accompanied by appropriate
supporting documents.

Forex Banks do not include overseas branch offices of banks headquartered in

Indonesia.

MoFR 98/2019 imposes significant financial penalties and administrative sanctions

for non-compliance with the DHE SDA Account Requirement, the Permitted Uses
Restriction and other obligations.

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 GR 1/2019 came into effect on 10 January 2019 while MoFR 98/2019 came into
effect on 1 July 2019.

MoFR 98/2019 needs to be read in conjunction with GR 1/2019.

2. Key Provisions

2.1 Relevant Natural Resource Products: The relevant Natural Resource Products are
those from the Indonesian mining, plantations, forestry and fisheries sectors.

It would seem, however, that it is not exports of all Indonesian mining, plantation,
forestry and fishery products that are subject to the DHE SDA Account Requirement
but, rather, it is only exports of those particular Indonesian mining, plantation,
forestry and fishery products specified by the Director General of Customs & Excise
(“DGoCE”), on behalf of MoF, that are subject to the DHE SDA Account
Requirement. In this regard, DGoCE is given express authority to determine or
specify the relevant Natural Resource Products.

2.2 DHE SDA: The relevant exporter must ensure that the DHE SDA amount (i.e., net
sales proceeds), in respect of a particular export transaction and deposited in its DHE
SDA Account (“DHE SDA Amount”), is consistent with the export value shown in
the previously registered PEB in respect of that export (“PEB Value”).

Where the DHE SDA Amount is less than the PEB Value by not more than 10% in
the case of mineral products or not more than Rp50,000,000 in the case of other
Natural Resource Products, this will be considered sufficient compliance and without
having to provide any supporting documents to explain the difference.

Where, however, the DHE SDA Amount is less than the PEB Value by more than
10% in the case of mineral products or more than Rp50,000,000 in the case of other
Natural Resource Products, this will only be considered sufficient compliance if the
relevant exporter is able to explain the reason for the greater difference by way of
submission of supporting documents to the relevant Forex Bank and such difference is
attributable to one or more of a number of specified factors.

2.3 Permitted Use of DHE SDA Accounts: Exporters, with DHE SDA Accounts, are
restricted in what use they may make of the export proceeds or DHE SDA once the
same are deposited in their DHE SDA Accounts. More particularly, DHE SDA
Account balances may only be used for:

(a) payment of export duties and other official fees related to export activities;

(b) repayment of loans;

(c) payment for imports;

(d) distribution of profits and dividends; and

(e) other investor needs recognized by Law No. 25 of 2007 re Investment

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 including:

(i) purchases of materials and goods, including capital goods, required to

protect the sustainability of capital investment;

(ii) financing of capital investment;

(iii) royalties;

(iv) technical assistance payments;

(v) project contract payments; and

(vi) fees for the use of intellectual property rights (together, “Permitted
Uses”).

It is not clear, however, to what extent, if any, the Permitted Uses are confined to
activities related to the exporter’s business activities of exploring for, managing and
processing Natural Resource Products intended for export or whether, instead, the
Permitted Uses extend to any business activities of the relevant exporter even if those
activities are unrelated to Natural Resource Products.

The Permitted Uses Restriction also does not make clear to what extent, if any, the
Permitted Uses are confined to onshore Permitted Uses or also include offshore
Permitted Uses.

2.4 Use of Escrow Accounts: Where the Permitted Uses are to be funded through an
escrow account, the relevant escrow account must also be with a Forex Bank
although, it would seem, not necessarily the same Forex Bank where the relevant
DHE SDA Account is maintained.

In the event the relevant escrow account has already been opened overseas, the
exporter must move the escrow account to Indonesia before any payments in respect
of Permitted Uses may be made using that escrow account.

The constraints on funding Permitted Uses through escrow accounts (together,

“Escrow Account Obligation”) are obviously intended to make it impossible or at
least more difficult for exporters to circumvent the Permitted Uses Restriction by not
making payments for claimed Permitted Uses directly from the relevant DHE SDA
Account but, rather, through third party accounts.

2.5 Reporting and Supervision: Exporters are obliged submit reports, to the Forex
Banks where their DHE SDA Accounts are maintained, on (i) the PEB Values of their
exports of relevant Natural Resource products and (ii) the uses they make of their
DHE SDA Account balances (together, “Exporter Reports”).

BI, through its oversight role in respect of Forex Banks, supervises compliance by
exporters with the DHE SDA Account Requirement and the Permitted Uses
Restriction.

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 Forex Banks are meant to report, in turn, to BI any non-compliance with the DHE
SDA Account Requirement and the Permitted Uses Restriction as evidenced by what
is disclosed to them in the Exporter Reports.

OJK supervises compliance by exporters with the Escrow Account Obligation. OJK is
meant to report to MoF any non-compliance by exporters with the Escrow Account
Obligation.

MoF has overall responsibility for supervising the implementation of GR1/2019 and
compliance by exporters with the DHE SDA Account Requirement, the Permitted
Uses Restriction and the Escrow Account Obligation.

2.6 Financial Penalties and Administrative Sanctions for Non-Compliance: In the

event an exporter fails to deposit DHE SDA in a DHE SDA Account and otherwise in
accordance with the DHE SDA Account Requirement, the relevant exporter is liable
to:

(a) pay a penalty equal to 0.5% of the DHE SDA amount not deposited in
accordance with the DHE SDA Account Requirement;

(b) receive an administrative sanction in the form of suspension of its right to

export; and

(c) ultimately (at least in theory) have its business license revoked.

In the event an exporter does not comply with the Permitted Uses Restriction, the
relevant exporter is liable to:

(a) pay a penalty equal to 0.25% of the DHE SDA amount that is used for
something other than a Permitted Use;

(b) receive an administrative sanction in the form of suspension of its right to

export; and

(c) ultimately (at least in theory) have its business license revoked.

In the event an exporter does not comply with the Escrow Account Obligation, the
relevant exporter is liable to:

(a) receive an administrative sanction in the form of suspension of its right to

export; and

(b) ultimately (at least in theory) have its business license revoked.

DGoCE, on behalf of MoF, is responsible for (i) calculating and imposing the
financial penalties and (ii) suspending export rights, in each case based on input from
BI or OJK as appropriate.

A literal reading of MoFR 98/2019 suggests that the administrative sanction will be
applied in two stages of increasing severity as follows:

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 (a) suspension of the next export transaction only of the relevant exporter if the
applicable financial penalty is not paid within 30 days of the first penalty
notification to the relevant exporter; and

(b) suspension, on an indefinite basis, of all export rights of the relevant exporter
if the applicable financial penalty is not paid within 30 days of the third
penalty notification to the relevant exporter.

Although not clear, it seems likely that the administrative sanction is not truly
independent of and in addition to the financial penalty but, rather, is simply designed
to put pressure on the relevant exporter to pay the financial penalty. If this is, indeed,
the case then, once the financial penalty is paid, the relevant exporter will be free to
resume its export activities.

The rationale for there being no financial penalty but, rather, only an administrative
sanction for non-compliance with the Escrow Account Obligation is hard to identify.

CONCLUSIONS & SUMMARY

The objective of GR1/2019 and MoFR 98/2019 is, apparently, to better manage the Current
Account Deficit rather that protecting the country’s foreign exchange reserves or reducing tax
avoidance/evasion by exporters. GR1/2019 and MoFR 98/2019, however, share a common
“macro objective” with earlier MoT and BI initiatives; namely, maximizing the economic
benefits that Indonesia and all Indonesians derive from the country’s natural resource exports
including mineral products.

The reporting and supervision process contemplated by GR 1/2019 and MoFR 98/2019 is
complex and involves multiple layers of review.

A very high degree of co-operation and co-ordination is surely going to be required among
Forex Banks, BI, OJK and MoF in order to properly “police” compliance with the DHE SDA
Account Requirement, the Permitted Uses Restriction and the Escrow Account Obligation.

In addition, the financial penalties for non-compliance with the DHE SDA Account
Requirement and the Permitted Uses Restriction are extremely modest.

Finally, there seems to be undue reliance on what may only be the temporary administrative
sanction of export right suspension in order to ensure payment of financial penalties and
without any lasting consequences for non-compliant exporters.

There must be a material risk that GR 1/2019 and MoFR 98/2019 have, together, simply
created a lot of extra compliance work, as well as a lot of associated extra cost, for reputable
exporters of natural resource products and Forex Banks without, however, necessarily doing
much, in any practical sense, to deter less reputable exporters of natural resource products
from avoiding their DHE SDA obligations.

Having regard to the foregoing, it is questionable just how effective GR 1/2019 and MoFR
98/2019 are likely to be, in practice, in ensuring repatriation and proper use of export

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proceeds or DHE SDA.

This further “tightening of the screws” on exporters may then, ultimately, do little to achieve
its intended objective of materially reducing Indonesia’s Current Account Deficit.

*********

This article was written by Bill Sullivan, Senior Foreign Counsel with Christian Teo &
Partners and Senior Adviser to Stephenson Harwood LLP. Christian Teo & Partners is a
Jakarta based, Indonesian law firm and a leader in Indonesian energy, infrastructure and
mining law and regulatory practice. Christian Teo & Partners operates in close association
with international law firm Stephenson Harwood LLP which has ten offices across Asia,
Europe and the Middle East: Beijing, Dubai, Hong Kong, London, Paris, Piraeus, Seoul,
Shanghai, Singapore and Yangon.

Get in touch

Bill Sullivan Christian Teo Claudius Novabianto

T: +62 21 5150 280 T: +62 21 5150 280 T: +62 21 5150 280

M: +62 815 8506 0978 M: +62 818 124 747 M: +62 818 0858 9235
E: bsullivan@cteolaw.com E: cteo@cteolaw.com E: cnbianto@cteolaw.com

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