Bank Indonesia has been requiring export proceeds to be disbursed through a licensed foreign exchange bank (FX Bank) in Indonesia for several years now1 . However, on 10 January 2019, the Government issued a new regulation that further tightens control over export proceeds of natural resources (Export Proceeds). As a result, these proceeds must be parked onshore, and can only be sent offshore for specific purposes. While previously, a number of schemes were introduced to immediately bounce export proceeds through FX Banks in Indonesia, at the very least, these arrangements will need to be reviewed.
These new requirements are set out in Government Regulation No. 1 of 2019 on Export Proceeds From Exploitation, Management and/or Processing Activities of Natural Resources (GR 1/2019). The regulation was issued to bolster Indonesia's foreign exchange reserves.
What sectors are covered
GR 1/2019 applies to Export Proceeds from mining (including coal, minerals and oil and gas), plantation, forestry and fisheries business activities. The Minister of Finance will issue further regulations to specify the types of goods that are subject to GR 1/2019 following further input from the relevant ministries.
What are the obligations?
GR 1/2019 provides that Export Proceeds must be deposited into a specific account maintained with an FX Bank in Indonesia (Proceeds Account). This is a bank which is licensed by the Financial Services Authority (OJK) to carry out activities in foreign currencies (including foreign bank branch offices in Indonesia); it does not include an offshore branch office of a bank whose head office is located in Indonesia. This must be done no later than the end of the third month after the registration of the relevant export notice - i.e., PEB (Pemberitahuan Ekspor Barang).
The exporter may only use the Export Proceeds placed in the Proceeds Account for payments of export duties and other export-related levies, loan repayments, to acquire imported goods, pay dividends and other investment purposes regulated under Article 8 of the Investment Law2 . In order to remit the Export Proceeds overseas, the exporter will need to provide the relevant underlying documents.
In addition, if the payment is made through an escrow account, the exporter must use an escrow account maintained by an FX Bank in Indonesia. Payment through an existing offshore escrow account is only permitted until 10 April 2019.
Key impacts of the regulation?
The regulation will affect those businesses who - for risk management reasons - prefer to offshore their funds as soon as they are received. It will also impact lenders, who prefer to take security over offshore collection accounts, rather than onshore ones. While foreign currencies can still be repatriated, there will need to be an underlying reason along with the relevant supporting documents to do this. Accordingly, it may be necessary to create collection accounts and place security over them in Indonesia, and to increase reserve amounts held offshore and to classify these as loan prepayment amounts. We expect that the implementing provisions to be issued by the Minister of Finance and Bank Indonesia will provide further clarity on feasible financing and structuring options.
The Minister of Finance will supervise the implementation of exports of goods which are subject to GR 1/2019. Bank Indonesia and the OJK will supervise the implementation of the requirement to place Export Proceeds into Proceeds Accounts and escrow accounts maintained by FX Banks respectively.
In this connection, we understand that Bank Indonesia will soon issue a new regulation to implement GR 1/2019. The new Bank Indonesia regulation will likely provide, among other things, technical procedures for opening of a Proceeds Account, requirements for incoming and outgoing transfers through Proceeds Accounts and Bank Indonesia's supervisory role.
Non-compliance with the obligations under GR 1/2019 will be subject to
administrative sanctions, including administrative fines, export prohibitions
and/or the revocation of business licenses.
1 e.g., under Bank Indonesia Regulation No. 16/10/PBI/2014 (as amended) and Bank Indonesia Circular Letter No. 16/9/DSTA Tahun 2014, including through the use of letters of credit for exports of coal sales.
2 Article 8 (3) of Law No. 25 of 2007 on Investments gives rights to investors to transfer and repatriate foreign currencies overseas for, among others, the following purposes: (a) capital; (b) profits, bank interest, dividends and other income; (c) purchases of raw and auxiliary materials, semi-finished and finished products; and replacements of capital goods required to maintain the investment; (d) investment financing; (e) loan repayment; (f) payment of royalties or other expenses; (g) employee salaries; (h) proceeds of sales or liquidation of an investment; (i) compensation for losses; (j) compensation in the case of nationalization; (k) payments for technical assistance; technical and management services; project contracts; and intellectual-property rights; and (l) proceeds of asset sales.