The Cost of Doing Business in Indonesia: The Role of Inflation

The Cost of Doing Business in Indonesia: The Role of Inflation

The island nation of Indonesia has become one of the most desirable locations for business processes. Indonesia has stable economic growth with their regulations continually being eased and erased. An example of this is the Omnibus law. This law introduces regulations that provide corporate tax cuts from 25% to 22%, which are meant to enhance corporate sector growth. Due to this, Indonesia’s startups, as well as large state-owned enterprises, are able to create more valuable stock market listings. This article will explore the costs of forming an LLC in Indonesia and how inflation affects this.

Penanaman Modal Asing

In Indonesia, a wholly or partially foreign owned LLC, is known as a Penanaman Modal Asing (PMA). PMAs are governed by the Foreign Capital Investment Law and are required to get approval from the Capital Investment Coordinating Board before it is permitted to conduct business in Indonesia. PMAs have a wide range of characteristics, such as:

- Depending on the type of business, the majority of the ownership may be foreign. But this ownership percentage is dependent on which industry the Indonesia company incorporation is in.
- A minimum 1 director, at least 2 shareholders and a commissioner is required.
- If the PMA is wholly foreign owned, the owners are legally required to sell at least 5% of the shares of the company to an Indonesian entity or person. This has to be done within 15 years of the enterprise being established.
- Depending on the activity of the Indonesia company incorporation, specific licenses may be needed from local authorities.
- Foreign owned companies are able to sponsor work permits and stay visas for their foreign employees.
- Although Indonesia allows foreign businesses, there are certain industries and sectors that foreigners are restricted from entering. They may be allowed to enter once they have met certain requirements to participate in.

Forming an LLC, or rather a PMA, in Indonesia allows 100% foreign ownership of certain company types while granting favorable business conditions for importing goods. Indonesia has also concluded over 65 Double Taxation Treaties which has made the country an ideal location for international businesses while their continued foreign investment promoted the growth and development of their service sector. Indonesian entrepreneurs may also choose to start an LLC on American soil, should they meet state requirements. For this reason, choosing Florida LLC formation services may well be preferred, as pointed out by The Really Useful Information Company (TRUiC).

Cost of forming a PMA

A PMA requires a minimum investment of just over $700 000 in Indonesia. This applies to all business sectors and the amount of minimum investment excluding the value of the land and buildings owned by the company. Additionally, foreigner business owners would also be required to pay a capital requirement of at least $175 000 to form a PMA in Indonesia.

The role of inflation

According to Bank Indonesia, Indonesia’s July annual inflation rate has risen from 1.45% to 1.52%. The country’s inflation has been below the central bank’s target range of 2% to 4% since mid-2020. This is due to the pandemic resulting in a decrease of domestic demand. An increase in inflation erodes the purchasing power which in turn causes a price increase. When this happens, the general response of consumers and businesses is to purchase goods and services as soon as possible to get the most value for money. This response to the rising inflation may be damaging by possibly causing a feedback loop. By business owners and businesses spending more money at a faster rate to maintain a decent value for money, the supply of money passes the demand. This then causes the price of money and the purchasing power of currency to fall even faster.

For existing PMA owners, their staff may request salary increases above the rate of inflation. This may lead to higher business costs, which would then contribute to a further rise in inflation. The rising rate of inflation in Indonesia, may also affect businesses that trade overseas. Higher inflation means higher prices of goods, seeing a decrease in demand for goods from Indonesia. Aspiring PMA owners may see this is a negative factor that may halt their decision to form a PMA in Indonesia.

The bottom line

Forming a business in Indonesia is an extremely attractive prospect because of all the benefits it offers. Although the low startup costs make Indonesia a fertile ground for business formation, rises in inflation may scare off entrepreneurs.

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