It may surprise you to learn that Indonesia is the fourth most populous country in the world, behind only China, India and the United States. With such a large population, it represents a huge opportunity for investment by international businesses looking to expand into Asia.
Driven principally by energy, agriculture, and car manufacturing, Indonesia’s populace of more than 270 million people have enjoyed excellent financial growth in recent years: the total national GDP is now worth around seven times what it was in 2000. This is thanks to a gradual move towards more pro-market policies by the Indonesian authorities, with a resulting influx of investment from overseas companies. Combine this with relatively low wages, and the potential for business success is huge.
However, this potential is not without its complexity. As is the case in many countries in the region, there is considerable bureaucracy to navigate from business, financial and payroll perspectives - so much so that it can be too much of a burden to handle in-house. To give you a clearer idea of how best to set up in the country, this guide covers the most important elements of running payroll in Indonesia.
The first barrier to setting up a business in Indonesia is the requirement to have a large amount of paid up capital. For a limited liability company (known as a PT), this can be anywhere between US$3,745 (approximately £2700, €3100) and US$748,740 (approx. £540,000; €630,000), depending on the size of the company. For a foreign-owned LLC (known as a PMA), an investment plan for at least US$1.2 million (approx. £860,000; €1 million) has to be presented, with at least 25% as paid-up share capital.
The set-up process is long and complex, including:
- Clearing the company name at the bank
- Obtaining company deeds through a notary
- Gaining approval for deeds with the Ministry of Law and Human Rights
- Obtaining Domicile Certificates for the company and for building management
- Payment of legal services fees
- Obtaining a company registration certificate and business trading license
- Registering with Ministry of Manpower
- Applying for healthcare insurance, tax registration number, VAT collection and social security
This process takes a long time - as much as three months - but the fees involved are nominal: no more than a few hundred pounds, dollars or euros in total.
Companies do not need to set up a bank account in Indonesia but it is highly encouraged. You will need the initial approval from BKPM, a tax number, a Deed of establishment, and a domicile letter. Additionally, a power of attorney and proper identification is necessary. The whole process should take about a week to set up.
Paperwork in Indonesia is notoriously lax when it comes to hiring employees, but you will need to have a registered contact with the Ministry of Manpower if you plan to hire someone on a temporary basis.
Collective bargaining is becoming more common in Indonesia, and so dealing with trade unions is becoming a bigger priority in wage discussions. There can be only one agreement for the entire enterprise. Agreements are valid for two years, and negotiations can start three months before expiration. If wage growth and bonuses are not written out in those agreements, then it is up to the employee and employer to negotiate the terms.
Employees can work a maximum of 40 hours per week. Females under 18, and pregnant women whose health would be at risk if they work, are not allowed to work between 11pm and 7am. Overtime is limited to three hours per day and 14 per week, paid at the rate of 1/173 of the employee’s monthly salary for every hour worked. Every employee should be given at least a 30-minute break for every four hours worked.
Compensation, Bonuses and Severance
There is no national minimum wage in Indonesia. There are minimum wages set for different industries in each of Indonesia’s 33 provinces, but these only apply for the first year of employment. After this, wages are agreed between employee and employer by negotiation.
Each year, employees who have worked the full year are entitled to the Tunjangan Hari Raya (religious allowance) bonus. This is worth one month’s salary and must be paid at least a week before the Eid-ul-Fitr public holiday; the date of this varies as it moves forward by approximately ten days every year. Other discretionary bonuses are also permitted.
Notice periods are generally 30 days, although several conditions apply (for example, a case of gross negligence must be proved in criminal court). Severance pay is one month’s salary per year of service up to a maximum of nine months pay, plus service appreciation pay of two months’ salary for the first three years of service, then one month for every three years thereafter, up to a maximum of ten months’ salary. However, it is important to note that these severance payments are taxed at special rates.
Tax and Social Security
Income tax in Indonesia is levied progressively across four bandings:
- The first 50 million Indonesian rupiah (£2500; $3450; €2900) per year is taxed at 5%
- Beyond this up to INR 250 million (£12,500; $17,250; €14,500): 15%
- Beyond this up to INR 500 million (£25,000; $34,500; €29,000): 25%
- Beyond INR 500 million: 30%
Corporate tax is levied at 22%, but this is due to be cut to 20% from the 2022 fiscal year onwards. Public companies with at least 40% of shares listed and meeting other conditions can reduce their rate by 3%. VAT is applied at 10%, with some exceptions, including the export of goods and services.
Social security contributions are made in five different areas:
- Working accident protection: employer 0.24%-1.74%
- Death insurance: employer 0.3%
- Old age contribution: employer 3.7%, employee 2%
- Healthcare: employer 4%, employee 1%
- Pension: employer 2%, employee 1%
Holidays and Leave
Paid leave entitlement is 12 days per year for all employees with at least one year of service. Employees are also entitled to paid time off on the 14 days of public holidays observed in Indonesia each year. In addition, workers are permitted to take personal leave for baptisms, weddings, and deaths.
Maternity leave entitlement is three months, divided equally pre- and post-birth, paid at normal rate. Paid paternity leave entitlement is two days.
Employees are entitled to paid sick leave if they can produce medical certification for it. Sick pay runs at 100% of salary for the first four months, 75% for the next four months, 50% for ninth to 12th months, then 25% beyond that. Female employees are also entitled to two days of menstrual leave, should they need it.
A large, low-wage, high-growth economy is always exciting for international businesses looking for expansion, and especially so in the case of Indonesia as its potential remains unexplored compared to many other countries in the region. But as this guide demonstrates, moving into Indonesia is a complex and bureaucratic undertaking, one where country-specific expertise is absolutely essential. This is where partnering with a global payroll company can really prove its worth, helping you keep up with regulations and avoid legal issues or audits further down the line.
This article is for informational purposes only and not intended to convey or constitute legal or any other advice. It is not a substitute for advice from a qualified professional.