Foreign Trade in the Indonesian Domestic Market

Under Government Regulation No. 36 of 1977 on the Termination of Foreign Business Activities in the Trade Sector, foreign companies and individuals were prohibited from engaging in any form of direct trade in the Indonesian domestic market, which had been allowed over the last decade. In order to spur the development of local enterprises and shift the import-substituting pattern of industrialization during the oil-boom of the early seventies to an export promoting one, foreign companies and individuals in the trade sector were restricted to either (a) appointing Indonesian Agents and/or Distributors to channel their goods and/or services and/or (b) establishing a Representative Office for trade promotion activities and exports. Similarly, the Indonesian Government began to require Government agencies, including the state-owned oil company, Pertamina, to deal through Indonesian agents when importing goods and/or services.
While the general rule remains today identical, it has been a little bit relaxed. Although the legislative framework must still be cleaned up and made intelligible, among others by revoking some clearly conflicting laws and providing comprehensive definitions of legal terms, the recent issuance by the Ministry of Trade of a set of regulations dealing with the licensing of Representative Offices and Agents/Distributors could be the sign of new impetus in that direction.

I. Presidential Decree No. 118 of 2000

In line with Government Regulation No. 36 of 1977, Presidential Decree No. 118 of 2000 (the “Negative List”), which lists in broad categories the sectors of the economy closed to FDI, stipulates that trading and trading supporting services are, as a rule, closed to investments in which a part of the shares is owned by foreign companies and/or individuals. The Negative List does, however, allow some important exceptions, such as, inter-alia, large-scale retail (malls, supermarket, department stores and shopping centers) and wholesale trading (distributors/wholesalers, exporters and importers).

The Negative List must be read in conjunction with Presidential Decree No. 127 of 2001. The latter reserves some business activities to Small-Scale Enterprises while others are opened to Medium and Large-Scale Enterprises under the condition that they enter into a Partnership (i.e., inter-alia, share participation, sub-contracting, franchising or agency) with a Small-Scale Enterprise. The obligation to enter into a Partnership applies, among others, to retail trade of large scale and other services covering modern markets such as malls, department stores, hypermarket or shopping centers.

The Negative List contradicts a higher-ranking Government Regulation No. 15 of 1998, which allows companies established under foreign capital investment in the production sector to sell their products to end-consumers through joint-ventures set up as retailers, in association with Indonesian capital. However, law-applying agencies seem to consider that the Negative List prevails over all sort of conflicting regulations and that the fact that these may not have been formally revoked yet should not constitute an obstacle.

II. Representative Offices

MoT Regulation No. 10/M-DAG/PER/3/2006 on the Provisions and Procedures for Issuing Trade Business License of Representatives of Foreign Trade Companies dated March 26, 2006 (“Decree 10”) revokes and replaces the prior MoT Decree No. 402 of 1997.

Both Indonesian and foreign citizens can be appointed by foreign trade companies as their representative in Indonesia, to undertake promotional activities, market research, and sales supervision. Representatives of foreign trade companies are prohibited from carrying trading activities and selling transactions, including submitting tenders, signing contracts or settling claims. However, they are explicitly allowed to close contracts for and on behalf of the appointing companies with companies in the country in the framework of export.

Decree 10 changes actually very little to the existing legislation. It sets a limit of three (3) years, renewable, to the period of validity of the Representative Office License (“SIUP 3A”), and hence probably increases red tape, and allows without restriction the opening of head or branch offices in capitals of regencies and cities throughout the Indonesian territory whereas the former Decree allowed such establishment only in capitals of provinces.

Decree 10 continues to categorize representatives into “selling agents”, “manufacturing agent” and “buying agents”, and thus unfortunately drags on the confusion on the term “Agent” which is used in another sense in other regulations.

III. Agents and Distributors

While under Government Regulation No. 36/1977 registration of an Indonesian Agent or Distributor with the MoT was voluntary (it was however a prerequisite for participating to Government procurements), it is now a mandatory requirement under the recent MoT Regulation No. 11/M-DAG/PER/3/2006 dealing with the licensing of Agents and Distributors of Goods and/or Services (“Decree 11”).

Decree 11 confirms that (a) foreign producers and suppliers, whether established inside or outside Indonesia, (b) foreign investment companies operating as distributors/wholesalers and (c) representative offices of foreign trade companies are required to appoint, a “National Trading Company” to act as their Agent and/or Distributor, for the “marketing” (purely promotional activities, however, can still be assigned to a local Representative) and/or sale of their products to end-users, respectively.

Although the term “National Trading Company” is not defined in the regulation, MoT officials understand it at the moment as referring strictly to wholly-Indonesian owned limited liability companies (“PMDN”).

The term “marketing” used in Decree 11 must be understood so as to cover both promotional activities (i.e., the sense in which it is used under Decree 10) and closing contracts for and on behalf of the principal.

An Agent is defined as a “National Trading Company acting as mediator to act for and on behalf of the principal on the basis of an agreement to undertake marketing without transferring rights to physic of goods and/or services owned/controlled by the appointing principal”. In other words, an Agent can both carry promotional activities and sign contracts on behalf of the principal. It cannot, however, own and/or store goods belonging to the principal and deliver these and/or services directly to the Indonesian consumer.

A Distributor is a “National Trading Company acting on the basis of an agreement with the principal to purchase, store, as well as market goods and/or services owned/controlled”.

Decree 11 provides that the principal can decide to appoint an Agent or Distributor as, respectively, sole Agent or sole Distributor and all of these can in turn appoint Sub-Agents/ Distributors, whose activities are strictly limited to undertaking marketing.

The Agent or Distributor Registration Identity (“STP”) delivered pursuant to the procedure organized in Decree 11 is valid for a period of two (2) years, renewable. Agents and Distributors are, among others, obliged to convey corporate activity reports every six (6) months to the Director of Business Development and Corporate Registration of the MoT.

Under Decree 11, the severance of an Agent or Distributor agreement is allowed by mutual consent or in the following cases: dissolution of the company, discontinuation of business, transfer or the agency or distributorship right, bankruptcy and expiration of the term of the agreement. While it can therefore still be quite difficult to get out of a bad relationship, Decree 11 provides a welcomed innovation in that in the case that a clean break cannot be achieved within three (3) months as from the date of termination of an Agent or Distributor agreement, the challenged SPT will be declared ineffective thus allowing the principal to appoint a new Agent, Sole Agent, Distributor or Sole Distributor, and preventing that the paralysis of the concerned trading activities.

While Decrees 10 and 11 may mark the beginning of a fresh new elaboration of the legislative framework for Foreign Trade in the Indonesian Domestic Market, there remain many efforts to be done in order to make it intelligible. Consistent definitions and respect of the hierarchy of norms, in particular, would be a welcome step which would secure some legal certainty and undoubtedly promote trade – if that is the intention.