The Indonesian market is a hub of geographical, cultural, and social diversity. It is the largest economy in Southeast Asia. However, the complexity of rules and regulations acts as a hindrance to businesses that wish to expand.
Therefore, what are these challenges and difficulties in hiring and managing the teams and setting up ventures?
Here’s a Skuad 101 guide that will answer these questions and give you an idea of setting up a subsidiary office and building remote teams with Indonesian talent.
Indonesian Rupiah, 1 IDR = 0.000068 USD
5.2% growth rate (2018)
Indonesia has 3 time zones, Western, Eastern, and Central.
- Sumatra, Java, West & Central Kalimantan: (GMT+7)
- Bali, Nusa Tenggara, South & East Kalimantan, Sulawesi: (GMT+8)
- Irian Jaya, Maluku: (GMT+9)
Full time (permanent), Contract & Freelance.
The employers in Indonesia writes the employee agreements in Bahasa, the official language of Indonesia.
Also, for non-Indonesian employees, the agreement is bilingual, with precedence given to the Indonesian version.
For contract employees, the contract can extend by one year, with a gap of 30 days between the expiry of an old contract and the commencement of a new one.
With over 4000+ tech startups, Indonesia is one of the most attractive markets and incubators for startups. Tech giants like GoJek, Uber, Facebook are taking leaps by relying on exceptional Indonesian tech minds.
Prestigious computer science institutes in Indonesia are at Institut Teknologi Bandung (ITB), Universitas Indonesia (UI), Institut Teknologi Sepuluh Nopember (ITS), University of Gajah Mada (UGM).
The majority of engineering talent in Indonesia is available in innovation hubs like Jakarta, Bandung, Yogyakarta, Tangerang, Surabaya, and Bali.
According to a report by Google-Temasek, the Indonesian internet economy will grow to $100 billion by 2025.
Thus, if you are a technology professional looking to be hired, connect with Skuad.
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Employment Laws in Indonesia
The minimum median hourly wage for a full-time & contract technology professional in Indonesia is IDR 210,000-280,000 ($15-20). For freelancers in Indonesia, the median hourly wage is IDR 430,000-580,000 ($ 30-40). Admittedly, these hourly rates can fluctuate depending on the years of experience and technology profile.
Indonesia follows standard working hours of 40 hours/week for full-time employees. Since a freelancer is not committed to an organization, no such clause applies to them.
In general, an employee can work overtime up to 14 hours/week or 3 hours/day. There are no payments made to full-time and contractual technology employees for each hour exceeding the defined working hours.
Indonesian employment law mandates 15 days of public holidays. Besides these, an employee receives 12 paid leaves/year. An employee cannot carry forward these leaves unless s/he has worked for at least a year with the organization.
Employees are entitled to be paid sick leaves in the case of illness or injury, evidenced by a medical certificate or statement. In case of prolonged sickness, leave entitlements are as follows:
Indonesia employment law mandates three months paid maternity leave (1.5 months before the birth & 1.5 months post-natal) to each female employee. On providing legal documents, the same rights are given to mothers under surrogacy & adoption arrangements.
Menstruation & Pregnancy Disability Leave
Female permanent & contract employees who have suffered an unfortunate miscarriage receive 1.5 months of paid leaves as a rest period. To claim the same, employees need to provide a medical certificate by an obstetrician.
They also get two paid leaves per month at the time of menstruation.
Male permanent & contract employees receive two days of paid paternity leave.
Employers must provide compassionate paid leaves to the permanent and contractual employees. Following are a few states of affairs:
The law allows a maximum of 3 months probationary period for a permanent employee. No such clause applies to contractual employees. During the probationary period, employers can terminate an employee without having to follow the general termination procedures.
Payroll and Tax Structure in Indonesia
Organizations pay full-time and contract employees once every month. They also pay salaries between the 5th and 15th of the month. Employers are subject to penalty rates for delayed payments capped at 50% of wages. For freelancers, payments are either processed on a half-and-half basis or post-completion of the project.
Employers have to provide monthly payslips to their employees for all payments and deductions. Employers must keep payroll reports for a minimum of 5 years. In the case of freelancers, they generate invoices monthly for any payment.
In Indonesia, the tax computation process is the same for permanent, contractual employees and freelancers. For a resident taxpayer, the net taxable income after the standard personal deduction is subject to the progressive tax bracket of 5% to 30% on income above IDR 50,000,000 ($3400). For non-resident employees, a flat tax rate of 20% is applicable.
NOTE: Indonesia tax year for most businesses runs from 1st January to 31st December.
A tax rate of 15% for resident taxpayers applies to income derived from dividends, interests, and royalties. For non-residents, a 20% rate is applicable unless reduced under the tax treaty.
Income Tax Returns (ITR)
Along with deducting taxes for each permanent & contract employee, an employer needs to facilitate ITR. Employer issues Form 1721-A1 to each permanent and contractual employee. This issued form serves as proof that the employer has withheld the employees’ taxes.
Freelancers access their taxable income and fill ITR accordingly. ITR filing extension is for a maximum of two months, and late tax payments are subject to a 2% tax penalty per month. In the case of late tax reporting, the administrative penalty is IDR100,000 ($6.80).
As of January 2019, the retirement age in Indonesia is 57 years which will keep increasing by a year every three years till it reaches 65 years in 2043.
Employers have to enroll their employees in a pension program. They contribute 2% of employee’s pre-tax monthly wages while the employee makes 1%. Employees receive old age security benefits when they retire or in case of permanent disability, death, or leaving Indonesia permanently.
Employees who have contributed ten years to the program can claim a certain percentage of benefit before retirement. An employee receives a lump sum amount if s/he contributes for less than 15 years.
Bouquet of Benefits
Healthcare and Social Security
Employers have to provide primary health care and social security to each employee who has completed more than six months with the organization. Badan Penyelenggara Jaminan Sosial (BPJS) is the public program, providing medical and old age coverage to all Indonesians.
This scheme unfolds in two parts; BPJS Kesehatan (Health Insurance) and BPJS Ketenagakerjaan (Social Security).
BPJS Kesehatan covers a maximum of five family members (employee, spouse, and three children) with contributions of 4% and 1% made respectively by employer and employee. Contractual employees are eligible for healthcare and social security benefits, while freelancers do not qualify for the same.
In general, Tunjangan Hari Raya (THR), or religious allowance, is the only bonus payment made by Indonesian employers. Employees under PKWT & PKWTT agreement with tenure over a month are eligible for the same.
THR is a 13th-month salary given to full-time and contract employees who’ve completed a year with the organization. A penalty of 5% is applicable for delayed THR payment.
For employers, the best time to hire new employees is post-Ramadan, as employees receive THR within seven days before the Idul-Fitr holiday. Asides from THR, it is not an obligation for an employer to pay any other bonuses unless stated otherwise.
The employer must give a 30 days notice period to terminate an employment contract. Further, there are certain payments made to the employee, except under serious offense:
- Severance pay- Depending on how long the employee has been working with the organization, they are entitled to severance pay.
Only permanent employees are eligible for a severance payment. If the employment agreement of a contractual employee terminates before its expiry, the employer has to pay compensation as stated in the contract.
- Appreciation Pay (UPMK)- It is a reward payment made to permanent employees to render long-time service to the organization.
- Reimbursement- This includes payment of pending annual leaves, employee relocation, travel expenses, etc.
- Separation Payment- A voluntary & contract-dependent payment.
An employee has to serve a month's notice period. On termination via resignation, the employee is not entitled to severance pay but may receive Uang Penggantian Hak (rights replacement) and Uang Penghargaan Masa Kerja (long tenure reward).
What it takes to set up an office in Indonesia
After learning about challenges in hiring employees, you must be wondering how to start a business in Indonesia. Setting up an office and doing business in Indonesia can be tricky. Factors to consider include location, language, and business type.
Since Indonesia is a decentralized country with varied rules, costs, and resources in different areas, an enterprise should connect with service providers like Skuad before starting the business setup process.
Law No. 40/2007 regulates foreign-owned companies, known as PT PMA, regarding LLC. BKPM (Indonesia Investment Coordinating Board) dictates the maximum percentage of foreign ownership. Following are the minimum vital requirements:
- Paid-up Capital: $175000
- 2 Shareholders (Corporate or Individual)
- 1 Commissioner
- 1 Director (Indonesian Resident with tax card, if not, then a nominee director is appointed till incorporation)
Representative Office (RO)
A representative office engages in market research, feasibility studies instead of trading and commercial activities. Only trading, construction services, oil, gas mining, and banking are only allowed to set up RO via authorization from BKPM and the government. Approval and registration can take anywhere from 3 weeks to 3 months.
Joint Venture (JV)
Joint Venture refers to partnering with Indonesian investor(s) to establish a business such that both parties jointly own the profits, losses, and management.
Sometimes, JV arises because the respective foreign company deals in a business that falls in the negative investment list, making a local partner a necessity.
To set up a JV, the application must consist of a written agreement between both parties on the structure, capital, equity, exit provisions, exclusivity, target timelines, etc.
Jakarta, Bali & Badung are major hubs for co-working spaces. A hot desk for each person costs around $50, whereas monthly studio memberships start from $200. Co-working space cost is low if we travel away from the center. Setting up virtual offices can be a lot cheaper and easier in Indonesia.
Value Added Tax (VAT) Registration
Businesses with an annual turnover of more than IDR 4.8 Bn have to register for VAT. 0% VAT applies to services like IT, R&D, consulting, etc., if requested from an overseas recipient & 10% if delivered locally. The foreign intangible goods and services provided via an e-commerce system impose a 10% VAT rate on Indonesia's Customs Area users.
Authorities issue businesses a 15-digit VAT TIN with the requirement to file returns monthly. Late returns and payments may attract a daily fine of 2% off the VAT due, plus an additional penalty of $34.
Corporate Income Tax (CIT)
For the year 2020-21, a flat 22% CIT will be applicable on net taxable income. From the year 2022 onwards, the rate would be 20%.
Following are the tax discount and subsequent effective rates for different companies:
Employment Visas for Indonesia
There are 2 types of employment visas: Izin Tinggal Terbatas (ITAS) and Kartu Izin Tinggal Tetap (KITAP). ITAS is a limited stay permit, while KITAP is a permanent stay permit for foreign workers who have held ITAS for three consecutive years.
Indonesia business visa requirements start with employers seeking approval from the government to hire foreign employees via SPT and RPTKA. IMTA is a work permit that allows foreigners to work in Indonesia for a year.
A limited stay permit called Visa Izin Tinggal Terbatas (VITAS) is a prerequisite for ITAS. Under new regulations, one can apply for both simultaneously. It costs the company around $1000 to $2000 to obtain ITAS.
Foreigners can apply for the KITAS and Blue Foreigners Registration Book that records the foreigner’s immigration status. It grants a stay of 2 years with validity extendable up to 2 years each time with a maximum stay of 6 years.
Your One-Stop Solution To Business Expansion In Indonesia
Business opportunities in Indonesia are umpteen. Whether you are a non-residential or residential business looking to hire in Indonesia, a global service like Skuad can be your go-to partner for successfully recruiting and managing.
We help connect remote technology talent to the most innovative companies globally, thereby helping them build exceptional tech teams.
Besides this, we also take care of permits, payrolls, and everything to help you expand your business! After all, isn't hiring a distributed team way better than handling and bearing in-office hassles and costs? Try for yourself!