The Indonesia-Singapore Bilateral Investment Treaty Comes into Effect
The latest Indonesia-Singapore Bilateral Investment Treaty (BIT) came into effect on March 9, 2021, and replaces the previous BIT, which was signed in June 2006 and expired in June 2016.
Under the treaty, investors from both countries will enjoy specific legal protection, such as access to international arbitration, thus safeguarding investments and boosting investors’ confidence. The treaty complements the updated double taxation avoidance agreement (DTAA) signed in February 2020 between the two countries.
Through the upgraded DTAA, the tax rate on branch profits was reduced from 15 to 10 percent, and the tax rate on royalties for copyrighted works of literature, arts, and film, and eight percent for the use of industrial, scientific, or commercial equipment was lowered from 15 to 10 percent.
Indonesia and Singapore have substantive cooperation across a wide range of sectors with bilateral trade reaching S$48.8 billion (US$36.3 billion) in 2020. Further, despite the pandemic, Singapore continued to be Indonesia’s top source of foreign investments in the same year, totaling US$9.8 billion; an increase from US$6.5 billion in 2019.
Indonesia’s Foreign Minister, Retno Marsudi, stated that the BIT can improve two-way investments by between 18 to 22 percent in the next five years, potentially translating to over US$200 billion worth of investments by 2030.
The new BIT provides several new provisions covering areas such as the most-favored-nation (MFN) treatment, the introduction of a multi-tiered dispute resolution mechanism, and the broadening of protection for investments.
The BIT guarantees the protection of investments in existence as of March 9, 2021, and investments made thereafter.
These investments have been broadly defined to include stocks, shares, and other forms of equity in an enterprise, as well as claims to money related to a business and under contract having economic value. However, the investment must have the ‘characteristics of an investment such as expectations for profits, and commitment to capital’.
Holding companies will not be entitled to protection if they do not have a significant business operation in their home state. This means that investments held in Singapore by an Indonesian-incorporated company with no business operations in Indonesia will not be protected, and vice-versa.
Further, investors from third countries that do not hold diplomatic relations with either Singapore or Indonesia may not be entitled to protection. For instance, Israeli investors who make investments in Indonesia via Singapore will not be protected as Indonesia does not have diplomatic relations with Israel.
This article was first published by AseanBriefing which is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia from offices across the world, including in in China, Hong Kong, Vietnam, Singapore, India, and Russia. Readers may write to [email protected]