EuroCham Indonesia - EUROPEAN BUSINESS CHAMBER OF COMMERCE IN INDONESIA

COMPANY LAW

On 20 July 2007, the House of Representatives endorsed the New Company Law UU 40:2007. Article 74 of the new law makes social responsibility compulsory for certain corporations operating in Indonesia, adding complexity to the corporate law regime. The move came as lawmakers warned Indonesian businessmen about not complying with environmental standards and using voluntary CSR as a public-relations instrument.

Although the CSR regime was initially meant to cover all Limited Liability Companies (LLCs) and involved a mandatory contribution of up to 5% of a company's net profit, strong opposition from the business community forced parliament to re-establish the jurisdiction of the bill to preserve the balance needed to continue attracting foreign investment. As a result, paragraph 74 of the bill now states that only companies operating in the natural resources sector and companies producing hazardous waste such as that produced by hospitals must comply with CSR rules. The new bill does not specify exact percentages of profit to be diverted to CSR programmes, but the tax deductibility of such CSR contributions has been assured. The government made clear its prerogative remains to promote foreign investment despite the new rules.

The fact that the corporate law segments between resource-based companies and others, means that the legislature has created two categories of corporations, this has received severe criticism as the measures contradict the notion of a level playing field initially endorsed in the 1995 Corporate Law.

The business community is waiting for the implementation of regulations, due to follow in the near future, as actual figures on the amount of funding that would have to be dedicated to CSR and sanctions for non compliance have not yet been defined.

In the context of regional decentralisation, the implementation of the law could overlap on the existing environment law and various regulations imposed at the local level, further complicating the procedures.

Source: Oxford Business Group briefing on Indonesia: CRS Duty, 3 August 2007