The Indonesia-Singapore Bilateral Investment Treaty Comes into Effect
- The Indonesia-Singapore Bilateral Investment Treaty (BIT) came into effect on March 9, 2021, and updates the rules on the treatment of investments from both countries.
- The BIT introduces a multi-tiered dispute resolution mechanism, as well as broadens the criteria for the protection of investments.
- Two-way investments are expected to increase between 18 to 22 percent in the next five years under the BIT.
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.
What are the key provisions under the Indonesia-Singapore Bilateral Investment Treaty?
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.
Existing investments are protected while investment criteria are broadened
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’.
Which type of investments will not be entitled to protection under the Indonesia-Singapore BIT?
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.
The new treaty sets out a multi-tiered dispute settlement mechanism that comprises mediation, consultation, and international arbitration. Mediation is voluntary and this comes at the expense of the parties involved.
In the previous treaty, investors only had the option of using an external body to resolve any disputes, such as a local court in the host country, going to any regional arbitration center in ASEAN, or arbitration by the ICSID.
Investors now have the option to resolve disputes through arbitration under the International Centre for Settlement of Investment Disputes (ICSID), or any other arbitral institution, or rules, that satisfies all parties.
Furthermore, investors also have the right to request to review the arbitral tribunal’s draft award, which is limited to the ‘disputing investor’.
Certain restrictions on the transfer of investments
The treaty allows the investors to freely transfer investments in and out of the host country; however, certain transfers are prohibited. These are:
- Securities, futures, options, and derivatives;
- Bankruptcies and insolvencies;
- Criminal offenses;
- Financial reporting; and
- Social security and severance.
In addition, the treaty allows for a country to restrict the transfer, or capital movement for investments if the country is experiencing economic difficulties.
Most favored nation treatment
Under this principle, both countries are not required to extend MFN privileges or preferences to the other based on BITs signed before this new BIT, or with a non-party in the same geographical region.
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