Doing Business in Singapore vs Indonesia
This article will cover the feasibility of doing business in Singapore and Indonesia and compare different aspects such as workforce, taxation, and business environment.
Which country will be one step ahead, and which country will be better for foreign investors in the long run?
Country Background – Indonesia
Renowned as the world's largest archipelago and boasting over 17,500 islands, there's no doubt that Indonesia is an emerging market. Globally, Indonesia is ranked 16th in the major economy and the biggest in Southeast Asia.
It's still democratically young and does an excellent job of maintaining political stability. Economic growth and urbanization are the driving forces for infrastructure demand, and the country's main exports are minerals and petroleum.
The country is still classified as a new industrial economy, so the government is committed to changing its investment scene to draw in foreign investment.
More sectors are reopening for investment, and various improvements have been made to the public sector to minimize red-tape processes.
Country Background – Singapore
Singapore is a small city-state, but make no mistake, it's a formidable economic force and carries a strong and positive reputation for doing business.
Singapore is ranked as the 4th most prosperous country globally based on GDP per capita. Singapore is a country with a highly developed and trade-oriented economy, relying on human capital and innovation to compensate for the lack of access to natural resources.
Singapore is highly successful in the engineering, manufacturing, financial, and biotechnology industries. The country is influential when it comes to policy-making. Combining this with its diverse economy and free trade philosophy, you get a government that constantly attracts foreign investors.
Governance and Transparency
For foreign companies and local business entities, corruption is one of the major concerns for incorporating their business in Southeast Asia.
The Corruption Perceptions Index by Transparency International ranks Singapore at 84/100, getting the highest score of all Asian countries and putting it at par with Sweden.
On the other hand, Indonesia scores 37/100, putting it at par with Colombia. With inefficient civil servants in their government, it doesn't surprise me when we say that it's slow to start a business in Indonesia. However, the Indonesian government has lifted a lot of the red tape to draw in more foreign investors. This is an ongoing process by the government, but it's still relatively slow compared to Singapore.
What's the Choice?
Singapore is the better choice for investors who are particular about government transparency and the potential for bureaucracy.
In Singapore, you have designated offices for incorporation, workforce, and immigration. There's hardly any overlap between government transactions. Inter-agency transactions are uncommon, but they've been taken care of as soon as possible.
Business Incorporation & Set-Up
Incorporating a business in Singapore is easier compared to Indonesia. Foreign investors can easily incorporate a business in the country as long as they meet the requirements. One of which is hiring a nominee director for compliance. It only takes about 24 hours and two processes to register a company in Singapore.
Incorporating a business in Indonesia is time-consuming and complicated for foreigners. Foreign investors need to get approval from the Indonesia Investment Coordinating Board (BKPM) before doing business. In contrast to Singapore, it could take anywhere between 3 and 6 months and up to 9 processes to incorporate a company in Indonesia.
Companies wholly owned by foreigners are referred to as Perseroan Terbatas Penananman Modal Using or PT PMA. This is the equivalent of a Private Limited Company structure in Singapore. They must have two shareholders and a minimum paid-up capital of IDR 10 billion, or roughly S$ 1 million.
What's the Choice?
Speed is of the essence here for foreign investors looking to set up their company in another country, making Singapore the obvious choice here. It takes anywhere between 1 and 3 days to get incorporated in Singapore, assuming you submit all requirements and documentation correctly. Working with a corporate service provider that provides company registration services can also make things easier for any foreign entrepreneur.
It's also worth mentioning that foreign entrepreneurs are allowed to hold 100% ownership of a Singaporean company, thanks to the Singapore Companies Act. In Indonesia, 100% foreign ownership is not allowed because only Indonesian citizens can own local companies.
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Taxation
The corporate tax rate in Indonesia sits at 25%, while Singapore caps it at 17%.
According to the Doing Business 2020 Report, Singapore ranks 7th worldwide for its attractive tax rates and online tax filing procedures. Indonesia ranks 81st for the same criteria. To put it into perspective, Singapore taxation is relatively more attractive and easier than Indonesia taxation.
The World Bank also notes that businesses in Indonesia make 52 tax payments in a year and spend about 259 hours a year in tax filing, tax preparation, and paying taxes.
On the other hand, Singapore has businesses making five tax payments a year and 82 hours doing tax preparation, tax filing, and making tax payments.
Income Tax
Individuals residing in Indonesia or are in the country for more than 183 days within 12 months need to pay a progressive income tax rate of up to 30%.
Singapore's progressive tax rate is capped at 22%.
Tax Exemptions & Incentives
Singapore and Indonesia do not provide full tax exemption. Instead, both countries only provide partial exemptions.
In Indonesia, small and medium enterprises with annual turnover below IDR 50 billion (roughly S$4.7 million) enjoy a 50% tax discount for gross revenues up to IDR 4.8 billion (around S$453,000).
Meanwhile, newly incorporated businesses in Singapore enjoy a 75% tax exemption on their first S$100,000 of chargeable income.
Withholding Tax
Non-residents in Indonesia are subject to a 20% withholding tax on Indonesia-sourced income, while Singapore's withholding tax ranges between 0 and 22%.
Filing Requirements
Companies in Indonesia must present annual reports to their General Meeting of Shareholders (GMS) after the close of each financial year. Some companies, such as public companies and companies with a turnover of more than IDR 50 billion, must have their financial statements audited by a public accountant. In addition, publicly listed companies must submit financial reports to Indonesia's financial services authority, Otoritas Jasa Keuangan (OJK).
Each year, companies in Singapore must hold an Annual General Meeting (AGM) once every calendar year. Annual financial reports must be audited, and tax returns must be filed every year.
What's the Choice?
When it comes to doing business in Singapore vs Indonesia, the lower tax rates in Singapore make it much more impressive to establish a business or settle down. However, in Singapore, non-tax residents pay more than tax residents. So that's also something to consider here.
Business owners and expatriates may need to sign up for a COR or Certificate of Residency to enjoy lower tax rates and other benefits.
Immigration Requirements
In Indonesia, a business visa is the easiest and fastest type of visa if you want to do business in the country. However, this 60-day visa should not be used for finding employment or receiving payments in Indonesia.
Expatriates who are employed in Indonesia may apply for the KITAS, which is a limited stay permit. However, the employer must explain why the job needs a foreign specialist. Once expatriates acquire a KITAS, they must wait for three years before they are eligible to file for KITAP, which is the permanent stay permit.
In Singapore, EP or Employment Pass is issued to foreign professionals, executives, and managers. EP holders also need a minimum salary of S$4,500 a month. Foreigners who want to start a new business in Singapore will need to apply for the EntrePass or Entrepreneur Pass.
Update:
Starting Sept 1 2022, the minimum qualifying salary will be raised from S$4,500 to S$5,000 for new applications.
For those working in financial services, the minimum qualifying salary for an EP applicant will be raised from S$5,000 to S$5,500.
The same adjustments will be implemented on EP renewals starting September 1st 2023.
What's the Choice?
Both Indonesia and Singapore are strict when it comes to their tourist visas.
In Singapore, you're allowed to stay for 30 days in the country, but you're not allowed to look for employment or do business in the country.
Singapore might consider foreigners for employment as long as the company's already met their quota for local jobs. Foreigners will then be advised to acquire an EP or Employment Pass before they can start working.
Foreign workers and foreign expatriates looking to extend their stay are advised to apply for Permanent Residency if they want to purchase a house or car.
Business Language
Bahasa Indonesia is the official language of Indonesia, and English is their second language.
The official languages are English, Mandarin, Tamil, and Malay for Singapore. English is the most widely spoken language in the country by the population aged 50 and younger. English is also the medium of instruction in Singaporean schools.
Singapore also has a unique spoken language dubbed Singlish, which is a colloquial form of English and carries with it a distinct accent. It also ignores the basic standards of English grammar because it's a combination of local slang and expressions from different languages and dialects spoken by different people.
Even if the medium of instruction is carried out in English, schools in the city teach the child's parentage language to make sure that the child does not lose sight of their traditional roots.
English Proficiency
In terms of English proficiency, Singapore ranks 5th in the EF English Proficiency Index, while Indonesia ranks 39th. Apart from being proficient in English, Singaporeans are bilingual and can speak either Chinese, Tamil, or Malay.
Foreign investors are more likely to benefit from incorporating Singapore than Indonesia due to the country's cultural diversity and commercial ties with other countries in Asia and countries from the West.
What's the Choice?
From a business perspective, it's relatively easier to communicate with businesses in Singapore because the official language is English. Indonesian business owners may speak English, but they'll probably default to using Bahasa.
This is not to say that Indonesian business owners and locals are incapable of speaking or understanding English.
Infrastructure and Resources
Singapore's infrastructure is focused on maintaining the quality of the workforce, extensive public transportation for ease of access throughout the country and reliable Internet connectivity. However, access to natural resources is limited compared to Indonesia.
In contrast, Indonesia is abundant in natural resources and is dubbed the wealthiest country in terms of its resources and compared with neighbouring countries. But its infrastructure has only just begun developing and expanding outside of its major cities.
While natural resources in Indonesia are abundant, distribution is slow due to inadequate public transportation and small intercity roads. In terms of Internet connectivity, Indonesian citizens might not be able to enjoy reliable Internet as it depends entirely on their geography.
Singapore looks to be the best choice for foreign investors and expatriates in doing business or settling down. But we're not implying that Indonesia is a wrong choice either.
Closing
As it stands, Indonesia is on a path where it will be as transparent as Singapore regarding governance and transparency. When the time does come, company incorporation and taxation will be two of the many things that will improve. This, in turn, will draw in more foreign investors as they become more incentivized to establish their business in Indonesia.
Both countries are not without their disadvantages as well. For instance, for businesses relying heavily on natural resources, incorporating in Singapore might not be the best move as the country has relatively limited access.
If you decide to set up your company in Singapore, work with a corporate service provider. They can make things easier for you at a minimal cost.
If you have any questions about doing business in Singapore, we here at Piloto Asia will be more than happy to answer your questions.