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Indonesia – Local Exporters May Apply For Exemptions From MTR 4 L/C Payment Requirements.

8 April, 2015


On 30 March 2015, the Indonesian Minister of Trade issued Regulation 26/2015, regarding specific provisions on the implementation of the use of letters of credit for the export of certain commodities from Indonesia (MTR 26). MTR 26 takes effect from 1 April 2015.


MTR 26 provides a process for exporters to apply for specific, “case-by-case” dispensations from the requirement to comply with Minister of Trade Regulation 4/2015 (MTR 4).


Any special exemptions or dispensations granted pursuant to MTR 26 would operate to suspend the MTR 4 requirement that payment for certain exports be by way of a letter of credit (L/C) (and so are referred to here as “suspensions”).


Without a suspension or other exemption, the export of those commodities affected by MTR 4 from 1 April 2015 must be paid for by L/C as a prerequisite to the issue of customs clearance for vessel departure.


1. Scope Of MTR 26


The upstream oil and gas industry had anticipated that an industry-wide exemption to the requirements of MTR 4 might be issued. MTR 26 does not provide a broad exemption as of right, requiring instead that exporters apply for suspensions (which may or may not be granted). However, by the same token, MTR 26 is not industryspecific; it is open to any exporter whose export activities are affected by MTR 4 (i.e. who exports one of the listed commodities set out in the appendix to MTR 4) to apply for a suspension, regardless of industry.


MTR 26 appears to suggest that suspensions will be issued in respect of specific contracts between the exporter and the foreign buyer or off taker (off-take contract) (i.e. on a contract-by-contract basis, not more broadly on a project or exporter basis).


In practical terms, given the administrative requirements and conditions (see below), MTR 26 appears to target long-term off-take contracts. For example, and in contrast to typical long-term contracts, spot sales contracts would generally give the parties the opportunity to agree payment terms at the time a confirmation is entered into in order to comply with MTR 4.


2. Suspension Applications: Review And Grant


Although MTR 26 does not expressly set out the required form of a suspension application, the matters to be taken into account by the Minister (described below) should provide some guidance for applicants.


Under MTR 26, the Minister of Trade is to consider the following factors in making a determination to grant or refuse a suspension:


(a) whether the relevant off-take contract:


(i) provides for a mode of payment other than an L/C; and


(ii) was entered into prior to the issuance of MTR 4; and


(b) whether the exporter has given, or is willing to give, an undertaking to the Minister of Trade that it will amend the mode of payment set out under the relevant off-take contract to provide for paymentby way of an L/C, in accordance with MTR 4 requirements.


The exporter is required to submit a stamped statement letter with its application, confirming the matters in paragraphs (a) and (b) above.


In assessing an exporter’s request, the Minister of Trade is to work with, and require a recommendation from, other Ministers relevant to the commodity in question (e.g. the Minister of Energy and Mineral Resources, the Minister of Agriculture, amongst others).


The matters that the other relevant Ministers may consider in making a recommendation are unclear on the face of MTR 26, but in the case of the specific minerals and oil and gas exports that are subject to MTR 4, we anticipate that the Minister of Energy and Mineral Resources, for example, may consider the strategic importance to Indonesia of permitting those exports to proceed.


It is also not clear to what extent the Minister of Trade has discretion under MTR 26 to grant a suspension, or to grant a suspension subject to any conditions, including where the exporter has not complied with the requirements of paragraphs (a) and (b) above. Presumably a suspension would not be granted if paragraph (a) is not satisfied (on the basis that the exporter should have negotiated for the buyer to provide an L/C before entering into that particular contract).


3. Scope Of The Exporter’s Undertaking


MTR 26 does not give any guidance on the required level of commitment on the part of the exporter, represented by the undertaking in paragraph 2(b) above.


An undertaking generally requires a firm commitment to do whatever act is the subject of the undertaking. However, the nature of the undertaking in this case is not a matter within an exporter’s sole discretion (e.g. agreeing amendments to an existing long-term contract will necessarily require the co-operation and agreement of the buyer). In light of these practicalities, it may be that the Minister of Trade will give some recognition to undertakings by exporters to use “reasonable endeavours” or similar commitments to obtain the Buyer’s agreement and establish an L/C payment mechanism under the relevant off-take contract.


4. Effect Of A Suspension


It appears that, under MTR 26, the grant of a suspension in respect of an off-take contract would mean that, at least for the duration of the suspension, those exports under that off-take contract could proceed even if payment is not made by way of an L/C.


5. Duration Of Suspensions


Given that the exemptions contemplated by MTR 26 are described as “suspensions”, this implies a temporary nature.


However, even so, it is not clear from the language of MTR 26 what the duration of any granted suspensions will be (for example, whether the suspension will apply for a fixed period, such as on a year-to-year basis, or whether the suspension will extend for the remaining term of the contract). This may vary on a suspension by-suspension basis.


As a general comment, it appears that MTR 26 is intended to be a temporary solution to the practical issues presented by MTR 4 while longer-term solutions are developed by exporters to ensure compliance with MTR 4 in due course. This is consistent with comments made by the Minister of Trade on 1 April, in particular, which refer to suspensions under MTR 26 allowing time for exporters to adjust and revise contracts entered into before MTR 4 was issued.


6. Review And Audit


MTR 26 provides that any suspension may be subject to subsequent review. The documents to be provided by the exporter with the application for suspension can be audited, together with the export activities carried out by the exporter pursuant to and during the period of the suspension. The audit is to be conducted by a special team established by the Minister of Trade, following the grant of the suspension (although the regulation is silent as to the timing to conduct an audit, and whether audits will be conducted more than once).


If the audit reveals that an aspect of the application, including the documents on which a suspension was granted, is untrue or incorrect, MTR 26 provides that the Minister of Trade may:


(a) terminate the granted suspension; and / or


(b) penalise the exporter, in accordance with prevailing laws and regulations.


It is not clear whether, as part of the review process noted above, the Minister of Trade will assess thesuccess of the exporter in agreeing amendments to the payment terms of the relevant off-take contract, or otherwise the extent to which it has tried to reach agreement with the buyer.


7. Requirement For Local Foreign Exchange Bank Amended


Separately to the provisions regarding suspension applications, MTR 26 also grants some additional flexibility, from an administrative perspective, to those exporters who are required to comply with MTR 4.


MTR 4 requires that the export proceeds paid under an L/C must be paid into a local foreign exchange bank in Indonesia. However, MTR 26 now provides that the exporter may also have those funds paid into an account with the Export Financing Institution established by the Indonesian Government (e.g. Indonesia Eximbank), provided that, in receiving the payment pursuant to the L/C, the Export Financing Institution complies with Bank Indonesia’s Regulation on Export Proceeds (Bank Indonesia Regulation 16/10/PBI/2014).


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For further information, please contact:


Daniel Reinbott, Partner, Ashurst

[email protected]


Sean Prior, Partner, Ashurst 

[email protected]


Jessica Ham, Ashurst 

[email protected]


Avinash Panjabi, Ashurst 

[email protected]


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