Indonesia and Vietnam Land Law

Comparison in Business Perspectives



Current business environment, already achieve very highly competition era where a lot of companies tried to move up there value chain and seek opportunity not only in their own country but around the globe. There's look like no physical boundaries between one country and another country. The world is flattening like Thomas L. Friedman said on his book titled ‘World is Flat'. For high value and high cost product which need certain minimum level of knowledge and skill, companies still saw the competitive advantage for operating in highly labor cost country or area such as United States, Europe, Japan, Singapore, and so on. For low value and low cost product, the competitive advantage will be eroded if their still maintain their operation in highly labor cost country, and they have to move their operation to low labor cost country such as China, India and developing country like Vietnam, Thailand, Indonesia, and so on.



Before invest in low labor cost country, companies not only consider the wage structure but also considered infrastructure, corruption in government, efficiency of law and order, quality of bureaucracy, property rights index, and others that differ from country to country. On this case, I just want to highlight efficiency of law and order, especially law that related with land ownership or land use due to Foreign Direct Investment (FDI) in Indonesia and trying to compare it with other new emerging country likes Vietnam.



Indonesia and Vietnam, is very different in term of government and political. Indonesia is presidential republic that practiced democracy with multi party and Vietnam is socialist republic with single party state. Both country legal systems based on civil law; Indonesia legal system based on Roman-Dutch law and Vietnam legal system based on communist legal theory and French civil law system.



Before we make comparison between Indonesia land law and Vietnam land law on their attractiveness in inviting FDI, we must determine what key considerations for FDI in term of land are. As a businessman when we want to buy or lease land we must consider:



* Land law and protection of ownership rights



* Easiness of procedure and administration of ownership



* Land price and location



* Tax that related with land





Indonesia land law or ‘Undang-undang Pokok Agraria No.5 /1960 (UUPA No.5/1960)', which approved by Indonesia parliament 38 years ago in order to substitute ‘Agrarische Wet' made by Dutch colonialism in 1870, was created to defense the rights of Indonesian people on their land. UUPA No.5/1960 was also made to overcome dualism in ‘Adat' (customary) land law which exists since Dutch Colonialism. In UUPA No.5/1960, Article 5 mentioned that Indonesia land law based on ‘Adat' law, as long is not against national and country interest.



According to ‘Adat' Law in Indonesia, there are two types of rights that emerge upon land, which are:



* Community Rights, is rights that own, mastered, used, proprietary by a group of people called law society (community law). Furthermore, this community is frequent called as ‘hak ulayat (Right of disposal of community land) ', ‘hak dipertuan', 'hak purba' or beschikingsrecht.



* Individual rights, is rights that own, mastered, used, proprietary by individual from particular confederation.



That's why, because of the complexity of Indonesia land law which started from Dutch Colonialism until now, there are no clear cut between ‘Adat ‘(culture) land law and Indonesia land law(western law).



Based on the yearly survey done by World Economic Forum (2007) headquartered in Geneva (Swiss) for The Global Competitiveness Report 2007-2008 shown that from 131 countries included in survey, Indonesia hold in position 93th. One of the reasons was there no certainty rights protection for business peoples when they bought land in Indonesia. According the information from Head of Badan Pertanahan Nasional (BPN), in 2007 at least 2.810 big cases on land dispute in Indonesia.



In order to attract Foreign Direct Investment (FDI), Indonesia land law is not very attractive because the limitation of rights and time that foreign entity can have. Actually UUPA No.5/1960 was issue by Government on that time in order to limit time frame of land ownership for Foreign Direct Investment (FDI) from 75 years to only 25 until 30 years, because on that time there were a lot commercial agriculture enterprise that make plantation (tea, coffee and other commodity) since Dutch colonialism and accordant to Indonesia government did not have social function (according article 6 in UUPA; every rights for land have social function).



There are several rights land titles for foreign direct investment, according to Indonesia land law:



* Rights of Tenure by long lease or Exploitation Rights (Hak Guna Usaha/HGU). This right is given to Indonesian nationals‚ joint venture companies‚ and Indonesian limited liability companies for agricultural undertakings‚ fish ponds and cattle ranching. This right is granted for a period of 25 to 35 years and is extendable to another 25 years (Chapter IV, article 28 – article 34).



* Rights to Build (Hak Guna Bangunan/HGB) entitle the holder of this right to build and own construction situated on land under the State or individual control. This right is granted for a period of 30 years and is extendable for another 20 years. (Chapter V, article 35 – 40)



* Right to Use (Hak Pakai) is the right to use land and/or harvest product from the land which is under the control of the State or individual for certain government-approved purposes for a specific period of time (Chapter 6, article 41 – 43).



* Leasehold (Hak Sewa) is the right to use land or buildings for a specific period of time under a contract between the land owner and the lessee (Chapter VII, article 44 – 45).



After bought land directly from land owner or stated, company must registered in order to get certificate according to its rights. There will be certain amount of administration fee regarding the rights that company must paid.



Vietnam Land Law



Land law in Vietnam is relatively new, because it was issued by Vietnam Government in 2003; NATIONAL ASSEMBLY No. 13-2003-QH11 titled LAW ON LAND which regulates the administration and use of land. In this article I will just mentioned that “Vietnam Land Law”.



Vietnam Land Law is very comprehensive land administration law, as mention in article 5 that land belongs to the people, with the State as its sole administrator, reserving the right to allocate land and determine its usage.



For investor they can have a land in Vietnam by leasing it from government and government will give guarantees to land users (investor) by issuing certificates of land use right to land users. According to its purposes, land was categorized in to three different categorize:



* Agriculture land category



* Non-Agriculture land category



* Unused land category, comprising land for which a use purpose has not yet been determined.



Most of FDI will deal with Non-Agriculture land used for production or business purposes, comprising land for construction of industrial zones; land on which production or business facilities are built; land used for mineral operations; land for production of construction materials and ceramics except commercial agriculture enterprise.



Comparison between Indonesia and Vietnam



* Price



In term of price, land in Indonesia depends on the market price. There are two factors that can influence price of land in Indonesia, especially in business area, industry area and city area; first scarcity and second is demand and supply factor. This is different with Vietnam; because land is owned by the people and manages by the state it has no market value. Actually this concept comes from Marxist Leninist theory but it's not tried to hamper the existence of land use rights market. To determine the land price in Vietnam, they use price formula devised by the Ministry of Finance for fees charged for land allotment, lease and transfer and compensation paid for compulsory acquisition and taxation. This price formula tried to ‘scientifically' replicate market price indicators. To accommodate local conditions, People's committees are permitted to raise or lower the prices by 50%.



Based on price, Land in Vietnam is more attractive than Indonesia because the price was fixed by the government. However for Investor, transparency of price is more importance, so market price in Indonesia could be more attractive, because it's based on negotiation. It Vietnam itself, government was worried about the land price, and according to General Department for Land Administration / GDLA Vietnam (1996) report, during periods of “land fever”; land prices in the “shadow” market can exceed statutory values by three or four hundred percent. This differential could generate incentives to corruptly allocate land (eg Thang Long Waterpark Case) or illegally convert land use.



* Location



There is certain limitation of rights that given by Indonesia Government due to land ownerships for FDI as mention before. Before buying land directly from the land owner or from state, every FDI must have permission that approved by BKPM (Badan Koordinasi Penanaman Modal or Indonesia Investment Coordinating Board) to start business or open representative office in Indonesia. For Financial Sector, Oil & gas sector, and other energy and mineral explorations they were different procedural. After granted permission to operate in Indonesia, FDI must obtained a location permit from local governance (province government and district/”kabupaten” government). Location permit is mandatory before investor can enter to negotiation with the land owner to buy the land. This permit not guarantees that FDI will get the land, because the land owner does not have any obligation to sell the land.



In Vietnam, location is fixed by government as mentioned in Vietnam Land Law article 11 on principles of land use. Government provides the place such as Industrial Park, High-tech Park, IT Park and so on, depend on the need. For property business such as housing, hotel and shopping mall, it will much better for FDI if the perform Joint Venture Company in order to get good location. From International Finance Corporation, step and time to registered property in Indonesia 7 procedures in 42 days with cost 10.5% of property value compare with Vietnam 4 procedures in 67 days with cost only 1.2% of property value.



Based on the location, Indonesia land law is more flexible. But in Vietnam, for location that already prepared by government have complete facility and ready to use. Also cost of registering property in Vietnam is cheaper.



* Time usage



It's clear mentioned in our first section about Indonesia's Land Law, that it's not very attractive for investor. Because rights to use that given by Indonesia government only 25 until 30 years and could be extended for 25 years. In comparison with Vietnam Land Law; article 67 point 3; implementation of investment projects in Vietnam shall be considered and decided on the basis of the investment project or the application for allocation or lease of land, but shall not exceed fifty (50) years; for bigger investment that need more time, government can give more time as long not exceed seventy (70) years.



In time usage, Vietnam Land Law is more interesting, because it's longer and for big investment that need long time pay back period, this more reasonable.



* Tax



In Indonesia, Tax related with lands and buildings were regulated by Law number 12 of 1985 about Land and Building tax and amendment Law number 12 of 1994. In those two laws also mentioned that lands and building tax fare only 0.5% from taxable amount of selling value of tax object which will determined by Government Rule. According to Government Rule (Peraturan Pemerintah / PP) number 25 of 2002 the taxable amounts are different between various objects. Below is the taxable amount according to objects:



* Tax on land and building for commercial agriculture enterprise, forestry and mining is 40% from selling value of tax object will be taxable.



* For other PBB objects its more depended on the value:



* Taxable amount is 40% from selling value of tax object if its value more than one billion rupiahs.



* Taxable amount is 20% from selling value of tax object if its value less than one billion rupiahs.



The taxable rate of land and buildings is very low by international standards, and as most land and building tax is provided to regional government anyway, it is appropriate that MoF has decided to study the impact of decentralizing the authority to set land and building tax rates (MoF 2002c).



In Vietnam, because land is own by the people with state as the representative owner, there is no tax on land. But base on article 5 about Ownership of Land in point 3(b) mentioned on agriculture land use tax; imposed annually on agricultural land users, calculated in form of rice and paid in cash; and house and land tax; imposed annually on residential, commercial and industrial, the rates are determined as one to 32 times of agricultural land use tax rates.



If we compare these two countries tax on land, we found that Indonesia lands and buildings tax is clearer in term of rates. Also in Indonesia there is no land use fee or land rent if we already bought the land or have rights to use it.



Conclusions



Due to its purpose, Indonesia land law was made to protect rights of Indonesian people on that time (1960) and to nationalize commercial agriculture enterprise which established since Dutch colonialism and was own by foreign people. Indonesia people only worker in that commercial agriculture enterprise. If we see Vietnam lands law, its build in 2003 with purpose to attract Foreign Direct Investment (FDI) and to encourage investment and transfer technology as mentioned in article 12 of Vietnam Land Law. We cannot say that Indonesia must adapt Vietnam land law or change its law accordingly in order to attract FDI. Situation and condition in both country were very different and also the constitution.



There are to major source of land conflict in Indonesia; land law still base on Adat law and compensation value due to land clearance. Until now, Indonesia government doesn't have complete database regarding land that own by Ulayat. The first thing that Indonesia government must do is to create land database in national scope so it can reduce conflict or dispute related with land ownership. According to government plan, land registration will be complete in early 2020s with supported from World Bank and the Australian Government. The second thing that Indonesia government has to do is to set the rule about compensation on land clearance. Many cases in Indonesia, when small people (wong cilik) that already own the land since there ancestor long time ago, when there is land clearance by government using public interest as an excuse, ‘wong cilik' will always gain lost. There is no adequate compensation due to their land even though we mentioned before that compensation base on the market price. Compensation did not calculate the side effect cost that will face by ‘wong cilik' in order to found alternative land.



In line with land registration, to make FDI attracted to invest in Indonesia in term of land its better if Indonesia government opened one roof service to serve every FDI like Vietnam did. This to tackle opinion from foreign people that said land administration and development control are prone to corruption. Using one roof services, it will cut down the cost of making investment in Indonesia and also prevent any further disputes that could be happened related with land ownership. Another advantage of one roof services, government can direct FDI into particular area according to land reform plan to spread development equally.



Time usage of Indonesia land was very short if we compare to Vietnam and this why big investor not very interested to invest in Indonesia. If we compare to other country like china; give 50 year lease; and Malaysia; give 75 years, Indonesia must consider to amendment the current land law and give more time usage to investor.



Entered the borderless world with more modern and liberal characteristics, the time is come for Indonesia government to make amendments on its Land Law in order to compliance with today business environment. However, compliance to business environment need is not enough, government also have to consider the rights of its people which majority are farmers. If the amendment law only to attract FDI, it will narrow agriculture area and impact to stability of food supply in the country.



If we apply all what we mentioned above; make good database on lands, one roofs service, and more usage time; probably it will make FDI more interested to invest in Indonesia. But what do Indonesia people get? Is there any guarantee that this investment will beneficiary to Indonesia people? Or it will have Indonesia government develop the country?



Only government can answer those questions. Good land law by it self is not enough to make sure appropriate answers for all those questions. Government must come out with supporting regulation; example for time usage, FDI can get 75 years if they invest in area that pointed by government and used local people as employees to reduce unemployment. Government can make new government regulation that granted free land for investor as long as they help government build infrastructure for people live in that area.



Land law is not only determined factor for investor to invest in ones country. But by having a good and comprehensive land law, it will make people convenience to invest because it representative of good property rights.

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