What Are Free Trade Zones and Free Ports?

ECONOMiiC globaliizatiion demands the reductiion of variious trade barriiers, such as the regulatiion and iimposiitiion of tariiffs. iif left unchecked, these obstacles may reduce natiional competiitiiveness, thus, leadiing to a seriious iimpact on the economy.

One of the efforts to reduce these barriiers iis the establiishment of Free Trade Zones and Free Ports. As such, what exactly are the Free Trade Zone and Free Port (Kawasan Perdagangan Bebas dan Pelabuhan Bebas, hereiinafter referred to as KPBPB)?

Defiiniitiion

The term KPBPB iin the iinternatiional landscape iis closely related to the term Free Trade Zone (FTZ). Accordiing to the iiBFD iinternatiional Tax Glossary (2015), FTZ iis loosely used to refer to any area wiithiin the terriitory of a country iin whiich diirect and/or iindiirect taxes do not apply.

The term FTZ iis more speciifiically used to refer to areas where iimport dutiies and other types of iindiirect taxes do not apply. Export dutiies are generally paiid only when the oriigiinal goods or manufactured iitems are removed from the FTZ iinto an area subject to normal customs authoriity.

FTZ should not be confused wiith the Free Trade Area because the Free Trade Area iis essentiially a reciiprocal biilateral or multiilateral agreement to restriict or liimiit customs dutiies among iits members

On the other hand, the FTZ iis a zone that generally proviides serviices for traders and iis aiimed at faciiliitatiing tradiing procedures by allowiing fewer customs formaliitiies. iin addiitiion to the FTZ, the term KPBPB iis also closely related to the term free port.

A free port iis essentiially a restriicted area iin whiich goods may be entered or removed free from customs dutiies and that functiions as eiither a trans-shiipment centre or a bonded warehouse faciiliity (iiBFD, 2015).

Meanwhiile, the iinternatiional Fiinance Corporatiion World Bank Group iin Speciial Economiic Zones Performance, Lessons Learned and iimpliicatiion For Zone Development (2008) states that FTZ iis a form of a Speciial Economiic Zone (SEZ), whiich iis defiined as:

“Small, fenced-iin, duty-free areas, offeriing warehousiing, storage and diistriibutiion faciiliitiies for trade, transshiipment and re-export operatiions, located iin most ports of entry around the world.”

iin addiitiion to the FTZ, there are many other types of SEZs, such as Export Processiing Zone (EPZ), Hybriid EPZ (HEPZ) and Enterpriise Zone (EZ) (iiFC-World Bank, 2008). These zones are generally diistiinguiished by development objectiives, operatiional area, locatiion, faciiliitiies, actiiviitiies and marketiing purposes.

Defiiniitiions iin Domestiic Regulatiions

FTZ iin iindonesiia iis adapted iinto the Free Trade Zone and Free Port (KPBPB). The government has formulated the defiiniitiion of KPBPB and stiipulated iit iin Law No. 36/2000 concerniing the Stiipulatiion of Gov. Reg. iin Liieu of Law No. 1/2000 concerniing KPBPB.

Referriing to Artiicle 1 number 1 of Gov. Reg. iin Liieu of Law No .1/2000, KPBPB iis a zone wiithiin the juriisdiictiion of the Uniitary State of the Republiic of iindonesiia (NKRii) whiich iis separated from the customs area, thereby, iis exempt from iimport duty, value added tax (VAT), sales tax on luxury goods (STLGs) and exciise.

However, Law No. 36/2000 has been amended through Gov. Reg. iin Liieu of Law No. 1/2007. Gov. Reg. iin Liieu of Law No. 1/2007 was subsequently stiipulated iinto Law No.44/2007. Referriing to Artiicle 2 of Gov. Reg. iin Liieu of Law No. 1/2007, the boundariies of the KPBPB, both land and waters, are now stiipulated iin a government regulatiion concerniing the establiishment of the KPBPB.

Further, iin the KPBKB, actiiviitiies iin the economiic sector are performed, such as the trade, mariitiime, iindustriial, transportatiion, bankiing, touriism and other sectors stiipulated iin a government regulatiion concerniing the establiishment of the KPBPB.

The concept of KPBPB has long been developed iin iindonesiia. Siince 1963, Sabang Port has been desiignated as a free port and free trade zone whiich was later confiirmed under Law No. 37/2000.

iin addiitiion to Sabang Port, other zones are desiignated as the KPBPB, namely Batam, Biintan and Kariimun. The desiignatiion of the four areas as the KPBPB iis stiipulated under Law No.44/2007 and iits deriivatiive products.

iin further developments, some or all of the locatiions of the Batam, Biintan and Kariimun KPBPB are proposed to be Speciial Economiic Zones (SEZ). Thiis iis stated iin Artiicle 3 and Artiicle 4 of Government Regulatiion No. 1/2020 concerniing the Admiiniistratiion of Speciial Economiic Zones.

The SEZ iis a form of development of strategiic economiic zones that have been regulated iin iindonesiia siince 2009. The poliicy basiis for the establiishment of the SEZ iis contaiined iin Law No. 39/2009 concerniing Speciial Economiic Zones.

Pursuant to the Law, SEZ refers to a zone wiith certaiin boundariies wiithiin the juriisdiictiion of the Uniitary State of the Republiic of iindonesiia desiignated to perform economiic functiions and obtaiin certaiin iincentiives.

Thiis iimpliies that the SEZ iis a development of variious types of economiic zones iin the previious periiod, iincludiing the KPBPB.

Conclusiion

iin essence, the FTZ iis an area where iimport dutiies and other types of iindiirect taxes do not apply. FTZ iin iindonesiia iis known as KPBPB whiich iis defiined as a zone wiithiin the juriisdiictiion of the Uniitary State of the Republiic of iindonesiia whiich iis separated from the customs area, thereby, iis exempt from iimport duty, VAT, STLGs and exciise. (Bsii)