What Are Free Trade Zones and Free Ports?

ECONOMIC globalization demands the reduction of various trade barriers, such as the regulation and imposition of tariffs. If left unchecked, these obstacles may reduce national competitiveness, thus, leading to a serious impact on the economy.

One of the efforts to reduce these barriers is the establishment 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, hereinafter referred to as KPBPB)?

Definition

The term KPBPB in the international landscape is closely related to the term Free Trade Zone (FTZ).  According to the IBFD International Tax Glossary (2015), FTZ is loosely used to refer to any area within the territory of a country in which direct and/or indirect taxes do not apply.

The term FTZ is more specifically used to refer to areas where import duties and other types of indirect taxes do not apply. Export duties are generally paid only when the original goods or manufactured items are removed from the FTZ into an area subject to normal customs authority.

FTZ should not be confused with the Free Trade Area because the Free Trade Area is essentially a reciprocal bilateral or multilateral agreement to restrict or limit customs duties among its members

On the other hand, the FTZ is a zone that generally provides services for traders and is aimed at facilitating trading procedures by allowing fewer customs formalities. In addition to the FTZ, the term KPBPB is also closely related to the term free port.

A free port is essentially a restricted area in which goods may be entered or removed free from customs duties and that functions as either a trans-shipment centre or a bonded warehouse facility (IBFD, 2015).

Meanwhile, the International Finance Corporation World Bank Group in Special Economic Zones Performance, Lessons Learned and Implication For Zone Development (2008) states that FTZ is a form of a Special Economic Zone (SEZ), which is defined as:

“Small, fenced-in, duty-free areas, offering warehousing, storage and distribution facilities for trade, transshipment and re-export operations, located in most ports of entry around the world.”

In addition to the FTZ, there are many other types of SEZs, such as Export Processing Zone (EPZ), Hybrid EPZ (HEPZ) and Enterprise Zone (EZ) (IFC-World Bank, 2008). These zones are generally distinguished by development objectives, operational area, location, facilities, activities and marketing purposes.

Definitions in Domestic Regulations

FTZ in Indonesia is adapted into the Free Trade Zone and Free Port (KPBPB). The government has formulated the definition of KPBPB and stipulated it in Law No. 36/2000 concerning the Stipulation of Gov. Reg. in Lieu of Law No. 1/2000 concerning KPBPB.

Referring to Article 1 number 1 of Gov. Reg. in Lieu of Law No .1/2000, KPBPB is a zone within the jurisdiction of the Unitary State of the Republic of Indonesia (NKRI) which is separated from the customs area, thereby, is exempt from import duty, value added tax (VAT), sales tax on luxury goods (STLGs) and excise.

However, Law No. 36/2000 has been amended through Gov. Reg. in Lieu of Law No. 1/2007. Gov. Reg. in Lieu of Law No. 1/2007 was subsequently stipulated into Law No.44/2007. Referring to Article 2 of Gov. Reg. in Lieu of Law No. 1/2007, the boundaries of the KPBPB, both land and waters, are now stipulated in a government regulation concerning the establishment of the KPBPB.

Further, in the KPBKB, activities in the economic sector are performed, such as the trade, maritime, industrial, transportation, banking, tourism and other sectors stipulated in a government regulation concerning the establishment of the KPBPB.

The concept of KPBPB has long been developed in Indonesia. Since 1963, Sabang Port has been designated as a free port and free trade zone which was later confirmed under Law No. 37/2000.

In addition to Sabang Port, other zones are designated as the KPBPB, namely Batam, Bintan and Karimun. The designation of the four areas as the KPBPB is stipulated under Law No.44/2007 and its derivative products.

In further developments, some or all of the locations of the Batam, Bintan and Karimun KPBPB are proposed to be Special Economic Zones (SEZ). This is stated in Article 3 and Article 4 of Government Regulation No. 1/2020 concerning the Administration of Special Economic Zones.

The SEZ is a form of development of strategic economic zones that have been regulated in Indonesia since 2009. The policy basis for the establishment of the SEZ is contained in Law No. 39/2009 concerning Special Economic Zones.

Pursuant to the Law, SEZ refers to a zone with certain boundaries within the jurisdiction of the Unitary State of the Republic of Indonesia designated to perform economic functions and obtain certain incentives.

This implies that the SEZ is a development of various types of economic zones in the previous period, including the KPBPB.

Conclusion

In essence, the FTZ is an area where import duties and other types of indirect taxes do not apply. FTZ in Indonesia is known as KPBPB which is defined as a zone within the jurisdiction of the Unitary State of the Republic of Indonesia which is separated from the customs area, thereby, is exempt from import duty, VAT, STLGs and excise. (Bsi)