In February 2026, the President of the Republic of Indonesia paid an official visit to the United States to attend a series of strategic meetings. A major item on the agenda was economic cooperation, culminating in the signing of the Agreement on Reciprocal Trade (ART) between Indonesia and the US.
The visit also included business and investment forums with private-sector representatives from both countries to strengthen bilateral economic ties. The ART is a comprehensive framework covering tariff exemptions for leading commodities, adjustments to import regulations, and cross-border investment cooperation.
What Is the Agreement on Reciprocal Trade?
The ART is a bilateral trade agreement between Indonesia and the US that provides for reciprocal tariff reductions, the easing of non-tariff barriers, and enhanced investment collaboration.
The negotiations were designed to preserve the competitiveness of Indonesian export products and safeguard an estimated four to five million workers in labor-intensive industries affected by tariffs. Rather than pursuing retaliatory trade measures, the government opted for a diplomatic approach to minimize potential economic disruption.
The agreement will take effect 90 days after signing.
The ART Core Clauses
The ART sets out several commitments agreed upon by Indonesia and the US, effective 90 days after the agreement is signed. The main provisions include:
- Indonesia’s leading export commodities, including palm oil, coffee, and cocoa, will be subject to a reciprocal tariff rate of 0%.
- Indonesia will open its market to 99% of US products at a 0% tariff rate.
- Removal of selected non-tariff barriers, including certain import licensing requirements, local content level (tingkat komponen dalam negeri/TKDN), recognition of US standards, and halal certification procedures.
- Purchases of metallurgical coal, LPG, crude oil, and refined fuel from the US valued at USD 15 billion.
- Aircraft purchases from the US worth USD 13.5 billion.
- An import quota of 1,000 tons of rice from the US.
- Import of US live poultry products.
- Agricultural imports such as rice, soybeans, soybean meal, wheat, and corn valued at USD 4.5 billion.
Implications of the ART for Indonesia
Increased Imports and Pressure on the Domestic Industry
Lower tariffs may lead to a surge in US imports into the Indonesian market. Small and medium-sized enterprises may face heightened competition, particularly as Indonesia increasingly becomes a competitive arena for both US and Chinese products.
From a tax perspective, higher import volumes may lead to increased revenue from import VAT and Article 22 income tax, consistent with rising transaction values.
Trade Balance and Macroeconomic Risks
A significant rise in duty-free imports could put pressure on Indonesia’s trade balance with the US and, if not offset by export growth, contribute to a broader trade deficit.
Between May 2020 and May 2025, Indonesia recorded a trade surplus of USD 15.38 billion with the US, driven primarily by exports of machinery and electrical equipment, footwear, and apparel.
Shifts in State Revenue Composition
Lower import duty rates may reduce customs revenue. However, stronger trade activity could broaden the tax base for import VAT and Article 22 income tax. As a result, state revenue may gradually shift from protective tariff-based income toward consumption- and transaction-based taxation.
Investment Growth and Tax Consequences
Expanded trade cooperation may encourage greater US direct investment in Indonesia. US companies operating locally may establish permanent establishments (PEs), making their Indonesian-source income subject to domestic income tax and applicable tax treaty provisions.
As of the second quarter of 2025, US investment in Indonesia stood at approximately USD 0.8 billion. The enactment of ART could catalyze further growth.
Transfer Pricing Complexity
Greater cross-border activity between related parties in Indonesia and the US may heighten transfer pricing risks, including profit shifting. Indonesia continues to require comprehensive transfer pricing documentation, including local files, master files, and country-by-country reports. The ART does not alter compliance obligations under the arm’s length principle.
VAT Implications
Indonesian exports remain subject to a 0% VAT rate, allowing exporters to claim input VAT refunds. If exports to the US grow, VAT refund claims may also climb, potentially affecting fiscal cash flow.
Conversely, imports from the US will remain subject to Indonesian VAT, which may boost VAT collections in the near term.
Digital Trade and Services Taxation
If the ART extends to digital trade and technology services, alignment of electronic transaction tax policies will be necessary to prevent disputes, particularly regarding digital tax non-discrimination provisions.
Fiscal Incentives and Tax Base Protection
Enhanced trade cooperation may prompt the expansion of fiscal incentives such as tax holidays or tax allowances to attract investment. However, such measures must be carefully calibrated to avoid erosion of the domestic tax base.
Withholding Tax and Cross-Border Payments
Cross-border payments of dividends, interest, royalties, and technical service fees to US entities remain subject to Article 26 withholding tax. Greater bilateral transactions may expand the taxable base, although treaty provisions may reduce effective withholding rates.
Fiscal Oversight and Authority Coordination
Higher trade volumes will require closer coordination between tax and customs authorities, particularly in areas such as under-invoicing, mispricing, customs valuation adjustments, and transfer pricing discrepancies.
The Indonesia-US ART carries significant implications for trade flows, investment patterns, and Indonesia’s tax framework. Its long-term success will depend on balancing enhanced trade competitiveness with the need to safeguard the national tax base. Beyond its immediate technical effects, the ART may play a strategic role in shaping Indonesia’s broader fiscal and economic policy direction.
Also Read:
https://ideatax.id/articles/updates-to-the-05-msme-final-income-tax-and-its-business-impact
https://ideatax.id/articles/article-26-withholding-tax-on-foreign-taxpayers
https://ideatax.id/articles/tax-revenue-realization-in-q3-2025
