Indonesia

LGS_Ahmad Jamal AssegafBy Ahmad Jamal Assegaf, Lubis Ganie Surowidjojo

Email: jamal@lgslaw.co.id

 

On June 15, 2017, Indonesian Government issued Government Regulation No. 27 of 2017, amending Government Regulation No. 79 of 2010 on the Recoverable Operational Costs and the Income Tax Treatment in the Field Upstream of Oil and Gas Business (the new regulation is referred to as “2017 Amendment” and the original regulation is referred to as the “2010 Regulation”). The 2017 Amendment amends certain provisions on upstream oil and gas cost recovery, with a view of incentivising Contractors to accelerate discovery of oil and gas, increase investment, and provide legal certainty.

Scope of applicability
The 2017 Amendment remains applicable only to PSC and Service Contractors, but expands the scope of Petroleum Activities to also include field processing, transport, storage and sale of own-production, thus making costs associated with these activities potentially recoverable.

Changes to recoverable costs
The 2017 Amendment provide important changes to the conditions in order for an operational cost to be recoverable by Contractors, which are:

  1. removal of the elucidation to Article 12(1)(a) of the 2010 Regulation, entailing that only costs directly related to the Petroleum Operations are recoverable;
  2. Community and environmental development expenditures during exploration and exploitation phases are now recoverable, where previously these were recoverable only during exploitation phase (see Art. 12(2)(e) 2017 Amendment); and
  3. Certain costs are no longer classified as irrecoverable, the most important of which are:
    a. Employee income tax paid by the Contractors, if paid as tax allowance (Art. 13(p)(1) 2017 Amendment);
    b. Transactions deemed as detrimental to the state (Art. 13(l) 2017 Amendment);
    c. Environmental and community development costs during exploration phase (Art. 12(2)(e) 2017 Amendment);
    d. Incentive for interest recovery (Art. 13(w) 2017 Amendment).
  4. Under Art. 13(r) 2017 Amendment, surplus materials are irrecoverable where they do not accord to the approved production plan (previously surplus materials are irrecoverable if they were purchased as a result of mistakes in planning or purchase).

Incentives
The 2017 Amendment provides for certain tax and non-tax incentives, as follow:

  1. The Minister of Energy and Mineral Resources may set a dynamic sliding scale split on the PSC. (See Art. 10A 2017 Amendment);
  2. Domestic Market Obligation (DMO) Holidays, granted by the Minister of Energy and Mineral Resources
    after approval from the Minister of Finance; and
  3. Tax and non-tax revenue incentives, in accordance with the prevailing laws and regulations (see Art. 10(4) 2017 Amendment);
  4. Exemption from the following taxes and duties:
  1. import duties on goods used during Petroleum Operations, for which a Contractor is eligible at both the Exploration and Exploitation Phases (Art. 26A(1) and Art. 26B (1) 2017 Regulation);
  2. Certain Value-Added Tax or or Luxury Goods Value Added Tax (Art. 26A(b) and Art. 26B(b) 2017 Amendment)
  3. Income Tax on imported goods already exempt from import duties under Articles 26A(1) and 26B(1)(a) 2017 Amendment; and
  4. Exemption from land and building taxes.

Please note that tax and duties exemptions during exploitation phase requires Minister of Finance approval, taking into account the economic aspects of the project.

Provisions that remain in force
Certain provisions of the 2010 Regulation remain in force, the most important of
which are:

  1. Additional incomes in the course of Petroleum Operation derived from the sales of derivative product or other forms are treated as deductions to operational costs (See Art. 14 of 2010 Regulation); and
  2. Provisions on Domestic Market Obligation (ie the obligation to deliver certain production amount for domestic market consumption) remains in force. A contractor is required to deliver 25 percent of production to Indonesia’s domestic market, for which it is remunerated at a rate set by the Minister of Energy and Mineral Resources.

 

 

LGS_The Law on Your Side2017

 

 

http//: www.lgslaw.co.id

Email: jamal@lgslaw.co.id

Tel: (62-21) 831-5005, 831-5025

Fax: (62-21) 831-5015, 831-5018

Tags: Energy, Indonesia, Projects, Tax
Related Articles by Firm
Indonesia: Technical provisions for the implementation of anti-money laundering and prevention of terrorism financing programmes within capital market sector
Indonesia’s Financial Services Authority (Otoritas Jasa Keuangan/ OJK) has issued Circular Letter No. 47/SEOJK.04/2017 ...
Indonesia: New regulation on guidelines and procedures for the implementation of investment climate development activities
The head of the Indonesian Investment Coordinating Board issued Regulation No. 9 of 2017 on Guidelines and Procedures for the Implementation of Investment Climate Development Activities ...
INDONESIA: The risk of government force majeure under PPA
The electricity industry is known to be a complicated but important industry, where external factors that are beyond the control of the parties involved can cause problems to the progress and/or cost of the projects.
Indonesia: New draft bill on the restriction of hard-cash transactions
The Indonesian government and the House of Representatives are currently in the process of drafting the Draft Bill on the Restriction of Hard-Cash Transactions ...
New regulation on wage structure and scale for businesses
A new regulation enacted by Indonesia’s Minister of Manpower requires employers to formulate, set and inform their employees of wage structure and scale....
Key new provisions for power purchase agreements
On January 23, 2017, Indonesia’s Minister of Energy and Mineral Resources introduced a regulation that limits room for negotiation and risk allocation in power purchase agreements (PPAs)....
Recent changes to Indonesia’s coal and mineral resources regulations
On January 11, 2017, the Government of Indonesia enacted Government Regulation No. 1 of 2017 on Fourth Amendment of Government Regulation No. 23 of 2010 on Implementation of Mineral and Coal Mining Business Activity ...
Indonesia’s new construction bill
In December 2016, Indonesia’s Parliament passed the Construction Services Bill to replace existing legislation on construction services, Law No. 18 of 1999 on Construction Services ...
Reformulation of coal prices for mine-mouth power plants
The Minister of Energy and Mineral Resources (MoEMR) has amended a number of key provisions that regulate the price for coal used in mine-mouth power plants. ...
Related Articles
Related Articles by Jurisdiction
Corporate liability for corruption
Anti-corruption compliance is rightly a focus of companies operating in Indonesia. One of the more interesting questions for such companies, particularly foreign investment companies, is whether the company …
New Trade Law and its effect on business
Indonesia’s House of Representatives (Dewan Perwakilan Rakyat or DPR) recently passed into law a long-awaited trade bill. The new Trade Law will act as an underlying regulation for other trade-related …
Latest Articles