The government has issued a long-awaited regulation on tax treatment for upstream oil and gas contractors operating under the gross-split mechanism, thus paving the way for it to soon conclude the auction of dozens of oil and gas blocks across the country.
Business players have repeatedly complained over the absence of clear guidelines for taxation in the gross-split scheme despite its first application to the Offshore Northwest Java (ONWJ) oil and gas block in January. The ONWJ block is operated by state energy giant Pertamina.
The gross-split scheme requires investors to pay for exploration and production costs instead of relying on the governmentfs reimbursement as seen under the previous cost recovery scheme. Now, investors might be able to breathe a sigh of relief after President Joko “Jokowi” Widodo signed on Wednesday Government Regulation (PP) No. 53/2017 on tax treatment for gross-split contractors, which was then enacted into law a day later.
“As initially expected, there were several key points in the new regulation, including one allowing contractors to carry forward losses for 10 years,” Deputy Energy and Mineral Resources Minister Arcandra Tahar said Thursday.
The previous stipulation allowed contractors to carry forward losses within a period of five years. Furthermore, PP No. 53/2017 imposes an income tax of 20 percent for compensation received by a contractor in Financing a partner for the purpose of upstream operations. Transfer of participating interest during an exploration phase is also subject to 5 percent tax, and 7 percent ifit occurs in the exploitation phase.
Then, each contractor is obligated to meet domestic market obligation (DMO) of 25 percent of its oil and gas production. The government, if needed, can also substitute a contractors income tax with additional shares of production. The government also provides a number of incentives for gross-split contractors.
For upstrea oil-related activities, contractors are exempted from the obligation of paying import duties during the exploration and exploitation phases until the beginning of the commercial production stage.
Value-added tax (PPN) and luxury tax (PPnBM) will also be scrapped from certain goods and service sused to support oil-related activities. Moreover, there is also a 100 percent reduction in land and building tax (PBB) in a contractor’s notification of tax due.
In using and sharing state facilities, contractors Will not be required to pay for PPN as Well. Moreover, the Energy and Mineral Resources Ministry is allowed to adjust a contractor’s split and incentives by considering the economic condition at an oil and gas field.
“As the regulation has been issued, We will officially close our oil and gas auction tomorrow [Friday],” Arcandra said.
The lack of a taxation mechanism in the gross-split scheme is seen as one of the reasons this year’s tender for 15 oil and gas working areas has been unsuccessful since its launch in May. While the deadline had initially been set to September at the latest, the government had extended it to Dec. 31 to accommodate the new regulation.
The new regulation has sparked hope for oil and gas businesspeople, many of Whom had been waiting for the tax regulation with bated breath. Sammy Hamzah, the head of the Indonesian Employers Association (Apindo) energy and mineral resources division, said that most contractors would likely welcome the new regulation as it provided legal certainty in the gross-split taxation.
“This would be a very good thing if the taxation and fiscal variables have been regulated. I will have to study it first,” he told The Jakarta Post.
The Jakarta Post, Page-13, Friday, Dec 29, 2017
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