As mandated by Law No. 41 of 2008 on the 2009 State Revenues and Expenditure Budget, and again in Law No. 36 of 2008 on the Fourth Amendment to Law No. 7 of 1983 on Income Tax, an implementing Government Regulation (now in Draft form) will soon be promulgated to address the issue of ‘cost recovery’ for oil and gas contractors: the program essentially refunds contractors for certain expenditures required for extractive activities, but has been loosely regulated and subject to abuse.
Cost recovery is extended as an incentive to oil and gas contractors, but it is coupled with the obligation that a fixed amount of the produced resources must be given back to the Indonesian state. It covers: ‘a particular year’s non-capital expenses from exploration, development, production operation activities, general administrative expenses, resource price depreciation, and unrecovered costs.’
With such a vague, enveloping definition, the program is predictably subject to widespread abuse. The Financial Audit Agency has seen numerous cases of contractors claiming extravagant and inadmissible activities under the ‘cost recovery’ categories, including expenses for public relations, legal consultancy, outsourced foreign employees, and even corporate social responsibility obligations.
Another issue is raised by the budget allocation for cost recovery programs, which is disproportionally small, given the expanded production targets that have been set by the government.
When it is issued, the Draft Government Regulation may help to enforce discipline over what may and may not be claimed for reimbursement, and may facilitate a calculation of reimbursement size that more appropriately accords with the state budget.
While the regulation will certainly apply to future contractors, existing contractors are given two years to comply with the requirements of the forthcoming Government Regulation, said the Coordinating Minister for the Economy Hatta Rajasa, as quoted from TempoInteraktif (6/4).
The Ministry of Energy and Mineral Resources has approved the current Draft, and Mr. Rajasa that it will be released before the end of April.
This Indonesian Legal Brief is based upon research conducted by the hukumonline team.
As mandated by Law No. 41 of 2008 on the 2009 State Revenues and Expenditure Budget, and again in Law No. 36 of 2008 on the Fourth Amendment to Law No. 7 of 1983 on Income Tax, an implementing Government Regulation (now in Draft form) will soon be promulgated to address the issue of ‘cost recovery’ for oil and gas contractors: the program essentially refunds contractors for certain expenditures required for extractive activities, but has been loosely regulated and subject to abuse.
Cost recovery is extended as an incentive to oil and gas contractors, but it is coupled with the obligation that a fixed amount of the produced resources must be given back to the Indonesian state. It covers: ‘a particular year’s non-capital expenses from exploration, development, production operation activities, general administrative expenses, resource price depreciation, and unrecovered costs.’
With such a vague, enveloping definition, the program is predictably subject to widespread abuse. The Financial Audit Agency has seen numerous cases of contractors claiming extravagant and inadmissible activities under the ‘cost recovery’ categories, including expenses for public relations, legal consultancy, outsourced foreign employees, and even corporate social responsibility obligations.
Another issue is raised by the budget allocation for cost recovery programs, which is disproportionally small, given the expanded production targets that have been set by the government.
When it is issued, the Draft Government Regulation may help to enforce discipline over what may and may not be claimed for reimbursement, and may facilitate a calculation of reimbursement size that more appropriately accords with the state budget.
While the regulation will certainly apply to future contractors, existing contractors are given two years to comply with the requirements of the forthcoming Government Regulation, said the Coordinating Minister for the Economy Hatta Rajasa, as quoted from TempoInteraktif (6/4).
The Ministry of Energy and Mineral Resources has approved the current Draft, and Mr. Rajasa that it will be released before the end of April.
This Indonesian Legal Brief is based upon research conducted by the hukumonline team.
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