Govt. to Amend Regulation on Cost Recovery

Indonesian Version

 
Marcell Sihombing, Fitri N. Heriani

 

 
The government has finally decided to take action in a bid to overcome the currently sluggish development of the oil sector, a situation which has persisted for some six years now. The Minister of Finance, Sri Mulyani, has revealed that her ministry, in conjunction with the Ministry of Energy and Mineral Resources, is currently deliberating Government Regulation No. 79 of 2010 on Recoverable Operational Costs and the Handling of Income Tax for the Upstream Oil-and-Gas Business Sector, which is commonly known as the “Cost-Recovery Regulation”.
 
According to Minister Mulyani, the ultimate goal of the revision is to ensure that optimum levels of state income are generated by production-sharing contracts or other similar agreements, as well as to set out an investor-friendly regulatory framework for the sector. The current Cost-Recovery Regulation is considered to be no longer suitable in the present climate, as it overly emphasizes the role of the government’s shares from oil-and-gas activity at the expense of boosting the investment climate.
 
“A number of discourses have focused upon revising the Cost-Recovery Regulation and the idea of establishing a more competitive environment and economic outlook has underpinned these debates. Furthermore, the revision is also being driven by the importance of the downstream oil-and-gas industry,” Minister Mulyani asserted at a press conference which was held at the Ministry of Finance Building in Jakarta on Friday, 23 September 2016.
 
During the press conference, Minister Mulyani also revealed that feedback had already been received from investors regarding the Cost-Recovery Regulation. Various contractors have firstly compared the incentive system stipulated under the Cost-Recovery Regulation with its predecessor. The previous regulation implemented the so-called “assume-and-discharge” mechanism, while the Cost-Recovery Regulation sets out a cost-and-recovery mechanism. The contractors believe that the obligation to pay value-added tax (VAT), as well as land-and-building tax (PBB), customs fees and regional tax (pajak daerah) places an excessive burden upon their operations, even though such payments would eventually be reimbursed through the cost-recovery scheme.
 
Secondly, contractors believe that the tax burden which is imposed upon exploration activities carried out by investors, and which encompasses both VAT and PBB, puts them at a distinct disadvantage. This disadvantage stems from the fact that the success rate, in terms of discoveries made during oil-and-gas explorations, is usually less than 40%. This in turn means that considerable losses have to be borne by contractors should they fail to discover any oil and gas during their various exploration activities, and yet they are still required to meet all of the relevant tax demands which are imposed upon them.
 
Thirdly, the economic feasibility of various oil-and-gas projects in Indonesia has shown a marked decline in recent years as a result of developmental difficulties. This situation has been made worse by the fact that offshore exploration requires more sophisticated technologies and, as a result, higher budgets.
 
Minister Mulyani also revealed during last week’s press conference that three objectives would hopefully be achieved through the revision of the Cost-Recovery Regulation. These objectives encompass improving the industry through updated laws and regulation on taxation, granting fiscal and non-fiscal incentives in order to increase the economic feasibility of oil-and-gas projects, and finally, ensuring a fair distribution of rights and profits between the government and contractors.
 
In essence, five main material revisions are currently under deliberation. Firstly, the granting of tax facilities for exploration activities, which would encompass import VAT, as well as customs fees, domestic PPN and PBB, is being explored. Secondly, contractors may soon also be entitled to enjoy various tax facilities during the exploitation stage, encompassing import VAT, customs fees and domestic VAT, provided that any such facilities are only utilized in order to support a project’s economic feasibility.
 
Thirdly, the granting of so-called “cost-sharing” exemptions are also being discussed. These exemptions include any income tax which must be paid by contractors for the utilization of state-owned property, as well as the allocation of overhead costs for central offices. Minister Mulyani also asserted that the granting of any such facilities would be regulated under a Ministry of Finance Regulation.
 
Fourthly, the revisions should clarify the granting of various non-fiscal facilities, including investment credit, accelerated depreciation and domestic-market-obligation (DMO) holidays. And fifth and finally, the revisions will closely regulate the concept of cost sharing as it relates to sliding-scale state revenues, which grants the government additional cost-sharing dividends in the result of any windfall profits occurring.
 
Commenting on this issue, Luhut B. Panjaitan, the Acting Minister of Energy and Mineral Resources, asserted that President Joko Widodo had already demanded efficiency across all sectors of the economy in order to increase investment in the country. Acting Minister Panjaitan also stressed that the government was currently carrying out a number of seismic studies in order to more accurately ascertain Indonesia’s future oil-and-gas potential.
 
“It would be advantageous if we had the country’s potential oil-and-gas data at our fingertips, because this will enable the government to more effectively promote Indonesia to potential investors,” Acting Minister Panjaitan concluded.
 
(rfs/sp)