Basic regulation in PSC operations isn’t much change. This new PP is now collaborating and accomodating PSC operation purpose and tax purpose. From many years ago, BP Migas and Directorate General of Taxes have intensive discussion on formulatng regulations that in line with tax law and also PSC agreement as a lex specialis. Below are the new regulated items:
- Minimum Government share
Ministry (MoEMR) has right to determine a minimum government share from a production field when approve development program (POD). Government share and contractor share ussually have been negotiated and stipulated in the PSC agreement, but by this decree, Ministry can ask for minimum share (minimum lifting) for new production field. This requirement will further regulate by a decree from MoEMR
- Contractor Revenue
Previously, contractor gross revenue is only related to PSC revenue (entitlement-FTP, Cost Recovery, Contracto rs Equity, DMO fee, Lifting Price Variance). As stipulated in the PP 79, contractor s revenue are now from PSC and other revenue that doesn’t relating to PSC such as uflift and interest transfer. In line with new Income Tax Regulation, it’s clearly regulated that transfer of participating interest is subject to income tax.
Non PSC related revenue such as :
- Uplift : subject to final income tax 20% from gross revenue/fee
- Interest transfer : subject to final tax : 5% in exploration stage and 7% in exploitation stage
Income Tax isn’t applicable for interest transfer to national companies as part of PSC obligations to transfer part of the interest. Tax is also not apply risk sharing purpose with criterias:
- Not transfer full of the interest
- Minimum 3 years holding
- Exploration activity has been taken for that field
- Not intended to gain profit
- Operating Cost, Cost Recovery and Non Cost Recovery
PP 79/2010 enhanced application of the uniformity principle. Cost recovery is the same for PSC and tax purposes. When the operating cost is recoverable, it’s also mean tax deductible so BP Migas and Directorate General of Taxes will have the same point of view. Previously bonus to government is not recoverable but tax deductible but today the expense is not recoverable and also non deductible tax expense. Donations for national disasters is tax deductible which also mean recoverable.
Indirect Taxes, Regional Taxes and Retribution?
For new PSC, Government favor to include indirect taxes (VAT, Land Taxes) and Regional Taxes as part of the PSC operating cost. Mean that no more VAT reimbursement for new PSC. With this new regulation, contractors will also borne the indirect & regional taxes. Previously, indirect & regional taxes is on Government obligation.
Non Cost Recovery
Basically, types of expenses that unrecoverable is not much change, but Government now clearly regulated some types of expense that non cost recovery such as :
- Expense for personal need of board of Directors, Commisioners, partners, employees and shareholders/owner. Personal need expenses is refer to Income tax regulation, so expense such as house maintenance, school fee, family recreation, family insurance etc will not be reimbursable.
- Training expense for expatriates, interest expense, bonus to government & interest recovery
- Income tax which should be on employee/other party responsible in any kind of method (allowance and or gross up method)
- Any fines or penalty
BP Migas Operating Cost Benchmark
BP Migas is requested to publish standard, category and benchmark of operating cost to control contractors operating cost/cost recovery.
- Home Office Overhead (PCO)
PP 79/2010 limit overhead charging from home office/parents companies. Charges is allowed with some criteria :
- Actually support Indonesia activities
- PSC has to submit audited parents company financial report consolidation and also provide basis of the allocation
- Amount wouldn’t exceed maximum limit allowed by government (will regulate later-currently capped by 2% of the total cost)
- Expatriates remuneration will be capped
Ministry of Finance by MoEMR considerations will formulate a decree that regulate maximum expatriates remuneration to be recoverable.
- Income Tax Obligation (Corporate & Dividend Taxes)
Income tax payable refer to income tax rate when PSC agreement is signed. Net income after tax is treated as dividend available to shareholders and subject to income tax. For non residence companies, net income is subject to Branch Profit Tax
Some new items regulated are :
- Contractor will receive tax assestment letter from Directorate of Taxes regarding of C & D tax settlement after audit is conducted. Before audit is done, DGT will issue temporarly tax payment assestment letter.
- Contractor is exempted from import duties and import tax for any goods/materials used for PSC operation both in exploration stage and exploitation stage.
- Tax administration for Contractor and Operator
Contractors have to register to tax office and obtaining NPWP. C & D tax is per contractor responsible, this is to avoid double tax avoidance misconduct.
- In regard of participating interest transfer, Contractor has to sent notification to DGT about value of the transfer
- Oil or gas volume to sette income tax
If necessary for domestic need, Government ask contractor to make in kind settlement for its C & D tax. So contractor will transfer oil/gas volume instead of cash payment for the C & D tax.
- Independent financial & technical verification
Ministry of Finance can assign/appoint independent third party to conduct financial & technical verification in order to ensure procurement process is done according the regulation, no misconduct project etc, to control cost recovery