The Future of VAT Reimbursement in Upstream Industry

VAT reimbursement rule has changed due to commencement of Government Regulation (GR) No 79/2010. Article 11 GR 79/2010 stipulates that indirect taxes (included VAT) are one of General and Administrative Expenses, which is part of the operating cost of the PSC. New PSC Agreement signed after December 20, 2010 – the effective date of GR79/2010 – onwards will have no VAT reimbursement clause in the PSC given that the VAT is part of the cost recovery.VAT Reimbursement scheme is still applied to the older PSC which has reimbursement clause in the PSC Agreement. Even though the new rule is applied to new PSC, many of PSC companies still facing uncertainty in regards of their VAT. The uncertainty is coming up due to silent of reimbursement clause in some of PSC which signed after Migas Law No 22/2001.It is familiar that PSC companies will get back their VAT payment through a reimbursement process when the PSC starts producing. The reimbursement itself commonly stated in the PSC Agreement as part of the Government obligation as follows:

5.3.2  except with respect to Contractor’s obligation to pay the income tax and the final tax on profits after tax deductions as set forth in clause 5.2.17 of this Section V, assume and discharge all other Indonesian taxes of Contractor including value added tax, transfer tax, import and export duties on materials, equipment and supplies brought into Indonesia by Contractor, its contractors and subcontractors, exactions in respect of property, capital, net worth, operations, remittances or transactions including any of tax or levy on or in connection with operations performed here under by Contractor.

PERTAMINA shall not be obliged to pay Contractor’s income tax including the final tax on profits after tax deduction nor taxes on tobaccos, liquor and personal income tax; and income tax and other taxes not listed above of contractors and subcontractors.

The obligations of PERTAMINA hereunder shall be deemed to have been complied with by the delivery to Contractor within one hundred and twenty (120) days after the end of each Calendar Year, of documentary proof in accordance with the Indonesian fiscal laws that liability for the above mentioned taxes has been satisfied, except that with respect to any of such liabilities which Contractor may be obliged to pay directly, PERTAMINA shall reimburse it only out of its share of production hereunder within sixty (60) days after receipt of invoice thereof. PERTAMINA should be consulted prior to payment of such taxes by Contractor or by any other party on Contractor’s behalf;

Further tax regulation was also issued to regulate the VAT Reimbursement process and supporting PSC companies to get their VAT payment reimbursed. Ministry of Finance Regulation (PMK) No 64/2005 provided further provision in regards of the reimbursement.

Article 2 of the PMK 64/2005 stipulated that a Business Entity or Permanent Establishment that has surrendered the Government Entitlement may obtain reimbursement of VAT and/or Luxury Tax (PPnBM). Business Entities and Permanent Establishment that are entitled to receive reimbursement of VAT and/or Luxury Tax (PPnBM) are those Business Entities and Permanent Establishment that are entitled to receive reimbursement of VAT and/or PPnBM as stipulated in their Cooperation Contracts for oil and gas enterprises with the Government

PMK 64/2005 was also clearly stipulated that the reimbursement mechanism was only applied to the PSC who had reimbursement clause in the Contract. It was also unclear how the Government will treat the VAT for those PSC who had silent reimbursement clause in their PSC? Since those PSC were not at the production stage at that time, they might have less concern regarding this matter. It was possible also for Government to do the same treatment to all PSC even though they have no reimbursement clause in the contract to maintain equal treatment and fairness.

Since the PSC after Migas Law 22/2001 is reaching their production stage after GR79/2010, the concern of VAT Reimbursement become important. As mention earlier that older PSC who has reimbursement clause in their contract will continue to get reimbursement. It is accordance to GR79/2010 provision that the existing PSC will continue to apply until its expiration, including continuance of VAT reimbursement.

Older PSC who has no reimbursement clause in the Contract, reimbursement would not possible given commencement of GR79/2010 which clearly regulates the VAT shall go to the operating cost and part of the cost recovery. Possibility for Government to apply the equal treatment for those PSC is no longer exist since the VAT treatment has explicitly stated and regulated by GR 79/2010.

Based on the above descriptions, it is mean that for older PSC who has silent reimbursement clause in the Contract should treat their VAT payment as part of the operating cost of the PSC and should charge the VAT accordance to cost recovery mechanism. This treatment should be applied to all VAT payment since inception.


Charging mechanism

GR 79/2010 has not provided further implementation of VAT cost recovery charging mechanism whether it will take the same process to other cost recovery mechanism or it will require some approval or audit before charging to cost recovery.  In the reimbursement scheme, normally VAT is reimbursed for the approved amount after review or examination by SKK Migas. In cost recovery scheme, SKK Migas (Government) usually does the post audit to ensure the cost accordance to PSC provision. Applying VAT charges mechanism as per other cost recovery mechanism seems simpler to PSC companies and Government in which the Government will do the post audit to the VAT charges.