Govt lowers tax on sale of oil and gas blocks

The government will slash the income tax on capital gains obtained by oil and gas contractors from the sale of the ownership of their blocks to other parties to between 5 percent and 7 percent.

Syarifudin Alsyah, a taxation regulation director at the Finance Ministry, said the policy would be enforced through a newly issued 2010 government regulation on cost recovery and taxation in the oil and gas industry.

Syarifudin said that initially the tax imposed on capital gains from ownership transfer would follow the general income tax rate, in which contractors had to pay taxes of as much as 20 percent of their gains.

“With the new regulation, the imposed tax is 5 percent if the blocks are in the exploration stage and 7 percent if they are in the exploitation stage. This can be seen as an incentive even though we actually do not expect contractors to transfer their participating interest too early,” Syarifudin said.

Indonesia requires foreign oil and gas contractors to divest at least 10 percent of their participating interest in oil and gas blocks to local companies. Most of the 10 percent stake goes either to state oil and gas firm PT Pertamina or to regional government-owned companies.

Syarifudin said the gains from sales of the 10 percent stake was exempted from the tax obligation.

Oil and gas companies operating in Indonesia have waited two years for the new government regulation, which is expected to provide legal certainties about both the taxation and the cost recovery payment.

Cost recovery is expense reimbursement given by the government to oil and gas contractors, part of the Indonesian-tailored oil and gas production sharing contract (PSC). The government only makes the reimbursement after the working areas begin commercial production. The payment is made annually through state funds.

Upstream oil and gas regulator BPMigas reported last week that the government paid US$11.95 billion for cost recovery in 2010. BPMigas chairman R. Priyono said cost recovery payment was estimated to reach between $12 billion and $13 billion next year.

Syarifudin said the new regulation would not cap the payment of the cost recovery. “The capping was stipulated in an earlier draft, but after discussions with stakeholders, including BPMigas and the Indonesian Petroleum Association, we agree to exclude it,” he said.

The regulation stipulates 24 cost items on its “negative list” that cannot be reimbursed to contractors. Seventeen of items on the list, such as personal expenses, pension funds, cost for tax consultants and representation allowance, were addressed in an earlier ministry regulation.

The new regulation adds seven new items to the list, including bonuses paid to the government, commercial audit costs, and loan interests.

Oil and gas is a major sector of the Indonesian economy, contributing around 30 percent to state coffers. BPMigas said the sector contributed $26.18 billion to state revenue in 2010.

NEW NEGATIVE LIST ITEMS

1. Granted assets
2. Fines, interests, and other administrative or criminal sanctions caused by contractor errors
3. Amortization costs of assets not owned by the government
4. Bonuses paid to the government
5. Costs occurring before the contracts were signed
6. Loan interests
7. Costs of commercial audits