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Govt and investors don’t see eye-to-eye on gross-split taxation
A government regulation (PP) intended to manage taxation under the newly-introduced gross-split scheme seems to be in a deadlock, due to a disagreement between the government and investors
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government regulation (PP) intended to manage taxation under the newly-introduced gross-split scheme seems to be in a deadlock, due to a disagreement between the government and investors.
Deputy Finance Minister Mardiasmo confirmed that the disagreement was largely regarding whether contractors should be forced to pay taxes during an oil and gas block’s exploitation period, especially as it has become a cash cow.
While both sides have agreed to implement a capital loss carryover during exploration — widely known as being high risk and needing large amounts of investment, the Indonesian Petroleum Association (IPA) has demanded a tax exemption during production.
“If they [contractors] have started making a profit and are becoming rich, then they should start paying value-added tax and property tax. This is something we still need to find a compromise for,” Mardiasmo told reporters on the sidelines of the 2017 Mining and Energy Expo in Jakarta on Tuesday.
The gross-split production sharing scheme (PSC) was introduced earlier this year to slowly phase out the current cost recovery scheme — which makes it compulsory for the government to reimburse contractors’ exploration and exploitation activities.
While it has since been revised to accommodate investor concerns, many have remained hesitant toward the gross-split scheme due to a lack of clarity on the taxation mechanism.
The government has disclosed that the upcoming PP would largely be similar to PP No. 27/2017 on taxation under cost recovery, which provides the minister with the authority to determine the sliding scale split in a cooperation contract and scrap the domestic market obligation (DMO) for investors with an approval from the Finance Minister, as well as detailed fiscal incentives.
Moreover, Mardiasmo also confirmed that income tax would be cut to 25 percent from the initial 35 percent.
Meanwhile, the ReforMiner Institute recently issued a report containing its simulation of the option to tax gross revenue under the gross-split scheme, in comparison to the current taxable income system.
Based on ReforMiner’s simulation, implementing tax on gross revenue caused the oil and gas block’s net present value (NPV) to decrease by 40 percent for every 1 percent hike in taxes. In comparison, using the current tax system would only cause it to decrease by 28 percent.
Furthermore, taxing gross revenue would also cause the internal rate of return (IRR) to decrease by a whopping 0.49 percent, in comparison to 0.09 percent using the taxable income scheme.
“Based on the comparison, a normal taxation system would give a healthier cash flow because the level of sensitivity is much smaller, meaning that it will produce better results and tax rates,” the report stated. “This is important to ensure an enticing project and also the longevity of the oil and gas industry during a period of unstable oil prices and a change in Indonesia’s fiscal system.”
The recent revision of the gross-split regulation and its subsequent effect on the upcoming PP on taxation has forced the Energy and Mineral Resources Ministry to once again postpone the deadline until November for the oil and gas blocks it has put on auction this year.
The ministry has put up 15 oil and gas blocks this year, all under the gross-split scheme. “[Investors] have asked us to be clear on taxation before they are willing to resubmit their bids for the blocks they wish to operate,” Deputy Energy and Mineral Resources Minister Arcandra Tahar said.
The gross-split scheme was initially established to entice more investors to Indonesia’s upstream sector, in addition to unburdening the government’s coffers.
In 2015, the government found no suitable winners for all 11 blocks it had put on auction that year. This is in stark contrast to the 2012-2014 period when there were 89 winners in auctions for a total of 50 blocks.
Separately, IPA executive director Marjolijn declined to confirm the contents of the association’s discussion with the government on the issue of taxation. “We cannot speak about it publicly since we are still discussing the details,” she said.
