Centre for Administrative Science Faculty of Social and Political Science University of Indonesia

Income Tax on Oil and Gas

(Law No. 22/2001) South- South Sharing of Successful Tax Practices

Upstream Industry Exploration Exploitation

LAW No. 22/2001

Downstream Industry Processing Trasportation Storage Retail

 Exploration : Any activities aimed at obtaining information on geological data to find hydrocarbon deposit and estimation of its reserve.

 Explotation Activities: o o o Drilling & Well Cementing Construction of Transport Infrastructures Processing (including refinery)

  Upstream Industry; can only be carried out by: o A business entity; or o A permanent establishment Provision in Indonesia Oil and Gas Law (art 10): o A business entity/Permanent Establishment (PE) that is engaged in the upstream industry is prohobited to engage in downstream industry o A business entity that is engaged in the downstream industry is not allowed to conduct business in the downstream industry

A Contract in the Upstream Industry

BP MIGAS

• A Business Entity Or • A Permanenet

Establishment CONTRACT

(MAX. 30 YEARS) Any Contract in the upstream industry must be reported to the parliament ( as stated in article 11 paragraph 2 Law No. 22/2001)

BP MIGAS A State Owned Legal Entity The budget for its operation is based on fee from the government

A Contract in the upstream industry: o The owner of the natural resources remains in the hands of the government o BP Migas holds the management of the operation o o The business enity or PE will make available funding and bear the risk The contract contains among other things (in art. 11): Government revenue; o o o o The expenditures obligation; The obligation to supply oil & gas for domestic market The transfer of rights and obligation Reporting requirements

 The applicable tax laws and their implementing regulations go into effect at the time the contract was signed, OR, the laws and their implementing regulations currently in force.

Tax Revenue Tax Revenue Taxes Customs and Excise on Import Local Taxes and Retribution Non Tax Revenue State’s Shares Dead Rent & Exploitation and Exploration fees Bonuses

Income Tax Treatment Exploration Period Lasts for 6 years, can be extended for another 4 years Exploration Cost (Pre-Production Cost) Income Tax Treatment

Exploitation Period

State Revenue A Certain Percatage of Net Production

Issue that may affect the income tax treatment in relation to state shares:  Is the state shares of oil geared to tax revenue?

 Is a Permanent Establishment treated differenetly from an Indonesian business enterprise in term of the state revenue?

Transfer of Interest Capital Gains Taxable in Indonesia Implementing Regulation

Transfer of Interest

Non Resident Tax Payer Non Resident Tax Payer Mining Area

Split Shares of Oil and Gas Tax Rate 35% Oil 71,1540 : 28,8460 30% 73,2143 : 26,7857 Gas 42,3077 : 57,6923 46,4286 : 53,5714

International Tax Aspects



Ring Fencing Policy



Deductibles Expenses of A Permanent Establishment



Capital Gains



Branch Profit Tax



Expatriate’s Income Tax

GERMANY INDONESIA

BP MIGAS

Ring Fencing

OILCO JAMBI Ltd.

CAYMAN ISLAND

OILCO LTD.

OILCO SORONG LTD.

WA-1 WA-2

Ring Fencing CAYMAN ISLAND

OILCO LTD.

OILCO JAMBI

GERMANY INDONESIA DESPATCH OF PERSONNEL TAX ISSUES:

•

PE OF OILCO LTD.

•

WITHHOLDING BY OILCO JAMBI

•

VAT

WORKING AREA-1

Deductible Expenses of A Permanent Establishment Operating Cost Cost incurred for opeation Bonuses Head Office Allocation Administration cost (HO allocation Interest expenses charged to PE

Operating Cost (OECD Model Article 7) “ In Determining the profits of a Permanent Establishment, there shall be allowed as deduction expenses which are incurred for the purpose of the permanent establishment, including executive and general administrative expenses so incurred whether in the state in which the permanent establishment is situated

Head Office Allocation Cost: 1. Administrative cost; shall not exceed the ratio of sales of the PE to world wide sale.

2. Interest expenses payable to a third party is deductible by the PE insofar as the fund is used to finance the operation of the PE Interest Expenses: o o Interest paid to its HO is not deductible by the PE Interest paid to a third party by the HO is deductible in the hands of the PE only if the fund is used for the purpose of the operation of the PE

Capital Gains (Article 13 OECD Model)

Gains derived by a resident of a contracting state from the alienation of immoveable property referred to in Article 6 and situated in the other contracting state may be taxed in that other state.

Article 6

The term immoveable property shall have the meaning which it has under the law of the contracting state in which the property in question is situated. The term shall in any cases include property accessory to immovable property, livestock and equipment used in agriculture and forestry, rights to which the provisions of general law respecting landed property and rights to variable of fixed payments as consideration for the working of, or the right to work, mineral deposits, source and other natural resources, ships, boats and aircrafts shall bot be regarded as immoveable property

CAPITAL GAINS OILCO LTD.

USA INDONESIA

OILCO JEPARA

CAYMAN ISLAND

WORKING AREA-1

OILCO JEPARA

TRANSFERS OF ITS INTEREST WORKING AREA-1 TO OTHER PARTY ISSUES:

•

THE IMPLEMENTING REGULATIONS TO TAX THE GAINS

•

TAX BASE

Capital Gains Legal Basis in Indonesia The Implementing Regulation through Ministry of Finance Regulation

The Computation of Capital Gain Deemed Profits Basis Deemed Profits Basis What percentage?

Treatment of Loses Historical Cost?

BRANCH PROFIT TAX

GENERAL POLICY UNDER LAW NO. 8/1971: THE REDUCED RATE OF BPT IN THE TREATY DOES NOT APPLY TO PSC IN OIL AND GAS SOME OF THE

DTA-s

DO NOT PROTECT THE PSC FROM REDUCED RATE

BRANCH PROFIT TAX (OIL & GAS) •

FIRST GROUP: DTA-s THAT PROTECTS PSC FROM REDUCED RATE

•

SECOND GROUP: DTA-s THAT PROTECTS THE REDUCED RATE ON TO CONTRACS THAT WERE SIGNED BEFORE 31 DECEMBER 1983

•

THIRD GROUP: DTA s THAT ADOPTS “MOST FAVOURE NATION CLAUSE

•

Branch Profit Tax 1st Group DTA-s Republic, Hungary, Luxemburg, Philipines, Poland, Rep of South Africa, Sudah, Syria, Taiwan, Tunisia, United Arab Emirates, Ukraine, USA, Uzbekistan, Venezuela, Vietnam Branch Profit Tax 2nd Group DTA-s

•

Belgium, Canada, Denmark, Finlandia, India, Italy, Rep of Korea, Netherland, Norway, Pakistan, Romania, Spain, Sweden, Switzerland, UK, Germany, France Branch Profit Tax 3rd Gup DTA-s

• • •

Japan Malaysia Singapore

INCOME TAX TREATMENT OF EXPATRIATES

USA INDONESIA

OILCO LTD.

EXPATRIATES

2.

THE SALARY OF THE EXPATRIATES SHALL BE TAXABLE ONLY IN THE USA PROVIDED: 1.

THEY ARE PRESENT IN INDONESIA LESS THAN 120 DAYS/12 MO; AND 3.

THEIR SALARY IS PAID BY AN EMPLOYER WHO IS NOT RESIDENT OF INDONESIA; AND IT IS NOT BORNE BY THE

PE

OF ILCO LTD.

WORKING AREA