In the upstream oil
and gas, Contractors need to pay tax on the working area, commonly known as
Land and Building Tax ("LBT"). It is imposed on the surface area utilized by
Contractor including building. The term of building means any technical construction that is
planted or permanently attached to the earth in Indonesian waters including office, pipelines, storage and processing facilities such as Floating Storage and Offloading (FSO),
Floating Production System (FPS), Floating Processing Unit (FPU), Floating
Storage Unit (FSU), Floating Production Storage and Offloading (FPSO), and
Floating Storage Regasification Unit (FSRU).
The LBT is also
imposed to offshore working area because the surface of land, in LBT law, covers soil and inland waters as well as the
sea within the territory of Indonesia. For easy reading, it is called Surface
component.
LBT is
also imposed on any economic value beneath the soil, such as oil and gas and
other minerals (gold, copper, etc.) For easy reading, it is called Sub Surface
component.
The formula for determining
LBT payable is the LBT rate multiply by sale value. How to determine the sale value (selling
price) for Subsurface component? Tax Office (DGT) realize that there is no market value for
Subsurface component, therefore DGT determine as follow :
- For PSC in
the exploration stage, it is officially
assessed by DGT
- For PSC in
the exploitation stage, DGT use an approach where the sale value is the revenue from oil &
gas multiply by a capitalization value (determined by DGT)
PMK-76/2013 and its implementing regulation provide that
the
revenue from oil is calculated using ICP (Indonesia Crude oil Price) as stated in the State Budged and the revenue from gas is
calculated as 17,96% of ICP, while
Industry
concern
Based on the formula above, the amount
of LBT Subsurface for producing PSC become very huge because of :
- The tax base is calculated from total gross revenue (Government portion + Contractor portion)
- Crude price is calculated from ICP stated in the state budget in previous year. In the condition of downturn oil price, Contractor pay tax more than it has to be
- Gas price is officially determined by Tax Office to be 17,96% of ICP, which is based on market price according to DGT. . For example, if ICP stated in the state budget is $ 70, it means the gas price for calculating LBT is 17,96% x $ 100 = $17,96. In fact, the gas price agreed in the sales agreement with buyer is far below that price
Due to significant amount of LBT, it shortly becomes an
industry concern. It has impacted not only to PSC with Cost Recovery system but
also to PSC with Gross Split system. For old PSC under assume and
discharge regime, it may have no impact because there is no cash flow for paying
LBT. The payment will be settled through overbooking mechanism internally by Ministry of
Finance (from Directorate General of Budget to Directorate General of Tax). While for PSC Cost Recovery or PSC Gross Split, they have to pay to the government by themselves.
The impact of LBT imposition for different type of producing PSC can be described as below :
Description
|
PSC assume & discharge (pre GR-79)
|
PSC Cost Recovery
(post GR-79)
|
PSC Gross Split
(GR 53)
|
Revised formula using actual price
|
Applicable
|
Applicable
|
Applicable
|
Method of payment
|
No cash payment (overbooking between internal MoF)
|
Pay cash to MOF
|
Pay cash to MOF
|
Accounting treatment
|
No cost recovery
|
Part of cost recovery
|
Part of cost
|
Burden of LBT
|
Government (all other taxes are borne by GOI)
|
Share between Government and Contractor in accordance with the production sharing
|
Solely borne by Contractor
|
To solve this issue, upstream oil and gas association (IPA) has made advocacy
to Ministry of Finance to revise the LBT Subsurface formula, as follows :
- Fixing the oil and gas assumption by using actual price
- Fixing the volume assumption by using Contractor share only
- Fixing the capitalization value by using lower number
New Regulation
After having several meetings and discussions,
finally Ministry of Finance (MoF) issue PMK-186/PMK.03/2019 ("PMK-186") dated 10 December 2019. In the consideration part, it mentions that this PMK is
intended to simplify LBT regulation and to provide legal certainty. Previously,
the determination of LBT object and sale value for various industry was
governed by different regulations which applicable only for such industry, such as forestry,
agricultural, oil and gas, and general mining. Now in the PMK-186, it governs LBT for all sectors.
Relevant provisions in PMK-186
|
Article
|
Upstream oil and
gas sector
|
|
Article 17 (7)
|
Sale value of
Subsurface component for producing PSC is
determined by Replacement Sale Value, which is the revenue from oil
and gas multiply by capitalization value
|
|
Article 18 (1)
|
Revenue from oil and
gas is the gross sales reported in Financial Quarterly Report (FQR) Q4 of the
year before the LBT is payable
|
|
Article 18(2)
|
In the event the
gross revenue is denominated in foreign currency, it will be converted into
Rupiah using MoF exchange rate as of 1 January of the year LBT is payable
|
Those provisions indicates that Government
accepted industry’s proposal to fix the assumption of price by way of using
actual price of oil and/or gas stated in the FQR (actual price).
Implementation
PMK-186 revokes some provisions in PMK-76/2013, particularly LBT calculation and LBT tax return. Subsequently DGT also issue a new implementing regulation for LBT tax return ( or SPOP in Bahasa)
namely PER-19/PJ/2019 ("PER-19"). The spirit of PER-19 is the same with PMK-186 i.e. simplification of regulation by consolidating all regulations governing LBT tax return for various industries into a single regulation.
As LBT adopts official assessment, based on
SPOP reported to Tax Office, then Tax Office will issue Notification of Tax Due
( or SPPT in Bahasa). The implementation
of the revised formula of LBT
Subsurface for producing PSC will be reflected in the SPPT received by Taxpayer in 2020.
Conclusion
From the comparison table above, it shows that PSCs signed before GR-79
(assume and discharge regime) are not
affected because there is no cash flow to pay LBT and it is 100% borne by
Government. On the other hand, PSC Gross Split
enjoy the most benefit because of lesser cash flow and lesser tax burden.
While for PSC under Cost Recovery regime enjoy moderate benefit, it is depend
the profit split between Government and Contractor.
The cost saving from LBT payment for PSC post GR-79 and PSC
Gross Split may improve their project economic and the Government expect that it can be used to finance the exploration of another field or
another working area. If new reserve can be found, ultimately the Government will
receive more revenue from LBT.
It is estimated that the multiplier effect of the LBT formula can
be greater if the Government try to fix the capitalization value and the volume
assumption in the formula. Hopefully the Government would consider these and let’s keep our finger crossed.
