Is LBT fair to an exploration ?

Land and Building Tax (“LBT”) or Pajak Bumi dan Bangunan (PBB) in Bahasa is a tax imposed to property such as land or building. However, pursuanto LBT  Law , Land is defined broadly. It covers surface area and subsurface (underneath) area. The surface of land is also defined broadly, it covers soil and inland waters as well as the sea within the territory of Indonesia.  While Buildings is defined as technical construction which are planted or installed permanently or land and/or waters.

By that definition, a working area of Production Sharing contract (PSC) regardless onshore or offshore will be subject to LBT. The reserve or potential reserve located underneath of land is subject to LBT as well.

Previously, nobody pays attention to imposition of LBT in upstream oil and gas industry. Why? Because under the old regyme, PSC Contractors only pay corporate tax and divident tax  while the government assume and discharge  all other taxes including LBT.  It is well known  as assume and discharge regime. Thus, PSC Contractors do not aware about LBT because impostion of LBT whether at the exploration stage or exploitation stage will be settled among government instituition  (DG Tax and DG Budget).

When GR 79 Year 2010 comes into effect, which abolish assume and discharge regime, all indirect tax including LBT will be paid by Contractor and will be treated as recoverable cost. Consequently all PSCs signed after GT 79 should pay indirect taxes by themselves.

Meanwhile Minister of Finance (MOF) issued regulation number PMK-15/PMK.03/2012 concerning Management of LBT in Upstream Oil and Gas. The amount of LBT payable which is previously settled internal government institution, it is now open to public because taxpayers have to pay LBT.  It becomes confusing period at that period, not only to taxpayes but also to tax officer. In my opinion, the government do not have sufficient academic reference in determining the value of an offshore area as well as the subsurface (underneath) area.  It is difficult to find benchmarking in other countries who impose tax on inland water or sea or underneath of the earth.

As the result,  the amount of of LBT imposed is very fantastic. Why ? because the basis for LBT imposition is the whole working area which is normally thousands of kilometers. Although LBT rate is relatively small but it is multiplied  by huge amount of area therefore LBT liabilities become so huge.

The new PSC signed after GR 79 is mostly in the exploration stage (exploration in upstream oil and gas takes 6 until 10 years).   It is not fair for them because  the amount of LBT paid is higher than the cost of drilling. How do they conduct exploration to find oil/gas if their money is allocated to pay LBT ? LBT become disincentive for investment climate.

Moreover, it is irrationale. A PSC signed in the end of the year, it has to pay LBT in the beginning of following year because LBT is imposed based on  condition of 1st  Jan. It is analogous to someone who comes into the restauratan  just sitting down but already proffered a bill.

Those PSCs protested that regulation and have filed litigation (objection to DG Tax and appeal to Tax Court). All of them have lost the case in the objection proccess, but some of them have won at the Tax Court while the remaining is under examination of the Judge.

Not only litigation, the Contractors through IPA advocated to some relevant institution such as SKKMIGAS, Ministry of ESDM, and Ministry of Finance to convey that LBT in the exploration stage become disincentive for upstream oil and gas. They also voiced this issue in the media to attract all relevant parties that LBT is a serious problem.

After trying tirelessly, the Goverment finally issued a regulation to provide incentive to upstream oil and gas. MOF issues PMK- 267/PMK.011/2014 dated 31 Dec 2014 which came into effect in 2015. This PMK-267 provides 100% reduction of LBT during exploration stage.

Geothermal

Learning from upstream oil and gas industry that LBT in exploration stage is a disincentive, now the Government provides LBT reduction as incentive to develop geothermal industry. Recently MOF issued PMK-172/PMK.010/2016 dated 14 November 2016. The intention of this PMK as stated in the consideration is to increase production of renewable energy and to support the accelerated development of power generation of 35.000 MW. This incentive is povided yearly basis to geothermal companies  who are in the exploration phase, but it is at maximum of 7 years (including 2 years extention). This PMK comes into effect in tax year 2017.

Who is eligible ?

This incentive is only eligible for those who have Geothermal license signed after the new Geothermal Law (Law No 21 Year 2014) . They have to submit SPOP (tax return for LBT) and attach recomendation from Minister of ESDM in their SPOP.  The incentive will be reflected in SPPT (LBT Assessment) they will receive.

By providing tax incentive in the exploration stage, now it become fair for taxpayer in upstream oil & gas and geothemal. In the exploration stage where they will not receive income, no tax will be imposed. This condition will improve investment climate in Indonesia and it is hoped it will atrract more investor to invest in Geothermal (as well as upstream oil and gas).