PMK 158, honoring PSC

In previous article (Does PMK-218 violate PSC Principle?), many PSCs are questioning the rationale of PMK-218 to exclude FTP portion from the basis of reimbursement because it had impact on cash flow due to take longer time to receive reimbursement from Government.  They are  also questioning  the rationale of excluding VAT from LNG processing from the basis of reimbursement and it is suspected as the way the government raising revenue through bearing the VAT jointly.  Since PMK-218 came into effect, they have sent letters to related government agencies to request for revision of PMK-218.

Apparently the Government heard the voice of PSCs Contractors.  Recently Minister of Finance has issued PMK-158/PMK.02/2016 dated 25 October 2016  regarding Revision of PMK-218/PMK.02/2014  concerning The Procedure for Reimbursement  VAT in Upstream Oil and Gas.  

In the socialization of PMK-158, the objectives of PMK-218 revision are  :

1) re-enforcing the clause that had been developed in the PSC to protect the rights and obligations of the state and contractors in the upstream oil and gas activities

2) improving legal certainty and encourage investment in the upstream oil and gas sector more attractive

3)  aligning business processes of VAT reimbursement with legislative provisions in the fields of taxation, in the field of non-tax revenues and the field of implementation of the State Budget

FTP

Pursuant to Article 2 of PMK-158,  Government Share is now defined as share from equity and/or FTP (it is re-referred to PMK-64, predecessor of PMK-218). However, it states that the maximum amount of VAT reimbursement claim does not exceed   the amount of government revenue received from Contractors, i.e. equity share plus FTP share.  It is also mentioned that in the event that PSC provides provision stating that the basis of VAT reimbursement excludes FTP, then the amount of VAT reimbursement claim is a maximum of equity share. 

 It is a pretty good news to upstream industry  and now  PSC Contractors  can take a breath in view of cash flow since no delay in claiming for reimbursement.

  

VAT LNG processing

In Article 3 paragraph 2(b) of PMK-158,  the government revise the provision of non-reimbursed VAT from "VAT payable on the operational costs of the LNG plant as further gas processing activities up to its sale"  to  " VAT payable on the operational costs of the LNG plant as further gas processing activities up to its sale, unless regulated differently in the contract and / or the statutory provisions ".  It means that VAT from LNG processing is now reimbursable as long as it is regulated in the PSC.  But, care should be taken for existing PSC in which there is no provisions clearly stated for LNG processing.

Remaining issues

PMK-158 is mainly revised FTP and VAT on LNG processing issues. Although It solved the biggest problem of PMK-218 which is violation of PSC principle, but there are still some issues remained.  One of them is an obligation to obtain Tax Clearance Letter (SKF) from tax office for the period claimed for reimbursement. It becomes an obstacle because tax office often delay to issue SKF for many reasons and it might relate to securing revenue target. 

Other issue is the number of days needed by Directorate General of Budget to verify the completeness of reimbursement  which is still unclear. On SKKMIGAS side, the number of days needed to verify reimbursement documents is still unclear as well.  If those administrative issues can be accommodated in PMK-218 revision, I think it helps  maintaining favorable  investment climate in the current condition  of declining oil price.