Does your PSC need to be amended to access tax facility ?

Background

Production Sharing Contract (PSC) signed  before the enactment of  Government Regulation 79 of 2010 (“GR 79”)  adopts  assume and discharge principle, which Contractor obliges to pay corporate income tax and branch profit tax/dividend tax while all other Indonesia taxes are borne by Government.

After GR 79 was promulgated, all other taxes need to be paid by Contractor and those taxes will treated as part of operating cost. It means the burden of all other taxes will be shared between Government of Contractor in accordance with the percentage of production sharing. However, Government still provides incentive in the form of exemption for import duties and taxes related to import to  mitigate the burden of Contractor. 

Tax incentive in GR 27 

GR 79   was amended by Government Regulation number 27 of 2017 ("GR 27 ") . One point of amendment is to revoke exemption for import duties and taxes related to import  and replaced it with certain tax facility.   Nonetheless, some tax facilities provided by GR 27 is with a condition that PSC, which was signed before Law No.22 Year 2001 (Oil and Gas Law), is amended in line with the provisions of GR 27 .

Those tax facilities relate to Indirect Taxes and Import Taxes, as below ;

Article	Indirect Taxes (VAT and LBT) and Import Taxes (Import duty and PPh 22)
26B(1)a.	Exemption of import duty
26B(1)b.	•      Value Added Tax not levied on; •      acquisition of certain Taxable Goods and/or certain Taxable Services; •      import of certain Taxable Goods; •      utilization of certain intangible Taxable Goods from outside the Customs Area, within the Customs Area; and/or •      utilization of certain Taxable Services from outside the Customs Area, within the Customs Area;
26B(1)c.	No collection of Article 22 Income Tax on the import of goods
26B(1)d.	Land and Building Tax (Sub Surface) reduction up to 100%

Scope

Those  tax facilities above may be granted in the context of Petroleum Operation .  Petroleum Operations shall be a range of activities of exploration, exploitation, transportation until the delivery point, plugging and abandonment of wells and restoration of oil and gas site, including field processing, transportation, storage and sales of self-production as a continuation of Exploration and Exploitation.   In other word, only expenditures that are recoverable (cost recovery) are eligible for tax facility. For example, cost for drilling is eligible for tax facility while cost for commercial audit (part of negative list) is not.

Recommendation Letter

For PSC in the exploitation stage, those tax facilities above shall be granted by the Minister of Finance based on the project's economic considerations from the Minister of ESDM.  Minister of Finance (MOF) regulation number 122/PMK.03/2019 (“PMK-122”),  the implementing regulation of GR 27,   provides  criteria of working area which  most likely need Minister of ESDM recommendation to develop it due to its impact to project economic (the targeted IRR will not achieved) . 

The criteria is as below :

  ü  Located in the deep water

  ü  has the potential for hydrocarbons at reservoir depths characterized by High Pressure, High Temperature, or High Impurities that have carbon dioxide (CO2) or hydrogen sulfide (H2S) content;

  ü  located in an area where the existence of oil and gas supporting infrastructure is still limited, located offshore and supporting infrastructure is not yet available,  or  located onshore and no supporting infrastructure is available at all

  ü  is a secondary field development and tertiary field; and / or

  ü  is an unconventional field development (such Coal Bed Methane/CBM)

Application

The procedure for obtaining tax facility is provided in PMK-122, can be described in brief as follows :

·        The Operator of a working are  shall submit the application to Regional Tax Office (Kanwil Jakarta Khusus) through Tax Service Office (KPP Migas) .

·        The application should attach a recommendation letter of project's economic considerations from the Minister of ESDM under Article 9(2) together with a result of economic calculation and copy of the amended PSC.

·        The recommendation letter above shall include the following information : name of the working area, name of the contractors with participating interest, name of the operator, effective date of the PSC and/or date of approval for the adjustment of the PSC, Criteria of the working area, tax facilities to be proposed, and effective period of the tax facilities

·        Regional Tax Office will issue a Tax Facility Certificate  or SKFP (Surat Keterangan Fasilitas Perpajakan ) on behalf of MOF  within 7 working days after receiving the application.

·        In case that the PSC is adjusted (in line with GR27), SKFP will be effective from the date of approval for the adjustment of the PSC .

Implementation

·        The operator must show the original Tax Facility Certificate and provide  a photocopy of  it to the  vender before the transaction.

·        Vender is required to make a Tax Invoice  in accordance with applicable regulation and given a statement reading: "VAT OR VAT & SALES TAX on LUXURY GOODS IS NOT COLLECTED ACCORDING TO GR NUMBER 27 OF 2017 ".

Conclusion

For  PSC followed GR 79/GR 27, by having tax facility, they can improve thier project economic because they can make improvement on cash flow by  not paying  indirect taxes (VAT and LBT) and import taxes as well as improvement on profitability by not having  additional cost from indirect taxes.  

Below is the comparison table for treatment of indirect taxes.

PSC Regime	PSC Signed Before GR 79/2010	PSC Signed after GR 79/2010 & GR 27/2017	PSC Signed after GR 79/2010 & GR 27/2017 (with Indirect Tax Facilities)
Mechanism of Indirect Tax	Assumed and Discharged	Cost Recovery	Cost Recovery
Value Added Tax (VAT)	Paid first by Contractor and will be reimbursed later from Government share	Paid first by Contractor and treated as cost that can be cost recoverable	VAT Exemption, Contractor doesn’t need to pay VAT
Land and Building Tax (LBT)	Contractor only need to report the amount without making any payment (overbooking mechanism internal MOF – DG Budget & DG Tax)	Paid first by Contractor and treated as cost that can be cost recoverable	LBT Sub Surface Reduction up to 100% Contractor doesn’t need to pay LBT (if receive 100% reduction).

Contractors who has PSC adopting Assume & Discharge regime (signed before GR 79) need to amend their PSC first before they can access the tax facility provided by GR 27 . However, comprehensive study should be taken in deciding whether amending the PSC is necessary or not after considering all costs and benefit.