Improvement on LBT imposition

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 the capitalization value is officially determined to be 10,04. Below the is the formula for LBT Sub surface : 

 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.