The Government of Indonesia (“GOI”) first regulated Gross Split Production Sharing Contracts (“Gross Split PSC”) in early 2017, with the enactment of Minister of Energy and Mineral Resources (“MEMR”) Regulation Number 8 of 2017 regarding Gross Split Production Sharing Contracts, as amended by MEMR Regulation Number 52 of 2017 regarding the Amendment of MEMR Regulation Number 8 of 2017 (August 29, 2017) (“MEMR Reg. 8/2017, as amended”). Despite this new regulatory push, however, as of the date of this article, the GOI has only executed one Gross Split PSC, with PT Pertamina Hulu Energi Offshore North West Java, for the Offshore North West Java Block.
In response to this apparent lack of interest from investors, the GOI issued a regulation on December 28, 2017, on the tax treatment for Gross Split PSCs, Government Regulation Number 53 of 2017 regarding Tax Treatment for Upstream Oil and Gas Business Activities with Gross Split Production Sharing Contracts (“GR 53/2017”). The GOI hopes the tax treatment under GR 53/2017 will attract more investors to Gross Split PSCs.
Tax Treatment under GR 53/2017
Prior to the enactment of GR 53/2017, the taxation of Gross Split PSCs was only incidentally regulated under MEMR Reg. 8/2017, as amended. GR 53/2017 provides a more comprehensive regulatory framework for the tax treatment of Gross Split PSCs. Its provisions apply retroactively to Gross Split PSCs signed before GR 53/2017 came into force.
GR 53/2017 regulates (i) income tax on the production sharing of oil and gas (“Production Sharing Income Tax”) and (ii) income tax on other revenues in addition to the production sharing of oil and gas (“Non-Production Sharing Income Tax”). It also provides various incentives for Gross Split PSC Contractors (“Tax Incentives”).
Production-Sharing Income Tax
GR 53/2017 provides two types of Production Sharing Income Tax, namely Corporate Tax and Branch Profit Tax (“BPT”).
Corporate Tax is the tax regulated under the Indonesian Income Tax Law. It is subject to the income of a company (either a domestic capital investment company or a foreign capital investment company) (“Company”) or a Permanent Establishment through which a foreign parent company operates its upstream oil and gas business activities in Indonesia (“Permanent Establishment”).
BPT is an additional tax imposed on the income of a Permanent Establishment, after Corporate Tax deduction, which is to be repatriated in the form of dividends to the parent company in the foreign country.
To identify the amount of the Corporate Tax and BPT, you must first determine the amount of taxable income deriving from production sharing (“Taxable Production Sharing Income”). GR 53/2017 provides a formula to calculate Taxable Production Sharing Income. After the Taxable Production Sharing Income is calculated, a contractor can determine the value of the Corporate Tax and BPT payable by the contractor.
In the context of Gross Split PSCs, Corporate Tax is subject to the amount of Taxable Production Sharing Income acquired by a contractor. GR 53/2017 provides that the value of Corporate Tax payable by a contractor (“Payable Corporate Tax”) is to be identified by multiplying the Taxable Production Sharing Income by the corporate tax rate applicable when the PSC was signed (if specified under the PSC) or by the applicable corporate tax rate under the prevailing Income Tax Law.
The corporate tax rate has changed over past PSC regimes, following amendments to the Income Tax Law. Currently, the applicable corporate tax rate for both a Company and Permanent Establishment is 25%.
The Payable Corporate Tax of a contractor having its business entity in the form of a Permanent Establishment is then imposed with BPT. GR 53/2017 stipulates that payable BPT can be calculated by multiplying the Payable Corporate Tax by a BPT rate of 20%, or by the rate acknowledged by the tax treaty between Indonesia and the relevant contracting state, if any.
Non-Production Sharing Income Tax
The amount of the Non-Production Sharing Income Tax differs pursuant to the types of income that may be acquired by a contractor in addition to the production sharing of oil and gas (“Non-Production Sharing Income”).
- Income Tax from Uplift or Similar Remuneration
GR 53/2017 defines uplift as a remuneration received by a contractor after bridging funds to finance PSC operations, which was originally liable upon another contractor in a Cooperation Agreement.
A contractor’s gross income deriving from uplift or other similar remuneration activities is subject to a final income tax in the amount of 20%. Such amount will not be further imposed with any additional income tax.
- Income Tax from Transfer of Participating Interest
The provisions related to the imposition of income tax upon the Transfer of Participating Interest (“Transfer”) are differentiated between Transfers conducted during the exploration and exploitation stages.
- Income Tax for Transfer during the Exploration Stage
GR 53/2017 stipulates that in the event a contractor obtains income from a Transfer during the exploration stage, its gross amount is subject to a final income tax in the amount of 5%. No additional income tax is to be imposed on this amount.
Income from a Transfer during the exploration stage may be exempted from the 5% income tax if certain criteria stipulated in GR 53/2017 are met.
- Income Tax for Transfer during the Exploitation Stage
If a contractor obtains income from a Transfer during the exploitation stage, GR 53/2017 stipulates the gross amount is subject to a final income tax in the amount of 7%. It is not subject to any additional income tax. Similar to above, income from a Transfer during the exploitation stage may be exempted from the 7% income tax if certain criteria are met.
Under GR 53/2017, the GOI also provides several tax incentives related to the (i) exploration and exploitation stages and (ii) indirect costs of head office.
If a contractor has been previously granted tax facilities in the form of an exemption of import duty and import tax before the enactment of GR 53/2017, such tax facilities shall remain in effect until their expiration.
The MEMR has the right to stipulate and provide the form and amount of incentives to support the economics of the working area development. Whereas, the Ministry of Finance may grant incentives in the framework of utilizing state property, in accordance with the provisions of the relevant laws and regulations.