The Indonesian government has introduced new tax regulations to provide greater legal certainty to encourage mining companies with Contracts of Work (Kontrak Karya) (“CoW”) to convert them into special mining permits (IUPK Operasi Produksi). Through Government Regulation No. 37/2018 on Tax Treatment and/or Non-Tax Government Revenue in the Mineral Mining Sector, which took effect on 2 August 2018, special mining permit holders will pay a lower rate of corporate tax but are now faced with additional levies, although it appears that the rate of taxes and dues payable overall will remain around the same.

The key changes for those entities that obtain special mining permits, following a conversion include the following (which apply for the life of the relevant special mining permit):

  • 25% corporate tax rate (reduced from 35% under the CoW regime);
  • 4% levy on net profit payable to the central government; and
  • 6% levy on net profit payable to the local government

The new legislation has a wide scope and also provides for revisions on taxes applicable to holders of other types of mining permit (IUPs, IUPKs and prevailing CoW), including setting out the types of income in respect of which tax is payable: for example, the legislation provides that sales/transfers of production yields are taxed on the basis of the market price of the natural resource in question (based on published quoted commodity prices), provided that if there is a difference between the quoted price and the actual sale price, the actual sale price can be used as long as it is not more than 3% lower than the quoted price.

Special mining permits converted from CoW have reportedly been issued to two entities, PT Freeport Indonesia, the local unit of Freeport McMoran Inc. which operates the world’s second largest copper mine, Grasberg, located in the province of Papua, and PT Medco Energi’s PT Amman Mineral Nusa Tenggara, which is also engaged in copper mining.

The introduction of the new tax provisions was largely motivated by the government’s bid to secure a long-standing proposed deal (said to be worth nearly US$4 billion) for the sale of a majority stake in PT Freeport Indonesia to the Indonesian government by ensuring fiscal clarity for Freeport before Freeport agreed to finalise the deal. The deal, if consummated, will see the Indonesian government take up a 51% stake in PT Freeport Indonesia through state-owned PT Inalum and reap greater dividends from its enlarged shareholding.

The new legislation provides clarity and fiscal certainty to entities converting their existing CoW into special mining permits. The redistribution of the corporate tax rate between a new lower corporate tax rate and levies payable to the central and local government means that the overall rate of tax payable by special mining permit holders remains largely the same as under previous legislation. While this is positive news for mining entities operating in Indonesia, the wider context of the new legislation as a means for securing the PT Freeport deal demonstrates the Indonesian government’s achievement of one of its biggest milestones in its continued policy of resource nationalism.