Introduction

Indonesia’s ban on raw ore exports has only been in effect for five months, but the Government already appears to be reconsidering its approach.

In February this year (Raw Ore Ban Rocks Indonesia – Legal Battles Continue), we reported that Indonesia’s controversial ban on exports, and requirement that all ore processing be conducted onshore, had finally come into effect.

During the first quarter of 2014, raw ore output and exports plummeted, mass worker layoffs were reported, and Foreign Direct Investment rose only 9.8% on a year-on-year basis, to hit US$6.2 billion. This was far below the 25% increase recorded in the previous quarter, and was attributed to a combination of the raw ore export ban and jitters leading up to the Presidential elections in July. The impact of the ban seems to be hitting home.

The general feeling in the mining community is that the export ban and the onshore processing requirements were “steamrolled” onto it. However, the Government is now considering a change in approach, in which incentives will be offered.

New approach

There are two prongs to the proposed new approach:

  • a relaxation in divestment obligations for smelting companies; and
  • relief from raw ore export tax, which was a last-minute “compromise” as the widely-criticised ban came into effect.

In September 2013 (Further Restrictions on Foreign Investment in Indonesian Mining), we reported that requirements for foreign shareholders to divest shares in mining companies to Indonesian interests had become stricter. Under the September rules, where a foreign investor acquires shares in a mining company which is 100% locally owned:

  • at exploration, the maximum foreign investment is 75%. Previously, this was unregulated; and
  • at production, the maximum foreign investment is 49%, no matter what stage the mine is at. Previously, divestment to 49% was required only at the tenth year of commercial production.

The Ministry of Energy and Mineral Resources (MEMR) recently circulated a draft regulation that would change divestment requirements for smelter companies in favour of foreign investors.

Under the draft:

  • a company with foreign investors which engages only in processing and refining will not be subject to any divestment; and
  • the foreign shareholders of a company which holds a mining permit and is also engaged in processing and refining will now be required to divest up to 40% of its shares to Indonesian interests by the 15th year of commercial production. This compares to 51% divestment for companies which do not have smelters, required immediately if foreigners acquire shares in a 100% locally owned company, and over ten years if the target company already has foreign shareholders.

Preferential tax treatment for smelter companies

The last-minute “compromise” to the January ban provided that, among other measures, certain concentrates with minimum purity of 15% may continue to be exported until 2017. However, export taxes start at 20%, and escalate to a hefty 60% by July 2016. The right to continue exports of raw ore was contingent on a commitment to build a smelter, either alone or in cooperation with another party.

The Government has now proposed also to provide tax relief to smelter companies. Under the plan, the evidenced commitment of companies to build smelters, and the level of progress of smelter construction, would impact on the level of export tax payable on raw ore exports. In other words, the more advanced the development of the smelter, the less export tax would be payable. At this stage, the formula for tax reductions has not been disclosed – and it will ultimately need to be committed to regulation.

Next steps

We emphasise that the above are only proposals at this stage, and we will have to wait to see whether they are ultimately regulated. However, it is encouraging to see a progressive technique of the carrot as well as the stick being used when it comes to mining regulations.