Centre for Administrative Science Faculty of Social and Political Science University of Indonesia Income Tax on Oil and Gas a Industry in Indonesia (Law No. 22/2001) South- South Sharing of Successful Tax Practices LAW No. 22/2001 Upstream Industry Exploration Exploitation Downstream Industry Processing Trasportation Storage Retail Exploration : Any activities aimed at obtaining information on geological data to find hydrocarbon deposit and estimation of its reserve. Explotation Activities: o Drilling & Well Cementing o Construction of Transport Infrastructures o Processing (including refinery) Upstream Industry; can only be carried out by: o A business entity; or o A permanent establishment Provision in Indonesia Oil and Gas Law (art 10): o A business entity/Permanent Establishment (PE) that is engaged in the upstream industry is prohobited to engage in downstream industry o A business entity that is engaged in the downstream industry is not allowed to conduct business in the downstream industry A Contract in the Upstream Industry • A Business Entity Or BP MIGAS • A Permanenet Establishment CONTRACT (MAX. 30 YEARS) Any Contract in the upstream industry must be reported to the parliament ( as stated in article 11 paragraph 2 Law No. 22/2001) BP MIGAS A State Owned Legal Entity The budget for its operation is based on fee from the government A Contract in the upstream industry: o The owner of the natural resources remains in the hands of the government o BP Migas holds the management of the operation o The business enity or PE will make available funding and bear the risk The contract contains among other things (in art. 11): o Government revenue; o The expenditures obligation; o The obligation to supply oil & gas for domestic market o The transfer of rights and obligation o Reporting requirements The applicable tax laws and their implementing regulations go into effect at the time the contract was signed, OR, the laws and their implementing regulations currently in force. Tax Revenue Tax Revenue Non Tax Revenue Taxes Customs and Excise on Import Local Taxes and Retribution State’s Shares Dead Rent & Exploitation and Exploration fees Bonuses Income Tax Treatment Exploration Period Lasts for 6 years, can be extended for another 4 years Exploration Cost (Pre-Production Cost) Income Tax Treatment Exploitation Period State Revenue A Certain Percatage of Net Production Issue that may affect the income tax treatment in relation to state shares: Is the state shares of oil geared to tax revenue? Is a Permanent Establishment treated differenetly from an Indonesian business enterprise in term of the state revenue? Transfer of Interest Capital Gains Taxable in Indonesia Implementing Regulation Transfer of Interest Non Resident Tax Payer Non Resident Tax Payer Mining Area Split Shares of Oil and Gas Tax Rate Oil Gas 35% 71,1540 : 28,8460 42,3077 : 57,6923 30% 73,2143 : 26,7857 46,4286 : 53,5714 International Tax Aspects Ring Fencing Policy Deductibles Expenses of A Permanent Establishment Capital Gains Branch Profit Tax Expatriate’s Income Tax Ring Fencing OILCO JAMBI Ltd. OILCO SORONG LTD. OILCO LTD. GERMANY INDONESIA BP MIGAS CAYMAN ISLAND WA-1 WA-2 Ring Fencing CAYMAN ISLAND OILCO LTD. OILCO JAMBI GERMANY INDONESIA DESPATCH OF PERSONNEL TAX ISSUES: • PE OF OILCO LTD. • WITHHOLDING BY OILCO JAMBI • VAT WORKING AREA-1 Deductible Expenses of A Permanent Establishment Operating Cost Cost incurred for opeation Bonuses Head Office Allocation Administration cost (HO allocation Interest expenses charged to PE Operating Cost (OECD Model Article 7) “ In Determining the profits of a Permanent Establishment, there shall be allowed as deduction expenses which are incurred for the purpose of the permanent establishment, including executive and general administrative expenses so incurred whether in the state in which the permanent establishment is situated Head Office Allocation Cost: 1. Administrative cost; shall not exceed the ratio of sales of the PE to world wide sale. 2. Interest expenses payable to a third party is deductible by the PE insofar as the fund is used to finance the operation of the PE Interest Expenses: o Interest paid to its HO is not deductible by the PE o Interest paid to a third party by the HO is deductible in the hands of the PE only if the fund is used for the purpose of the operation of the PE Capital Gains (Article 13 OECD Model) Gains derived by a resident of a contracting state from the alienation of immoveable property referred to in Article 6 and situated in the other contracting state may be taxed in that other state. Article 6 The term immoveable property shall have the meaning which it has under the law of the contracting state in which the property in question is situated. The term shall in any cases include property accessory to immovable property, livestock and equipment used in agriculture and forestry, rights to which the provisions of general law respecting landed property and rights to variable of fixed payments as consideration for the working of, or the right to work, mineral deposits, source and other natural resources, ships, boats and aircrafts shall bot be regarded as immoveable property CAPITAL GAINS CAYMAN ISLAND OILCO LTD. OILCO JEPARA USA INDONESIA WORKING AREA-1 OILCO JEPARA TRANSFERS OF ITS INTEREST WORKING AREA-1 TO OTHER PARTY ISSUES: • THE IMPLEMENTING REGULATIONS TO TAX THE GAINS • TAX BASE Capital Gains Legal Basis in Indonesia The Implementing Regulation through Ministry of Finance Regulation The Computation of Capital Gain Deemed Profits Basis What percentage? Treatment of Loses Deemed Profits Basis Historical Cost? BRANCH PROFIT TAX GENERAL POLICY UNDER LAW NO. 8/1971: THE REDUCED RATE OF BPT IN THE TREATY DOES NOT APPLY TO PSC IN OIL AND GAS SOME OF THE DTA-s DO NOT PROTECT THE PSC FROM REDUCED RATE BRANCH PROFIT TAX (OIL & GAS) • FIRST GROUP: DTA-s THAT PROTECTS PSC FROM REDUCED RATE • SECOND GROUP: DTA-s THAT PROTECTS THE REDUCED RATE ON TO CONTRACS THAT WERE SIGNED BEFORE 31 DECEMBER 1983 • THIRD GROUP: DTA-s THAT ADOPTS “MOST FAVOURE NATION CLAUSE • Branch Profit Australia, Tax 1stAustria, Group Bulgaria, Czech DTA-s Republic, Hungary, Luxemburg, Philipines, Poland, Rep of South Africa, Sudah, Syria, Taiwan, Tunisia, United Arab Emirates, Ukraine, USA, Uzbekistan, Venezuela, Vietnam Branch Profit Tax 2nd Group DTA-s • Belgium, Canada, Denmark, Finlandia, India, Italy, Rep of Korea, Netherland, Norway, Pakistan, Romania, Spain, Sweden, Switzerland, UK, Germany, France Branch Profit Tax 3rd Gup DTA-s • Japan • Malaysia • Singapore INCOME TAX TREATMENT OF EXPATRIATES THE SALARY OF THE EXPATRIATES SHALL BE TAXABLE ONLY IN THE USA PROVIDED: OILCO LTD. 1. USA INDONESIA EXPATRIATES WORKING AREA THEY ARE PRESENT IN INDONESIA LESS THAN 120 DAYS/12 MO; AND 2. THEIR SALARY IS PAID BY AN EMPLOYER WHO IS NOT RESIDENT OF INDONESIA; AND 3. IT IS NOT BORNE BY THE PE OF ILCO LTD.