The Indonesian Petroleum Association says there are differing opinions between the Tax Directorate and oil and gas contractors regarding the statement that 13 contractors have underpaid their taxes. The Vice President of the IPA, Sammy Hamzah, stated that this difference of opinion has occurred due to the interpretation of the usage of tax tariffs according to pre-existing treaties as well as the findings of an unfinished audit regarding cost recovery.
Sammy said that according to international taxation conventions, taxpayers domiciled in countries that have a tax treaty with Indonesia could apply a Brand Profit Tax (BPT) that is lower than 20%. These tax treaties, Sammy explained, have been signed by both Indonesia and the partner countries of the tax treaty.
“So the partner countries of the tax treaties have made an agreement with Indonesia through a bilateral agreement between countries, or G to G, that has been ratified based on the reciprocal principal to avoid double taxation,” he said during the IPA Presentation on PSC Taxation on Friday, August 19, 2011.
Sammy continued, “The tax treaty that has been agreed upon in the bilateral agreements will become a provision that must be obeyed by contractors that have domicile in the aforementioned countries. However, if the government planned to withdraw the oil & gas component from the tax treaty, this could not be done unilaterally and must be first discussed and agreed upon by the tax treaty partner countries.
“A PSC and tax treaty can be renegotiated, however the government cannot do it unilaterally, because the government must also respect the rights of the tax treaty partner countries, as agreed upon in the mentioned bilateral agreement,” he explained.
Moreover, he also asked government auditors to not only look at the potential state losses due to the lower government share due to contractors applying lower BPT, because BPT tariffs was not only applied by oil and gas contractors, but also by other industries as well.
Therefore, he added, if the Tax Directorate unilaterally issued a Tax Assessment Letter regarding the difference in income tax due to the BPT, then this would send a negative signal regarding Indonesia and would influence the current investment climate.
“If the Tax Directorate issues the Tax Assessment Letter with the income tariff difference over the BPT, Indonesia for sure will be isolated from international relations because it will be considered as violating international agreements that would impact the investment climate in Indonesia, which currently needs significant investment to increase the declining levels of oil & gas production,” he said.
Meanwhile, regarding the difference in opinion over cost recovery, Sammy believed that this was caused by different interpretations of the provisions contained in the Production Sharing Contract between BPMIGAS and Contractors. Sammy suggested that this must therefore be resolved through discussion and mutual understanding according to the provisions of the existing production sharing contracts between contractors and BPMIGAS.
“Before this dispute is settled, then according to the mechanism that has been agreed upon in the production sharing contract, the Tax Directorate should not issue a Tax Assessment Letter unilaterally based on the audit findings,” he said.
So far he believed that all oil and gas contractors operating in Indonesia were highly committed to complying with all regulations in effect in Indonesia, including tax regulations.