The Executive Agency for Upstream Oil and Gas (BP Migas) stated that the issue of Rp 1.6 trillion in tax arrears of three oil and gas companies from 1991-2008 is caused by the tax treaty and royalties for transfer of ownership of oil and gas working areas.
Raden Priyono, BPMIGAS Chairman said this disputed production sharing contractors in general are using the tax treaty under British Law. The tax treaty under British Law is only 10%, far lower than the national tax regulations that apply a Branch Profit Tax (PBDR) of 20%.
These British production sharing contractors which use British Law are BP Indonesia and Premier Oil. However, Priyono also stated that those companies were not necessarily the ones under dispute. “They (the contractors) have their arguments, so does the BPKP (the Development and Finance Controller), let’s discuss on it. Our position is that everyone must comply with government regulations and honor the contract,” he said on Wednesday.
BPKP earlier stated that the total arrears amounted to Rp 1.6 trillion. Following through on this inspection, BPMIGAS is routinely monitoring the follow-up with BPKP and the contractors concerned.
According to BPKP, the application of this tax treaty in the calculation of the Branch Profit Tax with a tariff below 20% is causing a reduction on tax revenue, making the 85%-15% split profits concept in the production sharing contract is not fully attainable. Meanwhile according to contractors, the tax treaty is part of tax regulation that must be implemented.
“We hope that the settlement over the contractor’s tax issues can soon be reached without disturbing the favorable oil and gas investment climate in Indonesia that would in the end reduce state revenues,” he said.
Concerning royalties for transfer of ownership over interests in a work area, according to Priyono, there are several issues that have caused dispute. Purchasing contractors are required to pay royalties to the previous contractor for all oil and gas production from the respective work area. This causes contractors to use the royalty as a deduction when calculating taxable revenue.
According to BPKP, continued Priyono, the royalty payment made by the contractors are not part of the production sharing contract and cannot be factored in as costs in calculating income tax. Because of this, every year BPKP’s inspections report a shortfall of Income Tax payment by contractors.
Fuad Rachmany, Director General of Taxes Ministry of Finance, stated that the tax treaty was applied years ago and is the international standard. He acknowledged that the tax treaty differs between countries. Fuad mentioned that UK tax treaties and the US are 10%, and Malaysia is 12.5% as examples.
“With a tax treaty of 10%, the Income Tax of contractors will decrease, but on the other hand Non-tax State Revenue will increase. This is the dispute and it has been going on for years,” he said.
To avoid this dispute from recurring, according to Fuad, the Finance Minister is giving directions so that taxes applied to contractors are in line with Government Regulation No 79/2010 regarding Cost Recovery. The Finance Minister will soon issue a Finance Minister Regulation regarding oil and gas contractor taxation.
Jim Taylor, Vice President of the Indonesian Petroleum Association said that if several oil and gas contracts are renegotiated, this would have a bad impact on oil and gas investments in Indonesia. All contractors spent a large amount of money in the past since the exploration phase. Contractors will not want to change the existing contract.
“The consistency and clarity of the contract is vital for the stability and investment assurance in Indonesia,” he said.