The Indonesian government recently issued the Regulation of the Ministry of Finance (PMK) No. 122/PMK.03/2019 (the regulation) which provides exemptions for oil and gas operators (relating to upstream oil and gas business activities) from value added tax (VAT) or VAT and sales tax on luxury goods, land and building tax, and from the tax treatment of charging of joint facility operating costs and head office indirect cost allocation expenditure.
Objective of the incentives
The tax incentives come after the Energy and Mineral Resources ministry announced a regulation that will open access for industry stakeholders to the nation’ oil and gas data, which is expected to encourage exploration and exploitation.
Based on the nation’ oil and gas data, in the first half of 2018, there were 100 oil and gas blocks that are still in the exploration stage out of a total of 210 oil and gas blocks. However, until the end of semester I-2019, the number of exploration oil and gas blocks has only decreased to 90 exploration blocks. On the other hand, there are 20 oil and gas blocks that are at the termination stage.
Indonesia has 3.15 billion barrels worth of proven oil reserves and burned through 450.78 million barrels of fuel last year, ministry data show. The government expects the data regulation to help accelerate exploration into 4.36 billion barrels of potential oil reserves and into 39.49 trillion standard cubic feet of potential gas reserves.
Type of incentives
At the exploration stage, the tax office will waive outstanding value added tax (VAT) or luxury tax (PPnBM) on acquired taxable goods used in the oil exploration process. It also deducts 100 percent of outstanding land and building tax (PBB) related to oil and gas projects stated in the tax notification letter (SPPT).
Furth, for the contractors/taxpayers who are at the exploitation stage, the facilities provided similar to the previous stage. However for the land and building tax the highest was deducted by 100 percent of the outstanding amount. Those who get the incentive are companies that do not achieve the internal rate of return located in the sea or unconventional field development.
The eligible companies must have certain working areas, such as developments of unconventional oil and gas fields. The tax office also relaxes income tax and VAT requirements on certain services.
In addition, the government provided tax incentive facilities in the form of an exemption from withholding income tax on operating costs. The expenditure of indirect head office allocations from contractors that meet certain conditions will not be used as a tax object.
The regulation will be in force 30 days from its promulgation on 27 August 2019
Source: Directorate General of Taxation