Gross Split Scheme Expected to Boost Investment

EMR's Deputy Minister Archandra Tahar - Photo by MEMR

JAKARTA (TheInsiderStories) – After a long wait, the Indonesian Government has finally issued a favorable tax ruling to be applied to oil and gas production sharing contracts (PSC), based on a gross split scheme, as a move to attract more investors into the oil and gas sector.

The tax code is labeled Government Regulation No. 53/2020 on Tax Treatment for Upstream Oil and Gas Business Activities and Gross Split-based Production Sharing Contracts. The new rule takes effect Dec. 28, 2017.

The gross split scheme will be applied in new oil and gas production sharing contracts, including in oil and gas blocks that are being auctioned off by the Energy and Mineral Resources Ministry.

Deputy Minister of Energy and Mineral Resources Arcandra Tahar said the content of the regulation has not changed much from the draft of the Government Regulation on Gross Split Tax. The tax rules will contain loss carry forward for 10 years and indirect tax exemptions until the first oil and gas production.

Arcandra Tahar is confident that these taxation rules are in accordance with the expectations of upstream oil and gas business players.

In addition to these two points, Arcandra Tahar also said there will be tax facilities in the exploitation period that can be provided by the government, based on the economics of additional revenue sharing (split) for the contractor. This additional split will be incorporated into a Minister for Energy and Mineral Resources regulation.

The PSC contractors who can directly apply this tax regulation include Pertamina Hulu Energi for ONWJ Block, because PHE ONWJ signed a contract extension to develop ONWJ Block based on a gross split scheme.

Overall, the Government Regulation on Gross Split Tax contains some important points as set forth in Article 9 to Article 12. The Rule of Article 9 paragraph 2 reads “Expenditures that have a useful life of more than 1 (one) year committed during Commercial Production are charged as fees through depreciation or amortization.”

Article 10 states that depreciation on expenditures of tangible property conducted during a Commercial Production period of more than 1 (one) year period is to be carried out in a declining portion over the estimated useful life by applying the depreciation rate on book value, and at the end of the useful life the book residual value is depreciated at once.

Depreciation begins on the month the property is put into service. Depreciation is calculated based on the group, tariff, and useful life, as contained in the attachment which is an integral part of this Government Regulation.

The tangible property, as referred to in paragraph (1), cannot be used any longer for damage due to natural factors or force majeure. The amount of the value of the books refers to tangible assets that can be directly charged as operating expenses.

In article 11 paragraph 1, it is stated that Amortization of expenses other than tangible property which has a useful life of more than 1 (one) year conducted during the period of commercial production is calculated based on the method of a production unit.

Article 12 governs Expenditures made before the commencement of Commercial Production, in the form of tangible or intangible property capitalized and amortized by the method of a production unit.

Amortization commences in the month of Commercial Production. With regard to expenditures, the Directorate General of Taxation may conduct an inspection to determine the amount of capitalized costs.

The provisions concerning loss carry forward are also contained in Article 18 paragraph 2. “In the case of income after deducting operating expenses, the loss is offset against income from the subsequent tax year up to 10 (ten) years.”

Article 25 gives a mandate to the Government to revoke all the incentives that the PSC contractors may obtain with this gross split tax rule. Article 25 paragraph 1 states that during the Exploration and Exploitation stage until the commencement of commercial production, the Contractor shall be granted facilities including the exemption of import duty on the import of goods used in the framework of petroleum operations.

The contractor is also levied value-added tax or value-added tax and sales tax on luxury goods payable or not on the acquisition of taxable goods and/or services subject to tax; import of taxable goods; the utilization of intangible taxable goods from outside the customs area or within the customs area; and/or utilization of taxable services from outside the customs area or within the customs area.

Meanwhile, for those goods used in the framework of petroleum operations, no collection of income tax, through Article 22 on the import of goods which have obtained the exemption facility from import duties and or reduction of land and building tax of 100 per cent of the indebted petroleum and natural gas and building tax as stated in the tax payable notice.

There are also other incentives as set forth in Article 26, paragraph 3, which states that “The imposition of the cost of sharing facilities by the Contractor in the framework of utilization of state property in the upstream sector of Oil and Natural Gas is exempt from income tax withholding and is not subject to value-added tax.”

Finally, Article 27 states that the imposition of the indirect cost of head office allocation is not subject to withholding income tax and is not subject to value-added tax, in accordance with the provisions of the laws and regulations.

Auction and Gross Split Scheme

The Energy and Mineral Resources Ministry (MEMR) is currently in the process of auctioning off 15 oil and gas Working Areas or blocks, consisting of five non-conventional oil and gas blocks and 10 conventional oil and gas blocks. The blocks are offered through direct offer schemes and regular tenders.

The auction of the oil and gas blocks has been extended from November to December, pending the issuance of a gross split tax ruling. The auction of the oil and gas blocks appears to have drawn limited interest from investors, although Arcandra Tahar, deputy minister for energy and mineral resources, claims that investor response has been better than previous years’ auctions.

Tahar said out of seven conventional oil and gas blocks, five have attracted the interest of investors, including Mubadala Petroleum, Repsol Esploración SA of Spain, PT Energi Mega Persada Tbk and Premier Oil Far East Ltd, as well as Kris Energy.

However, five conventional oil and gas blocks, namely South Natuna, Kasuri III, Tongkol, East Tanimbar, and Membramo, failed to attract any investor interest.

As for non-conventional oil and gas blocks, only two out of five blocks attracted investors’ interest, namely, MNK Jambi I and MNK Jambi II. Three blocks, GMB Raja, GMB Bungamas and GMB West Air Komering failed to attract investors.

The final result of the oil and gas block auctions is expected to be announced in the next few months. The 15 oil and gas blocks being offered are estimated to contain 830 million barrels of oil and 22 trillion cubic feet of gas.

Writtten by Roffie Kurniawan, Email: