oil and gas in indonesia

Oil and gas taxation in IndonesiaDeloitte taxation and investment guides

Tax professionals of the member firms of Deloitte Touche Tohmatsu Limited have created the Deloitte International Oil and Gas Tax Guides, an online series that provides information on tax regimes specific to the oil and gas industry. The Guides are intended to be a supplement to the Deloitte Taxation and Investment Guides, which can be found at www.deloitte.com/taxguides. For additional information regarding global oil and gas resources, please visit our website: www.deloitte.com/oilandgas

Contents

Deloitte taxation and investment guideswww.deloitte.com/taxguidesOil and gas tax guide

1.0 Summary 1

2.0 Corporate income tax 1

2.1 In general 1

2.2 Rates 2

2.3 Taxable income 2

2.4 Revenue 2

2.5 Deductions and allowances 3

2.6 Losses 5

2.7 Branch profits tax 5

3.0 Other corporate income tax 5

3.1 Income tax facility 5

3.2 Income tax holiday 6

4.0 Payments to related parties 6

4.1 Transfer pricing 6

4.2 Thin capitalization 6

4.3 Interest deductibility 6

5.0 Transactions 7

5.1 Capital gains 7

5.2 Asset disposals 7

5.3 Farm outs 7

5.4 Other income 7

6.0 Withholding taxes 7

6.1 Dividends 7

6.2 Interest 8

6.3 Rents and royalties 8

6.4 Tax treaties 8

7.0 Indirect taxes 8

7.1 VAT 8

7.2 VAT collector status 8

7.3 Import, export and customs duties 9

7.4 Excise tax 9

7.5 Stamp tax 9

7.6 State and municipal 9

8.0 Other 10

8.1 Choice of business entity 10

8.2 Foreign currency 10

9.0 Oil and gas contact information 11

Oil and gas taxation in the United States Deloitte Taxation and Investment Guides 1

1.0 SummaryIndonesia has several layers of taxation on upstream oil and gas activities. The most important taxes which apply to companies extracting oil and gas from Indonesia and/or the Indonesian Continental Shelf are; :

•Corporateincometax(upstream) DependsonthesigningdateoftheProductionSharingContract(“PSC”);thecurrentrateis25%

•Corporateincometax(downstream) 25%

•Branchprofitstax 20%

•Withholdingtax*

oDividends 10%–20%

oInterest 15%–20%

oRoyalty 15%–20%

•VAT 10%

*Dependsontherecipient;subjecttotreatyreductioninthecaseofnon-residents.

2.0 Corporate income tax2.1 In generalOilandgasbusinessactivitiesinIndonesiamainlyconsistofupstream(explorationandexploitation)anddownstream(processing,transport,storageandcommerce).Therearealsoothersupportingactivitiesforboththeupstreamanddownstreambusinesses.TheOilandGasLawprohibitsabusinessentityengaginginupstreamactivitiesfromalsoconductingdownstreambusinessactivitiesandviceversa.

Theupstreambusinessactivitiesarecarriedoutbyabusinessentity(commonlyreferredtoasthe“Contractor”)basedontheCooperationContractmadewiththeGovernment.TheCooperationContractcanbeintheformofaProductionSharingContract(“PSC”)oraServiceContract.APSCisthecommoncontractintheIndonesianupstreambusiness.Generally,aCooperationContractoverridesthegeneralprinciplesofIndonesianincometaxlaw,becausethecontractshavethestatusof“LexSpecialis”.ReferencetothegeneraltaxlawsandregulationswillbemadeonlyonmattersnotspecificallymentionedintheCooperationContract.

Taxationofbusinessentitiesoperatinginthedownstreamsectorisbasedupontheprevailingtaxlawsandregulations,except when downstream activities are an integral part of upstream activities.

The Cooperation Contract can be in the form of a Production Sharing Contract (“PSC”) or a Service Contract. A PSC is the common contract in the Indonesian upstream business. Generally, a Cooperation Contract overrides the general principles of Indonesian income tax law, because the contracts have the status of “Lex Specialis”.

Oil and gas taxation in Indonesia 2

2.2 RatesUpstream businessHistorically,thecorporateincometaxrateapplicabletotheContractoristheprevailingincometaxrateatthedateofsigningofthePSC.ThesummaryofoilandgassharingandcorporatetaxratesinvariousPSCregimesisasfollows:

Old 1985 – 1994 1995 1995 Province New

Oil Gas Oil Gas Oil Gas Oil Gas Oil Gas

Corporate tax 45 45 35 35 30 30 30 30 30* 30*

Branch profits tax 20 20 20 20 20 20 20 20 20 20

Effective 56 56 48 48 44 44 44 44 44* 44*

Share of production after

Government 85 70 85 70 85 70 65 60 Varies

Contractor 15 30 15 30 15 30 35 40 Varies

Contractor’s share of production before

Oil – 35/(100-44); Gas – 40/(100-44) 62.5 71.43 Depends on negotiated share

productionOil – 15/(100-44); Gas – 30/(100-44) 26.79 53.57

Oil – 15/(100-48); Gas – 30/(100-48) 28.85 57.69

Oil – 15/(100-56); Gas – 30/(100-56) 34.09 68.18

* The corporate tax rate has reduced to 28% for 2009 and 25% for 2010 onwards, which results in effective rates of 42.4% and 40% respectively.

ForcontractssignedafterGovernmentRegulationNo.79/2010(“GR-79/2010”),theincometaxrateisinaccordancewith the provisions of the laws and regulations relating to income tax. The Contractor can opt to either apply the income tax rates that prevailed at the time the contract was signed or follow the changes in tax rates as they occur over time.

Downstream businessThecorporateincometaxratefordownstreambusinessgenerallyfollowstheprevailingtaxlawandregulation,unlessa certaintaxincentiveisgrantedbytheMinisterofFinance(pleaserefertoSection3TaxIncentives).Thecurrenttaxrateis25%.

2.3 Taxable incomeThetaxableincomeofanupstreamContractorshallcompriseoftheincomederivedfromtheoperations(section2.4),lesscurrentyearnon-capitalcosts,lesscurrentyeardepreciationofcapitalcosts,lessprioryears’unrecoveredoperatingcosts.

ThetaxableincomeofadownstreambusinessisgenerallycomputedonthebasisofIndonesianaccountingprinciples.Certainadjustmentsaremadeforfiscalpurposestoarriveattaxableincomeasabasisforcalculatingcorporatetaxliability,forexamplebenefitinkindexpenses,taxexpenses,taxpenalties,provisionsandothernon-deductibleexpenses.

2.4 RevenueUpstream business AssessableincomeconsistsofgrossincomeofContractorsbasedonthetypeofCooperationContractsanditssource,as follows:

•incomewithintheframeworkofaPSC,whichisthetraditionalincomereceivedfromoilandgassharingasregulatedbythePSC,suchasequityshare,FirstTranchePetroleum,oiland/orgasderivedfromrecoveryofoperatingcosts,incentives,DomesticMarketObligation,andanypricevariance;

•incomewithintheframeworkofaServiceContract,whichisbasicallytheagreedcompensationreceivedfromtheGovernmentplustherealizedvalueofsalesofoiland/orgasderivedfromrecoveryofoperatingcosts;and

•incomederivedfromoutsideaCooperationContract,whichconsistsof:

a. Uplift or other similar income; and/or

b.Incomefromthetransferofaparticipatinginterest.


The Contractor may recover an investment credit from the capital cost directly required for developing the crude oil production facilities of a certain project.

Oil and gas pricing policyThevalueofcrudeoilisdeterminedbasedontheaverageIndonesianCrudePrice(“ICP”),whichisinturndeterminedbytheGovernmentperiodicallybasedonthemovementinthepriceofabasketofselectedinternationallytradedcrudes.TheICPisthebasisforconvertingthecrudeoiltogrossrevenueinordertocalculatetheContractors’share,costrecovery,andtaxableincome.

GaspriceisasstipulatedintherespectiveGasSalesAgreement.

First Tranche Petroleum (“FTP”)FirstTranchePetroleumorFTPmeanstheportionofoilorgasproducedandsetasidefromtheContractAreawhichtheGovernmentandtheContractorareentitledtotakeandreceiveeachyearbeforeanydeductionforrecoveryofOperatingCostsandproductionhandlingcosts.FTPisgenerally20%oftheproduction.AvariationmayexistinthelatestPSCswherebyonlytheGovernmentisentitledtotheFTP.

Investment creditTheContractormayrecoveraninvestmentcreditfromthecapitalcostdirectlyrequiredfordevelopingthecrudeoilproductionfacilitiesofacertainproject.DependingonthePSC,aninvestmentcreditmayalsobeavailableforthecapitalcostdirectlyrequiredfordevelopingnaturalgasproductionfacilities.

Generally,theinvestmentcreditrangesbetween15.78%and20%forcrudeoil,whilecertainPSCsprovidehigherinvestmentcreditforcrudeoilproductionfacilitiesofnewfieldsproducingfrompre-tertiaryreservoirrocks,andfornatural gas production facilities. The investment credit is recovered from gross production after recovering Operating Costs,commencingintheearliestproductionyear,andistaxableinthehandsoftheContractor.

Domestic Market Obligation (“DMO”)TheContractorisrequiredtoparticipateinsupplyingdomesticneedsforoiland/orgas.TheparticipationoftheContractorinthesupplyofdomesticneedsisdeterminedonaproratedbasisinlinewiththeshareofoiland/orgasproduction.TheamountoftheContractor’sparticipationisgenerally25%oftheoiland/orgasproduction.

Thepriceofcrudeoilsoldfordomesticsupplyistypicallyrangingbetween10%–25%oftheweightedaverageprice(“WAP”).EarliergenerationsofPSCsprovidedaDMOpriceofonlyUS$0.20perbarrel.

TheDMOrequirementfornaturalgasisgenerallystipulatedinCooperationContractssignedafterLawNo.22.AnynewnaturalgasreservediscoveredbytheContractorshallfirstbereportedtotheMinisterofEnergyandMineralResources(“MoEMR”).Intheeventthatthenaturalgasreserveistobeproduced,theMoEMRshallfirstgiveprioritytodomesticdemands.

Downstream businessAssessableincomeiseveryeconomicbenefit,originatingfromIndonesiaorabroad,receivedorobtainedbythetaxpayer,thatcanbeusedforconsumptionorforaddingtothewealthofthetaxpayer.Itincludes,amongstothers,businessprofits,capitalgains(whicharetaxedasordinaryincome),dividends,interestincomeandrentalincome.

2.5 Deductions and allowancesUpstream business The“UniformityPrinciple”isadoptedbytheupstreamoperation.ThisprincipleprovidesthatthetreatmentofdeductiblecostsfortaxpurposesshallbeidenticaltothecostsrecoveredbytheContractorsfromtheGovernmentwithintheframeworkoftheCooperationContract,andviceversa.GenerallytheContractorwillrecoveralloperatingcostsoutofsalesproceeds.IfinanycalendaryeartheOperatingCostsexceedthevalueofcrudeoilorgasproduced,thentheunrecoveredexcessshallberecoveredinsucceedingyears.

TheoperatingcostsofaCooperationContractconsistofexplorationcosts,exploitationcosts,andothercosts.Themainprinciplesgoverningthetypesofoperatingcoststhatcanberecoveredandthataredeductiblefortaxpurposes,areasfollows:

•incurredforincomegeneratinganddirectlyrelatedtotheworkareainIndonesia;

•satisfythearm’slengthpricing(fortransactionswithrelatedparties);

•theoperationisperformedinaccordancewithproperbusinessandtechnicalpractices;and

•theactivitiesareinaccordancewiththeworkplanandbudgetapprovedbyGovernment.

4Oil and gas taxation in Indonesias

Depreciation or amortization of assets follow the specific classification and rates as stated in the Cooperation ContractsCertaincostscannotberecoveredandarenotdeductibleforincometaxpurposes(thenegativelist),including:

•costsrelatedtothepersonalinterestsofworkers,management,holdersofparticipatinginterest,andshareholdersand/or their families;

•reservefunds,exceptformineabandonmentandsiterestorationcostsdepositedinabanklocatedinIndonesia;

•assetsthataredonated;

•taxadministrationsanctions,aswellaspenaltiesarisingfromnegligenceordeliberatemistakesbyaContractor;

•depreciationcostsofgoods/equipmentthatarenotownedbytheState;

•incentives,pensionfundcontributions,andinsurancepremiumsincurredforthepersonalinterestofforeignworkers,management and shareholders and/or their families;

•costsforforeignworkersnotfollowingtheExpatriateManpowerUtilizationPlan(RPTKA)proceduresand/ornothavingExpatriateWorkPermits(IKTA);

•legalconsultantfeesthatarenotdirectlyrelatedtotheCooperationContract’soperations;

•taxconsultantfees

•costsformarketingtheContractor’sshareofoil/gas,exceptgasmarketingcostsapprovedbytheGovernment;

•publicrelationscosts,includingentertainmentinanynameorformwhatsoever,unlessaccompaniedbyanominativelistofthebeneficiariesandtheirtaxidentificationnumbers;

•communitydevelopmentcostsduringtheexploitationstage;

•costsrelatedtotechnicaltrainingforforeignworkers;

•costsrelatedtomerger,acquisition,andtransferofparticipatinginterest;

•interestcostsonloans;

•employees’incometaxbornebytheContractorsorpaidasataxallowance,andthirdparties’taxthatshouldbewithheldorcollectedbutisinsteadbornebytheContractorsorgrossedup;

•procurementofgoodsandservicesorotheractivitiesnotinaccordancewiththearm’slengthprincipleandpropertechnicalpractices,orexceedingthevalueoftheauthorizationforexpenditurebymorethan10%;

•excessivesurplusofmaterialsduetoerrorsinplanningandpurchasing;

•bookvalueandoperatingcostsofassetsusedthatcannolongeroperateduetotheContractor’snegligence;

•transactionsthat:1)causelossestotheState;2)areprocuredwithouttenderprocess(exceptforemergencypurposes);or3)conflictwiththeregulations;

•bonuspaidtotheGovernment;

•expendituresincurredpriortosigningofCooperationContracts;

•interestrecoveryincentive;and

•costsforcommercialaudit.


Downstream business Generally,adeductionisallowedforanyexpensesincurredinobtaining,collectingandmaintainingtaxableincome.On theotherhand,theincometaxlawalsospecifiestypesofexpensesthatcannotbeallowedasexpensesforcalculatingcorporateincometax(non-deductibleexpenses).Pleasereferto“Deloitte–TaxationandInvestmentinIndonesia”fordetailsofallowableandnon-allowableexpenses.

2.6 LossesThereisnoconceptofataxlossfortheupstreambusiness.UnrecoverablecostscanbecarriedoverintothesubsequenttaxyearsuntiltheendoftheCooperationContract.

Taxlossesofcompaniesoperatingdownstreambusinessesareallowedtobecarriedforwardandappliedagainstfuturetaxobligationsforaperiodofuptofivefiscalyears.

2.7 Branch Profits Tax (“BPT”)UpstreamContractorsarealsosubjecttoafinaltaxontaxableincomeaftercorporatetaxdeduction(BranchProfitTaxorBPT).Thestatutoryrateis20%.ThemajorityofincometaxtreatieswillnotallowtheuseofalowerBPTrateforincomederivedfromoilandgasexplorationactivities.However,evenifsometaxtreatiesproviderelief,theapplicationofalowerBPTrateisstillanindustryissueandpotentiallycreatesdisputeswiththeauthorities,hencetheagreedproductionsplitformulaintheCooperationContractstypicallyimplytheapplicationofthestatutoryBPTrate.

TheapplicationofareducedtreatyrateforBPTpurposeshasbeenformallydisallowedinPSCswhichweresignedunderpost2001OilandGasLaw.AspecificprovisionhasbeenincludedinthePSCsignedmorerecently(underthenewOilandGasLaw)torevisetheproductionsharingscheme,suchthattheGovernmentendsupwiththesameafter-taxpositionifthereducedrateofBPTisappliedbytheContractors.

3.0 Tax incentives 3.1 Income tax facilityCompaniesinvestingorexpandinganexistingbusinessinthefollowingdownstreamsectorsmaybegrantedcertainincome tax concessions:

•oilrefinerywithpriorityforlocaldemand;

•naturalgasrefineryandprocessingbusinesstoproduceLNGandLPG;

•lubricantsmanufacturer;and

•organicbasicchemicalsindustryoriginatingfromcrudeoilandnaturalgas.

The income tax facilities are in the following forms:

•additionalnetincomereduction,uptoamaximumof30%oftheamountoftheinvestment;

•accelerateddepreciationandamortization;

•theperiodoflosscarryforwardbeingextendeduptotenyears;and

•withholdingtaxondividendstoforeignshareholderscappedat10%,oralowertaxtreatyrate.

ThesefacilitiesaregrantedbytheMinisterofFinanceuponconsideringproposalsfromtheHeadoftheInvestmentCoordinatingBoard.

Upstream Contractors are also subject to a final tax on taxable income after corporate tax deduction (Branch Profit Tax or BPT). The statutory rate is 20%.

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3.2 Income tax holidayCorporatetaxpayersintherefineryindustryofnaturaloiland/orbasicorganicchemicalsoriginatingfromnaturaloilandnaturalgasmaybeeligibleforacorporateincometaxexemptionfacility(TaxHoliday),subjecttoapplicationandapprovalfromtheMinisterofFinance.

TaxpayersthatmaybeentitledtotheTaxHolidayfacilityarenewcorporatetaxpayersthatfulfillthefollowingcriteria:

•operateinapioneerindustry;

•haveanewcapitalinvestmentplanofatleastIDR1trillion;

•willdepositataminimum10%ofthetotalinvestmentplaninanIndonesianbank;and

•havethestatusofalegalentityinIndonesiawhichshouldhavebeenvalidated,atmost,12monthsbeforetheeffectivedateofthetaxholidayregulation(i.e.15August2011),orthosetaxpayerswhosestatushavebeenvalidatedon or after the effective date of the regulation.

Exemptionfromincometaxmaybegivenforamaximumperiodoftenfiscalyearsandaminimumoffivefiscalyearsfromthefiscalyearinwhichcommercialproductioncommences.Aftertheendoftheexemptionperiods,taxpayerswillalsobeentitledtoa50%reductionofincometaxpayableforthesubsequenttwofiscalyears.

ThisincentivecanonlybeapplieduntilAugust2014.

4.0 Payments to related parties 4.1 Transfer pricingTheTaxLawrequirestransactionsinvolvingrelatedpartiestobeconductedatarm’s-length.Thearm’s-lengthprinciplemeansthatthepricingbetweenrelatedpartiesshouldbesimilartotheconditionsthatwouldhaveappliedhadthetransactiontakenplacebetweenunrelatedparties.Certaintransferpricingdocumentationwouldneedtobemaintainedbythetaxpayerforqualifiedtransactions.

Intheupstreambusiness,recoverableoperatingcostsinthecalculationofproductionsharingandincometaxmustalsofulfillthearm’slengthrequirementasmentionedintheIncomeTaxLaw.

4.2 Thin capitalizationIndonesiacurrentlydoesnothavespecificthincapitalizationrules.However,theincometaxlawauthorizestheMinistryofFinancetodeterminethedebt-to-equityratioofcompaniesfortaxcalculationpurposes.

4.3 Interest deductibilityPSCssignedpriortoGR-79/2010generallyincludeaprovisiontoallowinterestcostonborrowings,wheretheinterestratesdonotexceedaprevailingcommercialrateforcapitalinvestments,tobeclaimedascostrecoveryoncertainprojects.Inpractice,interestcostsaregenerallynotallowedtobeclaimedeitherasacostrecoveryorasataxdeduction,unlessspecificallyapprovedbytheGovernment.Detailsoffinancingplansandamountsmustbeincludedintheyearlybudgetforpriorapprovalbytheauthority.AllotherfinancingmustalsobeapprovedbytheGovernment.InterestrecoveryclaimedbytheContractorissubjecttowithholdingtaxundertheprevailingIncomeTaxLaw,atthestatutoryrateof20%.

However,GR-79/2010createsuncertaintyastowhetherinterestdeductionsorincentiveswillstillbeallowedgoingforwardforPSCssignedpriortotheregulationastheseitemsareconsideredasnon-recoverableandnon-deductibleforthe calculation of production sharing and income tax.

Interestdeductibilityforthedownstreambusinessfollowstheprevailingregulationswherebyinterestfromloansobtainedforthepurposeofgeneratingassessableincomeshouldbedeductibleincalculatingcorporatetaxliability.Iftheloanisobtainedfromarelatedparty,theinterestshouldbechargedonanarm’slengthbasisandthegearingratiomustbeinlinewithindustrypractice.

Oil and gas taxation in Indonesias

Corporate taxpayers in the refinery industry of natural oil and/or basic organic chemicals originating from natural oil and natural gas may be eligible for a corporate income tax exemption facility (Tax Holiday) …


5.0 Transactions 5.1 Capital gainsCapitalgainsearnedbyIndonesianresidentsaretaxableasordinaryincome.AspecificfinaltaxregimewillapplyonthedisposalofsharesofcompanieslistedonanIndonesianstockexchange.Thedisposalofsharesofanon-listedIndonesiancompanybyaforeignshareholderissubjectto5%tax,withpossiblereliefbasedontherelevanttaxtreaty.

5.2 Asset disposalsProfitsfromassetdisposalsearnedbyIndonesianresidentsgenerallyattractcapitalgainsandVAT.Disposalsofassetsintheformoflandand/orbuildingwillbesubjecttoafinalincometaxat5%forthetransferorand5%dutyforthetransferee.

5.3 Farm outsAtransferofaparticipatinginterestofanoilandgasblock(PSCTransfer)issubjecttoaspecificfinalincometaxattherateofeither5%fortransferduringexplorationstage,or7%fortransferduringtheexploitationstage.

Exemptionsmaybeavailableforcertaintransactionssuchasatransferforrisksharingduringtheexplorationstage,andtransfertoanationalcompanyduringtheexploitationstage.Risksharingoccurswhenthereisapartialtransferofparticipatinginterest,theinteresthasbeenheldforatleastthreeyears,explorationhasbeenperformedintheworkarea(investmentexpenditureshavebeenincurred),andthetransferisnotintendedtogenerateprofit.

ThelatestregulationaboutPSCTransfersfurtherelaboratesthattaxableincomeafterfinaltaxshallsubjecttoBPTof20%.Further,theIndonesiantaxauthoritydeemsthattheindirectsale(i.e.thesaleofsharesofanoffshorecompanywhichalsoownsaparticipatinginterest)willalsofallwithinthescopeoftransfersofparticipatinginterests.

ThetaxationrightsandobligationspertainingtotheparticipatinginteresttransferredshallberesumedbythenewContractor.

5.4 Other incomeCompensationreceivedbyanupstreamContractorinfinancingapartnerforthepurposeofupstreamoperations(i.e.uplift)issubjecttofinaltaxof20%ofthegrossamount.Inaddition,suchincomeisalsosubjecttoBPT.

TheincometaxtreatmentontheupstreamContractor’sotherincomeotherthanfromPSCTransfersandupliftshallfollow the prevailing tax law and regulations.

6.0 Withholding taxes6.1 DividendsDividendsreceivedbyaresidentcompanyfromashareholdinginanotherIndonesiancompanyaresubjecttoa15%withholdingtax.However,wheretherecipientcompanyholdsatleast25%ofthecapitalofthepayercompanyandthedividendsoriginatedfromretainedearnings,thedividendsaretaxexemptinthehandsoftheresidentcorporateshareholder.

Dividendsdistributedtoanon-residentshareholderaresubjecttowithholdingtaxattherateof20%,subjecttoreduction under the income tax treaties.1

DividendsdistributedbyanupstreamContractorwhichoperatesthroughanIndonesianlegalentityaretreatedasdividendsthatareavailableforpayment.Althougharguablythedividendsmaybeexemptedfromtaxorsubjecttoalowertaxratebasedontheprevailingtaxlawortaxtreaty,inpractice,theupstreamContractorsareexpectedtoremit20%taxondividendsastheagreedproductionsplitformulainthecontractsimplytheapplicationofa20%rate(pleaserefertoSection2.7BranchProfitTax).

1 Please refer to “Deloitte – Taxation and Investment in Indonesia” for further details of tax treaty rates.

Exemptions may be available for certain transactions such as a transfer for risk sharing during the exploration stage, and transfer to a national company during the exploitation stage.

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6.2 Interest Interestpaidtoaresident(excepttoabankorfinancialinstitution)issubjectto15%withholdingtax.InterestfromIndonesianbanksandIndonesianbranchesofforeignbanksisgenerallysubjecttoafinal20%withholdingtaxforbothcompaniesandindividuals(certainexemptionmayapplyforPSCcompanies).

Interestpaidtoanon-residentissubjecttowithholdingtaxattherateof20%,subjecttoreductionundertheincometax treaties.

6.3 Rents and royaltiesAroyaltypaidtoaresidentissubjecttoa15%withholdingtax,whilearoyaltypaidtoanon-residentissubjecttowithholdingtaxattherateof20%,subjecttoreductionundertheincometaxtreaties.

6.4 Tax treatiesIndonesiahasareasonablybroadincometaxtreatynetwork,whichpotentiallyallowsforareductioninlocalwithholdingtaxratesandmayprovideotherformsofreliefforcrossbordertransactions.Aforeignincomerecipientwouldneedtosatisfycertainadministrativeandsubstancerequirementswheneveritseekstoutilizethetaxtreatyrelief.

7.0 Indirect taxes7.1 VATCrudeoilandnaturalgasarenotsubjecttoVAT;therefore,upstreamContractorsarenottaxableentrepreneursforVATpurposes.However,theContractorswouldstillbeimposedwithVATonlocalpurchaseoftaxablegoodsand/orsupplies.TheVATpaidbyContractorsmaybereimbursablefromtheGovernmentwhenthePSCcommencesproductionandtheGovernmentreceivesashareofproduction,exceptforPSCssignedafterGR-79/2010whereVATshallbeincludedaspartofoperatingcostinsteadofreimbursablefromtheGovernment.

TheVATreimbursementfromtheGovernmentwillneedtobesupportedbyspecificdocumentation(e.g.originalcommercialandVATinvoicesetc.)andsatisfycertainconditions(i.e.mustnotrelatetoabenefitinkindorentertainmentunlessattheoperationalsiteorremotearea,andtherelatedcostsarerecoverable).VATpaidbyContractorswhofailtocommenceproduction,willnotbereimbursedandwillbeanabsolutecostfortheContractors.

DownstreamproductsandservicesaregenerallysubjecttoVAT.Anentrepreneurdeliveringgoodsand/orservicesthataresubjectVATshouldregisterasataxableentrepreneurifitssalesexceedacertainannualthreshold.Thereafter,ataxableentrepreneurisrequiredtocomplywithcertainVATadministrationrequirements,suchastheissueofaVATinvoice,collectionandreportingofVATtotheauthorities.ThegeneralVATrateis10%.However,aVATrateof0%isappliedontheexportoftaxablegoods,intangibletaxablegoods,andcertaintaxableservices.

VATpaid(inputVAT)byataxableentrepreneuronpurchasesofgoods/servicesfromlocalsuppliersonimportationmaybecreditedagainstVATcollected.WheretheinputVATishigherthantheoutputVAT,theexcessmaybeeitherclaimedasarefundorcarriedforwardtofollowingmonth(s).

7.2 VAT collector status UpstreamContractorsareappointedasacollectoroftheVATchargedbyitsvendors,exceptonthefollowingtransactions:

•expenditureswithvalueofIDR10millionorless;

•purchasesofgoods/serviceswhichareexemptedfromVAT;

•purchasesoffueloilandnon-fueloilfromPTPertamina;

•telephonebills;and

•airtransportservicesprovidedbyairlinecompanies.


Crude oil and natural gas are not subject to VAT; therefore, upstream Contractors are not taxable entrepreneurs for VAT purposes.


ContractorsarerequiredtocollectVATinthemonthwhentheVATinvoiceisissued.Thereafter,theVATcollectedshouldberemittedtotheStateTreasuryandreportedtotheTaxOfficebythe15thand20thofthesubsequentmonth.

7.3 Import, export, and customs dutiesPSCssignedbeforethe2001OilandGasLawwasenactedaregrantedexemptionfromimporttaxes(i.e.importduty,VAT,andArticle22incometax)fortheimportationofgoodsthatwillbeusedinpetroleumoperations.Thisexemptionisbasedontheprocedurespecifiedintheregulation,suchassubmissionofanannualImportPlanandobtainingaMasterListfromthecustomsauthority.

ForPSCssignedafterthe2001OilandGasLawwasenacted,theGovernmentprovidesanexemptionfromVATandcustomsdutyontheimportationofgoodsusedinupstreamactivities,withthefollowingconditions:

a. the goods are not yet produced in Indonesia;

b.thegoodsalreadyproducedinIndonesiabutcannotmeettherequiredspecification;and

c.thegoodsalreadyproducedinIndonesiabutcannotfulfillthedemandofindustry.

ThelatestregulationonArticle22incometaxalsostipulatesthattheimportofgoodsundertakenbythePSCContractorsisexemptfromArticle22incometax.

Importationbyadownstreambusinessentitygenerallyfollowstheprevailingregulationwhereimporttaxesarepayable,unless the importer is entitled to certain facilities.2

7.4 Excise taxThereisnospecificexcisetaxonoilandgasrelatedactivities.2

7.5 Stamp taxStampdutyappliestofinancialtransactions,legaldocumentsandreceiptsatratesrangingfromIDR3,000toIDR6,000,dependingonthevalueofthetransactionandtypeofdocument.

7.6 State and municipalCertainregionaltaxesanduserfeesareadministeredandcollectedbyregionalgovernments,suchasprovincesanddistricts.Themajortaxesapplicabletooilandgasarelandand/orbuildingtax,dutyonacquisitionoflandand/orbuilding,3andAutomotiveFuelTax(“AFT”).AFTisaregionaltaximposedonretailfuelsales.Theratecouldbeashighas10%(currentlyonly5%)andisalreadyincludedinstandarddomesticretailfuelprices.AFTiscollectedbytheproducerorimporteroffuelonbehalfoftheprovincegovernment.

ForolderPSCs,thisregionaltaxwouldbeassumedand/ordischargedbytheGovernment.However,thelaterPSCsenteredafterGR-79/2010nolongerhave“assumeanddischarge”provisions,meaningthatcontractorsofnewPSCswouldbeliabletoregionaltax.Regionaltaxbornebythecontractorscanbeincludedaspartofoperatingcosts.

Investorsshouldcarryoutseparatereviewsonpotentialregionaltaxesthatcouldapplyinspecificregionsand/ortoparticular oil and gas activities.

2 Please refer to “Deloitte – Taxation and Investment in Indonesia” for a general application of import taxes.

3 Please refer to “Deloitte – Taxation and Investment in Indonesia” for further details

PSCs signed before the 2001 Oil and Gas Law was enacted are granted exemption from import taxes (i.e. import duty, VAT, and Article 22 income tax) for the importation of goods that will be used in petroleum operations.

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8.0 Other 8.1 Choice of business entityBothupstreamanddownstreambusinessesmaybeconductedbystate-ownedbusinessentities,regionalgovernment-ownedbusinessentities,cooperatives,small-scalecompaniesandprivatebusinessentities.Specificallyforupstreambusinesses,aforeigninvestormayalsoconductactivitiesthroughabranchofaforeignincorporateenterprisewheretheyareautomaticallyconsideredasapermanentestablishment(“PE”).Mostforeigninvestorsprefertooperateintheformofabranch.

TheOilandGasLawprohibitsabusinessentity/PEthatisengagedinupstreamactivitiesfromalsoconductingdownstreambusinessactivities,andviceversa,unlesswheretheupstreamentityalsoundertakescertaindownstreamactivitiesthatareintegraltoitsupstreamactivities,subjecttopre-approvalfromtheauthority.

TheGovernmentdeterminesthebusinessentity/PEtobeappointedasthepartytoperformupstreambusinessactivitiesinagivenWorkArea.OnlyoneWorkAreacanbegrantedtoeachbusinessentity/PE(knownastheRingFencingprinciple).Aninvestorwouldneedtoestablishaseparatesubsidiaryforeachoilandgasblock.However,multipleinvestorscanbepartiestooneCooperationContract.

Thecommonformofbusinessorganizationforforeigninvestorsindownstreamactivitiesisalimitedliabilitycompany(Perseroan Terbatas,orPT).TherearecertainformalitiesforsettingupandmaintainingacompanyinIndonesia.3 Investorsshouldcarryoutseparatereviewsonthestructureoftheproposedinboundinvestmentinordertoachieveanefficientstructure.

8.2 Foreign currencySubjecttoapprovalfromtheMinisterofFinance,foreigninvestment(PMA)companies,permanentestablishments,andcertainentitieswithforeignaffiliations,ortaxpayersthatintendtopreparetheirfinancialstatementsinUSDollarsasthefunctionalcurrencyinaccordancewiththeIndonesianfinancialaccountingstandards,maymaintainEnglish-languageandUSdollarbooks.

UpstreamContractorsareonlyrequiredtonotifytheMinisterofFinanceiftheymaintaintheirbooksinEnglish-languageandUSDollars;pre-approvalisnotrequired.


3 Please refer to “Deloitte – Taxation and Investment in Indonesia” for further details

The Oil and Gas Law prohibits a business entity/PE that is engaged in upstream activities from also conducting downstream business activities, and vice versa …

9.0 Oil and gas contact informationJakarta (GMT +7)

Deloitte Southeast Asia

Deloitte Tax SolutionsThePlazaOfficeTower32ndfloor Tel:+622129923100Jl.M.H.ThamrinKav.28-30 Fax:+622129928303Jakarta10350

Firdaus AsikinManagingPartnerDeloitteTaxSolutionsTel:[email protected]

John SpissoySeniorAdvisor–SouthEastAsiaEnergy&ResourcesIndustryTaxLeaderDeloitteTaxSolutionsTel:[email protected]

Cindy SukimanIndonesiaOil&GasTaxLeaderDeloitteTaxSolutionsTel:[email protected]

John LauwrenzDirectorDeloitteTaxSolutionsTel:[email protected]

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