Indonesia – Tax Update For EPC And Oil And Gas Projects

 

As part of promoting the ease of doing business in Indonesia, the Indonesian government has issued many implementing regulations after the issuance of the Omnibus Law (UU Cipta Kerja). One of the fields that keep evolving is taxation as there are a lot of tax implementing regulations issued post the Omnibus Law. Recently, the government issued (a) Government Regulation Number 93 of 2021 on the Income Tax Treatment for the Transfer of Participation Interest in Upstream Oil and Gas Activities (PP 93) and (b) Regulation Number 115/PMK.03/2021 on the Guidelines for Granting the Facilities for Exemption from Value Added Tax (VAT) for the Importation and/or Delivery of Strategic Goods, Payment Procedures for the Exempted Goods that are Not Used According to the Original Intention or Transferred, and the Imposition of Sanction for Late Payment (PMK 115). PP 93 has been effective since 31 August 2021 while PMK 115 has been effective since 1 September 2021. As can be seen from the title, the subject regulation of PP 93 is transfer of participation interest in upstream oil and gas activities. On the other hand, PMK 115 focuses on the regulation of VAT for certain goods that are deemed as strategic goods and therefore can be exempted from the imposition of VAT. It is understood that the reasons for the issuance of the regulations is to boost legal certainty and ease of doing business in Indonesia.

 

This publication will focus on the key regulations that are regulated under PP 93 and PMK 115.

 

1. PP 93

PP 93 defines participation interest as rights, interests, and obligations of the contractors according to an oil and gas cooperation contract. The participation interest can be (i) direct interest, that is obtained through the approved cooperation agreement by the relevant ministry, or (ii) indirect interest, that is obtained through direct or indirect shares ownership in a contractor company. 

 

The regulation stipulates that the participation interest can be transferred to a third party. The proceeds from this transfer will be subject to a final income tax at the rate of (a) 5% of the gross amount – if transferred during the exploration period, OR (b) 7% of the gross amount – if transferred during the exploitation period. 

 

Nonetheless, the transfer will be exempted from the final income tax obligation if it fulfills the following conditions:

 

1. For Direct Interest

2. During the Exploration Period

 

The transfer must fulfill all of the following criteria:

 

• the contractors do not transfer all its participation interest,

• the contractors have owned the participation interest for more than three years,

• there is an investment for the exploration activities in the working area, and 

• the transfer is not intended for profit. 

 

2. During the Exploitation Period 

 

The transfer is conducted to fulfill the obligations of the contractors in the cooperation agreement or according to the prevailing laws and regulations. 

 

2. For Indirect Interest 

 

1. the profit from the transfer of the shares is already subject to income tax according to Article 4 paragraph (1) letter d and Article 6 paragraph (1) letter d of the Indonesian Income Tax Law,

2. the profit is considered as a final income tax object according to the prevailing laws and regulations,

3. the transfer is conducted in the case of a restructuring by using a book value method as regulated in the income tax regulations, and/or

4. the transfer is not intended for profit and for the purpose of restructuring only (without changing the ultimate parent entity). 

 

2. PMK 115

The highlights of PMK 115 are (i) the inclusion of the EPC Providers (EPC Contractors) as the subject who can enjoy exemption facilities, (ii) the addition of (a) liquified natural gas and (b) electricity as exempted VAT objects, and (iii) guideline to apply for the exemption facilities.

 

PMK 115 stipulates strategic taxable goods can be exempted from VAT obligation. The strategic taxable goods that are stipulated in the regulation are among others:

 

1. Importation or delivery of machinery and factory equipment that are used for producing strategic taxable goods (not including spare parts), including (i) the machinery and factory equipment that are used by parties who carries out integrated construction activities and (ii) a power generation unit that is an integrated part of a processing industry by licensed electricity providers,

2. Marine and fishery goods,

3. Seeds from agricultural, plantation, forestry, farm or fishery,

4. Electricity, including the fees for electricity connection and electrical load costs, except for housing with electricity power of more than 6,600 VA,

5. Liquified natural gas. 

 

To obtain an exemption for the importation or delivery of machinery and factory equipment, the taxable entrepreneur, the EPC project owners, and/or the EPC Contractors, as applicable must apply for a VAT Exemption Letter or Surat Keterangan Bebas PPN – SKB PPN through the Indonesian National Single Window System (SNISW).  If the taxable entrepreneur or the EPC project owners do not apply for an exemption from import duty facility, they can apply for the SKB PPN directly through the SNISW. 

 

On the other hand, if they apply for the exemption from import duty facility, they must first apply for the exemption through the website of the Ministry of Investment (previously recognized as Investment Coordinating Board – BKPM). After obtaining the so-called Masterlist issued by the BKPM, then the taxable entrepreneur, the EPC project owners, or the EPC Contractors, as applicable, can apply for the SKB PPN through the SNISW. The taxable entrepreneur, the EPC project owners, or the EPC Contractors who obtains this facility must submit an import and realization report annually, by the end of January at the latest. 

 

The exemption status and the SKB PPN can be revoked by the directorate general of taxation under the following conditions:

 

1. If there is information that the taxable entrepreneur, the EPC project owners, or the EPC Contractors is not eligible to obtain the exemption or only eligible for some part of the machinery/equipment,

2. There is revocation of taxable entrepreneur status,

3. If the machinery/equipment (i) are not used according to the original intention, or (ii) transferred to a third party within four years as of the importation of the delivery, excluding the transfer between head and branch offices. 

 

In any of the above cases, taxable entrepreneur, the EPC project owners, or the EPC Contractors must pay back the exempted VAT amount to the directorate general of taxation. The payment should be made within one month as of the occurrence of the event that triggers the payment, i.e.:

 

• For points a and b – as of the issuance of the revocation letter of the SKB PPN,

• For point c – as of transferred or not used according to the original intention. 

Failure of this repayment obligation may result in the imposition of sanction by the directorate general of taxation.  

 

Author Commentary 

 

Some of the key indicators of a nice investment environment are legal certainty and ease of doing business. By the issuance of the Omnibus Law and its implementing regulations, the Government has seriously taken measures to provide a nice investment environment for the investors in Indonesia. Through the issuance of PP 93 and PMK 115, the government has provided legal certainty to the investors, especially to the investors for EPC and Oil and Gas Projects, as the regulations provide guidelines on the imposition or exemption of certain taxes that apply for EPC and Oil and Gas Projects. In addition, the government also tries to simplify the process by incorporating the use of an integrated electronic system for the purpose of the application.