Govt to pay back local taxes to oil, gas firms

Regional taxes and levies in the oil and gas industry will be considered as variable costs that can be reimbursed to contractors under the new cost recovery scheme, the government says.

Finance Minister Sri Mulyani Indrawati told lawmakers at a hearing on Thursday that the government was drafting a new government regulation on the cost recovery scheme that would allow the reimbursement of indirect taxes, including regional taxes and levies.

“This is actually in line with what is written in existing contracts. [Oil and gas contractors] will no longer need to allocate separate additional payments both to regional and central government,” Mulyani said.

Indonesia’s oil and gas production sharing contract (PSC) system requires the government to reimburse all cost items covered by the cost recovery payment rules. Reimbursements are made once contractors enter the production stage.

The PSC regime only recognizes corporate income tax as a tax deduction, but since decentralization following the 1998 reform contractors have also been burdened with additional taxes and levies imposed by regional government. This has since some time drawn strong criticism from oil and gas contractors.

The upcoming government regulation on the cost recovery scheme is the first of its kind as previously cost recovery scheme provisions were simply covered by agreements between government and contractors.

The upstream oil and gas regulator BPMigas is wary that the adoption of the cost recovery scheme into a government regulation may discourage investors, as failure to comply with the regulation could result in binding legal penalties under criminal law.

BPMigas chairman R. Priyono said the cost recovery scheme should ideally fall within the jurisdiction of civil law instead of criminal law. Priyono said oil and gas contractors are guests who are invited to invest in the country, thus their interests should be protected.

“The change of regime in the cost recovery scheme could hurt the investment climate,” he said.

Mulyani argued that changes in the cost recovery scheme should not be seen as a deterrent, but instead as a sign of positive progress that would give more legal certainty to oil and gas contractors.

“The upcoming regulation is in line with the mandate given by the 2009 State Budget Law,” she said.

Lawmaker Effendi Simbolon said the government had violated the law by delaying the introduction of the regulation on cost recovery, as the law said the regulation should have been in force starting Jan. 1, 2009.

“Without the regulation, the calculation of ongoing cost recovery payments has no legal basis and this is

the government’s mistake,” Effendi said.

Mulyani said the government would temporarily use the PSCs as the legal basis for the payments until the regulation issued.

In a bid to further improve the investment climate, the government said earlier that it plans to abandon the practice of putting a limit on the cost recovery payments reimbursed to contractors. The cap was introduced since the 2009 state budget following strong criticism of the alleged lack of transparency in the implementation of cost recovery.