Getting Confidence on Oil and Gas Exploration Investment

As of the first week of June, at least four of 24 cases of objections toland and building taxes imposed on oil and gas exploration had been decided in the tax court.

It was a follow-up toa case surrounding a mistake in the calculation of land and building taxes on oil and gas exploration by the Finance Ministry, which reached Rp 3.18 trillion and was included in the 2012-2013 state budget. Of the amount, Rp 1.06 trillion was legally canceled by the tax court.

Such decisions are positive signals for Indonesian oil and gas exploration, which has been battered, especially over the last six to 10 years. One of the causes is the formulation of the regulation and calculations of land and building taxes on oil and gas exploration by the FinanceMinistry.

Actually, in the oil and gas cooperation contract signed by the government (represented by the director general of oil and gas) and upstream oil and gas investors, it is mentioned that in the explorationstage, contractors are free from all forms of taxation.

One advocacy effort carried out by the National Exploration Committee (KEN) in 2015 ensured the fair settlement of the case of the Indonesian oil and gas objection to the imposition of land and building taxes on exploration blocks that had already been included in the 2012 to 2013 state budget, before the enactment of Finance Ministry Regulation No. 267/PMK.011/2014, which "deletes" the obligation to pay land and building taxes on the surface area of explored blocks.

In relation to the above-mentioned issue, KEN has made various efforts. Aside from providing opinion articles to mass media about the importance of the tax court to decide on a fair settlement over objections to the exploration taxes as part of an expression of anxietyand efforts to get attention from the related parties, KEN has also made parallel efforts through the Presidential Office to ask for assistance to resolve the case, namely at the beginning of July and September 2015.

As a result, the Presidential Office promised to call and discuss the matter with the Directorate General of Taxation and/or officials who will represent the responsible parties so as not to impede efforts to appeal for the abolition of the taxes. The case has been admitted by the state because there was a mistake in the formulation of the regulation and its calculations, so the regulation needs to be corrected.

The mistake in the formulation of the regulation and calculation of taxes for oil and gas exploration blocks has caused interest in investing in oil and gas exploration in the country to substantially fall. Moreover, with the protracted and unfair settlement of the "mistake" case, some oil and gas exploration investors preferred to pull out of Indonesia.

Therefore, the process of advocacy for the settlement of the case became one of the priorities of KEN's quick-win measures from June to December. In KEN's last report and recommendations to the government in 2015, one of the highlighted points was the advocacy efforts.

Encouraging

Good enough news was received by KEN on June 2 this year, when closely watching a trial of the appeal on objections to the imposition of the land and building taxes on oil and gas exploration in 2012-2013 for the working region (WK) of West Aru I (WA-I) and West Aru II (WA-II) blocks, which are managed by Beyond Petroleum's (BP) cooperation contractor (K3S). In the verdict, the panel of judges granted the appeal for the "earth surface", though the appeal for the "earth body" was rejected.

The amount of the "earth surface" for WA-I was worth about Rp 322 billion and WA-II about Rp 315 billion. So the amount won reached Rp 637 billion. Taxes for the WA-I and WA-II earth body reached Rp 4.6 billion, so the amount rejected was Rp 9.2 billion. This is very encouraging because the objection appeal won 98.5 percent of the overall cash value.

Materially the result is 50:50, but financially it is 98.5:1.5. The unrealistic methodof calculating land and building taxes on the earth surface made tax bills expensive and nonsensical. Its calculation became many times more than the investment commitments to the oil and gas blocks in question.

Until now, of the 24 work regions having problems with the imposition of land and building taxes on oil and gas exploration, the appeal verdicts that havebeen issued are ENI (1WK) Statoil (1WK) and BP (2WK). The verdicts granted the appeal for the liberation of land and building taxes on the earth surface, but rejected the tax exemption on the earth body.

Meanwhile, for the Timor Sea I offshore block, the objection won by ENI reached Rp 164 billion for taxes on the earth surface in 2013, but was rejected in its earth body taxes in 2012 and 2013, amounting to Rp 2 billion per year.

Statoil in the Halmahera II block won a lawsuit for the land and building tax cancelation for the earth surface amounting to Rp 130 billion per annum or Rp 260 billion in 2012 and 2013. However, Statoil had to pay earth body taxes of Rp 2.3 billion per year.

Breath of fresh air

Court verdicts have been issued. It certainly gives a breath of fresh airto exploration activities in Indonesia, amid KEN's major agenda to ask the government to eliminate or reduce disincentives that are burdensome to upstream oil and gas contractors in their exploration period.

Equally important in KEN's priority agenda is coordination with all ministries/institutions to ensure the sanctity of contracts in upstream oil and gas exploration activities, including tax problems at the exploration stage, which are not in line with contracts signed by the government and upstream oil and gas contractors. Such supportisupheld to enable oil and gas exploration in Indonesia to move freely to find new reserves for the future of the country and restore investor confidence to invest.

Aside from continuously keeping an eye on the process of canceling the land and building taxes on oil and gas exploration, which are still queuing up in court, KEN also encourages the government through the Directorate General of Taxation to immediately return the money paid by upstream oil and gas contractors, namely Rp 530 billion (50 percent of the disputed total), which was provided to meet the requirements for the appeals.

Hopefully the process of refunding will not be too complicated and does not take a long time, so that it will not be counterproductive and can have a positive impression on the above-mentioned cancelations.

by Andang Bachtiar

source Kompas, Wednesday, June 22, 2016