TaxUpdate January 2018

Transcription

1 TaxUpdate January 2018 Tax Regime of Upstream Oil & Gas Gross-Split PSC On 27 December 2017, the President signed Government Regulation No. 53/ 2017 (GR53) to govern tax regime of gross-split production sharing contract (GS-PSC). GR53 is one of the implementing regulations of: a) Article 31D of the prevailing Income Tax Law (ITL), which stipulates that taxation of upstream oil and gas, geothermal, mining including coal, and sharia-based businesses are governed under Government Regulation; and b) Article 16B of the prevailing Value Added Tax (VAT) Law, which stipulates that non-collected VAT or VAT exemption for delivery or import of certain VAT-able goods and/ or services are governed under Government Regulation. GS-PSC is a relatively new PSC scheme adopted by Indonesia, and is defined under GR53 as a cooperation contract in the upstream sector based on gross production sharing principle without cost recovery mechanism. The Indonesian Government has adopted the GS-PSC scheme in the recent PSC renewal, first adoption was to the ONWJ block, and also in the recent new PSCs tender. GR53 is only applicable to upstream businesses operating under GS-PSC, whilst the previous PSCs with cost recovery mechanism (CR-PSC) will continue to be governed under the PSC fiscal regimes, Government Regulation No. 79/2010 dated 20 December 2010 (GR79) as amended by Government Regulation No 27/2017 dated 15 June 2017 (GR27) and its implementing regulations.

2 Key features of GR53 Topic Key Features AHSC comments Revenue GS-PSC Contractor revenue consists of: There is a significant difference in the revenue a) Contractor s share of production split minus DMO plus DMO compensation; and recognition between GS-PSC and CR-PSC, mainly due to the difference in the oil and gas production b) other (non-lifting) income. sharing/ split mechanism. Operating Expenses (Opex) The revenue from oil and/ or gas is recognised at delivery point using the Indonesian Crude Price (ICP) or price in the gas sale agreement. Delivery point is the point when the title of oil and/ or gas is transferred from the Government to the Contractor. Other (non-lifting) income consists of income from: a) uplift; b) participating interest (PI) transfer; c) sale of by-product from upstream activities; and d) other income. Opex consist of exploration, exploitation and other expenses. Exploration cost consists of exploration drilling, exploration general and administration (G&A) cost, geology and geophysics survey cost. Exploitation cost consists of development drilling, oil and gas direct production cost, natural gas processing cost, utilities (production equipment and maintenance and steam, water and electricity cost), exploitation G&A cost, depreciation and amortisation. G&A cost consists of administration and finance, employment, services, transportation, office general administration, indirect taxes, regional taxes and levy/ retribution. Other expenses consist of oil and gas delivery from lifting point to delivery point, post oil and gas lifting activities, approved oil and gas marketing, reimbursement to previous PSC contractor(s), and other operating costs. Deductible Opex must fulfill the following criteria: a) related to revenue generation/ maintenance and directly related to the upstream operations in the Contractor s concession area: depreciation only on goods and equipment used in the petroleum operations, which becomes government assets once acquired; head office (HO) direct cost allocation is allowed only if it cannot be performed by domestic institution, by Indonesian, and non-recurring; HO indirect cost allocation is allowed only if it supports the upstream business, audited consolidated financial statements of HO and cost allocation base are made available, and the limit is based on Minister of Finance (MoF) regulation; benefits-in-kind, natural disaster donation, and community development costs deduction are in Under CR-PSC, contractor revenue is calculated from its equity share and First Tranche Petroleum (FTP) share plus cost recovery and additional incentives minus DMO plus DMO compensation. Therefore, during the period when the (accumulated) unrecovered cost pool balance is still higher than the total lifting value, most of the revenue will go to the contractor (with the exception of the Government FTP share). GR79/GR27 also governs the taxation of uplift and PI transfer. The Opex category under GR53 is similar to those under GR79/GR27, except for the reimbursement to the previous PSC contractor(s). The criteria for deductible Opex are similar between the two tax regimes, except for SKK Migas approval on budget (see below). This means that despite of non-cost recovery mechanism, SKK Migas will still have significant roles and authority in reviewing and approving the work programs. A key difference between GR53 and GR79/GR27 is that under GR53 there is no SKK Migas approval on budget as one of the criteria for deductible Opex. The question is then to what extent a GS-PSC should follow the procurement and budget procedures under the current SKK Migas rules, e.g. the procurement procedures under PTK-007, the AFE overruns approval and AFE close out procedures. It is important to clarify this to avoid potential future dispute on deductible Opex, in particular there is a 2

3 accordance with the prevailing tax regulations; expatriate employee remuneration does not exceed the limit set by MoF. requirement to carry out operations based on business and technical best practices. b) adopts arm s length principles in accordance with the prevailing ITL if the transaction is between related parties; c) operations in accordance with business and technical best practices; d) operations in accordance with work programs approved by SKK Migas. Depreciation and Amortisation Non-deductible Opex consist of: a) cost incurred for the personal/ family benefits of employee, management, PI holder, and shareholder; b) provisions, except mine closure and rehabilitation which funds are placed under SKK Migas-Contractor joint Indonesian account in Government bank; c) asset grant; d) taxation administrative sanctions and any penalty as a results of Contractor s fault; e) non-government owned asset depreciation; f) income tax; g) incentives, pension and insurance premium incurred for the personal/ family benefits of expatriate, management, and shareholder h) cost related to expatriate that has no proper work permits; i) legal consultancy not related to PSC operation; j) representation and entertainment (except if nominative list is made available); k) technical training for expatriate; l) merger, acquisition and PI transfer costs; m) interest on loan; n) royalty to HO or its affiliates; o) third party s income tax, i.e. employment income tax paid by Contractor except in the form of taxable allowance and/ or withholding tax (WHT) of domestic vendors assumed by Contractor. p) net book value of unused assets due to Contractor s gross negligence or willful misconduct; q) transaction conducted not in accordance with the prevailing laws; r) Government bonuses; s) expenses incurred prior to signing of GS-PSC, except for the reimbursement to previous PSC contractor(s) as part of other expense above. Depreciation commences when the tangible asset acquired during Commercial Production 1 (CP) period is placed into service and based on declining balance method using the tariff and useful life as described in the attachment of GR53, e.g. 25% depreciation rate and five years useful life for production facilities and drilling/production equipment. Due to the difference in production sharing/ split mechanism, there are some differences between non-deductible Opex under GR53 and those under GR79/GR27. For example: a) GR53 includes income tax and royalty to HO/ affiliates as not deductible, and b) the following costs are not deductible under GR79/GR27 (not mentioned under GR53): tax consultant, contractor s oil/ gas marketing except for gas marketing approved by SKK Migas, procurement of goods and services not in accordance with best practice, budget overruns of over 10%, material surplus, transactions that are not in compliance with required tenders, and commercial audits. Under CR-PSC and GR79/GR27: a) depreciation only impact the timing of cost recovery; and b) there is no amortisation as all non-depreciable costs are included in the unrecovered cost pool. 1 Commercial Production (CP) is defined under GR53 as the period from commencement of oil and/ or gas sales up to the end of GS-PSC term. 3

4 Amortisation of assets: a) for tangible and intangible costs incurred prior to CP: to be capitalised and only amortised upon commencement of CP (the tax office may audit these costs and it is not subject to tax audit statute of limitation); b) for intangible cost incurred on or after the CP date: the amortisation commences in the month when the cost is incurred. The amortisation method is Unit of Production (UOP), with the total PSC life oil and gas volume based on approved Plan of Development (POD). The amortisation rate for costs incurred prior to CP is accelerated, i.e. doubled. Survey cost and intangible drilling cost incurred during CP period have a useful life of less than one year and should be directly expensed. Depreciation and amortisation considerations are important under GS-PSC, as this will likely result in a different tax position compared to CR-PSC, for example: a) if a project has strong cash in-flows in the early years of CP period due to for instance high oil/ gas price and/ or significant liftings: under CR-PSC the contractor will be able to take most of the liftings as cost recovery (except for FTP), which means Opex is equal to revenue (from cost recovery) and hence no income tax is due if there is still unrecovered cost pool balance. under GS-PSC the contractor will recognise revenue based on the gross production split in the contract, whilst deduction will follow the rules under GR53 (costs incurred prior to CP can only be claimed via amortisation), which means that there could be a situation where Opex is below Revenue and income tax is due (despite there is still unamortised pre-cp costs). b) If a project has low cash in-flows in the early years of CP period, but this will improve in medium to long period of time due to expected gradual increase in total liftings and/ or price: under CR-PSC the contractor will keep the unrecovered cost pool indefinitely up to the end of contract under GS-PSC, if the project incur tax loss under GR53 income tax calculation, the loss may be carried forward for ten years. Issue will arise if despite the ten-year tax loss carry forward period (as discussed below) there is still expiring/ unutilised tax loss carried forward balance. Taxable income and income tax rate Taxable income is Revenue (excluding those from uplift and PI transfer) minus Opex minus tax loss carried forward (if any). The income tax rate is based on the prevailing ITL, which is further clarified under GR53 as the tax rate in the contract (i.e. rate applicable at the time of contract signing) or tax rate based on the prevailing tax regulation that may change in the future. The after-tax-profit is then subject to further income tax based on the prevailing ITL. The current income tax rate is flat 25%. During GS- PSC tender/ negotiation, Contractor will need to elect whether to lock the income tax rate over the PSC term or to follow the prevailing income tax rate (historical trend is decrease in tax rate). The tax on after-tax-profit is often referred to as dividend/ branch profit tax (with prevailing rate at 20%). Under GR53, imposition of this dividend/ branch profit tax is based on prevailing ITL, which means that there will be different tax implications on holding the GS-PSC through an Indonesian limited liability (PT) company vis-à-vis holding through a foreign entity with a branch in Indonesia. Care should be taken when considering an access to a tax treaty lower dividend/ branch profit tax rate due to Indonesian requirements on implementation of a tax treaty (refer to our September 2017 TaxUpdate publication) and some tax treaties prevent upstream business from accessing the relief. 4

5 Tax Loss Carried Tax loss incurred may be carried forward up to ten years. Under the prevailing ITL, the maximum tax loss Forward carried forward period is five years. This is not relevant for CR-PSC due to the cost recovery mechanism, which effectively means tax losses may be carried forward indefinitely up to the end of the PSC term. Tax on Uplift Tax on PI transfer Books and record Incentives Uplift income is subject to a final income tax at 20% from gross uplift income amount. The after tax profit from uplift is not subject to further income tax. An implementing MoF regulation will be issued to govern the tax withholding and payment. PI transfer during exploration and exploitation period is subject to final income tax at 5% and 7%, respectively from transaction value. The after tax profit from PI transfer is not subject to further income tax. An implementing MoF regulation will be issued to govern the tax withholding and payment. PI transfer during exploration period is income tax exempt if: a) not the whole PI is transferred; b) PI holding of more than three years; c) exploration has been conducted (investment cost incurred); and d) PI transfer is not intended to generate profit. During exploitation, PI transfer to national party as required by prevailing law is also income tax exempt. Books must be maintained in Indonesia and prepared in Indonesian language or foreign language after approval from MoF. Books and records must be kept for at least ten years. Tax facilities Tax facilities available up to the commencement of CP are: a) duty exemption for import of goods to be used in petroleum operation; b) VAT exemption or non-collected VAT and Luxury Goods Sales Tax on the following: acquisition of taxable goods and/or services; import of taxable goods; import of intangible goods; import of taxable services. c) Article 22 income tax exemption on import of goods; and/ or d) 100% reduction in oil and gas land and building taxes. An implementing MoF regulation will be issued to govern the approval process of tax facilities above. Cost sharing Cost sharing (not for profit) on SKK Migas approved joint use of production facility is exempt from WHT and VAT. The provisions under GR53 in this respect are consistent with those of GR79/GR27. The provisions under GR53 in this respect are consistent with those of GR79/GR27. Note that PI definition under GR53 covers both direct and indirect PI. This means that indirect transfer of PI in GS-PSC will likely be taxable, e.g. transfer of shares in the company holding a GS-PSC. This is consistent with the treatment under CR-PSC, which is governed under MoF Regulation No. 257/2011. The provisions under GR53 in this respect are similar to those of GR79/GR27. The tax facilities during exploration period up to CP are similar between GR53 and GR79/GR27. We note that the tax facilities under GR53 are only available up to the commencement of CP. However, under GS-PSC, there is an additional production split for contractor in subsequent POD. We also understand that the Government has been considering a revision to the gross split formula to compensate contractor for indirect tax payment. This is consistent with the provisions under GR79/GR27. 5

6 HO indirect cost allocation HO indirect cost allocation is exempt from WHT and VAT. This is consistent with the provisions under GR79/GR27. Others Other tax aspects that are not governed under GR53 should follow the prevailing tax laws and regulations. Conclusions The following industry players will be impacted by GR53: a) upstream taxpayers operating under GS-PSC; b) investors participating in future tender of GS-PSC; and c) new and/ or existing investors that plan to participate in renewal or extension of expiring PSC under the GS-PSC model. In assessing the economics of an upstream project under GS-PSC, key features of GR53 should be carefully considered on top of other key assumptions, such as the overall gross production split percentage, future oil and gas price trends, investment cost, and Opex. The gross split between GS-PSC Contractor and the Government is governed under Minister of Energy and Mineral Resources (MoEMR) Regulation No. 08/2017 dated 16 January 2017 as amended by Regulation No. 52/2017 dated 29 August 2017 (Reg-52). Reg-52 reflects one of the Government s efforts to improve the economics of projects under GS-PSC, which is aimed to attract more upstream investments. Even if after the additional gross split to the contractor has been fully utilised but the project is still not achieving the expected economics, Reg-52 provides the MoEMR with an authority to give discretionary additional split to contractor (uncapped). It remains to be seen whether combination of these new regulations will be able to attract more investments in the sector. Please feel free to contact AHSC professionals below if you have any questions or require more information. ***** AH Strategic Consulting Tamansari Parama Boutique Office, Unit 8E Jl. K.H. Wahid Hasyim No Kebon Sirih, Menteng Jakarta 10340, Indonesia Tel/fax / AH Strategic Consulting Contacts: Ali Mardi Djohardi ali.mardi@ahsc.co.id Mobile Phone: Hermanto Suparman hermanto.suparman@ahsc.co.id Mobile Phone: This TaxUpdate publication is not intended to provide a comprehensive analysis of tax laws and practice developments. Readers should seek independent professional tax advice before applying the information contained in this publication. Whist every effort has been made to ensure the accuracy of this publication, Ali Hermanto Strategic Consulting ( AHSC ) is not responsible for any inaccuracies, errors or omissions in this publication. AHSC accepts neither responsibility nor liabilities to any parties for the outcomes or results of using or relying on this publication. 6