Government pursues unpaid taxes to reduce KBC's claim

Government pursues unpaid taxes to reduce KBC's claim

Urip Hudiono, The Jakarta Post/Jakarta

Facing an imminent court order to pay Karaha Bodas Company (KBC)
the US$299 million claims due to a canceled contract with state
oil and gas firm PT Pertamina, the government plans to intensify
its pursuit of an out-of-court settlement for the case.

Coordinating Minister for the Economy Aburizal Bakrie said on
Friday that in the planned settlement, the government would
challenge KBC's claim with its own claim that KBC still owes
taxes amounting to $126 million.

"We will negotiate with them so that their claim can be
reduced by at least the amount of taxes KBC still owes," he said.

Through such negotiations, the government is hoping to
significantly lower the amount it has been ordered by an
international arbiter to pay to KBC.

"We would like to see as much reduction as possible," he said.
"If possible, we want to see the amount owed reduced to zero."

KBC was one of 27 independent power producers whose projects
were terminated by the government -- as recommended by the
International Monetary Fund -- following the 1997 economic
crisis.

KBC is owned by private U.S. firms Caithness Energy LLC and
Florida Power and Light Co., in addition to local firm PT Sumirah
Daya Sakti.

A Swiss-based arbitration court ruled in 2000 that Pertamina
must pay damages to KBC for the termination of the project.

In August 2002, a U.S. district court froze $285 million,
belonging to the government of Indonesia and Pertamina, deposited
in Bank of America and Bank of New York. Pertamina owns $29
million, and the rest belongs to the Indonesian government.

Pertamina has tried to challenge that freeze order in U.S.,
Canadian, Hong Kong, Singaporean and Indonesian courts, but
failed when the U.S. Supreme Court, in a final ruling on Oct. 4,
2004, rejected Pertamina's bid to nullify the arbitration award
to KBC.

The Indonesian government's response was to ask the local
police to investigate and find out whether there were any
improprieties in the awarding of the contract by Pertamina and/or
the taxes still owed by KBC.

The taxes referred to include Rp 21 million (US$2,283) in
unpaid income taxes in 1998, Rp 12 million in value-added tax
since 1999 and $104 million in income tax resulting from the
arbitration award.

Observers have noted that the tax charges were the
government's way of forcing KBC to agree on an out-of-court
settlement and end its protracted legal battle with Pertamina.

Pertamina's lawyers recently said they would still try to
submit new evidence to the U.S. court of tax evasion and markups
in the project that KBC allegedly committed.

Meanwhile, State Minister of State Enterprises Sugiharto said
that although it would be impossible for the government to pay
the claims due to its cash-strapped condition, it would try to
recover its funds in the frozen accounts just in case the claims
were executed.