Govt plans to detain KBC executives for alleged tax evasion

Leony Aurora, The Jakarta Post/Jakarta

In the midst of a lengthy and ongoing dispute between Indonesia and U.S. power firm Karaha Bodas Company (KBC), the Directorate General of Tax is planning to immediately detain three top KBC executives due to tax arrears dating back to the 1990s.

Director General Hadi Purnomo said on Tuesday that the detention was for unpaid value-added taxes in 1999 amounting to Rp 12 billion (US$1.33 million).

The executives to be jailed were only identified by their title and their initials; the company's director, RDMC, finance manager, MC -- both U.S. citizens -- and LSP, an Indonesian shareholder, Antara news agency reported.

"The letter (ordering the detention) from the Ministry of Finance was issued last Friday," Hadi later told The Jakarta Post. "We will execute it immediately."

Hadi said that the U.S. citizens might have left the country. "So, we will send an extradition request to the U.S. government," he said

The local shareholder would also be detained as soon as possible, Hadi added.

KBC is owned by U.S. firms Caithness Energy LLC and Florida Power & Light Co., as well as local firm PT Sumirah Daya Sakti. It 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.

An international arbitration court in Switzerland ruled in 2000 that state oil and gas firm Pertamina, with whom KBC held a contract for a joint geothermal energy project, had to pay $271 million in damages to KBC for the termination of the project.

The tax office said that the company failed to report that additional income in 2000, even though it has not yet been paid by Pertamina. "The compensation is already considered a tax object. Collectively, the unpaid taxes and fines reach $176 million," Hadi explained.

Additionally, KBC allegedly did not submit an income tax report for 1998, even after the March 31, 1999 deadline set by the tax office. State losses amounted to $21 million.

The office had previously announced that it would detain all of the KBC shareholders for tax evasion. Government Regulation No. 137/2000 authorizes the Directorate General of Tax to detain alleged tax evaders without charge or trial for up to one year, after which the office must either release them or hand the case over to the police.

The Indonesian government is conducting separate efforts to settle the dispute with the U.S. power firm and lower the amount owed, which currently stands at approximately $300 million, including accrued interest.

It is seeking to reduce the company's compensation claim through an out-of-court settlement. Officials said that they were confident such a settlement was possible because there had also been allegations of a markup in the value of the power project.

The government also asked the police to check for any improprieties in the awarding of the contract by Pertamina to KBC. The police have so far questioned 24 people from both parties and charged three suspects for allegedly making fictitious transactions including a markup of some US$19 million in project construction costs.

Several critics have urged the government not to allow Pertamina to pay the claim because they say that the project was given to KBC without a proper tender process.

The government also plans to appeal to the State Supreme Court of New York, asking the court not to freeze $256 million of Pertamina accounts in U.S. banks.