Govt's battle with KBC, a year late and $300m short

Riyadi Suparno, The Jakarta Post, Jakarta

The Indonesian tax office has suddenly become merciless against tax evaders and swiftly sent Loedito Setyawan Poerbowasi, son-in- law of former vice president Sudharmono, to Cipinang penitentiary for alleged tax evasion.

Loedito is a shareholder of PT Sumarah Dayasakti, which owns a 10 percent stake at Karaha Bodas Company (KBC), LLC, a partner in the aborted Karaha Bodas geothermal power project in West Java.

According to the Directorate General of Taxation, KBC owes the state an accumulated tax debt -- since 1998 -- of US$126 million.

The debt includes $21 million in unpaid income taxes in 1998, Rp 12 billion in value added tax since 1999 and $104 million in income tax resulting from the arbitration award in which state oil company Pertamina and state electricity firm PT PLN were ordered -- but have not done so as yet -- to pay KBC US$261 million.

As has been reported, KBC took Pertamina and PLN to the Geneva-based UNCITRAL arbitration court in April 1998 for breach of contract following the government's decision to stop KBC's geothermal power project.

The court ruling in December 2000 ordered Pertamina and PLN to pay compensation of $261 million to KBC, with an interest rate of 4 percent per annum starting from January 2001. The amount will have grown to $305 million in five weeks time -- January 2005.

Although the compensation has not been paid as Pertamina continues to fight it in various courts as well as the assist from the tax office, government officials argue that taxable income is accrual based, and therefore, the awarded amount became taxable income as soon as it was decided by the court in Geneva.

Using this line of reasoning, the tax office jailed Loedito and is now seeking the arrests of two other KBC executives, one American and one Canadian -- who likely left the country long ago when the project was halted.

The question is: why is the tax office taking such steps now? And not much earlier when the alleged tax evasion case first emerged. There are also other questions that remain unanswered, such as why were Loedito and the KBC executives singled out, and not other, more high-profile, tax evaders.

We know that it is not a coincidence that the jailing of Loedito comes at a time when the government is scrambling to stop KBC from taking ownership of Pertamina's frozen U.S. bank accounts as a result of the arbitration court's decision.

With a New York court order in hand, KBC managed to retrieve US$29 million of Pertamina's $300 million in frozen funds in New York on Oct. 6, 2004. (Initially, the New York court froze a total of $650 million of Pertamina's money accrued from oil and gas exports. Nevertheless, the Indonesian government managed to withdraw $350 million of it on March 22, 2004).

Following the disbursement of $29 million to KBC, the New York court told Bank of America in New York to release the remainder of the arbitration award to KBC, pending an appeal decision.

The Indonesian government said on Monday that it had appealed the court order, arguing that the $271 million belonged to the government, not Pertamina.

Judging from this move, the jailing of Loedito can be interpreted as a move by the government to increase its bargaining position against KBC, considering the fact that the government is currently also negotiating with KBC over the compensation.

According to a source close to the negotiations, KBC demands Pertamina and the government to pay $271 million in compensation (less the $29 million already disbursed), plus $15 million in legal fees.

The government is apparently prepared to pay KBC, but not the full amount. And the latest move by the government to press forward with the tax evasion allegations against KBC is one way they hope to achieve that aim.

The tax fraud case is not the only ammunition being used by Pertamina and the government in their fight against KBC. The government also launched a corruption investigation into the Karaha Bodas project.

Police investigators have also named about 20 suspects in the case, mostly officials from Pertamina and KBC. Some parties have said the investigation should be widened to net big names such as former Minister of Energy and Mineral Resources Purnomo Yusgiantoro (see separate story on Purnomo).

This criminal investigation has apparently influenced the negotiations. One source claimed that KBC had given a second option for the government to consider, namely that the government may pay $271 million without any legal fees, but it must drop the criminal proceedings against KBC.

The government has said that $271 million is just too much. According to Pertamina, KBC has marked up its investment spending in Indonesia and also its future potential income based on exaggerated claims of geothermal reserves in Karaha and Lake Bodas.

Nevertheless, any argument regarding the compensation amount will not likely be taken seriously, as the arbitration verdict has been awarded and the damage has been done as a result of Pertamina's and PLN's general bungling of the case from the beginning.

Pertamina has lost in almost every court battle with KBC following the arbitration ruling, including those in the United States, Hong Kong, Singapore and even Indonesia.

The Indonesian Supreme Court's decision on 8 March 2004 -- but released to the media only this week -- overturned the Central Jakarta District Court's verdict, which annulled the arbitration ruling.

With this Supreme Court ruling, the Indonesian government has less and less hope in its fight against KBC. The only remaining hope is that the appeals court in the U.S. will cancel the New York's order for Bank of America to disburse the $271 million to KBC.

Now, the Indonesian government's loss seems assured. While waiting for the appeals court decision, most Indonesians hope that the latest move by the government to imprison a KBC shareholder might reduce the potential losses.