Kuntoro rejects plan to ease oil tax burden

JAKARTA (JP): Minister of Mines and Energy Kuntoro Mangkusubroto has rejected a proposal to ease the tax burden on the country's oil and gas contractors.

"Sorry, but after much debate I have decided to stick to the current fiscal regime, until there are new developments which can change my mind," Kuntoro said on Friday at a weekly news conference.

Oil and gas contractors have been lobbying for years for more lenient tax treatment as an incentive to boost oil and gas exploration across the country, but the government has never agreed to their request.

The proposal resurfaced during the 26th Convention of the Indonesian Petroleum Association (IPA) early this week in response to the government's call for an increase in exploration activities amid the monetary crisis.

Under the current fiscal policy, oil and gas contractors are taxed on the basis of their production sharing contracts (PSC). Each PSC is treated as a different taxable entity despite the fact that one company may have several PSCs. The oil and gas industry calls this scheme a "ring fence".

The government allows companies outside the petroleum and mineral sectors to consolidate the financial statements of its subsidiaries in determining the taxable income, thereby enabling them to pay less tax.

The contractors said that they deserved similar treatment and wanted the government to also allow them to consolidate taxes for several contract areas.

This would encourage them to boost exploration and develop oil and gas oil fields which were currently considered to have low economic value, they said.

Oil and gas contractors pay their taxes in the form of oil or gas products.

Kuntoro said the elimination of the ring fence provision would lower the government's earnings from oil and gas operations.

Under PSCs, state oil and gas company Pertamina, on behalf of the government, takes 85 percent of the oil output of each contract area, leaving the remainder to the contractor.

The government has to disburse 85 percent of the production costs to the contractor. If the government agrees to ease the tax system, contractors will recover all of their exploration costs even if the exploration fails to find oil or gas. Under the current system, the government reimburses the exploration costs only if the fields productive.

"I'm afraid (if the ring fence provision is eliminated) the government will possibly get nothing (from oil and gas operations)," Kuntoro said.

Contractors admitted that the elimination of the ring fence provision could lower the government's earnings from certain oil and gas fields but the government would see its total earnings from oil and gas operations increase if exploration activities bore fruit.

"The objective (of the elimination of the ring fence) would be for the government to receive a smaller share of a bigger pie but overall receive more revenue," said the vice president of Gulf Resource, Supramu Santosa, in a workshop during the IPA convention.

Contractors argue that if the government held on to the ring fence provision, few investors would be attracted to invest in the country's oil and gas upstream sector.

But Kuntoro dismissed the allegation, pointing to the fact that the government had awarded an increasing number of oil and gas contracts over the past several years despite the contractors' cry for the elimination of the ring fence provision.

The government awarded a record of 29 oil and gas contracts last year.

"For one, it is proved by the fact that I will witness the signing of many PSC and technical assistance contracts (TAC) next week," he said without elaborating. (jsk)