Kuntoro rejects plan to ease oil tax burden

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)