Newmont: Tax peace at any price?

By Donna K. Woodward

MEDAN (JP): After months of lawsuits, threats and counterthreats, the American multinational PT Newmont Minahasa Raya and the Minahasa regency in North Sulawesi have reached an out-of-court settlement of their tax dispute.

According to media reports, the local government has dropped its claim of US$2.4 million for unpaid taxes; in exchange Newmont will "contribute" $1.5 million to a welfare foundation they are to establish, and will "contribute" another $1 million per year for three years for community development programs.

Officials from the Ministry of Mines and Energy have lauded the settlement, claiming that it will calm foreign investors' fears that investment companies may be sued or closed down, or threatened with such actions, at the whim of local officials. Will it?

This outcome does nothing to establish that the rule of law will govern contracts in Indonesia. There has been no determination of the merits of the case, and future investors will still have to worry about the underlying issues: may a local government change the rules of the game in midstream, vis-a-vis taxes or other regulations?

And if they do, what recourse will the central government, as represented by the national judicial system, provide? This settlement does nothing toward demonstrating that Indonesia is committed to upholding the principle of the supremacy of law as administered by an impartial judicial system.

It does nothing to ensure investors that the central court system has ultimate jurisdiction over maverick provincial judges. It is hard to see this solution as anything but a charade starring two less-than-transparent parties -- three if the central government is included for the behind-the-scenes role it played.

When bona fide parties settle a civil suit it is usually because neither party feels sufficiently convinced they can win the legal battle.

Sometimes one party does feel confident of success, but concludes that the monetary or strategic costs of the lawsuit will far outweigh the value of winning. In this settlement it is hard to find either logic at work.

This financial settlement favors one side, the regency, disproportionately. If the reported settlement figures are correct, Newmont will pay out nearly twice the amount of the original claim.

Why would a respondent in a lawsuit settle a case in this manner, unless it faced undisclosed complications? One might be forgiven for imagining that Newmont, deluded by advisers into thinking that if payoffs are out in the open they are not illegal bribes, thinks it has found a creative way to pay for smooth relations with local officials while circumventing the Foreign Corrupt Practices Act.

If this settlement is accepted, it is an invitation to every cunning head of local government in the country to initiate similar "nuisance suits" against corporations.

And conversely, it is an invitation to every large corporation that may be operating in disregard of community or environmental interests to continue to do so, knowing that at the end of the day it will be cheaper to settle a lawsuit than to pay the price of doing business responsibly. Under this settlement, who really won?

Newmont won. If the directors agreed to pay $4.5 million dollars over three years, one can only imagine that they felt spooked by the possibility of more costly lawsuits in the future from grassroots community leaders who might demand far more money or even their mine's closure, as is happening with PT Inti Indorayan Utama in North Sumatra.

By making such generous "contributions" to welfare programs devised by the regent, no doubt Newmont can count on local government leaders' cooperation in discouraging future community opposition to its activities.

But the local government leaders won, too. Regent Dolfie Tanor now has the opportunity to design community welfare programs that Newmont will fund generously, but that he himself will receive credit for.

And no doubt there will be well-paid contracts and positions for the regent's family and cronies in the new welfare programs. The patronage system, something that is just a step away from flagrant corruption, collusion and nepotism (KKN), has just gotten a big boost from a company that is ostensibly trying to comply with the Foreign Corrupt Practices Act.

Will anyone suggest that someone inventory the regent's property -- bank accounts, jewelry, homes, cars, homes and cars of family members -- before Newmont's "contribution" is disbursed, and then to inventory his property again in a year or two? (At the same time someone might notice how may overseas trips family members and cronies take, and whether any are sent overseas to study.)

We might conclude happily that like all good settlements, this one was a win-win solution for the parties. However the real winners should have been the community and future communities of Minahasa, and Indonesia's current and prospective investors.

These groups have not had their best interests protected at all in this deal. The private parties to the settlement, not the investing community and not the community at large, are the real beneficiaries of this back-room deal.

The government's supervising officials have failed. To be fair, $4.5 million will, undeniably, bring the community new education, health and other programs. But did not Soeharto disburse money generously throughout his regencies for 32 years via similar welfare programs?

Did such programs really do much good for Indonesia's rural communities, in the end? Gift horses do not always bring good fortune.

Most lawyers believe that the best lawsuit is a settled lawsuit. A necessary evil, going to court should be a last resort. The exception to this rule of thumb comes into play when there is an important principle of law or paramount rights at stake.

In this case there were several critical issues that, if settled as a matter of law, might have brought stability and legal certainty to Indonesia's investment climate.

In addition to the principles of contract law and tax law that needed to be addressed, there are conflict-of-law issues, as between local and national laws, regulations and court systems, that are about to explode and blanket the country and investors with uncertainty.

Had Newmont remained principled and refused to settle a case it repeatedly insisted was spurious and inspired by greed, it might have helped establish valuable, ground-breaking legal principles. Instead it bought itself a questionable respite from a few tax problems.

It may be that this view of the Newmont-Minahasa settlement is too cynical. This writer would be more than happy to be proved wrong. I invite Newmont to rebut these suppositions with a factual, transparent, credible explanation of the logic behind this "dream" settlement.

The writer, an attorney and former American diplomat at the U.S. Consulate General in Medan, is president director of PT Far Horizons, a management consultancy firm.