Newmont: Tax peace at any price?

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.