Tax consolidation law expected for oil industry
Tax consolidation law expected for oil industry
JAKARTA (JP): The Indonesian Petroleum Association (IPA) said
yesterday that it expected its suggestion on tax consolidation,
which aims to boost investment in Indonesia's oil industry, to be
accepted by the government later this year.
"We hope to receive the 'green light' from the government by
the end of this year, although the measure still needs approval
from the Ministry of Finance and the House of Representatives,"
Baihaqi H. Hakim, a director of the association, told reporters
before the closing ceremony of the IPA's 24th annual convention.
Baihaqi, who is the president of Indonesia' largest oil
producer, PT Caltex Pacific Indonesia, said that such tax
consolidation is needed to stimulate new investment in the oil
industry, especially exploration in frontier areas, such as those
in the eastern provinces.
The granting of additional incentives in the production-
sharing contract system will not be sufficient to attract
investors to the frontier areas, he said.
Therefore, he said, it is time for the government to include
the concept of 'risk-reward sharing' in the new production-
sharing contract. The current contract only recognizes the idea
of 'reward-sharing', he added.
Under the proposed tax consolidation, Baihaqi said, oil
companies which currently operate in the western provinces may
consolidate their tax assessments with their operations in the
frontier areas.
He said that the assessment of taxes incurred in the
production and exploration processes should be consolidated to
decrease the operational cost of exploration.
IPA estimated that if the proposed tax consolidation was
accepted by the government, oil exploration in the frontier areas
could increase by almost 50 wells per year, he said.
That would mean that spending on exploration would increase by
about US$400 million per year, assuming one well needs a minimum
investment of $8 million.
Baihaqi said countries like Britain and Norway also allowed
such tax consolidation to attract new investors to their oil
industries.
He admitted that new competitors in the oil industry, like
Vietnam, did not apply tax consolidation, but said they granted
more interesting incentives than Indonesia.
He promised that PT Caltex would increase its investment in
oil exploration in the frontier areas if the tax consolidation
principle is applied by the government.
" Tax consolidation may initially benefit only oil companies
which already have producing concessions. But the collection of
more geological data in the frontier areas will also attract new
investors," he added.
Baihaqi said that such tax consolidation may reduce the
government's revenue by about $400 million per year for about
five years during the exploration stage.
But, he said, in the long term, the declining revenue will be
offset by the discovery of new reserves.
"The discovery of new reserves will extend the period before
which Indonesia is predicted to become a net oil importer,"
Baihaqi added.
Most analysts have estimated that, if new reserves are not
discovered in significant volume, Indonesia may become a net oil
importer by the year 2005.(04)