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)