Indonesia: Taxation related to oil and gas gross split PSCs and update on new transfer pricing implementing rule

January 30 2018

On December 28 2017, Government Regulation No. 53 of 2017 concerning Tax Treatment on Oil and Gas Upstream Business Activities with Gross Split Production Sharing Contracts (GR No. 53/2017) was enacted.

This relates to the issuance of the Ministry of Energy and Mineral Resources regulation back in January 2017 which generally requires all new/extensions to existing production sharing contracts (PSCs) to follow the 'gross split' format as provided thereunder. References to a gross split PSC herein refer to PSC contracts for exploration and exploitation of oil and gas based on the gross production split principle without a cost recovery (of operating costs) mechanism.

In general, the GR No. 53/2017 regulates types of income received by gross split PSC contractors, taxable income calculations, tax deductibility of operating costs, acknowledgment and measurement of income, production sharing calculations, and obligations of contractors or operators in relation to tax. The GR No. 53/2017 also provides several incentives in the form of taxation facilities from the exploration period through to the commercial production period to support the economic feasibility of the project.

The following types of gross income of gross split PSC contractors are acknowledged under the GR No. 53/2017: (i) income within the framework of oil and gas production sharing; and/or (ii) other income outside the framework of oil and gas production sharing.

The income of gross split PSC contractors is acknowledged at the point of transfer. The taxable income for oil and gas production sharing is calculated by deducting net income received by the contractor with loss compensation. The taxable income will then be subject to income tax under the prevailing regulations. As for income in the form of uplift, other similar compensation, and transfer of participating interest (PI), a final income tax in the form of particular tariffs will be imposed. Certain exemptions from the final income tax on income deriving from the transfer of PI during the exploration period may apply.

As mentioned above, the GR No. 53/2017 also provides certain taxation facilities to gross split PSC contractors, which include, among other things, import duty exemption for oil operations, non-collection of payable VAT or VAT and sales of luxury goods tax for certain taxable goods/services used for oil operations, and a reduction in land and building tax.

In addition to the above, the Directorate General of Tax (DGT) has issued Regulation No. 29/PJ/2017 concerning Procedures for the Management of Reports Per Country (DGT Regulation No. 29/2017), which is a follow-up to the previously enacted Minister of Finance (MoF) regulation on transfer pricing. The MoF regulation stipulates certain transfer pricing documents that must be compiled by taxpayers as the basis for the implementation of the arm's-length principle in transfer pricing, one of which includes the reports per country. The MoF regulation further mandated the DGT to issue a regulation pertaining to the management of these reports.

In brief, the DGT Regulation No. 29/2017 classifies the taxpayers who are required to submit the reports per country as well as part of the submission mechanism. The DGT Regulation No. 29/2017 also stipulates that the DGT will conduct an automatic exchange of reports per country with partner countries or jurisdictions having entered into qualifying competent authority agreements (QCAAs) with the Indonesian government.