INTERVIEW: IPA fighting against new tax policy

Brian Marcotte, president director of Unocal Indonesia, who is also chairman of the Indonesian Petroleum Association (IPA), unveiled the organization?s standpoint regarding the issue in an interview with Petromindo. Com on Wednesday.

Question: What is IPA?s position on the current tax dispute between PSCs and the tax office?

Answer: One of the issues that we have discussed internally within the IPA is the conflict between PSC law and VAT law. What we are trying to do is to discuss the conflict internally and with tax department to find possible resolution. But I want to be clear that the IPA does not argue individual rulings or tax rulings involving specific companies. We will only look at it from the broad regional perspective.

VAT issue is important because it highlights the difference between two existing laws. Let me take the new oil and gas law out of the equation. In the old situation we have PSC law and VAT law. PSC law is very clear in the relationship of the company and the payment of taxes other than very specific taxes such as corporate income taxes and personal tax. All other taxes under the PSC law are the responsibility of Pertamina and Pertamina pays them for out of production that was made by the PSC and the cost for that are recovered by Pertamina. The law is very clear that it can only be charged when recovery of that payment occurs within 60 days.

The new rulings under the VAT law basically just requires PSCs to pay the VAT that are not yet under production and may not be under production under a long period of time. So the 60 days requirement under the PSC law cannot be met. And so you have two different interpretations that are incompatible and the only way that can be resolved at this stage is through tax court because you have two equally valid laws.

Our position in the IPA is that the PSC law predates and pre-empts the secondary VAT law. We consider the controversy a very important issue because it will set a precedent for how this sort of issues will be handled in the future. That?s why we have made a fairly large issue out of it.

Q: Have you discussed this matter with the tax office?

A: We have held much discussion with tax department but so far we cannot get an agreement. This is a point I think that decision must be made at the ministerial level. Minister of Energy and Mineral Resources and Minister of Finance must come into an agreement as to how this issue will be resolved.

In the old system, PSCs were only required to pay VAT only after production occurred. The new interpretation of the law is VAT is payable even before production.

IPA?s point of view in that matter is that PSC law is the precedent setting law. That was the basis and the terms of the contract as we understood it and as we signed it and as the basis of rationale of all investment decision we made. If the new interpretation is put on top on that then the very basic of investment decision we have made are no longer valid. That?s the real issue.

Q: How do you think this kind of ruling impact future investment?

A: I think it could be detrimental. For example, when you have heavily front-end weighted investment in deepwater development where Unocal is deeply involved in. From time you make a discovery until the first production is a relatively long period of time. It could take five years. But you start making large investments pretty much right away in the first and second year. If VAT has to be paid right away and not deferred as what would have happened under old VAT system, then the payment would add cost to the very front end, which has the biggest detriment on the investment economics. So under that circumstances, that can be very a very huge issue. In the case of large investment, say US$500 million, if you have to pay VAT early on and not allowed to defer payment until production comes, it will change the whole investment decision that is made.

Q: Do you think contractors will stop projects because of this?

A: I can not say that would stop every project but it would certainly stop some. And that?s not what the country needs to encourage investment. It really is a major issue for every company operating in Indonesia.

Then there is also a production sharing contract area that never has production. They only drilled dry holes. There?s no possibility of ever recovering VAT from this kind of PSCs because there will never be production from that PSC. That?s not in the spirit of the laws were originally written and interpreted.

The policy just adding the burden to the investment that was never anticipated being there. From IPA?s perspective, the policy is changing the original agreement between the parties. (Alex)