Mercuria hurt by VAT dispute in Indonesia

By Petromindo.com team

The global coal market downturn has badly hurt many coal miners. But for global commodity trading company Mercuria Energy Group Ltd, which owns South Kalimantan coal miner PT Kalimantan Energi Lestari (KEL), a value added tax (VAT) dispute with the Indonesian tax office has caused further financial distress, and hampering the foreign giant from making new investments in the country.

Geoffrey M. Kelly, Global Head of Business Development and Assets at Mercuria Energy, said that KEL has not been able to get restitution for VAT totaling US$31 million. We are not only suffering loss because of coal prices, but also by not receiving our VAT restitution,? he told petromindo.com in a recent interview.

Mercuria, as one of the world?s top five independent commodity trading firm set up in 2004, acquired KEL in 2010 at a time when coal price was still hovering around $80 per ton. The Geneva-based company immediately ramped up production at KEL, jumping to 3.5 million tons in the first year after the acquisition from a previous annual output of 250,000-300,000 tons from 2004-2009.

Over a period of time, Mercuria turned KEL into one of the ?premium coal companies? in Indonesia with a comprehensive end-to-end mining operation from mine to vessel, and a US$35 million processing facility that can upgrade its coal quality from 4,400 kcal/kg to 6,000 kcal/kg (GAR). KEL has also received a number of environmental and tax awards.

KEL holds the third generation coal contract mining of work (CCoW) expiring in 2031, which clearly says that VAT on production inputs can be restituted. But Kelly said that since 2010, the company has not been able to get the VAT refund as the tax office declines to acknowledge coal as VATable. Under the previous local owner, KEL had been able to get the VAT restitution.

Executive Director of the Indonesia Coal Mining Association (ICMA) Supriatna Suhala said that other coal miners holding the same third generation CCoW have also suffered similar problem, while others have been successful in getting the VAT refund. He urged the tax office to end such discrimination as it would create investment uncertainty in the coal mining sector, urging the Ministry of Finance to issue a guideline for the tax office to treat coal as VATable.

The tax office has argued that since the issuance of Government Regulation No 144 in 2000, coal is no longer considered as VATable, which means that the miners can?t get restitution for the input VAT.

But Supriatna said that the third generation CCoW, signed with the government between 1997 and 2000, adopts the lex specialis principle, which means that the VAT restitution is nailed down until the contract expires.

Former director general of taxation Sigit P. Pramudito was about to issue a directive late last year for tax offices across the country to honor the third generation CCoW specifically with regards to treating coal as VATable, but suddenly announced his resignation in December reportedly because of failure in meeting the excessive tax revenue target.

In December 2015, KEL suspended production activity due to the combination of coal price drop and the VAT dispute, but it has recently resumed production to avoid laying off workers and to honor export commitments made with foreign buyers to maintain its reputation. KEL is expected to produce about 2.5 million tons of coal this year, slightly less than 3.1 million tons in 2015. The company, which operates a 6,200-hectare coal concession in Kotabaru Regency with mineable reserves of about 40 million tons, exports its entire coal output.

?We will continue to produce coal for the rest of the year unless something material happens in the market, meaning that if the market (price) stays around this level, we can take few dollars loss and continue. But if the market (price) drops another $5 or more, maybe we will reconsider,? Kelly said, adding that the company is expected to suffer a loss of up to $3 million this year from coal production due to the price drop, and another $6 million if it could not get the VAT refund. ?So, we are going to lose approximately $9 million to $10 million by producing coal this year.?

Kelly hopes the Indonesian government to be able to immediately resolve the VAT dispute (ongoing for more than 5 years), allowing KEL to get the VAT refund, so that Mercuria can proceed with planned new investments in Indonesia. ?We do not want special treatment, but we want our (mining) contract to be honored and treated like other 3rd generations CCOW holders,? he said.

Kelly said that Mercuria, which has revenue over $100 billion last year, plans to spend up to $1 billion in new investments in Indonesia including in new coal asset, two gold projects, and downstream LNG project. ?We have many potential new projects, but at the moment, we have got everything on hold due to the VAT issue,? he said.

?But we are looking at this positively. The VAT issue is an administration error, not a political error,?he ended.

Editing by Reiner Simanjuntak