Official: Deemed profit approach won?t be applied in gross split scheme

The government has assured that it would not apply so-called deemed profit (DP) approach in taxation system of the gross split production sharing contract, Kontan reported on Tuesday.

?We don?t need to talk about this anymore. The Deputy Minister (of Energy and Mineral Resources Arcandra Tahar) has said that the deemed profit has been forgotten, it?s no longer being discussed. We?re (now) only talking about normal tax in oil and gas sector,? said Tunggal, Director of Oil and Gas Upstream Management at the ministry to the paper.

The Indonesian Petroleum Associaiton (IPA) issued a statement on Monday expressing its objection to the government?s plan to apply the DP approach in the taxation system of the gross split contract.

The IPA argued that using the DP approach will potentially increase the economic burden of the contractors because (1) uniform DP percentage cannot represent all fields? unique characteristic, (2) may result in the PSC Contractor paying tax in years in which they are still at loss position and (3) may result a double taxation on the same income as the competent authority in home office might refuse/deny the income tax paid in Indonesia as tax credit in home country.

?In line with this, IPA strongly encourages government of Indonesia (GoI) to consider maintaining the current oil and gas income tax regime (i.e. revenue ? all relevant cost). However, in the event GoI insists for the application of DP, IPA believes that this should be optional where (oil and gas) contractor has the right to choose either to use DP or normal income tax,? IPA said.

The ministry earlier this year introduced a new gross split scheme to be applied in new oil and gas contracts, replacing the cost recovery mechanism. The new policy was recently revised, introducing extra incentives for oil and gas contractors. While the new policy has been generally welcomed by many industry players, they are still waiting for regulation regarding the taxation system of the new gross split scheme.

Tunggal said that is ministry is currently in talks with the Ministry of Finance over request from industry players for tax exemption during exploration and exploitation period. While the Ministry of Energy and Mineral Resources (MEMR) has agreed to the request, Tunggal said that the Ministry of Finance (MOF) has yet to approve the proposal.

He said that the MEMR will continue to hold talks with the MOF and ax authorities to conclude the taxation issues. (*)