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Miningin Indonesia
www.pwc.com/idDISCLAIMER: This publication has been prepared for general guidance on matters of interestonly, and does not constitute professional advice. You should not act upon the informationcontained in this publication without obtaining specific professional advice. No representationor warranty (express or implied) is given as to the accuracy or completeness of the informationcontained in this publication, and, to the extent permitted by law, KAP Tanudiredja, Wibisana,Rintis & Rekan, PT Prima Wahana Caraka, PT PricewaterhouseCoopers Indonesia Advisory,or PT PricewaterhouseCoopers Consulting Indonesia, its members, employees and agents donot accept or assume any liability, responsibility or duty of care for any consequences of youor anyone else acting, or refraining to act, in reliance on the information contained in thispublication or for any decision based on it.ContentsForeword1
AppendicesA Minimum processing and refining requirements prior to export | page 85B Regional Taxes | page 94C Ministry of Energy and Mineral Resources | page 96D IMA & APBI-ICMA | page 97E Summary of CCoW and Mineral CoW generations | page 99F Glossary | page 109G About PwC | page 111Acknowledgements | page 114Other PwC Mining Publications | page 115Map: Indonesian Mining Areas Map (provided in insert pocket)ForewordWelcome to the eighth edition of the PwC Indonesia Mining in Indonesia:Investment and Taxation Guide.
It is now more than seven years since the 2009 Law on Mineral and CoalMining No. 4 of 2009 (the Mining Law) was promulgated. While variousimplementing regulations, including a number of amendments, have beenissued by the Government in pursuing the goals of the Mining Law, there remainmany challenges for investors, particularly in the current low commodity priceenvironment.
These challenges apply for holders of both Contracts of Work (CoWs) andCoal Contracts of Work (CCoWs) issued under the pre-2009 mining regime,as well as holders of Mining Business Licences (Izin Usaha Pertambangan, orIUPs) issued under the new regime.
Issues include: the protracted CoW/CCoW renegotiation process; the demands of in-country processing/refining requirements (and the related 2014 ban on the export of unprocessed ores); and the numerous changes in regulatory response to the level of foreign ownership.
The Government has signed several renegotiated CoWs/CCoWs for some majormining operations, however many are still in the negotiation or memorandumof understanding stage. The completed renegotiations are generally for thoseContracts which were not lex specialis in nature, but rather were subject toprevailing laws and regulations. For those not yet finalised, there are somefundamental disagreements around the lex specialis status of the Contracts.Some of the issues still being debated are changes to the applicable fiscal regime(including royalty rates); in-country processing requirements; reductions in thesize of the Contract areas; and foreign divestment requirements.
All of the above means that the Indonesian mining investment environmentwill continue to be challenging in the short-term. Many investors viewIndonesia as having significant geological potential in terms of its coal andmineral resources, but the regulatory uncertainties and, to a certain extent,the royalty and fiscal regimes have become key deterrents to investment. Thisis particularly the case in this low commodity price environment when miningcompanies are looking to improve operating efficiency and productivity,and are limiting capital spending. There is therefore a real opportunity forimprovement in the regulatory climate for mining in Indonesia as investorsconsider the allocation of their scarce investment funds in the lead up to thenext round in the commodity cycle.
The Guide
PwC Indonesia recommends that investors contact our specialist mining team asthey consider investment opportunities. Please see Appendix G for the contactdetails of PwC Indonesias mining specialists.Mining in Indonesia Tax and Investment Guide 3 1Overview of theIndonesian MiningIndustry
It was hoped that the Mining Law and its supporting framework of implementingregulations would provide investors with the necessary regulatory certaintyto spur new investment and cement Indonesias position as a key player in themining sector. However, after more than seven years, there is still a long way togo before Indonesia can fully realise its potential for mining investment.
Indonesias long standing CoW framework for foreign investment, and thelicensing system for Indonesian investors, was replaced under the Mining Lawwith a new area-based licensing system applicable for all investors, incorporatingtendering procedures for granting licences, with the involvement of local andprovincial governments, as well as the Central Government.
Under the Mining Law, both national and regional governments play a vitalrole in the mining industry by setting up national mining policies, standards,guidelines and criteria, as well as deciding on mining authorisation procedures.Furthermore, the government is actively involved in development, control,evaluation and conflict resolution in the sector.
The Mining Law was heralded as the beginning of an era of greater certainty forinvestors in the mining industry in Indonesia. However, it has become evident inthe seven years since its promulgation, that the Government has had a difficulttask in balancing the interests of investors seeking to invest in Indonesiashighly prospective mining industry with the ultimate aim of ensuring that a fairproportion of the wealth generated from the exploitation of Indonesias mineralsis retained by Indonesians for the benefit of Indonesia.
Under the Mining Law, the Central Government determines areas that canbe mined and, except under certain exceptional circumstances, regionalgovernments then have the authority to grant mining business licences withinthis pre-determined area. Under this approach, it is expected that the CentralGovernment will have more control over the determination of areas open for
The implementing regulations which support the Mining Law also set up the framework for determining the annual Domestic Market Obligation (DMO) for producers, as the Indonesian Government seeks to ensure a sufficient supply of natural resources to meet the expected growth in domestic demand as investment in infrastructure expands. So far this DMO has only been applied to coal production, for which domestic demand is likely to continue to increase given the Governments planned build-out of coal-fired power plants over the next five to ten years as it looks to improve Indonesias electrification rate.
This theme of ensuring that more of the benefits of Indonesias mining activity are retained and reinvested in Indonesia has been reinforced in the implementing regulations for the Mining Law that have been issued over the last five years. Key implementing regulations which have been issued to date include: The requirement for the divestment of up to 51% of Operation Production IUP (IUP-OP) interests held by foreign investors by the end of the 15th year of production - noting that the actual divestment requirement varies depending on whether the mining company carries out processing and/or refining activities, and whether the mine is open pit or underground Restrictions on the export of unprocessed mineral ores and the requirement for further in-country processing The requirement for each export to be verified by a surveyor appointed by the Government Imposing minimum DMOs for coal Imposing a benchmark pricing framework for coal and mineral exports to set a minimum price for transactions involving such commodities Specific pricing for coal used in mine mouth power plants.
2 PwCWhile the GRs issued to date provide further details regarding the implementationof the Mining Law, there is still a lack of clarity in relation to some of themore recent regulations, such as the divestment and in-country processingrequirements. At present, there still appears to be some reluctance on the part ofinvestors to make significant investment decisions due to these uncertainties.
Despite the coal price decline during 2012 and 2013 Indonesia recorded increasesin coal production during those years. Demand was strong from coal-fired powerplants around the world and especially from plants in China and India during thatperiod. In addition, a number of new power plants have come on-line since mid-2008 both in Indonesia and abroad. In 2014 thermal coal production decreasedonly slightly to 458 million tonnes, despite some attempts from Governmentto limit production increases. In 2015 Indonesia saw a significant reduction inthermal coal production for the first time in many years, with the Governmentsofficial figures showing a decrease of 14% to 392 million tonnes. Consistent withexpectations given increasing demand in Indonesia, coal supplied to the domesticmarket increased by 26% to 96 million tonnes (up from 76 million tonnes in 2014)on top of a 6% increase in 2014. Given the Governments aggressive plans forcoal-fired power as part of the 35 GW electrification programme, of which coalrepresents more than 50%, domestic demand will continue to increase.
There is hope however that the commissioning of some smelter facilities in 2017 should help boost the production of nickel from 2017 onward.
Historical Indonesian coal and minerals production trends are presented in the diagram below (indexed to the base year 2000 = 100).
100.0 04 00
09 01
15 10
14 20 20 20
20 20 20 20
20 20
Source: Coal is from MoEMR and Petrominer (January 2016), whilst the minerals are from the US Geological Survey.
4 PwCMining in Indonesia Tax and Investment Guide 5 2 Mineral and Coal Mining Regulatory Framework
The Mining Law provides for three categories of mining licence depending uponthe location and nature of the mineral resources. The categories are as follows: Izin Usaha Pertambangan (IUP or Mining Business Licence) Izin Usaha Pertambangan Khusus (IUPK or Special Mining Business Licence), and Izin Pertambangan Rakyat (IPR or Peoples Mining Licence).
The Mining Law relies heavily on implementing regulations. To date seven GRs(including amendments) have been issued in respect of: Mining Areas (GR 22/2010) Mining Business Activities (GR 23/2010 as amended by GR 24/2012, GR 1/2014 and GR 77/2014) Mineral and Coal Mining Direction and Supervision (GR 55/2010); and Reclamation and Mine Closure (GR 78/2010).
The Director General of Minerals and Coal (DGoMC) has also issued a number of regulations/circular letters with some of the key ones in respect of: Royalty calculations Benchmark price (including Adjustment Costs and Benchmark Prices for certain types and uses) DMO Credits Affiliates Procedures and Requirements for Issuing Recommendations for Registered Coal Exporters, Production Costs for Determining the Coal Price for Mine Mouth Power Plants Metallic Mineral Price Determination Postponing on Granting Operation Production IUPK for Hauling and Coal Sales in Foreign Investment.
At the time of writing there is talk of a proposed new mining law but details are not yet available.
8 PwC The hierarchy of the current regulatory framework is illustrated in the diagram below:
Mining Law Law No.4/2009
Government Regulations Mining Areas Mining Business Mine Reclamation Mineral and Coal GR No. 22/2010 Activities GR No. & Closure Mining Direction 1 Feb 2010 23/2010 GR No. 78/2010 and Supervision 1 Feb 2010 (as lastly by 20 Dec 2010 GR No. 55/2010 GR 24 on 21 Feb 2012, 5 July 2010 GR 1 on 11 Jan 2014, and GR 77 on 14 Oct 2014 )
MoEMR Regulations Detailed Mining Services Mining Area Benchmark IUP Tender Procedures for PerMen No. Stipulation Pricing Procedures Granting Operation 28/2009 Procedure PerMen No. PerMen No. Production IUPs 30 Sept 2009 PerMen No. 17/2010 28/2013 IUPKs (amended by 12/2011 23 Sept 2010 13 Sept 2013 PerMen No. PerMen 24/2012 11 Aug 2011 32/2013 19 Nov 2013 on 8 Oct 2012) (amended by PerMen No. 32/2015 on 23 Oct 2015)
Mineral Authority Determination of Mine Reclamation Procedures and Delegation for Processing Requirements for Mining Areas and Closure Mining Licence PerMen No. Export of Processed PerMen No. PerMen No. Issuance 1/2014 and Refined 37/2013 7/2014 PerMen No. (amended by PerMen Mineral 24 Dec 2013 28 Feb 2014 25/2015 8 on 4 March 2015) PerMen No. 5/2016 12 Aug 2015 5 Feb 2016
DGoMC Circulars
At the time of writing, this mapping process was still ongoing and, since the final map of designated areas must be approved by Parliament, this process may take some time.
It should be noted however, that one key positive step taken by the Government is the establishment of a clean and clear list of mining licence areas which have been verified by the DGoMC and declared to be valid and free of competing claims. This list, which can be accessed at the DGoMC website, indicates that approximately only 64% of the nearly 10,000 existing mining licences had been given clean and clear status. There are indications that the MoEMR would revoke IUPs which fail to obtain the clean and clear status.
10 PwCMining licences
Within the designated mining areas (or WPs), mining licences may be issued toone or more parties as follows: IUP is a general licence to conduct mining business activities in a WUP area. An IUPK is a licence for conducting mining activities in a specific WPN area in which mining business activities can be carried out. An IPR is a licence for conducting a mining business in a WPR area of limited size and investment. IPRs are not available to foreign investors.
The comments in this guide are directed primarily at IUPs and IUPKs. For furtherinformation on the IPR requirements please contact one of our advisers.
The business entity must be an Indonesian legal entity. This includes (1)Indonesian companies wholly-owned by Indonesian nationals i.e. a LimitedLiability Company (PT) Biasa; (2) Domestic Investment company (PenanamanModal Dalam Negeri, or PMDN); and (3) Foreign-owned Indonesian company(Penanaman Modal Asing, or PMA). Under the previous Mining Law No.11/1967,a CoW/CCoW could be held by either foreign or domestic investors, whilst a KPcould only be issued to domestic investors.
The Mining Law therefore removes some of the distinctions between Indonesianand foreign investors in the mining sector, and is consistent with the currentNegative List on Foreign Investment issued by BKPM, which allows 100% foreigninvestment in the mining sector, subject to the share divestment rules discussedbelow.
A key feature of the Mining Law is that a privately held company can only holdone licence (i.e. one IUP/IUPK) and only companies listed on the Indonesian stockexchange are entitled to hold more than one licence. The most recent regulationsseem to have relaxed this requirement and in certain circumstances an IUP orIUPK can be transferred to an IUP/IUPK holding entity although details of theprocedures for such transfers still require further clarification.
For further details of how this restructuring could be beneficial please contact one of our advisers.
A mining company obtains an IUP or IUPK for two separate phases of mining activities as follows: Exploration: An Exploration IUP/IUPK is granted for the performance of general surveys, exploration and feasibility studies within a WUP/WPN area. Operation Production: An Operation Production IUP/IUPK is granted for performing construction, mining, processing, refining, hauling and selling within the WUP/WPN area.
Under GR 77, the most recent amendment of GR 23, if an IUP-OP holder does not undertake hauling and selling activities these activities could be performed by either: Another IUP OP holder which has processing and refining facilities, or Another entity which holds a special IUP for processing and refining.
Specific licences
Entities who do not themselves own their mines and intend to engage solely in trading, processing and refining activities are still required to obtain a special IUP- OP. However, these licences are distinguished by the specific activities which the holders intend to perform: Transport and Sales IUP-OP (for companies engaged in a coal/minerals transportation and trading business) Processing and/or Refining IUP-OP
PerMen 32 formalises the requirements for those wishing only to apply for these Transport and Sales and Processing and/or Refining IUP-OPs and imposes a number of new restrictions on these activities. In the PerMen 32 amendment, these requirements are waived for companies domiciled within an industrial area who perform mining activities for non-commercial purposes. Particularly for coal, the DGoMC in its instruction No.02.Ins/30/DJB/2015 indicated that there should be no new issuance of Transport and Sales IUP-OP for inter-province export and for PMA companies (up to 16 May 2016).
12 PwCLicensing
The key restrictions, and rights and obligations of each type of IUP-OP areoutlined below:
Temporary Licences
14 PwCThe licences are granted by the relevant authority in accordance with the locationfrom which the coal/minerals are excavated (see table below).
Any transport and Sales IUP-OPs and Processing and/or Refining IUP-OPs issuedprior to PerMen 32 should have been adjusted in accordance with this regulationby 18 November 2015.
Through PerMen 25/2015, the MoEMR delegated the authority to issue licencesfor PMA company to the Investment Coordinating Board as follows: IUP Exploration; IUP Operation Production including its extension; Cancellation of IUP due to returned to the Government; IUP OP for Transport and Sales including its extension; IUP OP for Processing and Refining including its extension; Temporary Licence for Transport and Sales; IUP-OP for Sales; Principle Licence for Processing and Refining; and Business Licence for Mining Service including its extension.
Exploration IUP Grantor Project location BKPM If the licence is issued to a PMA company or converted from CoWs/CCoWs. Minister Where the area covers more than one province. Governor Where the area covers more than one regency, but is within one province. Mayor/Regent Where the area is within one city or regency.
IUP-OP Grantor Project location Environmental impact BKPM For licences issued to PMA For licences issued to PMA company or converted from company or converted from CoWs/CCoWs. CoWs/CCoWs.
16 PwC Specific Licences (Transport and Sales IUP-OP and Processing and/or Refining IUP-OP) Grantor Project location BKPM For licences issued to PMA company.
Minister Where transport & sales and processing & refining activities extend across more than one province.
Extensions of Exploration IUP IUP-OP IUP-OP
Non-metallic 3 years 10 years*) 5 years x 2*) minerals
*) Certain non-metallic minerals companies may be granted a Production IUP-OP of 20 years, extendable twice for a maximum of 10 years.
Once the second extension of an IUP-OP expires the relevant Mining Business Licence Area (Wilayah Izin Usaha Pertambangan, or WIUP) is to be returned to either the central or regional government. If the WIUP relates to metallic minerals and coal it could be determined either as a WPN or WIUP/WIUPK (Wilayah Izin Usaha Pertambangan Khusus). The offer for a WIUP would be via tender, whilst the offer for a WIUPK would be via priority or tender (noting that the previous IUP-OP holder would have the right to match the tender offer).
Specific Licence
Extensions of Principle Licence Special IUP-OP Special IUP-OP Transport and Not Applicable 3-5 years Maximum 3 years Sales IUP-OP for each extension
18 PwCIUPK
Extensions of Exploration IUPK Production IUPK Production IUPK
Licence areas
A key aspect of GR 23 is that the size of the Exploration IUP for coal and metallicminerals must be reduced after three years of exploration (less for non-metallicminerals and rocks). The maximum area for the production phase is reducedagain when the Production IUP/IUPK is issued.
GR 23 (as amended by GR 24) and PerMen 28 provide the tender process and selection criteria for the WIUP and WIUPK.
Tender procedures
20 PwC d. The type of business entity allowed to participate in the WIUP tender process is based on the size of WIUP acreage, as follows: WIUP WIUPK 1,000 ha 1,001 5,000 ha > 5,000 ha** District-owned District-owned District-owned District-owned enterprise enterprise enterprise enterprise
A bidder must also place a cash deposit with a state-owned bank at the time ofapplication of to 10% of the value of compensation for data and information of anew mining licence, or 10% of the total cost of the data or investment in the caseof a licence which has expired. A successful bidder will be required to pay thetender value within five working days of being announced as the tender winner.
The Central Government has the authority to control production and export of each mining product. The Regional Government is obliged to comply with the production and export controls imposed by the Central Government.
The DMO applies to all types of coal and minerals. Broadly, mining companies must comply with the DMO requirements by selling to domestic consumers of minerals/coal.
There are provisions for a minimum floor price for DMO sales, which will be subject to Ministerial Regulation. However, PerMen 34 does provide that the minimum price will be subject to the same minimum price for exports (see the following comments on Coal and Mineral Price Benchmarking).
PerMen 34 introduces a cap and trade system, whereby mining companies that exceed their DMO obligations may sell/transfer DMO credits to a mining company that is unlikely to meet its DMO commitment. The mechanism for trading DMO credits has been clarified in Circular 5055/30/DJB/2010 (dated 29 November 2010) which provides that DMO credits can be transferred between mining companies with the approval of the DGoMC, including credits held by traders on behalf of a mining company. The pricing mechanism for DMO credits is to be determined on commercial terms.
22 PwCAt the date of writing, the DMO is currently only applicable to coal. TheGovernment has set a coal DMO of 111 million tonnes for 2016 (approximately26.5% of forecast 2016 total production). Whilst there were 82 coal miningcompanies which were required to fulfil the DMO target of 92.3 million tonnesin 2015, it is rather unclear how the DMO for 2016 would be allocated to coalmining companies, as the official Ministerial decree has yet to be issued to date.Furthermore, as the Government aims to accelerate the completion of its 35GWelectrification programme, it is expected that DMO coal sales will continue toincrease in the coming years.
Broadly, the Minister, through the DGoMC, will be responsible for setting theBenchmark prices for coal and metallic minerals. The Governor, and the Regentor Mayor, will be responsible for setting the Benchmark for non-metallic mineralsand rocks.
The Benchmark price is set at the Free on Board (FOB) vessel point of sale.Accordingly, certain costs are accepted to adjust the Benchmark price if thedelivery takes place at a point other than the FOB vessel (i.e. FOB barge orCIF). The allowable adjustments would include the costs of barging, surveyors,insurance and transhipment. For metallic minerals, the types of costs allowable asadjustments to the Benchmark price include treatment costs and refinery costs.
The Benchmark price serves as the floor price for the Government Royaltycalculation. If the actual sales price is higher than the Benchmark price, theGovernment Royalty will be based on the actual sales price. If actual sales arebelow the Benchmark price, the Government Royalty calculation should beperformed based on the Benchmark price.
The Benchmark price is applicable for spot sales and long term sales. For longterm sales, PerMen 17 requires mining companies to adjust the sales price every12 months. Specifically for coal, the long term coal sales price is determined basedon the weighted average coal Benchmark price for the preceding three months. Acoal mining company is required to notify the DGoMC of the proposed sales pricebefore signing long-term sales agreements.
The coal benchmark prices for specific types of coal would be based on the benchmark prices after taking into account some adjustment factors determined by the DGoMC, whilst the prices for coal for specific uses will generally be based on the production costs determined by the DGoMC, plus a margin.
Under PerMen 9, the basic coal price is calculated based on production cost (determined by DGoMC) plus a margin (from 15% to 25%) regardless of the calorific value of the coal. The margin is determined based on agreement between the mine owner and the power plant company within the range provided for in the PerMen. Where an agreement cannot be reached the margin will be determined by the MoEMR. Once approved by the MoEMR the basic coal price is valid for the duration of the Power Purchase Agreement. Transport costs are excluded except for the transportation of coal from the mine to the power plants stockpiling facility.
24 PwCNew Listing Rules for Mining CompaniesPursuant to the issuance of Indonesia Stock Exchange (IDX) Decision No.KEP00100/BEI/10-2014, the listing rules for mining (mineral and coal) companieswere simplified. The new rules cover mining companies (and prospectivecompanies) with a mining business licence, or holding companies which (orwhich will) consolidate 50% of a mining subsidiarys income, where the mine: Has commenced sales, or Is already in the production phase but has not commenced sales, or Is not yet in production.
To qualify for listing, the prospective issuers must fulfil the following conditions(among others): Net tangible assets and deferred exploration costs must be at least Rp 100 billion for listing on the Main Board and Rp 5 billion for the Development Board One or more of the companys directors must have technical expertise and at least five years work experience in the mining sector within the past seven years The issuer must maintain proven and probable reserves certified by a competent authority (in some other jurisdictions this is referred to as either a Competent Person report or a Qualified Person report) Have a clean and clear certificate, and Have undertaken a feasibility study within three years of the date the listing request is submitted.
Mineral and coal companies whose shares were listed on the IDX before theissuance of this Decision should have fulfilled the requirement on directorsqualifications by 1 July 2015.
DivestmentThe Mining Law provides that foreign shareholders must divest part of theirinterest in a mining concession company by the fifth year of production.Pursuant to the amendment of GR 23 by GR 77, the Government has reduced thedivestment requirement from 51% to 30% for IUP-OP and IUPK-OP holders whichundertake underground mining and extended the divestment period from the10th year of production to the 15th year for miners with underground operationsor which conduct downstream processing activities. Divestment down to 49%within 10 years is still required for concessions with no underground miningactivity or processing activities.
Alternatively, a foreign investor may set up a 100% owned PMA company engaged in a mining business. However, it would have to divest some of its share in order to comply with the maximum foreign ownership rules above. The divestment rules below are also applicable to PMA mining companies set up prior to the issuance of the rules.
26 PwCDivestments are to be made to (in order of preference) the Central Government,Provincial Government or Regency/Municipal Government, a state-ownedcompany or a national private business entity.
While the divestment requirement does not prima facie apply to CoW/CCoWholders as this is being dealt with through individual CoW/CCoW re-negotiationsit is likely that the divestment requirement will become applicable once thecontract term ends.
The changes from a PMDN company to a PMA company, or vice versa, will requireapproval from the Minister. IUP holders (including Transport & Sales IUP-OPand Processing and/or Refining IUP-OP) are prohibited from changing theirinvestment status prior to obtaining Ministerial approval. This is discussed furtherbelow.
The divestment via the Indonesian capital market will not be treated as satisfying these divestment requirements (refer to the GR 77 provision on mining companies with shares listed on the IDX above).
The divestment price is to be based upon the replacement cost of the investment from the beginning of exploration up to the period of divestment less: a. The accumulated depreciation/amortisation adjusted by inflation, and b. The financial liabilities up to the end of the year of divestment.
28 PwCTransitional provisions
On 11 January 2014, GR No. 1/2014 was issued which amends GR 23/2010 andGR 24/2012. These regulations clarify that, in respect of coal, processing coversthe following activities: Coal crushing Coal briquetting Coal blending Coal washing Coal liquefaction Coal gasification Coal upgrading Coal water mixing
30 PwC Export duty tariff 2014 2015 2016 - 2017
8. A set of export duty rates were issued for companies that have decided to build smelters. These new rates are based on the progress of the smelter construction and are effective from 1 August 2014 until 12 January 2017. The Export Duty is set at: 7.5% for companies where smelter construction is 7.5% complete or less, including the depositing of a seriousness guarantee of 5% of the project value 5% for companies where smelter construction is between 7.5% and 30% complete 0% for companies where smelter development is more than 30% complete.
Allowable Classification Export Duty ET*) Export Period 1. Processed and/or refined None Not Limited Yes mineral and rocks which satisfy the minimum level of process in Indonesia. (See Appendix 1 of PerMenDag 4) 2. Processed mineral with Applicable Up to 12 Yes limited processing in January 2017 Indonesia (see Appendix 2 And require of PerMenDag 4) Export Approval from MoT **) 3. Non Exportable mining Not Applicable Not Applicable Not products (see Appendix 3 Applicable of PerMenDag 4) Note: *) ET is valid for 3 years (recommendation from DGoMC on behalf of MoEMR is required) **) MoT approval is valid for 6 months (can be extended) and requires a separate recommendation from DGoMC on behalf of MoEMR
32 PwC11. The exports of coal and coal products can only be undertaken by Registered Exporters of Coal (ET Batubara). The export procedures and documents required for an ET Batubara application are generally similar to those for an ET Produk Pertambangan.12. For the purpose of processing and refining activities, the holder of an IUP may cooperate with another IUP-OP holder for processing or refining activities, which may be in the form of: Trading of raw materials, ore or concentrate, or Collaboration on processing and/or refining minerals, which requires recommendation from the Minister or Governor depending on the location of the IUP-OP and the issuing authority. A further implementing regulation is expected to be issued to deal with subsequent approval process.
There has been significant debate between the Government and the mining sectorsince the regulations were issued regarding the viability of implementing thesein-country processing requirements, including the imposition of the export duty.In particular, CoW holders have questioned the applicability of the regulationsto them, given the lex specialis status of the CoWs. Questions have also beenraised by the industry about the economic feasibility of processing certain typesof minerals, given current and forecast global and domestic demand and supplyconsiderations; the inadequate supporting infrastructure in some areas of thecountry for downstream processing facilities; and the level of the export levy andits impact on profitability. Nevertheless, the Government has repeatedly indicatedits commitment to pursuing enforcing these requirements.
In the event that a mining company intends to build a smelter in Indonesia, somekey considerations for investors considering investment in processing/refiningfacilities, and associated infrastructure are as follows: a. Whether it is favourable to include the processing/refining facilities and infrastructure within the company holding the IUP-OP (i.e. the mining company) or under a separate company holding a Processing and/or Refining IUP-OP? b. If a separate company is to be established, what would be the arrangement with the mining company? Is a trading or a processing service arrangement preferable? c. Whether any tax facilities are available, such as an income tax holiday or import facilities. d. What are the relevant tax considerations in relation to the Engineering, Procurement and Construction (EPC) contract? e. How can financing be arranged in the most tax efficient manner? f. What is the right model for cooperation between shareholders (mining companies, offtakers, financial investors, domestic, foreign, etc.)?
The exporter of mineral products should closely examine the new procedures and requirements in order to avoid unnecessary sanctions, including the suspension of export/import activities. However, it remains unclear how the rules can be effectively applied for inter-company sales, non-sales exports, exports through pipelines, and exports under trustee arrangements, among others.
The L/C can be paid via an export financing institution of the Government.
34 PwCMineral Mining Production Limitation RegulationsDue to the non-renewable nature of coal and mineral resources, which areessential for national development, and to guarantee sufficient supplies to fulfilnational needs, the Central Government considers that it is important to limitnational coal and mineral production as necessary. The Minister, Governor, orHead of Regency will determine the policy for production limitations.
Further entrenching the domestic content obligation is the requirement for the mining service company to use local goods, local subcontractors and local labour.
Further restrictions are placed on the ability to use subsidiaries and affiliates of the IUP/IUPK holder as subcontractors, namely the requirement to obtain approval from the DGoMC. Subsidiaries and affiliates are further defined (pursuant to DGoMC Regulation no. 376.k/30/DJB/2010, dated 10 May 2010) as an entity that has a direct ownership in the IUP/IUPK holder, i.e. where: a. The IUP/IUPK holder directly owns at least a 25% shareholding in the affiliated mining service company b. The IUP/IUPK holder is a direct shareholder and owns voting rights in the affiliated mining services company of more than 50%, based on an agreement for direct financial and operation control, and/or c. The IUP/IUPK holder has the authority to appoint or replace financial and operational directors or others at similar level in the mining contractor company. Approval will only be granted in circumstances where there are no other mining companies of the same kind in the Regency/Province, the IUP/IUPK holder has put the services out to tender and no Local or National service providers have either the technical or financial capability required to carry out the services. The IUP/IUPK holder must provide a guarantee that pricing will be based on arms length principles.
36 PwCProhibition on receiving fees from a mining services company
The IUP/IUPK holder is prohibited from receiving any fees from the miningservices company. This appears to have been introduced to eliminate practiceswhere the mining licence owner assigns all mining operations to a third party andreceives compensation based on a share of profit or the quantity of coal/mineralsproduced.
Mining companies which had already engaged mining services companies beforethe enactment of PerMen 28 were required to comply with the regulation no laterthan three years from the effective date of PerMen 28 (i.e. 30 September 2012).
All existing IUPs will continue to be valid until their expiration but must complywith the provisions of PerMen 28/24.
Fiscal regimeThere are no specific articles outlining the details of tax or other fiscal provisions inthe Mining Law. However it does provide that tax facilities should be provided inaccordance with the prevailing laws except as otherwise stated in the IUP/IUPK.
The lex specialis concept embedded in some CoWs/CCoWs may not be possible ifenduring fiscal terms can be agreed in the IUP/IUPK. The ability of a term in anIUP/IUPK to override Law No. 36/2008 (ITL) would however be problematicand likely to result in further uncertainty. It appears that all IUPs issued to datecontain no specific tax concessions.
Refer to Section IV for further details in relation to mining specific taxation issues.
RoyaltiesAll IUP/IUPK holders are required to pay production royalties the rates of whichwill vary depending on the mining scale, production level, and mining commodityprice. Currently, a range of percentages of sale proceeds applies for the differenttypes of coal and mineral mining.
The Government has been looking to increase the production royalty rates for IUPs, in particular for coal, as the current rates are significantly lower than that under a CCoW (i.e. a 13.5% production share). However, this has not been enshrined in any official regulations.
Transfer restrictions Under the Mining Law, the transfer of an IUP/IUPK to another party is generally prohibited. However, GR 24 provides an exception whereby IUP/IUPKs can be transferred if the transferee is at least 51% held by a company which already holds an IUP/IUPK. It is not yet clear whether this rule is intended for transfers to any IUP/IUPK holder or whether it is limited to a minimum 51% owned subsidiary of the existing IUP/IUPK holder.
38 PwCReclamation and mine closure guaranteesOn 20 December 2010, the Government released GR No.78/2010 (GR 78) dealingwith reclamation and post-mining activities for both IUP-Exploration and IUP-OPholders. This regulation updates Ministerial Regulation No.18/2008 issued by theMoEMR on 29 May 2008. On 29 February 2014, the Minister issued RegulationNo.7/2014 (PerMen 7/2014) (the implementing regulation of GR 78) detailingthe requirements and guidelines for the preparation of reclamation and post-mining plans.
PerMen 7/2014 also sets out the procedures for the preparation of the reclamationand post-mining activities report.
The transitional provisions in GR 78 and PerMen 7/2014 make it clear that CoW/CCoW holders are also required to comply with this regulation.
The reclamation and mine closure guarantees may only be withdrawn uponapproval from the Minister, the Governor, the Regent or the Mayor, as applicable.
Penal provisionsThe Mining Law also regulates the consequences of infringement of the law by theIUP/IUPK holder (an illegal miner), as well as the Regional Government.
Transitional Provisions Divestment
All existing KPs were required to have been converted to IUPs by 30 April 2010 based on GR 23. There are no transitional provisions concerning the conversion of KPs in the Mining Law. Although the conversion itself is relatively straightforward the impact of the implementing regulations, in particular PerMen 28, mean that a number of historical mining service structuring arrangements are no longer permitted under the Mining Law.
GR 23 confirms that companies that held multiple KPs can continue to hold these under the Mining Law, upon conversion to IUPs.
All existing CoWs/CCoWs/CCAs (Contracts) will continue until their expiry date and may be extended without the need for a tender (where further extensions are still available under the Contract).
However, the extended licence will be granted under the IUPK system, rather than under the CoW framework. If it has been extended once, the second extension would also be granted without the need for a tender. Both extensions require the companies to apply to the Minister at the earliest two years or at the latest six months prior to the expiry of Contract. Before issuing the IUPK, the Minister should have already issued approval for the relevant mine area as a WIUPK OP. Failure to fulfil these requirements may result in the mine area being opened for tender.
40 PwCDetailed guidance on the application for extension of IUPK OP is outlined in GR 77.
Although the terms of existing Contracts will be honoured, the Law specificallyprovides that holders of existing Contracts must, within five years of enactment ofthe Law, comply with the obligation under the Law to conduct onshore processingand refining of their ore.
Contract holders who have already commenced some form of activity arerequired, within one year of the enactment of the Mining Law, to submit a miningactivity plan for the entire contract area. If this requirement is not fulfilled, thecontract area may be reduced to that allowed for IUPs under the new Law.
Further, the Mining Law indicates that the provisions of existing Contracts mustbe amended within one year to conform with the provisions of the new Law, otherthan terms related to state revenue (which is not defined but presumably includesState Tax Revenue and Non-Tax State Revenue such as royalties). At the time ofwriting, more than five years after the issuance of the Mining Law, the negotiationprocess between the Government and Contract holders regarding amendments tothe Contracts is still ongoing. It is not clear to which provisions of the new MiningLaw existing contracts must conform, but this could include alignment with theMining Laws provisions on divestment obligations, re-sizing of the mining areas,reduced production periods, prohibitions on using affiliated mining contractorsand the like. Many of these matters have been raised by the Government incontract renegotiations with the Contract holders.
The transitional provisions were one of the most controversial aspects of theMining Law, with debate in Parliament continuing on this point right up to thefinal passage of the Law. Unfortunately, the outcome was two possibly conflictingprovisions meaning that, state income treatment aside, it is not clear how fullyexisting Contract rights will be honoured. Resolution of this question willobviously be of major interest to those investors holding Contracts, and is likelyto be a continuing deterrent to additional investment by existing contractors,until the Governments interpretation of these transitional clauses is clearlyunderstood, and Contract renegotiation efforts are completed.
Whilst the Government has commenced discussions with most Contract holders,in an attempt to expedite the negotiations, Presidential Decree No. 3/2012 wasissued on 10 January 2012 to establish a team, headed by the CoordinatingMinister for Economic Affairs and comprised of a number of ministers, tonegotiate the terms of the contracts and bring them into line with the Mining Law.However, after the third anniversary of this Decree, Contract renegotiations arestill ongoing with most Contract holders. It is understood that the negotiationshave been focusing on issues such as the size of the concession area, taxes androyalties, the use of mining service contractors, benchmark pricing, mine closureand reclamation, onshore processing and minimum divestment requirements.
The CoW system for regulating mining operations has played a key role in thesuccess of Indonesias mining industry. The CoW system, which was introducedin 1967, has been gradually refined and modernised over the past forty years toreflect changing conditions in Indonesia and abroad. To date, there have beenseven generations of CoWs. A comparison of the various generations of CoWs isprovided in Appendix E.
As discussed earlier, the Mining Law does not provide for CoWs under the newlicensing framework, however the transitional provisions state that existing CoWswill be honoured until the stipulated expiry date, but from that point can onlybe extended under the new IUPK licensing framework. The following discussion,therefore, is only applicable to CoWs which existed prior to the Mining Law, andbefore any amendment following the Governments renegotiation process to alignCoWs with the Mining Law. Any new mining activity can only be conducted underthe IUP framework of the Mining Law.
CoWs were regulated under MoEMR Decision Letter No. 1614/2004. In essence,a CoW is a comprehensive contract between the Government and an Indonesiancompany. The company could be 100% foreign-owned. However, if the companywas 100% foreign-owned, it may have been subject to divestment requirementsat a later date. As a practical matter, most CoWs have some level of Indonesianownership.
The CoW sets out the companys rights and obligations with respect to all phasesof a mining operation, including exploration, pre-production development,production and mine closure. A CoW applies to a specifically defined geographicalarea (the Contract Area).
The CoW company is the sole contractor for all mining in the CoW area,other than for oil and gas, coal and uranium. The CoW company has control,management and responsibility for all its activities, which include all aspectsof mining such as exploration, development, production, refining, processing,storage, transport and sale.
Term Available Stage (Years) Extension1
Note: 1) Depends on the CoW generation. For the detail, refer to Appendix E. 2) For first generation, the maximum period for general survey until feasibility study was 18 months, and can be extended for a maximum of six months
The CoW covers all tax, royalty, and other fiscal charges, including: dead rent in the Contract Area; production royalties; income tax payable by the company; employees personal income tax; withholding taxes on dividends, interest, rents, royalties and similar payments; VAT; stamp duty; import duty; and land and buildings tax.
CCoWs were regulated under MoEMR Decision Letter No. 1614/2004. Since November 1997, coal mining was brought more in line with general mining through the CoW structure. There have been two generations of CCAs (first and second generation contracts) and one generation of CCoW which is typically referred to as the third generation CCoW.
44 PwCThe first generation of CCA was regulated under the Presidential Decree No.49/1981 dated 28 October 1981 regarding the Principal Regulation for CoalCo-operation Agreement between PT Tambang Batubara Bukit Asam (now PTBukit Asam (Persero) Tbk or PTBA), the state-owned mining company, and theContractor. Presidential Decree No. 49/1981 was replaced by Presidential DecreeNo. 21/1993 dated 27 February 1993 which regulated the second generation ofCCA. The third generation of CCoW was issued pursuant to Presidential DecreeNo. 75/1996 dated 25 September 2006.
The key difference between the CCA and the CoW system is that under a CCA, theforeign mining company acted as a contractor to the Indonesian state-owned coalmining company, PTBA. Legislation has since been enacted and CCAs amendedto transfer the rights and obligations of PTBA under the CCAs to the Government,represented by the MoEMR.
Under the CCA, the coal contractor is entitled to an 86.5% share of the coalproduced from the area, and the contractor bears all costs of mine exploration,development and production. The Government (previously PTBA) retainsentitlement to the remaining 13.5% of production. However, in accordance withPresidential Decree No. 75/1996 dated 25 September 1996, the contractors paythe Governments share of production in cash, which represents 13.5% of salesafter the deduction of selling expenses.
For the first generation of CCA, equipment purchased by the coal contractorbecame the property of the Indonesian Government (previously PTBA), althoughthe contractor has exclusive rights to use the assets and is entitled to claimdepreciation. For the second and third generations of CCA and CCoW, theequipment purchased by the contractor remains the property of the contractor.
Foreign shareholders that own 100% of a first generation CCA are required tooffer shares to Indonesian nationals or companies so that, after ten years ofoperating, foreign ownership in the company is reduced to a maximum of 49%.
Under the CCoW, the mining company is, in effect, entitled to 100% of thecoal production however, a royalty of 13.5% of sales revenue is paid to theGovernment.
Term Stage Available Extension (years) (Years)
Construction 3 - Production 30 -
46 PwCExploration and DevelopmentThe stages coincide with decision points for the relinquishment of part of theContract Area. This section deals with the general survey, exploration, feasibilityand construction stages.
Upon signing the Contract, the company is required to lodge a US Dollar securitydeposit in the Ministers bank account, which is released upon completion of thefollowing: Satisfactory completion of the General Survey period (50%), and Submission of a general geological map to the Ministry within 12 months of completion of the Exploration Stage (50%).
For the seventh generation of CoW or third generation of CCoW, the securitydeposit is released upon completion of the following: Satisfactory completion of the General Survey period (25%); End the first year of exploration (25%); and Submission of a general geological map within 12 months of completion of the Exploration Stage (50%).
During the preproduction stage, all of the companies signing the Contract arerequired to submit detailed quarterly progress reports to the Minister. Under thecontracts, the companies have responsibility for all of the financing requirementsof the project and details are to be reported to the Minister.
For a company holding a Contract, obligations are imposed throughout the lifeof the contract with respect to environmental restoration, the employment andtraining of Indonesian nationals, preference to Indonesian suppliers, and theprovision of infrastructure for the use of the local community.
The company also has the following obligations under the Contract:
At the end of the Exploration stage, At the end of the Exploration stage, the company is required to file with the company is required to file with the Minister: the Minister: - A summary of its geological and - A copy of drill holes, pits and metallurgical investigations and assays of the samples; and all data obtained; and - A copy of geophysical or - A general geological map of the geological maps of the Contract Contract Area. Area.
At the end of the Feasibility Study At the end of the Feasibility Study stage the company is required to stage the company is required to submit a feasibility study, including submit a feasibility study, including environmental impact studies, to the environmental impact studies, to the Minister and to design the facilities. Minister and to design the facilities.
At the end of the Feasibility Study, At the end of the Feasibility Study, the company is required to have the third generation CCoW company reduced the Contract Area to not is required to have reduced the more than 25% of the original Contract Area to not more than Contract Area. 25,000 ha.
48 PwC Coal Co-operation Agreements/Coal Contracts of Work Contracts of Work Construction Stage Construction Stage
Throughout the life of the CoW, the Throughout the life of the contract, company is required to pay dead the company is required to pay dead rent. This is an annual amount rent. This is an annual amount based based on the number of hectares in on the number of hectares in the the CoW area and the stage of the approved area and the stage of the CoW. mining.
ProductionDuring the production phase, the company is required to provide the followingExploitation reports to the Minister: Fortnightly statistical report Monthly statistical report Quarterly report concerning progress of operations An annual report, and Other reports to various departments.
The company may export its production, but is encouraged to meet domesticdemand first. Sales to associates are required to be at arms length prices. Salescontracts exceeding three years are subject to Government approval.
The Contract also requires contractors to provide the following reports to theMinister: Monthly statistical report Quarterly report concerning progress of operations, and An annual report for the third generation of CCoWs.
The Contract company may choose to operate the mine itself or it may sub-contract the operations of the mine, but outsourcing mining operations shouldnow be considered in light of the rules contained in the Mining Law and PerMen28/24, which may be applicable to Contracts.
Because a company can be party to only one contract (either a CoW, CCA orCCoW), it is common for mining groups to have more than one company inIndonesia. Group overheads can be borne by yet another company formed toservice the group Contract companies. This can provide operational efficiencies,but its tax implications should be considered further. Mining in Indonesia Tax and Investment Guide 49 Other financial obligations Royalties
Royalties are payable quarterly to the Government based on the actual volume of production or sales, according to the provision set out in the Contract. However, in practice, currently the royalty is to be paid to the Government prior to shipment as required under the prevailing export administrative procedures.
Dead rent and Land and Buildings Tax (Pajak Bumi dan Bangunan or PBB)
The company is required to pay dead rent and PBB as set out in the Contract. Dead rent is an annual charge based on the number of hectares in the Mining Area. PBB is certain percentage from the mining operation.
50 PwC - If the Government does not accept the offer, the company then has six months to sell or remove its property, otherwise the property reverts to the Government without any compensation to the company.
c. Construction Period - The conditions are identical to those for the Feasibility period except that, if the Government does not accept the offer, the company has 12 months to remove or sell its property.
Upon the termination of the Contract, any property that is used for publicpurposes such as roads, schools and hospitals with associated equipmentimmediately becomes the property of the Government without any compensationto the company.
Transfer of ContractsPurchase and sale of direct interests in the Contract
The Contract does not allow the CoW/CCA/CCoW companies to transfer or assignall or part of their interest in the contract without the prior written consent ofthe Government. On such a transfer, the company is not relieved of any of itsobligations under the contract, except to the extent that the transferee or assigneeassumes and performs such obligations.
However, the shareholders of the Contract company cannot transfer shares priorto the commencement of the operating period, without the written consent of theGovernment.
The Contract and the income tax legislation of general application do not address farm-ins per se. As a commercial matter, a typical farm-in to a mineral property involves an eventual transfer of an interest in the property. Accordingly, the farm-in arrangement, and the tax treatment thereof, will be considered by the Minister in conjunction with his consideration of approval of the transfer. A farm- in can usually be effected more easily through a transfer of shares in the offshore investing company.
52 PwC c. The amount of royalties: the Government proposes to increase the royalty rates d. Obligations to process raw materials in Indonesia: the CoW and CCoW holders were required to increase the level of value-added processes carried out in-country (please refer to the Mandatory in-country processing and export duty section on page 29 for more details); e. Divestment: foreign shareholders are required to divest up to 51% of their interest in the CoW and CCoW company (please refer to the Divestment section on page 25 for more details); f. Utilization of local goods and services: further restrictions on the use of affiliated service companies and promoting the use of local service contractors (please refer to the Restriction on the use of affiliates/subsidiaries section on page 36 and Service providers to the mining industry section on page 76 for more details), and g. Tax provisions (except for Corporate Income Tax (CIT) rate): tax provisions are to follow the prevailing regulations.
Meanwhile, there are still 23 CoW and 51 CCoW holders who have not agreedwith several terms in the proposed amendment. At the time of writing, theGovernment is in process to drafting the amendment of CCoW first generation.
Given that contracts are specific to each contract holder, the outcomes fromthe negotiations will vary, however one of the key sticking points has been theinability for the Government to agree to any change which would reduce theamount of State Revenue collected under the contract. Accordingly, the holdersof earlier generation CoWs and CCoWs, which lock in a higher rate of tax, arereluctant to agree to any significant changes if the tax and royalty rates cannotbe reduced. Similarly, the maximum mining areas under the Mining Law aresignificantly smaller than some CoWs and CCoWs, which is also proving a hurdleto aligning existing contracts with the Mining Law.
It is still not clear that more than seven years on from the issuance of the MiningLaw any significant progress has been made in finalising renegotiated termsespecially for the first and third generation CCoW holders. The industry willbe keen to see the new Governments approach to this, and hopes for a strongcommitment to respecting contract sanctity.
The Mining Law stipulates that any tax facilities for a mining project should beprovided in accordance with the prevailing laws except as otherwise stated in theIUP/IUPK. This indicates that tax concessions outside of the prevailing Tax Law/regulations may still be available.
However, it appears that there is a strong intention on the part of the Governmentto apply the prevailing Tax Laws/regulations to IUP/IUPK holders. Therefore, inpractice, special tax provisions with overriding status (lex specialis) may not beavailable for an IUP/IUPK, as is the case for already issued IUPs.
A company holding an IUP/IUPK is required to register for tax and obtain a taxregistration number. The tax registration number is called Nomor Pokok WajibPajak (NPWP). The IUP/IUPK company is also required to register for tax atthe local tax office within whose jurisdiction the mine operates which includesValue Tax Added (VAT) obligations (if applicable and not centralised in the headoffice) and Withholding Tax (WHT).
Under the prevailing Income Tax Law (ITL), the Government may issue a GRgoverning taxation of mining business. As at the date of this publication a GRon mining taxation has not been issued. Thus, unless specifically stipulated theprevailing tax rules are likely to apply.
Below are some of the main tax considerations which will be relevant to a mininginvestor.
CIT Rate
Under the prevailing ITL/regulations a company is subject to CIT on its net taxableprofit. The net taxable profit is calculated based on gross income minus allowableexpenditure.
CIT rate is 25% of net taxable profit. A 5% income tax reduction is applicable for acompany listed on the IDX, subject to meeting certain requirements.
Gross income usually represents sales of mining products and any other income earned by the mining company.
General expenses
Certain expenditure may not be tax deductible under the ITL such as certain donations and benefits-in-kind provided to employees. Some types of benefits- in-kind provided at the mining site may be deductible if the mine is located in a remote area and approval from the DGT is obtained.
Selling, general and administrative expenses are generally tax deductible in the year in which they are incurred.
Fixed assets are categorised into four categories depending on the nature of the asset and its expected useful life. The rate at which assets can be depreciated will depend upon the category of the asset. Assets are generally depreciated over 4, 8, 16 or 20 years and taxpayers may apply a diminishing balance or straight line approach to depreciation.
56 PwCAmortisation of intangible assets
Intangible assets may include pre-operating costs, patents, rights, licences, etc.Intangible assets can be amortised over an effective life of either 4, 8, 16 or 20years using either a diminishing balance or straight line approach.
For costs incurred in the acquisition of mining rights with a beneficial life ofmore than one year these costs should be amortised based on a production unitmethod not exceeding 20% per annum.
Tax losses can be carried forward for up to five years under the prevailing ITLand are recouped on a first-in-first-out basis. Tax losses cannot be carried back.
Reclamation reserve
Mine closure
The prevailing ITL is not clear on whether a provision for mine closure (e.g. mineinfrastructure demobilisation costs) is deductible. Since mine closure costs areusually spent in the later stages of a mines life when the company is earning littleor no income, proper planning is crucial to ensure the utilisation of deductionsfrom these costs. The current regulations on reclamation reserves is silent on thematter of mine closure reserves therefore mine closure reserves are unlikely to bedeductible.
On 9 September 2015, the MoF issued the thin capitalisation rule underRegulation No.169/PMK.010/2015 (PMK 169). PMK 169 is effective for fiscalyear 2016 onwards. The thin capitalisation rule provides a maximum ratiobetween debt to equity (DER) of 4:1. PMK 169 excludes CCoW/CoW where therespective contract specifies the applicable DER.
The DGT has increased its audit focus on related party transactions. Taxpayers must disclose a significant amount of detail in their CIT return regarding the level of related party transaction that exists and must also be able to justify the use of a particular pricing methodology. The DGT has started performing transfer pricing audits. As a result, taxpayers with related party transactions must carefully consider their transfer pricing position.
58 PwCBookkeeping in US Dollars
For tax purposes however, the US Dollar is the only alternative to IndonesianRupiah.
PMK-107 requires a party which purchases coal from an entity (or individual)holding an IUP to collect and remit Article 22 Income Tax at 1.5% of thepurchase price at the time of purchase. PMK 107 also stipulates that Article22 Income Tax at 1.5% is applicable to export of coal and minerals by IUPcompanies (remitted upon export).
Furthermore, the sale of gold bars, other than where sold to Bank Indonesia andwhere proceed into jewellery for export is also subject to Article 22 Income Taxat 0.45%. This is collected by the gold producer.
The Article 22 Income Tax constitutes a CIT prepayment (cash flow concernonly).
Tax Allowances
In relation to the mining sector tax incentives are available, subject to the satisfaction of certain criteria, for: Basic iron and steel manufacturing Gold and silver processing and refining Certain brass, iron ore, uranium, thorium, tin, lead, copper, aluminium, zinc, manganese and nickel processing and refining activities Coal gasification, and The use of coal for energy liquefaction.
Apart from the processing and refining of copper, silver and gold, these income tax incentives are generally only applicable to activities undertaken outside Java.
Tax Holiday
The government provides tax holiday through MoF regulation No. 159/ PMK.010/2015 which provides CIT reduction to 10% up to 100% of the CIT due for 5 - 15 years from the start of commercial production. The period can be extended to 20 years if the investment is deemed in the national interest.
For the mining sector, the tax holiday is available for the upstream metal industry. The tax holiday is applicable to the relevant pioneer industry taxpayers established on or after 15 August 2011 which have new capital investment plans of at least IDR 1 trillion, meet the 4:1 DER and commit to place a time deposit equal to 10% of the planned investment value in Indonesian banks.
60 PwCMany smelter companies expect to be eligible for the tax holiday facility. However,by including the smelter business in the tax allowance, the Government wishes toencourage investors in smelters to (only) apply for the tax allowance (and not thetax holiday). At the time of writing, we were not aware of any tax holiday facilityhaving been granted for a smelter company.
The delivery of goods and services in Indonesia is generally subject to VAT exceptfor the delivery of certain pre-determined types of goods and services. Thecurrent VAT rate is 10%.
The prevailing VAT Law stipulates that supplies of gold bars, coal and naturalresources taken directly from source are not subject to VAT. This VAT positionmay change according to the level of processing of the mining product inquestion. In respect of coal, there are a number of private rulings from theDGT indicating that washing or crushing activities do not constitute processing(although briquetting activities do). Further issues may arise in this respect oncethe detailed requirements of the Mining Law in respect of in-country processingare stipulated.
In the event that a company delivers a non-VAT-able mining product (e.g. goldbars and coal), any Input VAT incurred on the import and/or domestic purchaseof goods/services will not be creditable/refundable and so effectively becomingan additional cost (which should be deductible).
For most companies, a VAT refund is only available at the end of the year.However, companies that incur VAT during the pre-production may still applyfor refunds in respect of VAT on capital goods on a monthly basis. However, ifthey fail to reach production (defined as the delivery of VATable goods/services)within three years (may be extended to five years) from the date on which theycredit the Input VAT, they must repay the VAT refund by the end of the monthfollowing the failure to enter production. This timing requirement obviouslypresents a problem for long-term mining projects which may take several years toenter into production.
If the payments are made to a non-resident the WHT rate is 20%. A tax treaty may provide outright relief on services payments and reduce the WHT on payments of dividends, interest and royalties (generally to 10% or 15%). The DGT regulated procedures to be followed to access the benefits of a tax treaty including a pre- determined disclosure form, and measures to prevent tax treaty abuse.
The DGT issued Regulation No. PER-47/PJ/2015 (PER 47) regarding Procedures for the Imposition of PBB within the Mining Sector for Minerals and Coal Mining, which revoked PER-32/PJ/2012. PER 47 was effective from 1 January 2016.
In general, PBB in the mining industry covers land and/or buildings located in mining areas including locations in the mining licence area and outside the mining licence area which are used for mining activities. It is applicable to both onshore and offshore activities.
The PBB rate is 0.5% of the taxable sale value of the PBB object. The taxable value for mining is stipulated as being a proportion of the sale value of the PBB object at 40% of the sale value for PBB objects.
The sale value of the PBB objects are determined by the DGT on behalf of the MoF and are updated periodically depending on the economic development of the Region in question.
Specifically for land and buildings used for mining, the sale value should also take into account the net income from the mining activity (gross income less production costs). PER 32 provides a detailed explanation of how this calculation should be performed.
62 PwCTax Regime for a CoW/CCoW/CCA CompanyOne of the key features of a CoW/CCoW/CCA (Contract) is its lex specialis status that is, the terms in the contract override the general law. For example, whencertain specific tax rules are set out in a Contract these tax rules generally takeprecedence over the prevailing Tax Laws.
Generally, the tax rules in a Contract reflect those that are in force at the timewhen the contract is signed although there may be some exceptions. Typically, aContract fixes the tax rules for the duration of the contract (with the exceptionof second generation Contracts where they generally follow the prevailing taxregulations).
Taxation matters that are not governed in the Contract should follow theprevailing Tax Laws and regulations (as discussed above).
The advantage of having lex specialis tax rules in a Contract includes tax stabilitythroughout the life of the project or at least up to the end of the Contract term.
The disadvantage of lex specialis status is that the mining company may notalways be able to access favourable changes in the ITL such as a reductionof income tax rates or the introduction of tax incentives. Despite this, the lexspecialis tax rules have historically been favoured by investors particular for biglong-life mining projects because it provides stability in various aspects of miningoperations including tax.
The transitional provisions of the Mining Law (Article 169) provide that theexisting contracts will remain effective until the expiration date. However,the contracts should be adjusted within one year to conform with the MiningLaw except for provisions on state revenue (note that the exception is notapplicable if there is an effort to increase the state revenue). Currently, thecircumstances where the government can seek to amend the tax/non-tax staterevenue provisions in a Contract remain unclear. The Government has beeninvolved in negotiations with individual Contract companies regarding revisionsto the Contract terms, but as yet there have not been any wholesale changesto Contracts. Rather, any changes have been made on a case by case basis. Atpresent, there is still no guidance on how Article 169 of the Mining Law will beimplemented, although it is understood that the Government tends to require theCoW/CCoW companies to follow the prevailing Tax Law except for the corporateincome tax rate (which may be higher than the prevailing rate).
Note that the tax treatments described in this booklet are generic and variations may exist between the various generations of Contracts. Appendix E summarises the typical tax treatments in the particular generations of Contracts. Not all generations of Contracts have specific tax rules and as such those contacts may simply require the tax treatments to follow the prevailing Income Tax Law. In assessing the applicable tax regime, a detailed review of the Contract is necessary because different rules may exist between two Contracts of the same generation.
Tax registration
A company holding a Contract is required to register for tax and obtain a NPWP.
The Contract company should register for tax at the local tax office where the mine operates. These include the obligations for VAT (if applicable and not centralised at head office) and WHT.
Bookkeeping in US Dollars
Irrespective of the currency and the language used, the company may settle their corporate income tax liabilities in Rupiah or US Dollars, and file tax returns in Indonesian language. With respect to CIT, relevant tax returns should be presented in US Dollars side by side with Rupiah in the annual CIT return.
64 PwCThe mineral CoWs typically have lex specialis CIT rules. In respect of a CCA/CCoW, the first and most of the third generation contracts include lex specialisCIT provisions whilst the second and remaining third generation CCoWs donot. Where lex specialis tax rules do not apply the company must follow theprevailing income tax rules for the CIT calculation.
CIT rate
Where a Contract includes a specific CIT rate these Contract companies maynot be entitled to the reduced 25% CIT rate which is applicable from the 2010income year onwards (the rate was reduced from 30% in 2008).
The CIT rate applicable to the third generation CCoW and sixth/seventhgeneration CoW companies has been a longstanding issue not least because theseCCoWs/CoWs typically provide a lex specialis tax framework linked to the 1994Income Tax Law (i.e. with a 30% maximum CIT rate) but the relevant provisionin the Contract could be subject to a different interpretation.
On 24 November 2014, the DGT issued SE-44 which states that, in the DGTsview the 30% CIT rate continues to apply. The DGT had also imposed interestpenalties on some to taxpayers who applied the 25% CIT rate.
Operating expenses
On-site exploration expenses are generally deductible in the year the expensesare incurred provided the expenses relate to the Contracts Area.
As per the prevailing tax rules however, some generations of Contracts mayrequire reference to the previous Income Tax Law and/or a deposit with a state-owned bank in order for the reclamation provision to be deductible.
Employee benefits/facilities
Pre-Contract expenses
Mining infrastructure such as buildings, roads, bridges and ports are generally depreciable. Public infrastructure such as roads, schools and hospitals are usually deductible through depreciation under the Contracts rules.
Fixed assets should be classified into several different categories based on their useful life. Accelerated depreciation rates may be available for fixed assets located in the Contract Area. Earlier generations of CCoW/CCA usually provide an investment allowance deduction (i.e. hypothetical depreciation) and have a fixed depreciation rate based on the straight line method irrespective of the type of assets.
66 PwCFor certain Contracts, if the mine life is shorter than the assets fiscal useful life, theremaining book value may be fully depreciated at the end of the mine life.
Intangible assets may include pre-operating costs, patents, rights, licences, etc.
Expenses incurred prior to production (with a useful life greater than one year some Contracts do not require this) may be capitalised and amortised onceproduction commences. These expenses may also include expenses incurred bythe Contract companys shareholder(s) prior to the formation of the company(i.e. pre-incorporation expenses).
Interest expenses
Most CoW/CCoW provides specific rules on DER. If such rule is not available inthe contract, the company should follow the DER as stipulated in PMK 169.
Under a Contract, tax losses can be carried forward for the period stipulated in theContract. This may be more or less than the five years carry forward allowed underthe prevailing Income Tax Law. Tax losses cannot be carried back.
Sales Tax
Before the enactment of the VAT Law in 1984, Indonesia adopted a Sales Tax.Under the lex specialis rules Sales Tax is still applicable for the Generation 1 CCAcompanies. Sales Tax is imposed at 5% maximum on certain services provided tothe contractors, and payable on a self-remittance basis (similar to WHT).
During pre-production the company will not have any Output VAT due to therebeing no deliveries of mining products. Therefore VAT overpayment is likelyas the company should pay its Input VAT to vendors for purchases of taxablegoods/services.
Subject to the tax rules in the Contract, the company may claim a refund on the Input VAT paid but must undergo a tax audit.
All VAT payments are denominated in Rupiah. If the company keeps its books in US Dollars outstanding VAT receivables would give rise to a foreign exchange issues.
PBB for CoW and CCoW are usually specifically governed under the contract.
68 PwCNon-Tax State RevenueRoyalties
Royalties are payable quarterly to the Government based on the actual volume ofproduction or the sales price. For CoW/CCoW holders this is based on the termsof the Contract. However, based on the prevailing regulations and current practicethe royalty should be paid prior to shipment.
The prevailing royalty rates applicable to IUP/IUPK holders are set out in Section 2.
Dead Rent
Throughout the life of the Contract the company is required to pay dead rent. Thisis due annually and the amount is normally calculated based on the number ofhectares in the contract/licence area and the stage of the mining operations (e.g.different rates for general survey, exploration, and exploitation stage).
Regional TaxA mining company may be liable for a number of Regional Taxes and Retributions.The rates range from 1.5% to 35% of a wide number of reference valuesdetermined by the relevant regional Government. Contracts may limit additionaltypes and rates of Regional Tax introduced after the signing date of the contract. Asummary of the types of regional taxes that may apply is included at Appendix B.
The prevailling ITL stipulates that gains arising from the transfer of a mininginterest, financing participation or capital investment in a mining company aresubject to Income Tax.
The prevailling ITL also stipulates that the Government will issue a separate GRon the calculation of Income Tax for the mining sector. The GR may cover theIncome Tax on the transfer of a mining interest, however to date, no mining sectorspecific GR has been issued in respect of the calculation of Income Tax.
There are several tax issues which need to be resolved in respect of the assignment of a Contract. This includes the tax implications of the transfer of the tangible assets (such as mine infrastructure equipment, etc.) and intangible assets (such as Deferred Exploration Expenditure) to the buyer without creating any additional tax costs. Therefore, specific advice should be sought on the tax impacts arising from the sale of mining rights.
The sale of shares is a taxable event. For a domestic seller, the Income Tax is imposed on the profits earned from the sale. For a non-tax resident seller, a 5% income tax on gross proceeds is due unless relief is available under a tax treaty or the company being sold is a listed company in Indonesia (in this case, a 0.1% final tax is due on the sale proceeds).
The prevailling ITL provides for a long-arm capital gains tax provision. The DGT can treat the sale of a conduit or special purpose company established in a tax haven country which has an Indonesian PE or subsidiary as the sale of an interest in an Indonesian company. In this case, the DGT can impose a 5% final income tax on the gross sale proceeds.
The implementation and further development of this new rule should be closely monitored, since to date there has still been no clear definition of what will constitute a tax haven, or what the implications will be if the indirect ultimate shareholder of the tax haven company is resident in a jurisdiction with which Indonesia has a tax treaty.
Investment Structuring As a general rule of thumb, a tax efficient investment structure would create significant tax savings for the life of mine, which in turn would increase the economic value of the mine. A favourable structure would also be effective for project financing purposes. Care must therefore be taken in structuring the initial investment in the mining industry. Some relevant Contract and IUP/IUPK issues to be aware of include:
70 PwC A company can only hold one Contract or one IUP/IUPK. This ring fencing rule, together with the fact that there is no group relief for Income Tax purposes, requires careful planning, particularly for the use of service companies within one group, inter-company charges, inter-company borrowing, etc. The use of a tax efficient shareholding structure to maximise profit repatriation/dividends would enhance the project feasibility (note that under some tax treaties the WHT on dividends may be reduced from 20% to 15% or 10%) Sales of shares in Contract or IUP/IUPK companies that are not listed on the Indonesia Stock Exchange by foreign investors are taxed at 5% income tax on gross proceeds, unless protected by a tax treaty. The investment may be structured to reduce the tax on exit A typical concession in some of the Contracts of a reduced WHT rate for dividend tax payments to founder foreign shareholder(s) The use of tax efficient project financing strategies or intra-group financing considering the thin capitalisation rules and the fact that debt forgiveness is subject to tax in Indonesia (this issue is common in unsuccessful exploration projects), and The best investment structure and arrangements for mineral processing and refinery businesses.
The obligations for Limited Liability companies set out in the Investment Lawincludes: Prioritising the use of Indonesian citizen manpower Creating a safe and healthy working environment Implementing corporate social responsibility, and Environmental conservation.
Investors exploiting non-renewable natural resources must also allocate funds forsite restoration that fulfil the standards of environmental feasibility. Sanctionsfor non-compliance with certain aspects of the Investment Law, (which includescorporate social responsibility) include restriction, freezing or revocation ofbusiness activities/licences.
Forestry LawGeographically, Indonesia has resource-rich soil, which includes forest resources.The use of forest resources is therefore strictly governed by the CentralGovernment, especially protected forests. It is common that mining concessionareas overlap with forestry areas (either a protected or productive forest), whichmeans that mining activities will be impacted by the rules applicable to such forests.
Protected forest areas are open for mining activities provided that mining is performed through underground mining (not an open pit), subject to a number of conditions. For areas designated as Production forest areas, underground and open pit mining may be permitted. Mining is prohibited in areas designated as Conservation forests.
Use of a forest area for mining will require compensation to be made, by way of either land compensation or compensation payments. No compensation is payable for certain limited survey and exploration activities (unless for a trial purpose to determine a mines economic feasibility). The borrow-and-use permit holder will also be required to pay certain non-tax State Revenue and undertake reforestation activities upon ceasing its use of the land.
Approval for the use of forestry areas is generally granted by the Minister of Forestry. However, approval for the use of forestry areas for mining operations in a WPN that have a significant impact cover a significant area, and have strategic value, can only be granted by the Minister of Forestry after initial approval is obtained from Parliament.
74 PwCBoth the Mining Law and the Environmental Law in conjunction require miningcompanies exploiting natural resources that have an environmental or socialimpact to create and maintain an environmental impact planning document(Analisis Mengenai Dampak Lingkungan or AMDAL), which consists of anenvironmental impact assessment, an environmental management plan and anenvironmental monitoring plan. An environmental management effort document,Upaya Pengelolaan Lingkungan (UPL) and Upaya Pengawasan Lingkungan (UKL)generally need to be prepared in any situation where the AMDAL document is notrequired.
The sanctions applied for breaches of the Environmental Law range from threeto 15 years of imprisonment and/or a fine from Rp 100 million to Rp 750 million.The Environmental Law also stipulates the minimum penalties which apply,depending on the nature of the breach.
Energy LawGiven the importance of energy resources, it is necessary for the CentralGovernment to create an energy management plan to fulfil the national energyneeds in the long run. Law No. 30/2007 established the National Energy Councilas a government body to design and formulate the national energy policy, todetermine the national energy general plan, to determine the steps to be taken inan energy crisis and in emergency conditions, and to monitor the implementationof policy in energy fields with cross-sectoral characteristics.
Under the Mining Law and PerMen 28/24, only Indonesian incorporated companies may provide services to mining licence holders in Indonesia.
We outline below some of the guidance associated with the most significant mining services described above:
76 PwC Exploratory Construction Contract mining Hauling and drilling and company and overburden barging company sampling removal company company
Maximum Oil and Generally for non- Same Ferry, river andforeign gas survey small scale EPC requirements lake transportownership services services is 67% and as a and transport (49%) for construction construction facilities (49%) Geological contracting and company Special and consulting is 55%. Small and goods, cargo geophysical For certain medium scale and heavy survey construction, excavating equipment (49%) different and earth transport Geothermal requirements moving work (49%) survey may apply, such and site Support (95%) as for platform preparation business in construction the for mining terminals maximum foreign (only for local (49%) ownership is 75%, small scale Domestic and for spherical tank companies). international and offshore piping sea transport installation the (49%) maximum foreign Land transport ownership is 49% rental (local whilst for onshore investor only) piping, vertical/ Up to 100%, horizontal tank if formed construction as a general is reserved for mining services domestic investors company. only. Small and medium scale construction contracting and consulting (only for local small scale companies) A construction company can be in the form of a representative office. In this case, a joint operation with local construction company is required.
Tax Prevailing tax Prevailing tax laws Prevailing tax Prevailing tax laws laws (with a final deemed laws profit tax regime)
Under the Law no. 40/2007 (Corporation Law) Article 74, PT companies that have a resource business must implement CSR, which must be budgeted for in the companies expenditure plans. The details of such responsibilities will be further regulated under government regulations. As of the date of writing, no government regulations had been issued.
Processing Under the Mining Law, mining companies will be required to process their minerals within Indonesia.
Downstream processing Law 25/2007, Presidential Regulation Regulation 36/2010, Law 4/2009, PerMen 1 Investment licence issuer Investment Coordinating Board MoEMR/Governor/Mayor depending on Business licence issuer the location Maximum foreign ownership Up to 100% Tax Prevailing tax laws
Mining Infrastructure The establishment of a greenfields mining project is capital intensive, and in the case of Indonesia often involves substantial investment in mine infrastructure (access/haulage roads, potentially railways, conveyors, captive power plants, camp and recreation facilities, washing and crushing facilities and ship loaders) given the often remote locations and distance from water/transhipment facilities.
We outline as follow some of the investment guidance associated with the most significant infrastructure described above:
78 PwCAs a separate business
Special Port/ Road Power Plant Railways Terminal
Sea Port Operating Licence is issued by : Minister for Main Ports and Hub Ports Governor or Mayor/Regent for Feeder Ports
Lake/River Port Operating Licences are issued by the Mayor/Regent
80 PwC Special Port/ Road Power Plant Railways Terminal
Fee to Stipulated in the Not stipulated in Non tax state Not stipulated ingovernment concession rights the regulations revenue collected the regulations agreement from electricity transmission and distribution facility
82 PwC Special Port/ Road Power Plant Railways Terminal
Land rights Right to Use Right to Use Right to Use Right to Use
No Processing Refining Ore Mineral Products Quality Products Quality
No Processing Refining Ore Mineral Products Quality Products Quality
86 PwC Appendix A
No Processing Refining Ore Mineral Products Quality Products Quality
No Processing Refining Ore Mineral Products Quality Products Quality
88 PwC Appendix A
No Processing Refining Ore Mineral Products Quality Products Quality
No Processing Refining Ore Mineral Products Quality Products Quality
90 PwC Appendix A
No Processing Refining Ore Mineral Products Quality Products Quality
No Processing Refining Ore Mineral Products Quality Products Quality
92 PwC Appendix A
No Processing Refining Ore Mineral Products Quality Products Quality
*) This represents iron concentrates which contains hematite/magnetite mineral with iron componentof Fe 62%.
**) This represents iron concentrates which contains goethite/laterite mineral with iron component ofFe 51% and alumina (Al2O3) and silica (SiO2) components of 10%.
***) This represents iron concentrates which contains lamella magnetite-ilmenite mineral with ironcomponent of Fe 58% and compound concentration Titanium oxide of 1% TiO2 25%.
****) This represents iron concentrates in the form of pellet which contains lamella magnetite-ilmenitemineral with iron component of Fe 56% and compound concentration Titanium oxide of 1% TiO2 25%.
*****) This represents iron concentrates which contains lamella magnetite-ilmenite mineral withcompound concentration Titanium oxide of TiO2 50%.
Regional Taxes This table represents a selection of the various regional taxes relevant to the mining industry.
A. Provincial Taxes
0.075% on second or subsequent title transfer
94 PwC Appendix B
DIRECTORATE GENERAL OF MINERALS and COAL
Secretariat of Directorate General
Directorate of Program Supervision for Minerals & Coal
Directorate of Supervision for Mineral business
Directorate of Supervision for Coal business
Directorate of Engineering & Environment for Minerals and Coal
96 PwC Appendix D
The association serves as a link between the Government and the mining industry,organizing lectures, seminars and training activities for the members, organizingperiodic conferences on mining in Indonesia, publishes proceedings and mininginformation, and representing the Indonesian mining industry at national andinternational meetings. IMA is a founding member of the ASEAN Federation ofMining Associations and currently provides the secretariat for the Federation.
IMA Purpose
The aims and objectives of the association are to support the government in itspolicies to encourage the development of the mining industry and to utilise non-confidential and non-proprietary information to promote the exploration, mining,mineral beneficiation and metallurgical aspects in Indonesia through:
98 PwC Appendix E
3 CIT a. Tax Rates 35% for the 25%*) Incremental
45% thereafter
b. Depreciation rates
Non-building assets:
d. Accelerated Depreciation Non-building assets: 25% Not Applicable*) Not Applicable Accelerated depreciation can be Building assets: 10% Not Applicable*) Not Applicable claimed only within any of the first four year of the life of the assets
e. Investment allowance 20% of total Not Applicable*) Not Applicable At the rate of 5% a investment year
f. Deductible expenses:
Operating Expenses: i. Cost of materials, supplies, equipment and utilities ii. Expenses for contracted services iii. Premiums for insurance iv. Damage/losses not compensated for under insurance v. Payments of royalties or other payments in respect of patent, design, technical information and services vi. Losses from Provision is not obsolescence or deductible destruction of inventory vii. Rentals
100 PwC Appendix E
v. Technical fees
xi. General overhead expenses
xii. Exploration expense
g. Interest deductibility
102 PwC Appendix E
4 WHT rates
ii. VAT on domestic Not Applicable* 10% paid to 10% collected Input VAT cannot be purchases vendor*) by the mining credited/refunded by company Second Generation CCoW holders, but this is deductible for CIT purposes iii. VAT on import Not Applicable* 10% paid to Could be Custom Office*) exempted in accordance with the prevailing regulations iv. VAT on Not Applicable 10% on self- 10% on self offshore services assessment assessment basis basis*)
Note: *) follows the prevailing tax laws and regulations
104 PwC Appendix E
No Item Third Generation Fourth Generation Fifth Generation Sixth Generation Seventh Generation Remarks
b. Depreciation rates Non-building assets: i. Straight line 12.5% Not Applicable Group 1 & 2 follows 10% -50% (for tangible 10% -50% (for tangible For the fifth generation, the tax ITL 1984 assets located in assets located in depreciation rates only apply to tangible Group 3: 12.5% the Contract Area); the Contract Area); assets located in the Contract Area. otherwise 5%-25% otherwise 5%-25% Otherwise, provision under the 1984 Income Tax Law should prevail. ii. Declining balance Not Applicable 25% Group 1 & 2 follows 20% - 100% (for 20% - 100% (for ITL 1984 tangible assets located tangible assets located in the Contract Area); in the Contract Area); otherwise 10%-50% otherwise 10%-50%
Building assets: i. Straight line 12.50% 25% 12.50% 10% -20% (for tangible 10% -20% (for tangible assets located in assets located in the Contract Area); the Contract Area); otherwise 5%-10% otherwise 5%-10%
ii. Declining balance Not Applicable Not Applicable Not Applicable Not Applicable Not Applicable
No Item Third Generation Fourth Generation Fifth Generation Sixth Generation Seventh Generation Remarks
c. Amortisation rates a. Straight line 12.5% Not Applicable 25.0% 10% -50% 10% -50% Under most CoWs, costs incurred prior to commercial operation may be deferred and amortised
b. Declining balance Not Applicable 25% Not Applicable 20% - 100% 20% - 100% d. Accelerated Depreciation Non-building assets: 25% Not Applicable Not Applicable Not Applicable Not Applicable For the third generation, accelerated depreciation can only be claimed within Building assets: 10% Not Applicable Not Applicable Not Applicable Not Applicable any one of the first four years of the life of the assets e. Investment allowance 20% of total investment Not Applicable Not Applicable Not Applicable Not Applicable At the rate of 5% a year f. Deductible expenses: Operating Expenses: i. Cost of materials, supplies, equipment and utilities ii. Expenses for contracted services iii. Premiums for insurance iv. Damage/losses not compensate for insurance v. Payments of royalties or other Third Generation - payment to affiliates payments in respect of patent, is subject to approval from the DGT design, technical information and services vi. Losses from obsolescence or destruction of inventory vii. Rentals viii. Deadrent, surface rent, production royalties, stamp duty, and other levies ix. Sales tax Silent Silent Silent Silent x. Uncredited VAT Silent xi. Expenses for treating, processing, repairs and maintenance, handling, storing, transporting and shipping
106 PwC Appendix E
No Item Third Generation Fourth Generation Fifth Generation Sixth Generation Seventh Generation Remarks
No Item Third Generation Fourth Generation Fifth Generation Sixth Generation Seventh Generation Remarks
iii. Technical, management fees and Prevailing law 2% to 20% 9% for domestic tax 15% of deemed net 15% of deemed net others payer; 20% for foreign income/20% income/20% tax payer iv. Rentals Prevailing law 15% for domestic tax 15% for domestic tax 15% of deemed net 15% of deemed net payer; 20% for foreign payer; 20% for foreign income/20% income/20% tax payer tax payer v. Employee income tax Applicable Applicable Applicable Applicable Applicable Follows the prevailing tax laws and regulations 5 VAT rates i. VAT on sales Silent 10% on domestic sales; 10% on domestic sales; 10% on domestic sales; 10% on domestic sales; The fifth generation VAT obligations are 0% on export sales 0% on export sales 0% on export sales 0% on export sales grandfathered to the 1984 VAT Law
ii. VAT on domestic purchases Silent 10% paid to vendor 10% collected by the 10% collected by the 10% collected by the The sixth and seventh generations VAT mining company mining company mining company obligations are grandfathered to the 1994 VAT Law iii. VAT on import Silent Deferred up to the Deferred up to the Could be exempted in Could be exempted in 10th anniversary of 10th anniversary of accordance with the accordance with the Operating Period Operating Period*) prevailing regulations prevailing regulations iv. VAT on offshore services Silent 10% on self assessment 10% on self assessment 10% on self assessment 10% on self assessment basis basis basis basis 6 Sales Tax rates Applicable Not Applicable Not Applicable Not Applicable Not Applicable Sales tax was repealed in 1984, when VAT was introduced 7 Import of capital goods: a. Exempted up to the 10th a. Exempted/reduced a. Exempted/reduced a. Exempted/reduced a. Exempted/reduced Exemption of import duty is subject a. Import Duty anniversary of commercial rates up to the 10th rates up to the 10th rates up to the 10th rates up to the 10th to either CoW or BKPM Master List production; anniversary of anniversary of anniversary of anniversary of approval Operating Period, in Operating Period*), in Operating Period, in Operating Period, in accordance with the accordance with the accordance with the accordance with the prevailing regulations; prevailing regulations; prevailing regulations; prevailing regulations;
b. Article 22 Income Tax b. Silent b. Silent b. Silent b. Could be exempted b. Could be exempted in accordance with the in accordance with the prevailing regulations prevailing regulations 8 Other taxes & levies a. Regional taxes (e.g. motor vehicle and - Regional charges Applicable Applicable Applicable Applicable Generally capped at the rate not street lighting levy) - Regional Development Tax exceeding the rate prevailing at the (IPEDA): amount equal CoW signing date to deadrent and an amount based on non-public area
Note: could be different under several CoW *)
108 PwC Appendix F
Term Definition
Term Definition
110 PwC Appendix G
About PwCThe firms of the PwC global network - Tax disputes(www.pwc.com) provide Industry-focused - International assignmentsassurance, tax and advisory services for - Customs; andpublic and private companies. More than - Investment and corporate208,000 people in 157 countries connect servicestheir thinking, experience and solutions tobuild trust and enhance value for clients and Advisory services implement antheir stakeholders. integrated suite of solutions covering deals and transaction support andPwC is organised into four Lines of Services, performance improvement.each staffed by highly qualified experienced - Business Recovery Servicesprofessionals who are leaders in their fields. - Capital Projects & InfrastructureThe lines of service are: - Corporate Finance - Corporate Value Advisory Assurance Services provide assurance - Deal Strategy over any system, process or controls - Delivering Deal Value and over any set of information to the - Transaction Services highest PwC quality. - Risk Assurance Consulting Services help - Financial Audit organisation to work smarter and - Capital Market Services grow faster. We consult with our - Accounting Advisory Services clients to build effective organisation, innovate & grow, reduce costs, manage Tax Services optimise tax efficiency risk & regulations and leverage talent. and contribute to overall corporate Our aim is to support you in designing, strategy through the formulation of managing and executing lasting effective tax strategies and innovative beneficial change. tax planning. Some of our value-driven - Management Consulting tax services include: - Risk Consulting - Corporate tax - Technology Consulting - International tax - Strategy Consulting - Transfer pricing (TP) - Mergers and acquisitions (M&A) - VAT
112108 PwC Appendix G
Heryanto Wong email@example.com T: +62 21 528 91030
Tax Tim Watson Antonius Sanyojaya Suyanti Halim email@example.com firstname.lastname@example.com email@example.com T: +62 21 528 90370 T: +62 21 528 90972 T: +62 21 528 91004
Advisory Mirza Diran Joshua Wahyudi Michael Goenawan firstname.lastname@example.com email@example.com firstname.lastname@example.com T: +62 21 528 90950 T: +62 21 528 90833 T: +62 21 528 90340
Consulting Charles Vincent Lenita Tobing Paul van der Aa email@example.com email@example.com email@example.com T: +62 21 528 90960 T: +62 21 528 90608 T: +62 21 528 91091
Photographic contributions
Project Team
114 PwCOther PwCMining Publications
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Visit www.pwc.com/id/eum- publications to download or order hardcopies of reports 1. mineIndonesia - survey of trends in the Indonesian mining sector 2. Power in Indonesia 4 5 Investment and Taxation Guide 3. Indonesian Mining Areas Map 4. Energy, Utilities and Mining Newsflash 5. Global Mining Deals 6. Mine - review of the global mining sector 7. Aussie mine - review of the Australian mining sector 8. Financial Reporting in the Mining Industry 9. Indonesian Pocket Tax Book 10. Initial Public Offering - Are 6 7 www.pwc.com\mining 8 You Ready? Financial reporting in the mining industry International Financial Reporting Standards
6th edition
9 10
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