Getting to Know the Concept of Nail-Down and the Prevailing Law in Mining Tax Collection

Getting to Know the Concept of Nail-Down and the Prevailing Law in Mining Tax Collection

PPh - 17 May, 2024 11:05 WIB

The government reported a slowdown in tax revenue in the first quarter of 2024. Compared to the same period of the previous year, tax deposits fell by 8.8%. In other words, tax revenue until the first quarter of 2024 amounted to 393.3 trillion (Kontan 2024). 


Some experts suggested that the drag in tax revenue in early 2024 was partly due to the poor tax and customs administration system. In addition, the decline in tax revenue this time is also due to the decrease in commodity sales transactions in Indonesia. As is known, commodity sales still largely support tax revenue in Indonesia. Some economists explained that Indonesia's high economic growth last year was due to high commodity prices (Kompas, 2023).


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However, the windfall in commodity prices does not last forever. This year, for example, commodity prices have decreased due to the easing of the Russian-Ukrainian conflict. This decline in commodity prices has had an impact on tax revenue. The Ministry of Finance noted that the mining industry's tax deposits decreased by 58.2% in the first quarter of 2024. This time, the decline in mining sector revenue was caused by a decrease in coal mining performance by 60.1% and iron ore mining by 17.8% (Kontan 2024).


If we look deeper, we can find out that in the mining industry tax collection, the principles of nail down and prevailing law apply. In the Oxford Dictionary (2024), nail-down means forcing someone to give a certainty (to force someone to give a definite promise or tell you exactly what they intend to do). In the Indonesian taxation context, the term nail down means the tax imposition on a mining business transaction as a result of an agreement between the government and mining entrepreneurs. For example, in the amendment of the government's contract of work with nine contract-of-work entrepreneurs in 2015, it was agreed that the corporate income tax rate applicable to these mining companies was 30–35% (Ministry of Energy and Mineral Resources 2015). 


Based on this matter, the company will be subject to a corporate income tax rate of 30–35% during the work contract term, even though the current corporate income tax rate is 20%.


The opposite of the nail-down concept is the prevailing law. The prevailing law regulates that tax provisions on the mining industry are imposed by applicable regulations. Article 131 of Law No. 4/2009 on Mineral and Coal Mining stipulates that the amount of tax and non-tax state revenue collected from holders of Mining Business License or Izin Usaha Pertambangan (IUP), Community Mining License or Izin Pertambangan Rakyat (IPR), or Specific Mining Business License or Izin Usaha Pertambangan Khusus (IUPK) is determined based on the provisions of laws and regulations.


Implicitly, this provision explains that the principle of prevailing law applies to contracts of work signed after Law 4 of 2009. Thus, the amount of tax imposed on mining business license holders follows the prevailing provisions.


For example, the mining business license contract signed by PT Freeport with the Government of Indonesia in 2017 adheres to the principle of prevailing law. The Minister of Finance, Sri Mulyani Indrawati, confirmed and explained that the tax provisions and export duties were to be paid by PT Freeport in 2017 after the signing of the contract for the provision of an IUPK per Law No. 4 of 2009 (CNN 2017).


Which one is more favorable?

Both nail-down and prevailing law have their pros and cons. In recessionary conditions such as COVID-19, nail-down provisions are more favorable to the government. In addition, the global trend of decreasing corporate income tax rates makes the nail-down provision more favorable in the eye of the government.


However, in uncertain conditions, a more dynamic prevailing law can be more favorable for the government because the government can freely adjust tax rates for economic and development purposes. Moreover, the investment war between countries after the economic recovery of COVID-19 requires the government to be resourceful in formulating tax rates to attract investors.

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