Taxation Aspects of the Oil and Gas Industry
Jakarta, Ideatax -- The upstream oil and gas industry is in the heat of the moment. One of the Dutch oil operators decided to sell its 35% Participating Interest (PoI) in Masela block for USD 1.4 billion (Kontan, 2023). The plan to sell Participating Interest in the largest oil mining block in Indonesia has angered the government. This is because the sale of Participating Interest hampers the development of the Masela block which ultimately causes losses to the government (CNBC, 2023).
Referring to the Indonesian Oil and Gas Statistics 2022 book, it is known that during the first semester of 2021 there was a decrease in the value of upstream oil and gas investment by 8.33% compared to the same period the previous year (Ministry of Energy and Mineral Resources, 2022). This condition was caused by a decrease in investment in oil and gas exploration and production activities. In fact, during the first semester of 2022, there was an increase in crude oil prices in Indonesia by 66.75% compared to the same period in 2021 (Ministry of Energy and Mineral Resources, 2022).
It should be noted that the upstream oil and gas industry is a large industry. Therefore, oil and gas operators have two obligations, namely providing profit sharing to the government and paying taxes. Then, what exactly are the tax regulations for the upstream oil and gas industry? Here is the explanation.
One of tax obligations regulation for oil and gas operators is Government Regulation No. 53/2017 on Tax Treatment for Upstream Oil and Gas Business Activities with Gross Split Production Sharing Contracts.
Government Regulation No. 53/2017 defines Gross Split Production Sharing Contract as a form of Cooperation Contract in Upstream Business Activities that is based on the principle of sharing gross production without any mechanism to recover operating costs. In addition, the regulation also defines Contractor as a business entity or permanent establishment that is determined to carry out Exploration and Exploitation in a Working Area based on a Cooperation Contract with the Special Task Force for Upstream Oil and Gas Business Activities.
Contractor Income Regulation
Government Regulation No. 53/2017 regulates at least two types of income of oil and gas cooperation contractors (KKKS), namely income in the context of oil and gas production sharing and other income other than in the context of production sharing. Income in the context of production sharing is income calculated based on the realization of oil and gas minus the realization of the delivery of Domestic Market Obligation (DMO).
Meanwhile, other income other than in the context of production sharing includes: income derived from uplift, income derived from the transfer of participation rights, proceeds from the sale of by-products and other income that provides additional economic capacity.
Contractor Cost Regulation
In addition to revenue, contractor costs are also regulated in Government Regulation No. 53/2017. There are three operational costs of oil and gas contractors regulated in PP 53 of 2017, including: exploration costs, exploitation costs, and other costs.
Exploration costs consist of exploration drilling costs, general and administrative costs, and geological and geophysical costs. Meanwhile, exploitation costs include: development drilling costs, direct production costs, natural gas processing costs, utility costs, general and administrative costs and amortization depreciation costs.
Operating costs as mentioned above can be calculated as an income deduction element in the regulation of oil and gas production sharing in calculating taxable income. However, deductible operating costs must meet several criteria as follows: incurred to earn, collect and maintain income, incurred in the actual amount, petroleum operations are carried out in accordance with good business and engineering principles and petroleum operations are carried out in accordance with the established work plan.
Contractor Income Tax Calculation
For gross split production sharing contractors, income tax is calculated by multiplying the applicable corporate income tax rate by net income after deducting loss compensation. The loss of the production sharing contractor taxpayer can be compensated with the following year's income for up to ten years.
For other income in the form of uplift, final income tax is charged at 20% of the gross amount. Meanwhile, other income in the form of transfer of participating interest is subject to final income tax of 5% of the gross amount if the transfer is made during the exploration period. However, if the transfer of participating interest is made during the exploitation period, it will be subject to a final income tax of 7%.
Contractor Bookkeeping Obligations
Contractor Taxpayers are obliged to organize bookkeeping and recording with due observance of good faith and reflect the actual circumstances or business activities. The bookkeeping as referred to above must be organized in Indonesia using Latin letters, Arabic numerals and compiled using Indonesian or foreign languages after obtaining approval from the Minister.
Furthermore, the bookkeeping must be made with the principle of compliance, in accordance with financial accounting standards, and in accordance with the principle of gross split production sharing. Books, records, and documents that form the basis of bookkeeping or recording and other documents must be kept in Indonesia for ten years.
CNBC. (2023, June 1). Kisruh Menteri Vs Shell Soal Blok Masela, Begini Saran Ahli. Retrieved from CNBC Indonesia: https://www.cnbcindonesia.com/news/20230529123128-4-441432/kisruh-menteri-vs-shell-soal-blok-masela-begini-saran-ahli
Kontan. (2023, June 1). DEN: Shell Akan Lepas 35% Saham Blok Masela dengan Harga US$ 1,4 Miliar. Retrieved from Kontan: News, Data, Financial Tools: https://industri.kontan.co.id/news/den-shell-akan-lepas-35-saham-blok-masela-dengan-harga-us-14-miliar
Ministry of Energy and Mineral Resources. (2022). Statistic Oil and Gas Semester I 2022. Jakarta: ESDM.
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