Proposal to Design Natural Resources Tax
Proposal to Design Natural Resources Tax: A Reconstruction Fiscal Policy
toward Energy Resiliency in Indonesia
Haula Rosdiana, Inayati, Maria R.U.D. Tambunan
1. Background
The aim of this research is to describe tax liabilities and state levies shall be
accomplished by oil and gas industries, specifically upstream business entities in Indonesia.
In addition, the problems raise with regard to the fulfilment of liabilities will be also one of
important highlight. Then, simpler fiscal policy to reduce administrative burden and to
improve business friendly climate are the main considerations of reconstructing fiscal policy.
Finally, this study will propose adoption of natural resources tax to simplify completion of
business liabilities and ease the government to monitor business tax liablities.
Energy security is a crucial and critical issue for almost all of the country, because it
will not only determine the existence of particular countries in global economy but it is also
one of key factor for development acceleration. Phenomenon energy crisis disturbing
government stability in several countries shall be lesson learned, and then determining energy
security issue becomes priority on government program. In addition, countries which have
abundant reserved energy (top 15 countries) such as Cina and USA still aggressively expands
exploration projects in seek for new energy sources in other countries. It is driven by
economic development and industrial activities which need high energy consumption,
followed by government responsibility to ensure reserved energy availability until next 100
years. It also intended to reduce energy dependency on other countries. In fact, increasing
trend of energy consumption in contrast with declining energy production happens (Rosdiana
et. Al, 2015).
Indonesia is also covered by current global energy crises. Reserved energy, for
example fossil energy; oil and coal is continuously declining. It is also worsen by inefficient
fossil energy used. Considerable population increased significantly affect high demand of
energy consumption. It has been predicted that Indonesia energy reserved will be fully used
in 10-20 year.
1
Besides as instrument to promote energy security, oil and gas sector contributes
significantly in Indonesia revenue although it is still fluctuative. In era Repelita 1 I,
contribution of oil and gas sector in Indonesia revenue was up to 27% of total national
revenue. Then, in 1978/1979 contribution of this sector was up to 54% and its peak was in
1981/1982, up to 70%. However, the following years, its contribution has been going down
until now2. In 2008-2012, for instance, the contribution oil and gas for government revenue
was about 29,47%-20,75% with approximate 23,08%. In National Budget Revenue and
Expenditure 2013, it has been predicted that oil and gas contribution on national revenue will
be only 17,02% of total revenue3.
Further, income tax revenue from oil and gas enterprises increased about 13,5% per
year in perode 2007-2011. Each of sector, income tax revenue from oil business entities
contributes about 37,3% and from gas industries about 62,7%. Revenue from tax on oil and
gas is also affected by ICP, discrepancy value betweem IDR-USD and oil and gas lifting
Besides contribute to government revenue through income tax, this sector also contributes
through state levies.
The fluctuation of oil and gas contribution on government revenue is caused by
internal factor; reduction of oil and gas production and internal factor; fluctuation of
international oil and gas price. Realization of Indonesia oil lifting in period 2008-2012
slightly increased, approximately 930,1 thousand barrel per day (2008), 953,9 barrel per day
(2010). Start from 2011, the realization of lifting declined becoming 898,5 thousand barrel
per day. In separated, based on information published by SKK Migas 4, in period 2008-2011,
realization of oil lifting tended to increase, 1.146 thousand barrel per day in 2008 then peak in
2011, 1.318 MBOEPD. However, the realization of oil lifting per day in the beginning of
2012 declined into 1.240 M Barrel Oil Equivalent Per Day (MBOEPD).5 Besides problem of
oil and gas production declining, Indonesia technology availability to refine crude oil has not
been sufficient. Therefore, GoI has to impor crude oil 350.000 barrel per day and ready to
used fossil fuel 400.000 barrel per day.6 Besides negatively affect government revenue, these
conditions will severe Indonesia energy security.
1
Repelita I stands for Rencana Pembangunan Lima Tahun, the 1 st era of President Soeharto became of
Indonesian President 1968-1973
2
National Budget Revenue and Expenditure 1992/1993
3
Contribution of oil and gas sector on national revenue based on official government revenue and
expenditure report 2014.
4
Indonesian Oil and Gas Authority
5
6 2013
6
Detik Finance, 30 Agustus 2013
2
In order to solve the problem, the president instructed central authorities and local
authorities through Presidential Instruction No.2/2012 to make effort to accelerate and
maximize oil and gas production7. With regard to this sector, the characteristic of this sector
which is “long time production process” and capital intensive shall be taken into account.
Therefore, the role of private sector becomes considerable important. To attract investment,
the government shall offer policy promoting friendly investment climate. One of important
policy is state levies. Excessive state levies probably will increase government revenue in
short term. However, in medium term and long term, this policy will be contra productive for
national revenue because it will potentially reduce investment attraction.
Taking example from neighbour country which produce oil and gas such as Malaysia,
it a has design programs toward energy sustainability that is known as Enhanced Oil
Recovery (EOR). Besides high awareness of fossil energy availability, the government
accelerate this program by offering fiscal incentives and marginal field project. In addition,
the government also provides subsidy such as direct money transfer. All of the programs
implemented by the government of Malaysia become consideration in determining this
country as one of research sites to be a benchmark for Indonesia.
Impletemented tax policy on oil and gas industry is that shifting of high royalty then
compensating it with low tax liability. Other feasible policy is intervention through
production sharing contract (PSC) which allows mixed company (national and multinational)
to run the contract. This business relation probably show stronger legal binding and
transparent cooperation, different with regulation in the current production sharing contract;
which is mixed company is represented by two types shareholders. The status of mixed
company shall ensure basic protection of minority shareholders.
2. State Levies on Oil and Gas Industry in Indonesia
For the context of tax liabilities and other state levies, oil and gas industries, to be
specific upstream industries are treated different with other industries since upstream shall be
arranged under Production Sharing Contract (PSC). Most of treatment under PSC will be lex
specialist to the general rules, including Income Tax Law in Indonesia and state levies.
Through PSC, concept of cost recovery has been introduced therefore each cost/expenses
bear to produce oil and gas will be reimbursed to the government as long as the expenses
7
Officia Report National Revenue and Expenditure 2014
3
economically are related to the business process. All of the utilized asset on production
process would belong to the government. Contractors will get return based on quantity of oil
produced under agreement (PSC) with government.
A part from reduction of oil lifting, raised taxation problem; imposition tax on land
and building potentially negatively affect investment climate on oil and gas industries. The
stipulation of Government Regulation (GR) No.79/2010 regarding reimbursement of
operating cost and taxation treatment on upstream oil and gas industries replaces regulation
before, which implemented “assume and discharges” concept. The existence of “assume and
discharge” concept allows the contractors have not to pay tax on land and building, it would
be on government’s responsibility. Technically, Directorate General Taxation should pay the
amount of tax payable to Directorate General Budget. However, GR No. 79/2010 regulates
that contractors have to pay tax on land and building which is collected based on plan of
development (PoD). Then, tax paid can be reimbursed to Directorate General Budget
immediately after area of PoD has commercially produces petroleum and have getting
approval from SKK Migas8. Therefore, contractor has to pay tax payable on land and
building for each contract sign after stipulation of GR No. 79/2010.
Large amount of tax payable imposed from contractor before commercial years will
tighten the cash flow during pre commercial years. In addition, upstream oil and gas
industries are capital intensive and high risk industry that need huge of money. The study
showed that failure risk during exploration is up to 70%-80%. It means when contractors fail
to find a potential hole, they have to pay tax in advance which can be reimbursed. This
situation will be difficult for contractor to set business forecasting. In 2013, SKK Migas
reported that 12 contractors lost 1,9 milliard USD because they only found dry hole in 16
exploration bloc. Further, the numbers of contractor relinquish PoD to the government
immediately while bidding process in 2013 because of high fiscal costs. It was indicated by
only 37,5% of contractors run the contract in the first round 2013. It is far lower compare to
years before which was up to 90%.
Importantly, high fiscal cost caused by tax on land and building before commercial
stage will adversely affect not only availability of energy, specifically oil and gas in
Indonesia but also other government revenue through corporate income tax on upstream
industry. With regard to this problem, therefore it need to redesign appropriate tax policy
8
Government body which deal with PSC
4
which accommodate business process and business risk in this sector without abuse
government potential revenue.
3. Reconstructing Fiscal Policy: Adopting Natural Resources Tax in Indonesia
Following the study Daniel et. Al (2010, 1) the common challenges faced by investors
(upstream business) which is high risk and capital intensive are the heavy of designing
natural resources tax. To be specific, the principal motivation lies rather in distinct challenges
for tax design and implementation that are posed by inherent characteristics of the sector:
heavy sunk cost and long production process. In addition, the base premises of levying taxes
in which certainty, credibility also add the rigorous though to policy maker. Citing the study
of Daniel et al.(2010), he stated that the ideal concept of fiscal regimes shall consider not
only literal taxes which is compulsory unrequited to government, but also cover for example
production sharing, royalties, state participation, contract fees, output pricing constraints and
together with tax administration. The description of upstream business process since
exploration process and commercial stage in Indonesia can be explained in the following
graphs:
5
Graph 1
Cost of Production Process on Upstream Industries
High risk, less return
less risk, high return
RISK
CUMMULATIVE
INVESTMENT
Geology risk
Natural risk
Economics risk
Technical risk
Political risk
Exploration
Investigation
Development
Production
Finding
Development study
Source: Sudjati Rachmat, Jenis-jenis Pengusahaan Hulu Minyak dan Gas
Similarly, following the study of Nakhle (2010), he highlighted most issues cover
taxation policies for petroleum business which put specific character of upstream business
and complexity as important consideration. Different with other industries, the upstream
business come to a country because of its natural resources. Therefore, the certainty of
agreement component and strong support of government in location or country invested is
critical. They cannot move immediately their business like factory industry for example.
Unfortunately, sometimes even though upstream industry in its characteristic has
international common practice in operational and production process, the local or location of
operation in a particular country may take a part in influence or shaping in the decision of tax
treatment. This fact cannot be blamed negatively influence the attractiveness of investment.
6
The uncertainty of initial investment associated to upstream industry that is the cost of
petroleum project by its risky nature has to incur up front. Then, the time lags are critical
since it often will take of many years and even decades for one project, from the initial
discovery of oil or gas reserves to the time of first production (commercial stage). Moreover,
imposition of petroleum taxes and the involvement of the private sector in oil activity tend to
be accompanied by intense political debate where political dogma and related stakeholder
interest can overshadow economic principles.
Similarly posed by Boadway (2010) that series of process consisting of discovering,
developing, exploiting, marketing/selling and closing an oil field/bloc can cost a lot of money
and needs years. In oil and gas, it is common for 50 years or more to pass throughout the
process from the exploration until rehabilitation stage. Moreover, the associated expenses in
large proportion have to bear in early of projects for year in which stability of cash flow is
critical; the limited sunk cost in the beginning shall affect the whole process whereas only
little alternatives probably can be taken to cope with this process. It may happen that if an
offshore oil platform may be moved to other field or other countries, for example, but the
amount of cost spent looking for or exploring potential oil fields successfully or not is gone.
A different of cost acquisition of getting fruitful initial production process, significant sunk
cost are probably incurred in other lines of business too, for example in developing power
plan may be business entities have to undertake R&D, as the analogous to exploration
spending, or on pharmaceuticals have conduct series of research– however, their
pervasiveness and magnitude in resources activities put them at the central of the problem of
sectoral tax design,.
Similarly, it is also stressed by Nakhle (2010) that the perception of oil field
competitiveness is also affected by the design of tax regime although it might not be in the
first place of competitiveness consideration. An easy tax structure and friendly tax
administration process may recapture or be a bit balancing other problems potentially raised
as the result of exploration process, development activities, technical, financial or probably
political problems in location. It may also show a supporting position of government in
respect to the producing process and contribution of oil companies for the supply of domestic
energy availability.
However, another perspective of designing fiscal regime is the propensity of each
(government and oil company) want to maximize their own benefits through the agreement.
Therefore, it need to look thoroughly the most appropriate burden be shifted to each through
take into account each stakeholder interest and attractiveness in the projects. Comparison
7
with other countries will be critical for both of them before signing the contracts. The
common practice/international best practice shall give another view of levying or shaping tax
burden.
When the outcomes of negotiation process between then show mutually benefit,
both of them will enjoy sharing reward and will maintain more sustain economic relation in
long term.
In separated part, it is perhaps can be said that if the tax regime is too favor, the
government will be in weak position in which the investor may utilize it to maximize rent
seeking potential, then the return taking by government probably will not as it should be. If
the tax treatment and state levies are too complicated, then the incentives offered to
contractors (upstream business) to invest in exploration stages, development process and
production process in reality cannot lessen the burden then worsen by uncertainty rule of law,
it can be severely damaged then as the result, the investors will be inflow their capital into the
countries offering a more attractive fiscal regime and more friendly investment climate.
For the context of Indonesia, imposition of tax on land and building for upstream
contractors immediately on the exploration process seems unusual. Even though the cost bear
for paying tax on land and building is reimbursable through cost recovery, upfront cost in
initial process shall tighten the cash flow in the stage when the investors have to spent huge
money. In addition, the recovered cost in which tax payable on land and building consisted
can be back once the investor has reached commercial/ economic stage. This treatment will
be disincentives for investors (which are mostly private) while Indonesia has not has
sufficient resources to engage in their own upstream process. International best practice in
levying taxes, specifically tax on land and building need to consider that most of the countries
do not impose tax on land and building on upstream company. Several examples of state
levies and tax treatment on upstream can be seen in the following table.
Table 1
Tax Structure and State Levies in Several Countries
Country
Malaysia
Fiscal Treatment
Malaysia regulate tax scheme and state levies on upstream oil and gas
industries through Petroleum Income Tax Act (PITA).Exploration and
exploitation projects are exclusively undertaken by National Oil Company
(NOC) Petronas. Other private willing to take a part in upstream shall go into
agreement through Production Sharing Contract (PSC) or Risk Sharing
Contract (RSC) with Petronas.
State levies and tax schemes:
a. Royalty 10% from gross profit
b. Petroleum Income Tax;(i) 38% once tax incentives applied, (ii) Join
8
Development Area (JDA) first 8 year 0%, second 7 year 10% and rest
20%
c. Income Tax 25%
d. Real property tax (per 1 January 2014):
30% of net profit after 3 year of commercial operation
25% of the 4th year
15% of the 5th year
6% of 6th year and the rest
Although tax and state levies are imposed, the government provides capital
allowance:
Qualifying expenditure
Property
Secondary recovery
Any other cases
Fixed, offshore platform
Environmental protection equipment facilities
Computer software and hardware
Building
Secondary recovery
Any other cases
Thailand
Initial
allowance
40%
20%
nil
40%
20%
10%
8%
10%
20%
40%
20%
10%
3%
3%
Regulation regarding imposition of tax and state levies in Thailand can be
categorized into 3 term:
a. Thailand I, royalty 12,5% from total sell, petroleum income tax 50%
from net profit
b. Thailand II,
Royaty 12,5% from total sell
Yearly net profit (concession agreement is considered)
Yearly bonus (concession agreement is considered)
Petroleum income tax 50% from net profit
c. Thailand III
Royalty, 5%-15% based on amount of product per bloc basis
Special remuneration (yearly basis) 0%-75%
Petroleum income tax 50% from net profit
Capital allowance offered by the government
Assets
Building:
Non permanent
Permanent building
Aircraft and accessories
Cost of acquiring concession and petroleum reserves
Cost of acquiring concession and petroleum reserves
Cost of acquiring lease rights:
No agreement or renewable
Limited lease period
Other capital expenditure not mentioned above:
Tangible capital expenditures
Capital expenditure for deep sea exploration blocks (deeper
than 200) meters
Philippine
Annual
allowance
% per year
5%
100%
33,33%
10%
10%
10%
Lease period
20
State levies and tax schemes applied in Philippine shall be according to
Production Sharing Contract (PSC):
Contractor will receive service fee 40% from exploration projects and
government no more than 60%
9
Bonus in signing the contract
Income tax 30% as general provision
Contractors are eligible for capital allowance and investment
incentives
PSC contract in Laos does not regulate kinds of business liabilities such as
signature bonus, royalty. Provision of production sharing is as followed:
Laos
Daily average product
(barrels per calendar
month)
Up to 25.000
25.001 – 50.000
50.001 – 75.000
75.001 – 100.000
100.001- 125.000
125.001 – 150.000
150.001 – 175.000
175.001 – 200.000
More than 200.000
Australia
Germany
Business’ share
Government’s
share
35%
32,5%
30%
27,5%
25%
22,5%
20%
17,5%
15%
65%
67,5%
70%
72,5%
75%
77,5%
80%
82,5%
85%
Australia combines several regulation regarding income tax, petroleum
resources rent tax and royalty based tax on upstream business. Provision of
levies is as follow:
Royalty 0%-12,5%
Income tax 30%
Resource rent tax 40%
Government undertake different treatment for those underside under Australia
business law, they shall be imposed Capital Gain Tax (CGT) and taxable
Australia Property (TAP):
Property tax covers area which solely produce deposits
Indirect Australian Real Property Tax for specific case
Germany does not impose specific tax on upstream. Simple tax liabilities shall
be paid by contractors:
Income tax, approximately 29,*%
Royalty 0%-40%
Bonus does not apply
Before examining further to the probability of designation of natural resource tax, it is
important to know the fundamental aim of imposing this specific tax. Land (2010) stated that
the aim of imposing natural resources tax is to enable government having reward of potential
revenue which cannot be captured solely by the preliminary contracts because of possibility
of unpredicted richer resources. The strong definition by citing the fundamental concept of
resource rent tax is “the ex-post surplus of the total project lifetime value arising from the
exploitation of a deposit, in present value terms, over the sum of all cost exploitation of a
deposit, in present value term, over the sum of all costs of exploitation, including
compensation to all factor of production” (Land, 2010, 245).
In a more strong and clear position, resources rent tax can be said as combination of
other taxes and changes. Thus, in royalty/tax regime, a resources tax is typically combined
10
with royalty and corporation tax. The resources rent tax may either be used as final tax
levied on after-tax cash flows or as supplementary levy on pre-tax income, payment of which
would be deductible for corporation tax purpose (Land, 2010, 252). In simple way, it can be
said that natural resources tax shall be capture the fairer way of tax burden paid by investors
and the appropriate revenue received by the government. In its implementation, for example
taking case in Papua New Guinea, the design of natural resources tax is used to seek the
attractiveness of new investment.
In addition, in designing tax on natural resources, tax system should be done in more
flexible way. The premises of this is that the cost of extraction may different throughout the
process, the deposit is extracted under dynamic price, the greater potential benefit from the
basin, the more earned by the government. In vice versa, for the high risk extracting projects,
the government may get less revenue. In ideal context, fiscal treatment for contracts/
agreement shall be more specific and flexible (Land, 2010). In principle, natural resource tax
enables the government to capture resources from deposit without deterring the investment.
The following is the comparison of resources tax with other taxes on profits.
Table 2
Comparison of Resources Rent Tax with Other Taxes
Government “take” link to
Government “take” responsive to:
Reserves or
Price change
Costs
production
Production (daily cumulative)
yes
no
no
Timing of
Cost
cash flows
capital
partly
no
of
Example: company share of profit oil is 50% at low output falling to 15% high output (Uganda)
Price (price caps or base prices)
no
yes
no
partly
no
Example: oil profits taxed at 25% until oil price exceeds USD 30/bbl, thereafter rising by 0,4% for every USD
1/bbl > USD 30/bbl (Alaska, USA)
Annual profit
yes
yes
yes
no
no
(profit margin or return in a tax year)
Example: mine taxable income is taxed at the higher of 25% or 70-1500/x where x (%) = taxable income/gross
income; the higher rate applies when x > 33,3% (Botswana and Uganda; South Africa and Namibia employ the
same scheme with different value in the numerator)
Example: mine after-tax profits taxed at a rate of 0-15% once return on capital employed > long term bond rate
+ 5% (Australia mining agreement)
R Factor
yes
yes
yes
partly
partly
(revenue: cost ratio or investment
multiple)
Example: company share of profit oil is x% at IM < 1,5 falling to y at IM > 3,5 where IM = ratio of cumulative
11
net income to total investment (India)
Resource Rent Tax
yes
yes
yes
yes
yes
(Rate of return)
Example: petroleum after tax cash flow taxed at 40% once the project internal rate return exceeds the long term
borrowing rate plus 5% (Australia)
Source: Source: Bryan C. Land, (2010), Resource Rent Tax: A re-appraisal page 252
For Indonesian context, imposition of tax on land and building seems violate principle
of natural resource tax, because in its implementation, it seems does not consider life time
value, present value and discount rate of project by simply imposing tax on land used in
exploration process, seems like property. In addition, for risk consideration, the difference
treatment between one contract and others seem could not be reached.
When a country intends to design natural resources tax, Land proposes that they shall
keep in mind 3 fundamental element of designing natural resources tax (i) specific rates of
return on investment that trigger the imposition of the tax (ii) specific tax rates imposed on
net profit once the rates of return has been exceeded and (iii) the tax base which is typically
an individual resource project and allowable deduction.
Several important consideration and challenges need to think of in designing
resources tax regimes as proposed by Boadway and Keen (2010); (i) a discount rates and
their implication, (ii) risk sharing (iii) responses to asymmetric information. With regard to
discount rates, for such long projects, the discount rates applied by government and investor –
difference calculation between them can play a critical role. For the investors, the discount
rate may describe cash flow during the process and potential risk is captured through cost of
capital. Importantly, the number of discount rate commonly is different across the countries
because of the different activities and potential risk. In principle, companies’ discount rates
should reflect and give understanding to the shareholder of potential risk they face and
potential gain they can get on their portfolio and assets. This also should reflect the ability of
government in host country commitment to support existing projects and tax regime applied.
Then, in the second place needs to taken into accounts is risk sharing. The available
tax schemes on the projects may reflect allocation of risk and to what extend mutually benefit
between government and investors. Both of them probably take different attitude in facing
potential risk in order to maximize benefit. For the party who has willingness to cope with the
potential risk shall be getting more return. To examine the uncertainty of the projects, it is
important to make such a simulation by supposing project return at a series of time and
12
putting time consistency issue of project completion. This imaginary result shall enable the
government to commit credibly in prescribe tax schedule. The tax schedule could take any
shape: it might be progressive with a higher average tax rate in the more successful the
project or it could be regressive based on project potential return.
Finally, responses to asymmetric information. Policy makers shall also consider
potential difficulty of being less well-informed on aspects covering the process, for instance
information about the geological and commercial circumstances of resources project than are
being implemented. The response of government in undertaking of the project shall be the
thorough examination of potential unbalance information that has been covered through tax
schemes in acceptable way of business. Several considerations need to think of as criteria and
indicators in evaluating policy before designing appropriate policy:
Table 3
Evaluation Criteria and Indicator in Designing Natural Resources Tax
Evaluation criterion
neutrality
Revenue raising capacity
Adaptability/progressivity
Risk to government
Investor perception of risk
Relating revenue
investor risk
Prosperity gap
yield
Key Indicators
Type of sample or output
Average effective tax rate Single
case,
international
(government take in profitable comparison
case)
Marginal tax rate
Single case at investor’s
discount rate
Time profile of revenue
Price just yielding investor’s
Share of rent to government
discount rate
Tax share of total benefits
Variance of NVP of revenue
Probability distribution of cases
Proportion of revenue in first n
year
Dispersion of expected IRR
Probability distribution of cases
Probability of below-target
returns
Value of negative returns
to Compare expected yield index Probability distribution of cases
with expected risk index
Present value to equalize mean Probability distribution of cases
PV to investor
Present value to equalize PV of
negative return
Source: Daniel Philip et. Al (2010), Evaluating Fiscal Regimes for Resources Projects, page
Finally, as the example in designing natural resources tax, several details as references can be
seen in the following table:
13
Table 4
Details of Resources Rent Tax in Selected Countries
Countries
Australia
(Resource
tax)
Single
rate/sliding
rate
Single rate
rent of 40%
Namibia
3-tier
Petroleum
sliding
Additional profit scale
tax
starting
25%
Malawi
10%
(Resource Rent
Tax)
Ghana
35%
(Additional
Profit Tax)
Liberia
20%
(Resource rent
tax)
IRR
threshold
Legislated/
contractual
Biddable
Levied pre-tax
or
post-tax
status
Pre-tax
Long
term legislated
borrowing rate
(6,18%
for
2008) + 5%
for exploration
cost/+15% for
capital cost
15%
legislated
20%
25%
no
20%
legislated
no
Post tax
25%
legislated
no
Post-tax
22,5%
legislated
Yes-rate
Pre-tax
in excess
of
prescribed
rate
2nd and 3rd Post-tax
tier
tax
rates
at
Source: Bryan C. Land, (2010), Resource Rent Tax: A re-appraisal page 259
4. Conclusion
Regulation on imposition of tax and other state liabilities on upstream industry shall consider
its business characteristics; high risk and capital intensive. High tax burden in exploration
stage (non commercial stage) probably will severe business’ cash flow, moreover if the
country apply cost recovery system in which abuse “assume and discharge” system.
Reimbursement probably will be the way out once the upstream investors has reached
commercial stage, however the cost will gone even though they only find dry hole. For
Indonesia context, imposition of tax on land and building which cover the all of the working
area seems unfair for business. If the government wants to capture potential revenue on
natural resources/oil and gas through tax and other state levies, it needs to think and consider
business life cycles and risks. In addition, it also needs to think a simple system and less
administrative burden. The latest tax scheme on this risky sector; natural resources tax needs
14
to consider as an alternative. In the designing appropriate tax scheme, the government should
adopt its policy choice into principle of natural resources tax.
5. References
Boadway Robin, (2010), Theoretical Perspective on Resources Tax Design, New York:
Routledge International Monetary Fund.
Boadway Robin, (1993), The Taxation of Natural Resources: Principles and Policy Issue,
Working Paper Policy Research Department International Monetary Fund
Daniel Philip et al., (2010), Evaluating Fiscal Regimes for Resource Projects: An Exmple
from Oil Development, New York: Routledge International Monetary Fund.
Hogan Lindsat and Goldsworthy, (2010) International Mineral Taxation: Experience and
Issue, New York: Routledge International Monetary Fund.
Land Bryan C. (2010), Resource Rent Tax: A-Reappraisal, New York: Routledge
International Monetary Fund.
Mullins Peter, (2010), International Tax Issue for the Resources Sector, New York:
Routledge International Monetary Fund.
Nakhle Caroline, (2010), Petroleum Fiscal Regime: Evolution and Changes, New York:
Routledge International Monetary Fund.
Rosdiana et. Al (2015), Indonesia Property Tax Policy on Oil and Gas Upstream Business
Activities to Promote National Energy Security: Quo Vadis? Procedia Environmental
Science, Elsevier.
15
toward Energy Resiliency in Indonesia
Haula Rosdiana, Inayati, Maria R.U.D. Tambunan
1. Background
The aim of this research is to describe tax liabilities and state levies shall be
accomplished by oil and gas industries, specifically upstream business entities in Indonesia.
In addition, the problems raise with regard to the fulfilment of liabilities will be also one of
important highlight. Then, simpler fiscal policy to reduce administrative burden and to
improve business friendly climate are the main considerations of reconstructing fiscal policy.
Finally, this study will propose adoption of natural resources tax to simplify completion of
business liabilities and ease the government to monitor business tax liablities.
Energy security is a crucial and critical issue for almost all of the country, because it
will not only determine the existence of particular countries in global economy but it is also
one of key factor for development acceleration. Phenomenon energy crisis disturbing
government stability in several countries shall be lesson learned, and then determining energy
security issue becomes priority on government program. In addition, countries which have
abundant reserved energy (top 15 countries) such as Cina and USA still aggressively expands
exploration projects in seek for new energy sources in other countries. It is driven by
economic development and industrial activities which need high energy consumption,
followed by government responsibility to ensure reserved energy availability until next 100
years. It also intended to reduce energy dependency on other countries. In fact, increasing
trend of energy consumption in contrast with declining energy production happens (Rosdiana
et. Al, 2015).
Indonesia is also covered by current global energy crises. Reserved energy, for
example fossil energy; oil and coal is continuously declining. It is also worsen by inefficient
fossil energy used. Considerable population increased significantly affect high demand of
energy consumption. It has been predicted that Indonesia energy reserved will be fully used
in 10-20 year.
1
Besides as instrument to promote energy security, oil and gas sector contributes
significantly in Indonesia revenue although it is still fluctuative. In era Repelita 1 I,
contribution of oil and gas sector in Indonesia revenue was up to 27% of total national
revenue. Then, in 1978/1979 contribution of this sector was up to 54% and its peak was in
1981/1982, up to 70%. However, the following years, its contribution has been going down
until now2. In 2008-2012, for instance, the contribution oil and gas for government revenue
was about 29,47%-20,75% with approximate 23,08%. In National Budget Revenue and
Expenditure 2013, it has been predicted that oil and gas contribution on national revenue will
be only 17,02% of total revenue3.
Further, income tax revenue from oil and gas enterprises increased about 13,5% per
year in perode 2007-2011. Each of sector, income tax revenue from oil business entities
contributes about 37,3% and from gas industries about 62,7%. Revenue from tax on oil and
gas is also affected by ICP, discrepancy value betweem IDR-USD and oil and gas lifting
Besides contribute to government revenue through income tax, this sector also contributes
through state levies.
The fluctuation of oil and gas contribution on government revenue is caused by
internal factor; reduction of oil and gas production and internal factor; fluctuation of
international oil and gas price. Realization of Indonesia oil lifting in period 2008-2012
slightly increased, approximately 930,1 thousand barrel per day (2008), 953,9 barrel per day
(2010). Start from 2011, the realization of lifting declined becoming 898,5 thousand barrel
per day. In separated, based on information published by SKK Migas 4, in period 2008-2011,
realization of oil lifting tended to increase, 1.146 thousand barrel per day in 2008 then peak in
2011, 1.318 MBOEPD. However, the realization of oil lifting per day in the beginning of
2012 declined into 1.240 M Barrel Oil Equivalent Per Day (MBOEPD).5 Besides problem of
oil and gas production declining, Indonesia technology availability to refine crude oil has not
been sufficient. Therefore, GoI has to impor crude oil 350.000 barrel per day and ready to
used fossil fuel 400.000 barrel per day.6 Besides negatively affect government revenue, these
conditions will severe Indonesia energy security.
1
Repelita I stands for Rencana Pembangunan Lima Tahun, the 1 st era of President Soeharto became of
Indonesian President 1968-1973
2
National Budget Revenue and Expenditure 1992/1993
3
Contribution of oil and gas sector on national revenue based on official government revenue and
expenditure report 2014.
4
Indonesian Oil and Gas Authority
5
6 2013
6
Detik Finance, 30 Agustus 2013
2
In order to solve the problem, the president instructed central authorities and local
authorities through Presidential Instruction No.2/2012 to make effort to accelerate and
maximize oil and gas production7. With regard to this sector, the characteristic of this sector
which is “long time production process” and capital intensive shall be taken into account.
Therefore, the role of private sector becomes considerable important. To attract investment,
the government shall offer policy promoting friendly investment climate. One of important
policy is state levies. Excessive state levies probably will increase government revenue in
short term. However, in medium term and long term, this policy will be contra productive for
national revenue because it will potentially reduce investment attraction.
Taking example from neighbour country which produce oil and gas such as Malaysia,
it a has design programs toward energy sustainability that is known as Enhanced Oil
Recovery (EOR). Besides high awareness of fossil energy availability, the government
accelerate this program by offering fiscal incentives and marginal field project. In addition,
the government also provides subsidy such as direct money transfer. All of the programs
implemented by the government of Malaysia become consideration in determining this
country as one of research sites to be a benchmark for Indonesia.
Impletemented tax policy on oil and gas industry is that shifting of high royalty then
compensating it with low tax liability. Other feasible policy is intervention through
production sharing contract (PSC) which allows mixed company (national and multinational)
to run the contract. This business relation probably show stronger legal binding and
transparent cooperation, different with regulation in the current production sharing contract;
which is mixed company is represented by two types shareholders. The status of mixed
company shall ensure basic protection of minority shareholders.
2. State Levies on Oil and Gas Industry in Indonesia
For the context of tax liabilities and other state levies, oil and gas industries, to be
specific upstream industries are treated different with other industries since upstream shall be
arranged under Production Sharing Contract (PSC). Most of treatment under PSC will be lex
specialist to the general rules, including Income Tax Law in Indonesia and state levies.
Through PSC, concept of cost recovery has been introduced therefore each cost/expenses
bear to produce oil and gas will be reimbursed to the government as long as the expenses
7
Officia Report National Revenue and Expenditure 2014
3
economically are related to the business process. All of the utilized asset on production
process would belong to the government. Contractors will get return based on quantity of oil
produced under agreement (PSC) with government.
A part from reduction of oil lifting, raised taxation problem; imposition tax on land
and building potentially negatively affect investment climate on oil and gas industries. The
stipulation of Government Regulation (GR) No.79/2010 regarding reimbursement of
operating cost and taxation treatment on upstream oil and gas industries replaces regulation
before, which implemented “assume and discharges” concept. The existence of “assume and
discharge” concept allows the contractors have not to pay tax on land and building, it would
be on government’s responsibility. Technically, Directorate General Taxation should pay the
amount of tax payable to Directorate General Budget. However, GR No. 79/2010 regulates
that contractors have to pay tax on land and building which is collected based on plan of
development (PoD). Then, tax paid can be reimbursed to Directorate General Budget
immediately after area of PoD has commercially produces petroleum and have getting
approval from SKK Migas8. Therefore, contractor has to pay tax payable on land and
building for each contract sign after stipulation of GR No. 79/2010.
Large amount of tax payable imposed from contractor before commercial years will
tighten the cash flow during pre commercial years. In addition, upstream oil and gas
industries are capital intensive and high risk industry that need huge of money. The study
showed that failure risk during exploration is up to 70%-80%. It means when contractors fail
to find a potential hole, they have to pay tax in advance which can be reimbursed. This
situation will be difficult for contractor to set business forecasting. In 2013, SKK Migas
reported that 12 contractors lost 1,9 milliard USD because they only found dry hole in 16
exploration bloc. Further, the numbers of contractor relinquish PoD to the government
immediately while bidding process in 2013 because of high fiscal costs. It was indicated by
only 37,5% of contractors run the contract in the first round 2013. It is far lower compare to
years before which was up to 90%.
Importantly, high fiscal cost caused by tax on land and building before commercial
stage will adversely affect not only availability of energy, specifically oil and gas in
Indonesia but also other government revenue through corporate income tax on upstream
industry. With regard to this problem, therefore it need to redesign appropriate tax policy
8
Government body which deal with PSC
4
which accommodate business process and business risk in this sector without abuse
government potential revenue.
3. Reconstructing Fiscal Policy: Adopting Natural Resources Tax in Indonesia
Following the study Daniel et. Al (2010, 1) the common challenges faced by investors
(upstream business) which is high risk and capital intensive are the heavy of designing
natural resources tax. To be specific, the principal motivation lies rather in distinct challenges
for tax design and implementation that are posed by inherent characteristics of the sector:
heavy sunk cost and long production process. In addition, the base premises of levying taxes
in which certainty, credibility also add the rigorous though to policy maker. Citing the study
of Daniel et al.(2010), he stated that the ideal concept of fiscal regimes shall consider not
only literal taxes which is compulsory unrequited to government, but also cover for example
production sharing, royalties, state participation, contract fees, output pricing constraints and
together with tax administration. The description of upstream business process since
exploration process and commercial stage in Indonesia can be explained in the following
graphs:
5
Graph 1
Cost of Production Process on Upstream Industries
High risk, less return
less risk, high return
RISK
CUMMULATIVE
INVESTMENT
Geology risk
Natural risk
Economics risk
Technical risk
Political risk
Exploration
Investigation
Development
Production
Finding
Development study
Source: Sudjati Rachmat, Jenis-jenis Pengusahaan Hulu Minyak dan Gas
Similarly, following the study of Nakhle (2010), he highlighted most issues cover
taxation policies for petroleum business which put specific character of upstream business
and complexity as important consideration. Different with other industries, the upstream
business come to a country because of its natural resources. Therefore, the certainty of
agreement component and strong support of government in location or country invested is
critical. They cannot move immediately their business like factory industry for example.
Unfortunately, sometimes even though upstream industry in its characteristic has
international common practice in operational and production process, the local or location of
operation in a particular country may take a part in influence or shaping in the decision of tax
treatment. This fact cannot be blamed negatively influence the attractiveness of investment.
6
The uncertainty of initial investment associated to upstream industry that is the cost of
petroleum project by its risky nature has to incur up front. Then, the time lags are critical
since it often will take of many years and even decades for one project, from the initial
discovery of oil or gas reserves to the time of first production (commercial stage). Moreover,
imposition of petroleum taxes and the involvement of the private sector in oil activity tend to
be accompanied by intense political debate where political dogma and related stakeholder
interest can overshadow economic principles.
Similarly posed by Boadway (2010) that series of process consisting of discovering,
developing, exploiting, marketing/selling and closing an oil field/bloc can cost a lot of money
and needs years. In oil and gas, it is common for 50 years or more to pass throughout the
process from the exploration until rehabilitation stage. Moreover, the associated expenses in
large proportion have to bear in early of projects for year in which stability of cash flow is
critical; the limited sunk cost in the beginning shall affect the whole process whereas only
little alternatives probably can be taken to cope with this process. It may happen that if an
offshore oil platform may be moved to other field or other countries, for example, but the
amount of cost spent looking for or exploring potential oil fields successfully or not is gone.
A different of cost acquisition of getting fruitful initial production process, significant sunk
cost are probably incurred in other lines of business too, for example in developing power
plan may be business entities have to undertake R&D, as the analogous to exploration
spending, or on pharmaceuticals have conduct series of research– however, their
pervasiveness and magnitude in resources activities put them at the central of the problem of
sectoral tax design,.
Similarly, it is also stressed by Nakhle (2010) that the perception of oil field
competitiveness is also affected by the design of tax regime although it might not be in the
first place of competitiveness consideration. An easy tax structure and friendly tax
administration process may recapture or be a bit balancing other problems potentially raised
as the result of exploration process, development activities, technical, financial or probably
political problems in location. It may also show a supporting position of government in
respect to the producing process and contribution of oil companies for the supply of domestic
energy availability.
However, another perspective of designing fiscal regime is the propensity of each
(government and oil company) want to maximize their own benefits through the agreement.
Therefore, it need to look thoroughly the most appropriate burden be shifted to each through
take into account each stakeholder interest and attractiveness in the projects. Comparison
7
with other countries will be critical for both of them before signing the contracts. The
common practice/international best practice shall give another view of levying or shaping tax
burden.
When the outcomes of negotiation process between then show mutually benefit,
both of them will enjoy sharing reward and will maintain more sustain economic relation in
long term.
In separated part, it is perhaps can be said that if the tax regime is too favor, the
government will be in weak position in which the investor may utilize it to maximize rent
seeking potential, then the return taking by government probably will not as it should be. If
the tax treatment and state levies are too complicated, then the incentives offered to
contractors (upstream business) to invest in exploration stages, development process and
production process in reality cannot lessen the burden then worsen by uncertainty rule of law,
it can be severely damaged then as the result, the investors will be inflow their capital into the
countries offering a more attractive fiscal regime and more friendly investment climate.
For the context of Indonesia, imposition of tax on land and building for upstream
contractors immediately on the exploration process seems unusual. Even though the cost bear
for paying tax on land and building is reimbursable through cost recovery, upfront cost in
initial process shall tighten the cash flow in the stage when the investors have to spent huge
money. In addition, the recovered cost in which tax payable on land and building consisted
can be back once the investor has reached commercial/ economic stage. This treatment will
be disincentives for investors (which are mostly private) while Indonesia has not has
sufficient resources to engage in their own upstream process. International best practice in
levying taxes, specifically tax on land and building need to consider that most of the countries
do not impose tax on land and building on upstream company. Several examples of state
levies and tax treatment on upstream can be seen in the following table.
Table 1
Tax Structure and State Levies in Several Countries
Country
Malaysia
Fiscal Treatment
Malaysia regulate tax scheme and state levies on upstream oil and gas
industries through Petroleum Income Tax Act (PITA).Exploration and
exploitation projects are exclusively undertaken by National Oil Company
(NOC) Petronas. Other private willing to take a part in upstream shall go into
agreement through Production Sharing Contract (PSC) or Risk Sharing
Contract (RSC) with Petronas.
State levies and tax schemes:
a. Royalty 10% from gross profit
b. Petroleum Income Tax;(i) 38% once tax incentives applied, (ii) Join
8
Development Area (JDA) first 8 year 0%, second 7 year 10% and rest
20%
c. Income Tax 25%
d. Real property tax (per 1 January 2014):
30% of net profit after 3 year of commercial operation
25% of the 4th year
15% of the 5th year
6% of 6th year and the rest
Although tax and state levies are imposed, the government provides capital
allowance:
Qualifying expenditure
Property
Secondary recovery
Any other cases
Fixed, offshore platform
Environmental protection equipment facilities
Computer software and hardware
Building
Secondary recovery
Any other cases
Thailand
Initial
allowance
40%
20%
nil
40%
20%
10%
8%
10%
20%
40%
20%
10%
3%
3%
Regulation regarding imposition of tax and state levies in Thailand can be
categorized into 3 term:
a. Thailand I, royalty 12,5% from total sell, petroleum income tax 50%
from net profit
b. Thailand II,
Royaty 12,5% from total sell
Yearly net profit (concession agreement is considered)
Yearly bonus (concession agreement is considered)
Petroleum income tax 50% from net profit
c. Thailand III
Royalty, 5%-15% based on amount of product per bloc basis
Special remuneration (yearly basis) 0%-75%
Petroleum income tax 50% from net profit
Capital allowance offered by the government
Assets
Building:
Non permanent
Permanent building
Aircraft and accessories
Cost of acquiring concession and petroleum reserves
Cost of acquiring concession and petroleum reserves
Cost of acquiring lease rights:
No agreement or renewable
Limited lease period
Other capital expenditure not mentioned above:
Tangible capital expenditures
Capital expenditure for deep sea exploration blocks (deeper
than 200) meters
Philippine
Annual
allowance
% per year
5%
100%
33,33%
10%
10%
10%
Lease period
20
State levies and tax schemes applied in Philippine shall be according to
Production Sharing Contract (PSC):
Contractor will receive service fee 40% from exploration projects and
government no more than 60%
9
Bonus in signing the contract
Income tax 30% as general provision
Contractors are eligible for capital allowance and investment
incentives
PSC contract in Laos does not regulate kinds of business liabilities such as
signature bonus, royalty. Provision of production sharing is as followed:
Laos
Daily average product
(barrels per calendar
month)
Up to 25.000
25.001 – 50.000
50.001 – 75.000
75.001 – 100.000
100.001- 125.000
125.001 – 150.000
150.001 – 175.000
175.001 – 200.000
More than 200.000
Australia
Germany
Business’ share
Government’s
share
35%
32,5%
30%
27,5%
25%
22,5%
20%
17,5%
15%
65%
67,5%
70%
72,5%
75%
77,5%
80%
82,5%
85%
Australia combines several regulation regarding income tax, petroleum
resources rent tax and royalty based tax on upstream business. Provision of
levies is as follow:
Royalty 0%-12,5%
Income tax 30%
Resource rent tax 40%
Government undertake different treatment for those underside under Australia
business law, they shall be imposed Capital Gain Tax (CGT) and taxable
Australia Property (TAP):
Property tax covers area which solely produce deposits
Indirect Australian Real Property Tax for specific case
Germany does not impose specific tax on upstream. Simple tax liabilities shall
be paid by contractors:
Income tax, approximately 29,*%
Royalty 0%-40%
Bonus does not apply
Before examining further to the probability of designation of natural resource tax, it is
important to know the fundamental aim of imposing this specific tax. Land (2010) stated that
the aim of imposing natural resources tax is to enable government having reward of potential
revenue which cannot be captured solely by the preliminary contracts because of possibility
of unpredicted richer resources. The strong definition by citing the fundamental concept of
resource rent tax is “the ex-post surplus of the total project lifetime value arising from the
exploitation of a deposit, in present value terms, over the sum of all cost exploitation of a
deposit, in present value term, over the sum of all costs of exploitation, including
compensation to all factor of production” (Land, 2010, 245).
In a more strong and clear position, resources rent tax can be said as combination of
other taxes and changes. Thus, in royalty/tax regime, a resources tax is typically combined
10
with royalty and corporation tax. The resources rent tax may either be used as final tax
levied on after-tax cash flows or as supplementary levy on pre-tax income, payment of which
would be deductible for corporation tax purpose (Land, 2010, 252). In simple way, it can be
said that natural resources tax shall be capture the fairer way of tax burden paid by investors
and the appropriate revenue received by the government. In its implementation, for example
taking case in Papua New Guinea, the design of natural resources tax is used to seek the
attractiveness of new investment.
In addition, in designing tax on natural resources, tax system should be done in more
flexible way. The premises of this is that the cost of extraction may different throughout the
process, the deposit is extracted under dynamic price, the greater potential benefit from the
basin, the more earned by the government. In vice versa, for the high risk extracting projects,
the government may get less revenue. In ideal context, fiscal treatment for contracts/
agreement shall be more specific and flexible (Land, 2010). In principle, natural resource tax
enables the government to capture resources from deposit without deterring the investment.
The following is the comparison of resources tax with other taxes on profits.
Table 2
Comparison of Resources Rent Tax with Other Taxes
Government “take” link to
Government “take” responsive to:
Reserves or
Price change
Costs
production
Production (daily cumulative)
yes
no
no
Timing of
Cost
cash flows
capital
partly
no
of
Example: company share of profit oil is 50% at low output falling to 15% high output (Uganda)
Price (price caps or base prices)
no
yes
no
partly
no
Example: oil profits taxed at 25% until oil price exceeds USD 30/bbl, thereafter rising by 0,4% for every USD
1/bbl > USD 30/bbl (Alaska, USA)
Annual profit
yes
yes
yes
no
no
(profit margin or return in a tax year)
Example: mine taxable income is taxed at the higher of 25% or 70-1500/x where x (%) = taxable income/gross
income; the higher rate applies when x > 33,3% (Botswana and Uganda; South Africa and Namibia employ the
same scheme with different value in the numerator)
Example: mine after-tax profits taxed at a rate of 0-15% once return on capital employed > long term bond rate
+ 5% (Australia mining agreement)
R Factor
yes
yes
yes
partly
partly
(revenue: cost ratio or investment
multiple)
Example: company share of profit oil is x% at IM < 1,5 falling to y at IM > 3,5 where IM = ratio of cumulative
11
net income to total investment (India)
Resource Rent Tax
yes
yes
yes
yes
yes
(Rate of return)
Example: petroleum after tax cash flow taxed at 40% once the project internal rate return exceeds the long term
borrowing rate plus 5% (Australia)
Source: Source: Bryan C. Land, (2010), Resource Rent Tax: A re-appraisal page 252
For Indonesian context, imposition of tax on land and building seems violate principle
of natural resource tax, because in its implementation, it seems does not consider life time
value, present value and discount rate of project by simply imposing tax on land used in
exploration process, seems like property. In addition, for risk consideration, the difference
treatment between one contract and others seem could not be reached.
When a country intends to design natural resources tax, Land proposes that they shall
keep in mind 3 fundamental element of designing natural resources tax (i) specific rates of
return on investment that trigger the imposition of the tax (ii) specific tax rates imposed on
net profit once the rates of return has been exceeded and (iii) the tax base which is typically
an individual resource project and allowable deduction.
Several important consideration and challenges need to think of in designing
resources tax regimes as proposed by Boadway and Keen (2010); (i) a discount rates and
their implication, (ii) risk sharing (iii) responses to asymmetric information. With regard to
discount rates, for such long projects, the discount rates applied by government and investor –
difference calculation between them can play a critical role. For the investors, the discount
rate may describe cash flow during the process and potential risk is captured through cost of
capital. Importantly, the number of discount rate commonly is different across the countries
because of the different activities and potential risk. In principle, companies’ discount rates
should reflect and give understanding to the shareholder of potential risk they face and
potential gain they can get on their portfolio and assets. This also should reflect the ability of
government in host country commitment to support existing projects and tax regime applied.
Then, in the second place needs to taken into accounts is risk sharing. The available
tax schemes on the projects may reflect allocation of risk and to what extend mutually benefit
between government and investors. Both of them probably take different attitude in facing
potential risk in order to maximize benefit. For the party who has willingness to cope with the
potential risk shall be getting more return. To examine the uncertainty of the projects, it is
important to make such a simulation by supposing project return at a series of time and
12
putting time consistency issue of project completion. This imaginary result shall enable the
government to commit credibly in prescribe tax schedule. The tax schedule could take any
shape: it might be progressive with a higher average tax rate in the more successful the
project or it could be regressive based on project potential return.
Finally, responses to asymmetric information. Policy makers shall also consider
potential difficulty of being less well-informed on aspects covering the process, for instance
information about the geological and commercial circumstances of resources project than are
being implemented. The response of government in undertaking of the project shall be the
thorough examination of potential unbalance information that has been covered through tax
schemes in acceptable way of business. Several considerations need to think of as criteria and
indicators in evaluating policy before designing appropriate policy:
Table 3
Evaluation Criteria and Indicator in Designing Natural Resources Tax
Evaluation criterion
neutrality
Revenue raising capacity
Adaptability/progressivity
Risk to government
Investor perception of risk
Relating revenue
investor risk
Prosperity gap
yield
Key Indicators
Type of sample or output
Average effective tax rate Single
case,
international
(government take in profitable comparison
case)
Marginal tax rate
Single case at investor’s
discount rate
Time profile of revenue
Price just yielding investor’s
Share of rent to government
discount rate
Tax share of total benefits
Variance of NVP of revenue
Probability distribution of cases
Proportion of revenue in first n
year
Dispersion of expected IRR
Probability distribution of cases
Probability of below-target
returns
Value of negative returns
to Compare expected yield index Probability distribution of cases
with expected risk index
Present value to equalize mean Probability distribution of cases
PV to investor
Present value to equalize PV of
negative return
Source: Daniel Philip et. Al (2010), Evaluating Fiscal Regimes for Resources Projects, page
Finally, as the example in designing natural resources tax, several details as references can be
seen in the following table:
13
Table 4
Details of Resources Rent Tax in Selected Countries
Countries
Australia
(Resource
tax)
Single
rate/sliding
rate
Single rate
rent of 40%
Namibia
3-tier
Petroleum
sliding
Additional profit scale
tax
starting
25%
Malawi
10%
(Resource Rent
Tax)
Ghana
35%
(Additional
Profit Tax)
Liberia
20%
(Resource rent
tax)
IRR
threshold
Legislated/
contractual
Biddable
Levied pre-tax
or
post-tax
status
Pre-tax
Long
term legislated
borrowing rate
(6,18%
for
2008) + 5%
for exploration
cost/+15% for
capital cost
15%
legislated
20%
25%
no
20%
legislated
no
Post tax
25%
legislated
no
Post-tax
22,5%
legislated
Yes-rate
Pre-tax
in excess
of
prescribed
rate
2nd and 3rd Post-tax
tier
tax
rates
at
Source: Bryan C. Land, (2010), Resource Rent Tax: A re-appraisal page 259
4. Conclusion
Regulation on imposition of tax and other state liabilities on upstream industry shall consider
its business characteristics; high risk and capital intensive. High tax burden in exploration
stage (non commercial stage) probably will severe business’ cash flow, moreover if the
country apply cost recovery system in which abuse “assume and discharge” system.
Reimbursement probably will be the way out once the upstream investors has reached
commercial stage, however the cost will gone even though they only find dry hole. For
Indonesia context, imposition of tax on land and building which cover the all of the working
area seems unfair for business. If the government wants to capture potential revenue on
natural resources/oil and gas through tax and other state levies, it needs to think and consider
business life cycles and risks. In addition, it also needs to think a simple system and less
administrative burden. The latest tax scheme on this risky sector; natural resources tax needs
14
to consider as an alternative. In the designing appropriate tax scheme, the government should
adopt its policy choice into principle of natural resources tax.
5. References
Boadway Robin, (2010), Theoretical Perspective on Resources Tax Design, New York:
Routledge International Monetary Fund.
Boadway Robin, (1993), The Taxation of Natural Resources: Principles and Policy Issue,
Working Paper Policy Research Department International Monetary Fund
Daniel Philip et al., (2010), Evaluating Fiscal Regimes for Resource Projects: An Exmple
from Oil Development, New York: Routledge International Monetary Fund.
Hogan Lindsat and Goldsworthy, (2010) International Mineral Taxation: Experience and
Issue, New York: Routledge International Monetary Fund.
Land Bryan C. (2010), Resource Rent Tax: A-Reappraisal, New York: Routledge
International Monetary Fund.
Mullins Peter, (2010), International Tax Issue for the Resources Sector, New York:
Routledge International Monetary Fund.
Nakhle Caroline, (2010), Petroleum Fiscal Regime: Evolution and Changes, New York:
Routledge International Monetary Fund.
Rosdiana et. Al (2015), Indonesia Property Tax Policy on Oil and Gas Upstream Business
Activities to Promote National Energy Security: Quo Vadis? Procedia Environmental
Science, Elsevier.
15