Tax Incentives for Cost Recovery Scheme Oil and Gas Contractors 

“... to increase the discovery of national oil and gas reserves and mobilise the investment climate and provide more legal certainty in upstream oil and gas businesses ...,” reads the consideration section of Gov. Reg. 27/2017 which reveals one of the reasons for the granting of tax incentives to oil and gas investors, quoted Friday (17/2/2023).

In further detail, tax incentives are granted to exploration and exploitation activities.

Exploration Tax Incentives

Article 26A of Gov. Reg. 27/2017 states that the incentives granted to contractors during the exploration period include, first, the exemption from import duty collection on the import of goods used in the context of oil operations.

Second, VAT or STLGs payable not collected on 4 aspects. The four aspects include the acquisition of certain taxable goods (BKP) and/or certain taxable services (JKP), imports of certain taxable goods, utilisation of certain intangible taxable goods and/or utilisation of certain taxable services used in the context of oil operations.

Third, exploration is not subject to Article 22 Income Tax collection on the import of goods eligible for an exemption from import duty.

Fourth, a reduction in Land and Building Tax of 100% of oil and gas land and building tax payable stated in the Notice of Tax Due during the exploration period.

Exploitation Tax Incentives

Article 26B further stipulates in detail tax incentives during exploitation. During the exploitation phase, including field processing, transportation, storage and sales of products as a continuation of the upstream oil and gas business, contractors are provided with a number of incentives.

Contractors will receive incentives, first, the exemption from import duty collection on the import of goods used in the context of oil operations.

Second, the exemption from import duty collection on the import of goods used during the exploitation period applies to 4 aspects. The four aspects include the acquisition of certain taxable goods and/or certain taxable services, imports of certain taxable goods, the utilisation of certain intangible taxable goods and the utilisation of certain taxable services.

Third, contractors will not be subject to Article 22 Income Tax collection on the import of goods eligible for an exemption from import duty collection.

Fourth, the maximum reduction of Land and Building Tax on the earth’s mantle is 100% of oil and gas Land and Building Tax payable listed in the Notice of Tax Due.

It should be noted, however, that these tax incentives may only be utilised by contractors that have adjusted their production sharing contracts (PSC) pursuant to Gov. Reg. 27/2017.

“Cooperation Contract Contractors ... may choose to follow the terms of the cooperation contract (KKS) or perform overall adjustments pursuant to the provisions under this Gov. Reg. by adjusting the cooperation contract within a period of 6 months from the enactment of this Gov. Reg.,” reads Article 38A of Gov. Reg. 27/2017.

With this provision, production sharing contract holders that have not adjusted their PSC with Gov. Reg. 27/2017 “seem” to be unable to utilise the tax incentives provided by the government whereas, the deadline for the adjustment to PSC contracts ended at the end of 2017. (sap)