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C.1. The award and offer of Work Areas

Geothermal work areas are offered to prospective investors by way of tender by the MoEMR, Governors (Provincial Authorities) or Regents/Mayors (Regencies/

a. Phase one – this covers administration/formalities as well as technical and financial capabilities. As part of the financial evaluation, bidders are required to deposit cash guarantees of:

- 2.5% of the estimated first-year exploration costs; and

- US$10m (to guarantee the potential drilling costs for two standard- exploration and exploitation wells); and

b. Phase two – this covers a valuation of the steam and electricity prices offered by bidders. The lowest offered price carries a preference to win the bid.

C.2 Geothermal Mining License (“IUP”)

The geothermal activities cover: a. Exploration;

b. Feasibility studies; and c. Exploitation.

Exploration, Feasibility Studies and Exploitation can be carried out by businesses after obtaining an IUP. The largest work area to be granted an IUP is 200,000 hectares which should be partly relinquished during the exploration and feasibility study. The largest work area to be granted for the exploitation phase is 10,000 hectares (noting that a separate approval can be sought for more than 10,000 hectares).

An IUP gives the holder a 3 year exploration period which is extendable twice each time for a maximum of 1 year. The feasibility study period is for a maximum of 2 years. Exploitation is for a maximum of 30 years (but extendable). The IUP holder must commence exploitation activities within 2 years of the end of the exploration period.

A ring fencing principle applies, meaning that one legal entity can only be granted one IUP.

C.3. Activities (MoEMR Regulation No.11/2009)

Prior to the exploration phase, the Central and Regional Governments will generally conduct Preliminary Surveys but the Central Government may appoint another party to do so. Exploration, feasibility studies and exploitation are done by businesses (state, regional or private).

For each phase of geothermal activity, the IUP holder is required to submit written reports to MoEMR and the relevant Regional Government Authorities. These written reports include:

a. At the commencement of each phase:

• a long term plan of activities (for each phase); and

• an annual work program and budget (WP&B). The annual WP&B should be submitted two months prior to the relevant year. b. during the relevant phase:

• monthly reports (submitted within one week after the end of the month);

• quarterly reports (submitted in the first week of April, July, October and January); and

• an annual report (submitted within two weeks after the end of the year).

Exploration activities should be commenced within six months of the issuance of an IUP. Failure to do so will require the IUP holder to pay 5% of the (previously mentioned) US$10m guarantee to the State Treasury.

There are a number of other obligations under MoEMR Regulation No.11/2009 with respect to procedures for relinquishment, temporary discontinued operations (due to force majeur), reclamation and mine closure. With respect to mine closure, IUP holders are required to fund banks from the commencement of the exploitation phase. Detailed procedures on this are still to issue.

The Government can impose administrative sanctions on IUP holders who do not fulfil their obligations. The sanctions can be in the form of written warnings (x3), a discontinuation of their operations or IUP cancellation.

C.4. Non-Tax State Revenues

IUP holders are required to pay Non-Tax State Revenues which include Fixed Retributions, Production Retributions, Other State Levies (in respect of, for example, education and training services and research and development services) and Bonuses.

Further detail on these Non-Tax State Revenues are to be stipulated in a separate GR.

new regime there are no specific tax regulations for geothermal activities meaning that the prevailing tax laws and regulations should prevail.

Suppliers of steam and electricity are considered VAT exempt, meaning that any input VAT would not be creditable (but should be deductible). Under the “old regime”, this VAT was reimbursable.

Under the prevailing tax rules, tax losses can be carried forward for a maximum of five years (carry back is not allowed). This will be a concern if the work area is not producing within the five-year time frame.

C.5a Tax Incentives

The following tax incentives are potentially available for Geothermal investments.

Income tax

• Pioneer investor tax holiday: - stipulated under GR No.94/2010. This provides Income Tax exemptions or reductions to companies in pioneer industries, including renewable energy (i.e. this includes geothermal). Subject to meeting the capital investment criteria, the tax payer may be granted an Income Tax exemption of five to ten years from the start of commercial production, and may also receive a 50% reduction of the Income Tax due for the two years following the end of the Income Tax exemption.

• Income Tax facilities:- stipulated under GR No.1/2007 (as amended by GR No.62/2008 and GR No.52/2011). The incentives include a 30% investment credit, accelerated depreciation/amortisation rates, 10% WHT on dividends paid to non-residents and tax loss carry forward for up to 10 years.

Import taxes

In general, similar income tax and duty facilities are available for Geothermal businesses as were described above for oil and gas. In additional, Geothermal business can use of a number of facilities indented for the producers of electricity.

i. JOC Regime

Older geothermal businesses that entered into the Joint Operation Contracts (“JOC”) with Pertimina should be able to make use of MoF Decreee No.766/1992 (“MoF-766”) which indicates that the import of operational goods for the

exploitation of geothermal resources shall not be subject to Import Duty, VAT or Art. 22 Income Tax as provided by the Joint Decree No.1122.K/92/M./PE/1997; 321/KMK.01/1997; 251/MPP/Kep/7/1997 of 18 July 1997, which has not been revoked.

In addition, MoF Regulation No.78/PMK.010/2005 was issued on 6 September 2005 which provided an exemption for Import Duty for Geothermal businesses under the JOC regime.

ii. New Regime

For contracts entered into after the Geothermal Law No.27/2003, separate regulations should apply to provide facilities for Import Duty, VAT and Art. 22 Income Tax, as discussed below.

Import Duty VAT Art. 22 Income Tax JOC Regime    New Regime Exploration Stage    Exploitation Stage  ()*  Import Duty

As for oil & gas, PMK-177 also provides an Import Duty exemption for Geothermal businesses during exploration and exploitation, subject to the conditions regarding availability in Indonesia (as described above).

In addition, MoF Regulation Mo.154/PMK.011/2008 (“PMK-154”) provides an exemption from Import Duty for qualifying electricity producers and suppliers, subject to same local production restrictions as noted above for PMK-177. In order to benefit from this facility, the power producer must submit an application to the Director General of Customs and Excise.

VAT

PMK-27 also applies for Geothermal exploration business in a similar manner to that described above for oil & gas.

* In addition, an exemption is available on the import of capital goods used for the delivery of certain strategic goods, including electricity, under MoF Regulation No.31/PMK.03/2008. As a result, an energy producer may be able to make use of this additional regulation to obtain a VAT facility during the exploration stage.

Art. 22 Income Tax

MoF Regulation No.21/PMK.011/2010 provides an exemption from Art. 22 Income Tax subject on the import of machinery and equipment. The exclusion is available without use of a Certificate of Exemption.

C.5b Draft GR on Income Tax for Geothermal

In late December 2009, the Directorate General of Tax (DGT) circulated a draft GR on Income Tax for the geothermal sector. Some key points outlined in the draft GR are:

a. that the tax calculation for geothermal will generally follow the prevailing Income Tax Law. An exception could be an extension on the tax loss carry forward (i.e. seven years from production commencement). Fixed retributions, production retributions and bonuses were confirmed deductible; and

b. that all geothermal contracts signed prior to PD No.76 (old regime) should be amended within three years to comply with provisions in the GR.

As this publication went to print, there had been no known developments on this draft GR.

There has also not been any (advanced) geothermal activity under the new regime. Therefore, the relevant investment and tax frameworks have not been fully tested at a practical level.

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