A PSC entity (where foreign incorporated) is required to set up a branch office in Indonesia. This branch also gives rise to a permanent establishment (PE). This is the case for all foreign incorporated PSC interest holders (i.e. operators and non- operators).
A PSC branch, as a PE, should register for tax by filing an appropriate registration application form including the following attachments:
a. a letter from the branch’s “head office” declaring the intention to establish a branch in Indonesia including information on the branch’s chief representative;
b. a copy of all pages of the passport of the branch’s chief representative; c. a notification letter on the chief representative’s domicile (issued by a
local government officer);
d. a notification letter on the domicile/place of business of the branch (usually issued by a building management company where the branch is located in a commercial office building);
e. a copy of the PSC;
f. a copy of the Directorate of Oil and Gas letter which declares the entity the PSC holder; and
Compliance
The registration obligation applies from the time of commencement of business activities. Therefore, this includes the exploration phase (i.e. there is no entitlement to defer registration until, say, commerciality is declared). Ongoing tax obligations include:
a. the filing of annual Income Tax returns for each interest holder (although see comments on GR 79 above);
b. the filing of monthly reports on the Income Tax due on monthly liftings as well as the remittance of Income Tax payments (for each interest holder-but obviously only after production);
c. the filing of monthly returns for withholding obligations (for the operator only);
d. the filing of monthly and annual Employee Income Tax returns (for each interest holder – noting that generally for a non-operator this will be a nil return);
e. the filing of monthly VAT reports (for the operator only);
f. the maintaining of books and records (in Indonesia) supporting the tax calculations (for the operator only).
On 18 February 2014 the DGT issued Regulation No.5/2014 on the format and content of the annual income tax return for PSC taxpayers (DGT Regulation No.28 was revoked).
In addition to distinguishing liftings and non-liftings income, Contractors are now required to complete and attach (as appropriate) six special attachments concerning:
a. Corporate Income Tax for PSC Contractors;
b. Branch Profits Tax/dividend tax for PSC Contractors;
c. Details of Costs in Exploration/Exploitation Stage for PSC Contractors; d. Depreciation Schedule for PSCs;
e. Details of the Contractor’s portion of their FTP share; f. Details of Changes in the Participating Interests.
From April 2012, the DGT sought to move all PSC Contractors to the Badora II Tax Office, which has a specific responsibility for the industry.
Ring Fencing
Pursuant to MoF Regulation No.SE-75/1990, an entity may hold an interest in only one PSC (i.e. the “ring-fencing” principle). There are also no grouping or similar consolidation arrangements available in Indonesia. This means that the costs incurred in respect of one PSC cannot be used to relieve the tax obligations of another.
As noted in GR 79, PSCs and relevant PoDs now book to ring fence by field.
Joint Audits
Pursuant to a Memorandum of Understanding (MoU) entered into between SKK Migas, BPKP (a Government auditing body) and the Directorate General of Taxes (DGT) Joint Audits by these bodies have been carried out on all operational PSCs and non-producing PSCs with an approved Plan of Development (PoD) since April 2012. A number of these audits have now extended beyond the initial audit timeframe and a number of draft and final Joint Audit Reports have now been issued.
This is the first systematic DGT audit of PSCs meaning that many PSCs are experiencing a DGT tax audit for the first time. Given the operation of the uniformity principle (i.e. where deductibility is driven by cost recovery
administration) the DGT has been primarily focused on transactional taxes (e.g. withholding taxes (WHT) and VAT).
Common issues raised by the DGT to date include:
a. General reconciliations between the financial reports and the monthly tax returns – the DGT is often requesting an explanation of discrepancies between the “accounts” and the tax objects disclosed in the monthly WHT and VAT returns. Whilst this type of request is common with general taxpayers, this can be challenging for PSC entities as their financial data may be limited to their financial quarterly reports. Completing these reconciliations can be very time consuming. b. “Head office” overhead allocations – since 1998 Article 26 WHT and
Self-Assessed VAT on head office overhead allocations has (effectively) exempted via DGT Letter S-604. Although the DGT appears to be still accepting S-604, the challenge appears to have shifted to satisfying the DGT as to the nature of the charge and which entity(s) constitute the “head office”. This also seems to remain a point of difference between the DGT and SKK Migas.
c. Benefits in Kind (BiK) – BPKP/SKK Migas often seem to have a different view on BiK costs. SKK Migas often allows cost recovery (meaning deductibility under the uniformity principle). However the DGT is of the view that deductibility, even via cost recovery, creates an Article 21 Employee WHT due on the grossed up value of the benefit.
The experience is that the DGT is being very thorough in its tax audits but its knowledge of PSC issues can impact the findings and the volume of data requested. This can lead to requests for information outside the scope of the PSC activities. PSCs should consider how they respond to information requests carefully. As with all tax audits taxpayers should still do as much as possible to eliminate audit findings during the draft/temporary findings stage. This can help avoid protracted Objection and Appeal procedures. Under GR 79 (please see above at 3.4.2) tax audits may now also take place during the exploration stage. As noted, accounting records are subject to audit by SKK Migas and BPKP and occasionally BPK (Badan Pemeriksa Keuangan – another audit body established under the Constitution and independent to the Government).