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Indonesia: Upstream oil and gas activities; tax incentives for cost allocations

Indonesia: Upstream oil and gas activities

Regulation No. 122/PMK.03/2019, relating to upstream oil and gas activities, sets forth measures about the tax treatment for shared facilities and for claiming head office cost allocations.

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The regulation 122/2019 applies for production sharing contracts signed both before and after the enactment of Law No. 22/2001 as well as entered into after the issuance of prior regulations in 2017 (regulations No. 79/2010 and No. 27/2017).

The 2019 regulation also provides “tax facilities” (tax incentives) for oil and gas contractors in either the exploration and/ or exploitation stage (processing, transportation, storage and sale). The tax facilities include:

  • Value added tax (VAT) relief for certain goods or services related to the oil and gas activities (such as with regard to the use of certain offshore intangible goods or services obtained from outside the customs area)
  • A 100% reduction of the land and building tax for certain oil and gas-related land and building items reported on the tax return

To claim these tax benefits, a request must be filed by the operator of the oil and gas activities with the appropriate official of the tax office, and that office must then issue a tax facility certificate within seven business days.

For contractors in the exploitation stage, the tax facilities are subject to certain conditions being satisfied (such as a specified rate of return).

Lastly, regulation 122/2019 also provides that certain head office cost allocations are not subject to withholding tax and VAT if certain conditions are satisfied.

KPMG observation

The 2019 regulation is viewed as an effort to make the upstream oil and gas industry more attractive to investors and contractors, and there are reports that even more tax incentives are being considered. The tax incentives provided by the regulation are expected to provide a positive cash flow for exploration contractors and qualifying exploitation contractors. The tax treatment clarifications further are expected to result in reduced time and effort during tax audits or in challenging tax assessments.


Read an October 2019 report prepared by the KPMG member firm in Indonesia

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