The government asserts that any income derived from the transfer of participating interests or the proportion of ownership of production and exploration in oil and gas Contract of Work (KK), either directly or indirectly by contractors, is subject to Income Tax (PPh).
The affirmation is contained in Government Regulation (PP) Number 93 of 2021. Previously, the imposition of income tax on the transfer of participating interest has been slightly mentioned in Government Regulation Number 53 of 2017 but has not been regulated in detail.
In both regulations, it is affirmed that the income tax rate imposed on profits from the transfer of participating interest is final, with the amount adjusted to the stage of management of the oil and gas working area.
If the transfer is carried out during the exploration period, the applicable final income tax rate is 5%. However, if it is transferred during the exploitation period, the final income tax rate is 7%.
The tariff will be charged to the value that has been received by the contractor or that should have been received if the transaction is carried out with a party who has special relationship.
The final income tax must be withheld and paid by the contractor to be subsequently reported to the Directorate General of Taxes (DGT).
Restructuring is Exempted
In the new regulation, which was just released on 31 August 2021, there are several clauses that are regulated in more detail. Especially regarding the exclusion of the imposition of final income tax on the transfer of ownership of direct and indirect participating interest during the exploration period for restructuring purposes.
In detail, the following are the criteria for the transfer of ownership of direct participating interest during the exploration period which are not subject to final income tax:
First, if the contractor does not transfer all of his participating Interests. This is because, during the exploration period, the contractor has taken a big risk in finding oil and gas reserves. Therefore, to mitigate this risk, the contractor may transfer the participating interest.
Second, the contractor has had a participating interest for more than three years.
Third, the contractor has invested in exploration activities in the working area.
Fourth, the transfer of participating Interest is not to gain profit or not to obtain additional economic capacity because it is carried out in the context of risk mitigation.
This is indicated by the transfer value which is lower than the investment value issued by the contractor.
Meanwhile, if the transfer of ownership of direct participating interest during the exploitation period is not subject to the final income tax, as long as it is done under a cooperation contract to a national company.
For the profit of indirect ownership transfer of participating interest is not subject to final income tax, if it meets the following criteria.
First, the gain or loss has been calculated using generally accepted tax provisions, or in accordance with Article 4 paragraph (1) of the Income Tax Law.
Second, it is included in the final income tax object in Indonesia according to the provisions of the Income Tax Law.
Third, the transfer is carried out in the context of restructuring using the approved book value.
Fourth, the transfer transaction is part of the restructuring process which is not for profit and does not change the main head office.
To prove that the transfer of ownership of the participating interest is for restructuring purposes that are non-profit-oriented, the contractor must submit a restructuring notification to the DGT.
The notification is accompanied by a number of documents, such as approval for restructuring by the head office, audited financial statements of the party transferring share ownership, consolidated financial statements of the head office for the year prior to audited restructuring, transfer agreement documents, as well as tax notification letters by the head office and the parties conducting the transaction.
If the documents are incomplete or the information submitted is not appropriate, the contractor will still be subject to final income tax.
With this provision, the government expects that the imposition of income tax on the transfer of participating interest can provide legal certainty for the oil and gas industry. Thus, it can increase domestic oil and gas production.