Withholding and Payment of Income Taxes on Other Contractor’s Income and/or Participating Interests

On October 14, 2024, the Minister of Finance (the “MOF”) enacted the MOF Regulation Number 81 of 2024 on Taxation Provisions for the Implementation of the Core Tax Administration System (the “Regulation”). The Regulation came into force as of January 1, 2025. The Regulation is an omnibus regulation that consolidates and updates various tax rules to enhance the new Core Tax Administration System. Its objective is to modernize tax administration by ensuring transparency, efficiency, and accountability through advanced IT systems, improved business processes, and comprehensive databases.

Due to the extensive range of provisions covered in the Regulation, this Newsflash only discusses the procedures for the withholding income taxes in respect of a contractor’s income in the upstream oil and gas business. These provisions were previously regulated under MOF Regulation Number 257/PMK.011/2011 dated December 28, 2011 on Procedures for Withholding and Payment of Income Taxes on Contractors’ Other Income in the Form of Uplifts or Other Similar Rewards and/or Contractors’ Income from Transfer of Participating Interests (the “Previous Regulation”).

Withholding Tariff of Income Tax

Under the Regulation, there are no significant changes regarding the withholding of income taxes for an Oil and Gas Cooperation Contractor (the “Contractor”) on any income other than cooperation income. Specifically, for income in the form of any Uplift and/or a transfer of Participating Interests, the following tariffs apply:

  1. Uplift (or other similar compensation): 20% (twenty percent) of the gross amount
  2. Transfer of participating interests:
    • 5% (five percent) of the gross amount for transfers during the Exploration Period (from the effective date of the Cooperation Contract until the approval of the first field development plan in a Contractor’s work area). The transfer is exempt from income tax if it meets the following criteria:
      • not transfer all of the Participating Interests owned;
      • Participating Interests are owned for more than 3 (three) years;
      • in the work area, the exploration has been carried out and the Contractor has made investments to carry out the exploration; and
      • the transfer of the Participating Interests by the Contractor is not intended to make a profit, and
    • 7% (seven percent) of the gross amount for transfers during the Production Period (from the end of the exploration period until the end of the Cooperation Contract). This transfer is exempt from any income tax if conducted to fulfill the transfer obligations of Participating Interests to national companies as stipulated in the relevant Cooperation Contract.

Taxation of Participating Interests Transfers

Under the Regulation, the basis for imposing the income tax on a transfer of the Participating Interests is:

  1. the amount actually received or obtained by the Contractor; or
  2. the amount that should have been received or obtained if there is a special relationship between the parties involved in the transfer.

Article 211 of the Regulation mandates that Contractors transferring Participating Interests must report the transfer value to the Tax Services Office where they are registered. The report must include the Participating Interest Transfer Agreement and the Financial Quarterly Report for the last quarter prior to the transfer. This report must be submitted within 14 (fourteen) business days from the signing date of the agreement. If the recipient Contractor is not registered as a Taxpayer, the reporting obligation falls on the transferring Contractor. Non-compliance with these requirements allows the Director-General of Tax to determine the transfer value ex officio.

Article 213 of the Regulation provides that the income tax becomes payable at the earlier of the following events: at the time of payment, at the time of the transfer of Participating Interests, or upon approval of the transfer by the minister overseeing energy and mineral resources. The receiving Contractor must withhold the tax and issue proof of withholding.

Under Article 213(3) of the Regulation, if the recipient Contractor is not yet registered as a taxpayer, the withholding, deposit, and reporting must occur after the recipient’s registration.

Meanwhile, if the transfer of Participating Interest is carried out indirectly and does not change the Taxpayer Identification Number (in Indonesia, Nomor Pokok Wajib Pajak), the Contractor transferring the Participating Interests is required to pay the income tax payable directly no later than the 15th (fifteenth) day of the following month after the relevant tax period.

Uplift or Other Similar Compensation

Article 212 of the Regulation regulates that the income text in the form of Uplift or other similar compensation is payable at the time income in the form of Uplift or other similar compensation is paid or recognized as an expense, depending on which one occurs first. The Contractor making the Uplift payment must withhold the tax and issue proof of withholding/collection in accordance with applicable laws and regulations.

AKSET

Please contact Johannes C. Sahetapy-Engel (jsahetapyengel@aksetlaw.com) or Arthur Basa Okuli Nainggolan (anainggolan@aksetlaw.com) for further information.

 

Disclaimer:

The foregoing material is the property of AKSET and may not be used by any other party without prior written consent.  The information herein is of general nature and should not be treated as legal advice, nor shall it be relied upon by any party for any circumstance.  Specific legal advice should be sought by interested parties to address their particular circumstances.

Any links contained in this document are for informational purposes and are available and relevant at time this publication is made.  We provide no liability whatsoever in respect of any information or content in such links.