New tax regulation up’s coal royalty.

On the 11th April 2022, the Government Regulation 15 of 2022 was issued on “Tax treatment and/or Non-tax state revenue in the field of coal mining business”, to provide “permanent” legal and business certainty for the coal mining sector. This regulation follows closely previous such regulations, and provides an interesting array of definitions in the accompanying explanatory notes.

The main regulatory points in this Government Regulation include general requirements; Income Tax treatment, withholding obligation and/or collection of Income Tax; tax treatment and/or Non-Tax State Revenue for IUP, IUPK, and PKP2B holders; tax treatment and/or Non-Tax State Revenue for IUPK Holders as Continuation of Contract/Agreement Operations; rights and tax obligations and/or Non-Tax State Revenue for holders of IUP, IUPK, IUPK as Continuation of Contract/Agreement Operations, or PKP2B; transitional provisions; and closing conditions.

Exploration

Chapter 2, Part 4 on depreciation, residual value and tangible & intangible assets; Exploration expenditure which has a useful life of more than one year can be capitalized and then amortized (as approved by the Minister). Exploration carried out during production can be depreciated or amortized if useful for more than 1 year, or disbursement is useful for less than 1 year. Part 5 goes into some detail on treatment of donations, etc.

Business Certainty.

IUPK Holders as Continuation of Contract/Agreement Operations whose contracts expire at the latest in 2025 applies tax and nonstate revenue to include;

a)?????HBA < USD 70 (seventy) per ton, (rate 14 % (fourteen percent) times the selling price) minus the rate of production fees or royalties reduced tariffs on utilization of state-owned goods (0.21%) ex PKP2B from production per ton;

b)????HBA > USD 70 (seventy) per ton up to with < USD 80 (eighty) per ton, (tariff 17% (seventeen percent) times the selling price) etc;

c)?????HBA > USD 80 (eighty) per ton up to with < USD 90 (ninety) per ton, (tariff 23% (twenty three percent) times the price selling) etc;

d)????HBA > USD 90 (ninety) per tonne up to with < USD 100 (one hundred) per ton, (rate 25% (twenty five percent) times the selling price) etc

e)????HBA > USD 100 (one hundred) per tonne, (rate of 28% (twenty eight percent) times the selling price) etc. ?

Corporate Income Tax rate of 22% (twenty two percent);

Regional government share is 6% (six percent) as referred to in paragraph (1) letter i and paragraph (2) letter i is regulated with the following details: a. provincial government gets a share of 1.5% (one point five percent); b. the district/city government that produces share of 2.5% (two point five percent); and c. other district/city governments within the province the same will receive a share of 2o/o (two percent).

Various other tax provisions of Revenue Non-Tax State, and regional income come into comes into force from the beginning of the next tax after the year after the IUPK was issued as Continuation of Contract/Agreement Operation;

Explanations.

Coal price index refers to: a. Indonesian Coal Index/ Argus Coalindo; b. New Castle Export Index; c. Global Net Castle Index; d. Platts Index, e. Energy Publishing Coking Coal Index f. IHS Markit Index, and/or g. Other price indexes used by different ministries in charge of energy and mineral resources affairs in determination of HBA.

Calculations are to consider the CV value of coal (GAR), sulphur, ash, total moisture adjustments, and in some cases consider out of specification coals (fines, reject, certain impurities).

Personal Conclusion;

This regulation provides the tax and royalty bases, (along with clearer interpretations of many accounting items) for immediate planning to recalculate the feasibility of PKP2B mines for their presumed 10-year extension period. It seems most PKP2B extensions due in 2025.

These regulations will clearly help with government revenue during the current period of high prices, and conversely hurt the government with more mine closures during price downturns. Perhaps a more robust approach may be to have specified the HBA coal royalty rate for USD 60 or USD 50/ ton price ranges.?