APPLICATION FOR CoW
A foreign investor that wishes to conduct general mining in Indonesia is required to incorporate an Indonesian subsidiary company (a PMA company) under the framework of Foreign Investment Law No. 1/1967. The newly incorporated company will enter into a CoW with the Indonesian government. However, the company cannot be incorporated before the President of the Republic of Indonesia approves the draft CoW.
The steps involved in the CoW application process are as follows.
1. The applicant requests a geological map of the mining reserve applicable for the CoW from the Department of Mines and Energy. A registration fee of Indonesian rupiah IDR 100,000 is payable at this time.
2. The Department will provide a map indicating the mining area reserved for the applicant. The applicant then has to pay IDR 10,000,000 for the area to be reserved.
3. Based on the mining area reserved, a CoW application is submitted to the Department. The area reserved is usually 250,000 hectares for general mining and 100,000 hectares for coal mining.
4. Before a CoW application is submitted to the Department, the applicant has to pay a refundable deposit of IDR 10,000 per hectare for the mining area reserved.
5. The following is required to be attached to the CoW application:
- The map of the mining area reserved provided by the Department;
- Copy of bank transfer/deposit slip for the payment of the IDR 10,000,000;
- Copies of the last three years of audited financial statements of the applicant or its parent company;
- Power of Attorney for the person who is making the application and who will represent the applicant company;
- Memorandum of Understanding if the applicant is more than one party; and
- If the applicant is an Indonesian company, a copy of the latest corporate tax return.
6. The Department will make an in principle decision as to whether the application is approved or not.
7. While waiting for the approval, the applicant may request a Preliminary Survey Permit (SIPP) from the Department. The permit is valid for one year and may be extended. If the applicant for the CoW is a foreign company, the holder of the SIPP is required to pay a refundable deposit of US$5.00 per hectare.
8. If the CoW application is approved, the Directorate General of Mines will establish a negotiation team to discuss the draft CoW with the applicant.
9. The agreed draft CoW is submitted by the Minister of Mines and Energy to the Parliament for consultation, and a copy is submitted to the Indonesian Investment Coordinating Board (BKPM).
10. The response from the Parliament is submitted by the Minister of Mines and Energy to the President.
11. BKPM also submits a recommendation to the President.
12. The President grants approval to the draft CoW, and authorizes the Minister of Mines and Energy to sign the CoW on behalf of the Indonesian Government.
13. The PMA company is incorporated to sign the CoW.
The PMA company will be required to register for tax and to obtain a tax registration number. The tax registration number is called NPWP (Nomor Pokok Wajib Pajak).
Tax registration must occur within one month of the company commencing its business activities. However, many companies register for tax soon after the completion of the deed of establishment.
For corporate tax purposes, the company should register for tax at the PMA tax office in Jakarta. The company is also obligated to register at the tax office located at the mine site, or at the tax office that covers the mine site area.
In addition to the tax registration, the company must also register with the Ministry of Trade.
BOOKKEEPING IN US DOLLARS
The Indonesian tax law allows certain companies, including mining companies engaged under the CoW framework, to maintain their books in US dollars subject to approval from the Director General of Tax.
Although the CoW itself allows the company to maintain its books in US dollars, most companies also apply for the approval from the Director General of Tax. Transactions dominated in currencies other than US dollars are converted to US dollars using the prevailing exchange rate at the date of the transaction.
The annual corporate income tax return must be prepared in Indonesian rupiah and the conversion of financial statements from US dollars into rupiah is based on an exchange rate stipulated by the Minister of Finance.
PRE-CONTRACT OF WORK EXPENSES
The shareholder of the CoW company will typically incur significant expenditures before the CoW company is incorporated and signs the CoW. These pre-incorporation expenditures may be transferred from the shareholder to the CoW company as deferred pre-operating costs, and may be claimed as deductions in the calculation of the CoW company’s corporate tax by way of amortization starting from the period in which production commences. These expenses must be audited by a public accountant and approved by the Department of Mines and Energy and the Directorate General of Tax.
There are a number of taxation issues to be addressed in relation to the transfer of pre-incorporation expenditures to the company, in particular VAT and withholding tax obligations. It is very important that any preincorporation expenditures are subject to proper and careful planning to ensure the maximum tax benefit can be obtained from the expenditures.