CoW

COAL CONTRACTS OF WORK AND COAL CO-OPERATION AGREEMENTS

Foreign ownership in Indonesian coal mining was until recently conducted through CCAs. Since November 1997, coal mining has been brought more in line with general mining through the CoW structure. There have been two generations of CCAs and one generation of CCoW, which is typically referred to as the 3rd generation CCoW.

COAL CO-OPERATION AGREEMENTS

The key difference between the CCA and the CoW system is that under a CCA, the foreign mining company acted as a contractor to the Indonesian state-owned coal mining company, PT Tambang Batubara Bukit Asam (PTBA). Legislation has since been decreed and CCAs amended to transfer the rights and obligations of PTBA in respect of CCAs to the Indonesian Government represented by the Minister of Mines and Energy.

Under the CCA, the coal contractor is entitled to an 86.5% share of the coal produced from the area, and the contractor bears all costs of mine exploration, development and production. The Indonesian Government (previously PTBA) retains entitlement to the remaining 13.5% of production. However, in many cases, the coal contractor may be requested to sell all or part of this coal on behalf of the Government.

Equipment purchased by the coal contractor becomes the property of the Indonesian Government (previously PTBA), although the contractor has exclusive rights to use the assets and is entitled to claim depreciation.

Foreign shareholders under CCAs are required to offer shares to Indonesian nationals or companies so that, after ten years of operating, foreign ownership in the company is reduced to a maximum of 49%.

COAL CONTRACTS OF WORK

The terms and conditions under the current Coal Contract of Work (CCoW) are more in line with the 7th generation CoW.

Under the CCoW, the mining company is, in effect, entitled to 100 percent of the coal production, however, a royalty of 13.5% of sales revenue is paid to the Indonesian Government.

EARLIER COW GENERATIONS AND CCAS

Many earlier generation contracts, including CCAs, are based on the taxation and other laws and regulations in place at the time the agreements were signed. In many circumstances, this means that the regulations affecting mining companies operating under such contracts differ from current regulations, which often creates difficulties in interpreting the agreements as well as doing business with other companies. Potential investors in mining properties covered by earlier generation CoWs or CCAs should seek professional assistance to examine such issues.

Many earlier generation CoWs and CCAs also include divestment requirements for foreign shareholders.

SUPPLIERS TO THE MINING INDUSTRY

Service providers and suppliers to the mining industry are regulated by the general laws and regulations of Indonesia. However, many transactions with mining companies are also impacted by the terms of the CoW, CCoW, or CCA. For example, the mining contract specifies the types of services subject to withholding taxes and the applicable rates, which may differ from the general regulations.

Potential investors into mining services companies or suppliers considering establishing operations in Indonesia are referred to the PricewaterhouseCoopers Doing Business in Indonesia publication.

ACCOUNTING AND AUDIT

As stated earlier, mining companies are usually permitted to maintain their accounts and records in US dollars, subject to approval from the Director General of Tax.

Indonesia has a specialised accounting standard on accounting for the mining industry. The standard covers exploration, development and construction, production and environmental management. The accounting framework in Indonesia largely follows International Accounting Standards, with some exceptions. Accounting and financial reporting considerations of mining companies in Indonesia are set out in the PricewaterhouseCoopers publication Financial Reporting in the Mining Industry.

Mining companies are required to lodge annual audited financial statements. Other Indonesian companies are required to lodge annual audited financial statements with the Minister of Trade and Industry, if the company has total assets of at least IDR 50,000,000.

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