Under the Mining Law, the conduct of mineral exploration, development and production in Indonesia is regulated by:

1. The Kuasa Pertambangan (KP);
2. The Contract of Work (CoW); and
3. The Coal Contract of Work (CCoW), previously Coal Co-operation Agreement (CCA).

The KP can be owned only by Indonesian nationals or Indonesian owned companies. Foreigners are not permitted to hold KP’s. A separate KP must be granted for each of the five stages of operation: general survey; exploration; exploitation (mining); processing and refining; and, transport and sale.

A CoW can be entered into only by an Indonesian company that is at least partly owned by foreigners. The CoW covers virtually all minerals except coal and petroleum, and addresses all stages of operation.

A CCoW can be entered into by an Indonesian company that is at least partly foreign owned, or by an Indonesian wholly owned company. The CCoW applies exclusively to coal operations.

CoWs and CCoWs are not available in respect of the island of Java, however KPs can be issued for Java.

Petroleum exploration and production in Indonesia is subject to a separate regulatory regime, which is explained in PricewaterhouseCoopers’ booklet Oil and Gas in Indonesia: Investment and Taxation Guide.

CONTRACT OF WORK

The CoW system for regulating mining operations has played a key role in the success of Indonesia’s contemporary mining industry. The CoW system, which was introduced in 1967, has been gradually refined and modernized over the past thirty years to reflect changing conditions in Indonesia and abroad. Soon, the Government will release the 8th generation of CoW for application to mining operations other than coal. The 3rd generation CCoW is in use by the country’s coal industry.

The comments in this book relate specifically to the 7th generation CoW. A number of the CoW provisions have changed over the various generations.

In essence, a CoW is a comprehensive contract between the Government of Indonesia and an Indonesian company. The company can be 100 percent foreign owned. However, if the company is 100 percent foreign owned, it may be subject to Indonesia’s divestment requirements at a later time. As a practical matter, most CoWs have some level of Indonesian ownership.

The CoW sets out the company’s rights and obligations with respect to all phases of a mining operation, including exploration, preproduction development, production, and mine closure. A CoW applies to a specifically defined geographic area (the “Contract Area”). Generally speaking, a CoW is a practical document that is relatively easy to understand.

Some of the important considerations that are covered by a CoW include: expenditure obligations; import and export facilities; marketing; fiscal obligations; reporting requirements; records, inspection, and work program; employment and training of Indonesian nationals; environmental management and protection; regional cooperation in regard to infrastructure; and local business development. It is a tribute to the Government and to the industry that these important matters can be appropriately addressed in a concise legal contract.

The CoW covers all tax, royalty, and other fiscal charges, including: dead rent in the Contract Area; production royalties; income tax payable by the company; employees’ personal income tax; withholding taxes on dividends, interest, rents, royalties, and similar payments; value added tax (VAT); stamp duty; import duty; and land and buildings tax. This booklet comments on most of these government charges.

TAXATION

An important general principle of Indonesian law is that the CoW and CCoW have the status of lex specialis – that is, the contract terms override the general law. For example, the income tax rules that are set out in the CoW take precedence over the Law on Income Tax. Generally speaking, the tax rules in the CoW and the CCoW reflect the general tax rules that are in effect at the time that the contract is signed, although there are some exceptions. Importantly, the typical CoW or CCoW fixes the tax rules for the duration of the contract, again with some exceptions. The downside to this is that the company may not always be able to take advantage of favourable changes in the general law.

A taxpayer that conducts mining operations under a KP is subject to the Indonesian tax rules of general application – that is, the KP regulatory regime does not specify distinct tax rules.

Although Indonesia’s investment approval and mining tax regimes are relatively straight forward, care must be taken in structuring an investment in the mining industry. The reasons for this include:

• A company can be party to only one CoW. The “one company, one COW” rule, together with the fact that there is no group relief for income tax purposes, requires careful planning;
• The Government relies heavily on withholding taxes and VAT as sources of tax revenues. The rules governing these taxes are quite specific, and require special attention in order to avoid overpayment and penalties for underpayment;
• While the Government’s attitude towards foreign investment is generally positive, approved company incorporation documents and investment approvals tend to be very specific as to the nature of the business that a company and its employees can undertake. Sometimes, it is necessary to set up more than one company; and
• Indonesia has signed tax treaties with a wide range of countries. These treaties offer a number of opportunities for planning inbound investment structures. At the same time, the Indonesian Tax Office is diligent in enforcing its right to tax foreign companies that carry on business in Indonesia.

Professional advice should be obtained at an early stage of the investment process.

OUTLOOK

During the 1990’s, the process of political change in many parts of the globe has opened up more than two-thirds of the earth’s land mass to mineral investment. Both developed and developing countries recognize the net benefits of hosting a prosperous mining industry, and are actively competing to attract mineral investment. While geological prospectivity, the existence of infrastructure, the availability of an educated work force, political stability, and a conducive regulatory regime are important factors in the investment decision-making process, it is also important that a country’s tax regime be internationally competitive.

A competitive mining tax regime will take into account the unique characteristics of the mining industry. Although there is always room for improvement, the CoW system does a very good job in recognizing these unique features of the industry. Perhaps most importantly, the thirty year track record of the CoW system, and Indonesia’s consistently positive attitude towards investment in the mining industry, allow Indonesia to offer something very important that few other countries can offer – namely, regulatory stability. The investor in Indonesia’s mining industry can have a relatively high degree of confidence that the “rules of the game” will not be substantively altered part way through the life of a project.

In 1998, Indonesia’s Department of Mines and Energy announced a programme to reform the mining and energy sector, and released an Agenda for Reform.

The sector reforms are intended to improve business efficiency and productivity in the bureaucracy. The Department will review the various rules and regulations that impede development, simplify permit requirements, accelerate administrative procedures, and identify and eliminate corruption, collusion, and nepotism practices in the Department.

The Agenda for Reform, which was released in May 1998, lists a wide range of steps to be taken, including: to release data and information that is more than five years old into the public domain; to review Government Regulation No. 20/1994, which allows 100 percent foreign ownership; to allocate additional revenues for regional sharing; to develop small-scale mining businesses; and to regulate the channels for obtaining data from the CoW in order for it to be utilized by new investors.

Reform of any kind brings with it some added degree of uncertainty. However, Indonesia’s thirty-year track record of continuous improvement in regulating and encouraging mining investment bodes well for the future of the industry in this country.