Deciding Disputes on Tax Clauses in Oil and Gas Production Sharing Contracts (PSC), Is Arbitration Authorized?

Nov 8, 2022 | Litigation & Dispute Resolution

Upstream oil and gas (“Migas”) business activities will not be separated from exploration and exploitation activities carried out by the government through state-owned enterprises in collaboration with contractors and other related parties. To ensure the implementation of upstream oil and gas exploration and exploitation activities, the parties will conclude a contract known as a production sharing contract (“PSC”). If examined from various PSC variations, there are several main characteristics of PSC that can be seen, namely, management is in the hands of the state-by-state companies (managed by state), operating cost recovery (operating cost recovery), production split (production split), taxes (tax clauses), and ownership of assets is in the state (state-owned the assets).

Of course, in its implementation, it is not uncommon for problems between the state and contractors to cause disputes. One of them that has the potential to trigger a dispute, namely regarding the tax provisions or tax clauses in the PSC that has escaped attention is the mechanism for resolving the dispute over the tax clause in the PSC. Generally, in Indonesia, the contractors in the development of upstream oil and gas businesses are foreign investors, so if there is a dispute regarding the clauses in the PSC, they will choose an arbitration forum as an alternative dispute resolution, including resolving disputes over tax clauses.

The question is, is arbitration authorized to decide PSC disputes related to tax clauses according to Indonesian law? Considering the tax provisions partly include the realm of private law and partly include the realm of public law and the parties to the dispute, one of which is the state which is a public legal entity. For that, here’s a brief explanation!

Production Sharing Contract for Upstream Oil and Gas Business

PSC is an example of a contract that is not recognized by the Civil Code or is said to be an innominate contract. Howard R. William and Charles J. Meyers explained what is meant by PSC as follows:

“A contract for development of mineral resources under which the contractor’s costs are recoverable each year out of the production but there is a maximum amount of production which can be applied to this cost recovery in any year. In many such contractors, the maximum is 40%. This share of oil produced is referred to as “cost oil”. The balance of the oil (initially 60%) is regarded as “profit oil” and is divided in the net profit royalty ratio-for instance, 55% to the government. After the contactor has recovered its investment, the amount of the “cost oil” ill drop to cover operating expenses only and profit oil increases by a corresponding amount”

Based on this understanding, in Indonesia applying the concept of the PSC system in upstream oil and gas business activities is to use a Gross Split Production Sharing Contract. With a gross split profit sharing contract, the base split is 57 percent for the state and 43 percent for oil contractors, while 52 percent for natural gas is shared with the state and 48 percent for contractors. This percentage of profit sharing will certainly have implications for the tax provisions contained in the PSC as a tax clause. Generally, under PSCs, contractors are not subject to a surface tax as is usually the case in concessions. This is in accordance with the principle that the larger the share of the state, the lower the income tax imposed on contractors.

So, the choice is whether the share of the state is enlarged by reducing the distribution of other fiscal obligations or conversely, the share of the state is reduced by increasing the distribution of other fiscal obligations. Not infrequently these provisions change in accordance with government policies that occur due to political interests or national needs. So that the contractor becomes the aggrieved party for the change in policy which indirectly has implications for the implementation of the PSC, especially in the tax clause.

Arbitration Authority to Dispute PSC

In Law No. 22 of 2001 concerning Oil and Gas (“Oil and Gas Law”) and PP No. 35 of 2004 concerning Upstream Oil and Gas Business Activities (“PP Hulu Migas”), there is no article that regulates dispute resolution in the event of a dispute between BP Migas in this case SKK Migas and a business entity and/or permanent establishment on the substance of the PSC. including the tax clause.

In practice, the dispute resolution clause in the PSC that was made between PT. Pertamina and several contractors are included in Section XI PSC on Consultation and Arbitration. In Section XI.2., the PSC stipulates that dispute resolution may be carried out amicably, if the reconciliation effort is still unable to resolve the dispute between the parties, the implementing agency and contractor can resolve it through arbitration.

This means that all clauses contained in the PSC, if they cause a dispute, can be resolved through an arbitration forum, including a tax clause. Apart from many parties who are still debating the scope of taxation, including the realm of private or public law, as long as it is contained in a commercial contract, it is subject to the realm of private law.

The arbitration authority to decide on tax clause disputes refers to the agreement of the parties when in the agreement contains an arbitration clause, then the arbitration has the authority to decide the dispute. This is because the arbitration clause in an agreement gives absolute authority to the arbitration institution to resolve disputes arising from the implementation of the agreement based on the provisions of Article 3 jo. Article 11 Alternative Dispute Resolution Law.

Therefore, it can be said that arbitration has the authority to decide PSC disputes related to tax clauses according to Indonesian law based on Article 3 jo. Article 11 of the Alternative Dispute Resolution Law as long as there is an arbitration clause in the PSC as a dispute resolution forum agreed by the parties because the substance of the PSC is a private law domain.

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