Indonesia’s Geothermal Business Legal Framework
by Pudji W. Purbo (Partner), Fanny Kurniawan (Associate), and Prita Nazarudin (Associate).
Published: July, 2010 - Indonesia
Submission: July, 2010
The Legal Framework
In terms of legal framework, Indonesia’s current private sector development of the geothermal energy business is divided into three separate legal regimes. The first regime started in 1981 under Presidential Decree No. 22 of 1981 amended by Presidential Decree No. 45 of 1991 (“PD 22/1981”) which still continues to apply as it is grandfathered by the later enacted Law No. 27 of 2003 on Geothermal Energy (“Law 27/2003”). The second regime was under Presidential Decree No. 76 of 2000 (“PD 76/2000”) which was issued at the time Indonesia was still in the midst of recovery from the Asian economic and monetary crisis in 1997-1999. The third regime started when Law 27/2003 was enacted.
For the purpose of describing the geothermal business legal framework, we outline the legal regimes that exist at present as follows:
1. Pre-Law 27/2003 regime
Pre-Law 27/2003 regime is dominated by geothermal energy business development undertaken according to PD 22/1981. Under PD 76/2000 we noted that there were no significant work areas or business licenses granted or any development activities undertaken.
Under these two regimes, geothermal business was monopolized and conducted solely by Pertamina, the Indonesian state oil and gas company established pursuant to Law No. 8 of 1971 (which has now been transformed into PT Pertamina (Persero)), by way of a joint operation with geothermal contractors and based on a ‘Kuasa Pengusahaan’ which was an authority granted to Pertamina under PD 22/1981 to explore, exploit and develop geothermal resources in Indonesia under Pertamina’s monopoly.
The underlying business concept of this regime was that Pertamina, as the holder of the ‘Kuasa Pengusahaan’, was granted a number of geothermal work areas by the Government of Indonesia (“GOI”) to be developed and exploited through either its own operation or a joint operation.
This regime does not require the establishment of an Indonesian company or a foreign investment company as it adopts a similar concept to that of the oil and gas sector in that a permanent establishment [i.e. foreign established entity] can perform its activities in Indonesia.
Role and Authority of the Regional Governments
2. Law 27/2003 regime
Law 27/2003 sets out a new and different business structure from the pre-Law 27/2003 regime as it no longer recognizes the monopoly of the geothermal business by Pertamina and the joint operation concept. It introduces a structure where the geothermal business is undertaken by way of a tender for a certain work area and a business license. All business entities may participate in bidding for a work area and the winner of the work area may obtain a business license. However, one business entity can only hold one work area. If a business entity already holds a work area and wishes to obtain other work areas, it must set up a separate legal entity for each further work area.
2.1 Geothermal Upstream Business Activities
There are six phases of geothermal business activities under the Law 27/2003 regime:
Indirect utilization means for power generation purposes under the Electricity Law and regulations.
Direct utilization of geothermal steam is for non-electric power needs (e.g. food drying and hot spring facilities). It is to be further regulated under a Government Regulation. To date no government regulation on the direct utilization of geothermal energy has been issued.
It is important to note that the area offered in a tender is usually on as is where is basis, which often becomes an issue that impedes the development of the project. It is important for interested bidder to make a thorough assessment and take into account other aspects related to the area, for example land clearance if there are people inhabiting the area, forestry license if the area is in forest area and overlapping areas with mining concessions, etc.
2.2 Geothermal Downstream Business Activities
Geothermal downstream business activities concern the utilization of geothermal energy for specific purposes. Law 27/2003 provides that geothermal energy can be utilized directly and indirectly. However, to date a regulation regarding the direct utilization of geothermal energy for specific purposes has yet to be issued.
power for the public’s interest. The electric power generated is to be sold to PLN or the holders of an integrated IUPTL; or
(b) Electric Power Operating License (IO) - the electric power generated is for
the license holder’s own use, commonly referred to as a license for a captive power project.
Tax and Fiscal Incentives
Since the advent of the geothermal era in Indonesia in the 1980s, there have been five significant changes to the related tax and fiscal regime. The first three changes were brought about under PD 22/1981, PD 76/2000 and Law 27/2003; and the latest two changes result from the prevailing laws and regulations on tax.
The development of tax and fiscal incentives in the geothermal industry in Indonesia can be divided into two major classes: pre-Law 27/2003 and post-Law 27/2003.
1. Pre-Law 27/2003;
1.1 Presidential Decree No. 23 of 1981 in conjunction with Decree of the Minister of
Finance (“MOF”) No. 746/KMK.012/1981 (as amended) 22 December 1981 - 12 July 1992
Contractors were obliged to pay (i) corporate income tax of 40% on the contractors’ net income and (ii) another 10% tax for interest, dividends, and royalties, calculated on the contractor’s net income after the deduction of corporate income tax.
Amortization of certain fixed assets and other costs before production was 10 -12.5% per annum, except for generators and electric power transmission equipment which remains to be further stipulated by the MOF.
The Investment allowance provided by the Government was 20% of all costs borne by the contractor to develop geothermal facilities. Compensation for losses over the first five years after production could be deducted from taxable income for the following year.
1.2 Presidential Decree No. 49 of 1991 in conjunction with Decree of the MOF No.
766/KMK.04/1992 (as amended) 13 July 1992 – 31 December 2000
In this era, the Government was entitled to 34% of the contractor’s net income. This government portion was treated as payment of the contractors’ income tax. In its recent development, effective as of 1 January 2008, under Decree of the MOF No. 165/PMK.03/2008, part of the income tax owed by geothermal contractors was charged to the Government.
1.3. The third amendment to the Indonesian Income Tax Law (Law No. 17 of 2000) in
conjunction with GR 76/2000 1 January 2001 – 21 October 2003
Under GR No. 76 of 2000, tax and fiscal treatments applicable to the geothermal industry were to be determined by the prevailing Indonesian laws and regulations on tax, i.e. income tax, VAT, import duties and other levies. Under the then Indonesian tax law, income tax applicable to corporations was 30% of net income. The Government also provided a maximum investment allowance of 30%. However, we understand that no exploration activities have taken place since the promulgation of GR 76/2000.
2. Law 27/2003;
2.1 The fourth amendment to the Indonesian Income Tax Law (Law No. 36 of 2008) in
conjunction with Government Regulation No. 62 of 2008 (“GR 62/2008”) on Amendments to Government Regulation No. 1 of 2007 on Income Tax Facilities for Capital Investment in Certain Business Sectors and/or Certain Regions 22 October 2003 – 27 January 2010
During this era, the new geothermal law was enacted and changed the mining authorization to a Geothermal Business License (IUP). This law is in line with GR No. 76 of 2000 under which tax and fiscal treatments applicable to the geothermal industry are to be determined by the prevailing Indonesian laws and regulations on tax.
Some tax facilities were borne by the Government. Under MOF Regulation No. 242/PMK.011/2008, the Government bore VAT on imports of geothermal equipment for the 2009 fiscal year.
Also available to contractors was expedited depreciation and amortization for certain classes of tangible fixed assets.
With the intention of reducing dependence on and preserving non-renewable resources, i.e. fossil fuels, the Government is again creating tax and fiscal incentives to attract investors and to promote Indonesian renewable resources, i.e. through geothermal exploitation by promulgating Decree of the MOF No. 21/PMK.011/2010 on Tax and Fiscal Incentives for the Exploitation of Renewable Energy.
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