The government has issued provisions on the income tax treatment on transfers of participating interests in upstream oil and gas businesses. These provisions are outlined in Government Regulation No. 93 of 2021 concerning the Income Tax Treatment on Transfers of Participating Interests in Upstream Oil and Gas Businesses (Gov. Reg. 93/2021).

This regulation has been released to provide legal certainty for contractors by clarifying the provisions concerning income tax on transfers of participating interests. The new Gov. Reg. is also intended to support the restructuring of State-Owned Enterprises (SOEs) (Badan Usaha Milik Negara/BUMN). Broadly speaking, Gov. Reg. 93/2021 stipulates the form of ownership and transactions of participating interest transfers, exclusion from the imposition of income tax on transfers of participating interests, income tax rates, and the tax bases, as well as when transfers of participating interests become payable.

These provisions were regulated in Gov. Reg. 79/2010 as amended by Gov. Reg. 27/2017, and Gov. Reg. 53/2017, but not detailed. In addition, the former regulation has not accommodated provisions that support policies to increase company values through SOE restructuring.

Participating interests refer to the rights, interests, and obligations of contractors based on cooperation contracts (Kontrak Kerja Sama/KKS) in the oil and gas sector. Participating interests constitute a form of KKS between the government and contractors for the management of an oil and gas working area. Participating interests are included in the immovable property category that can be held directly and indirectly. Direct ownership refers to ownership due to the approval obtained by a contractor from the Minister of Energy and Mineral Resources.

Indirect ownership, on the other hand, refers to ownership through shares or direct equity participation in the contractor or the party that owns the contractor. Such participation interests can be transferred to another party through sale, transfer, supply, or disposal in other ways in whole or in part to share risks or other economic purposes.

The income from transfers of participating interests is considered as income for the contractor and subject to final tax with two types of rates. First, 5% of the gross amount for transfers of participating interests during the exploration. Second, 7% of the gross amount for transfers of participating interests during the exploitation.

The party required to withhold and/or pay and file income taxes on transfers of participating interests is the contractor. Further provisions will be regulated in a minister of finance regulation. The rates remain the same as those stipulated under Gov. Reg. 79/2010 as amended by Gov. Reg. 27/2017 and Gov. Reg. 53/2017.

However, not all transfers of participating interests are subject to final tax at these rates. Several transfers are excluded from the imposition of final tax if they meet stipulated conditions. First, income from transfers of directly held participating interests in the exploration. These provisions apply if they cumulatively meet the following four criteria:

i.	not transferring all of their Participating Interests;
ii.	participating interests have been held for more than three years;
iii.	investment has been made for exploration in the working area; and
iv.	transfers of participating interest are not profit-oriented.

Second, income during the exploitation from transfers of directly held participating interests to carry out obligations as per the KKS to national companies. Third, income from transfers of share ownership which constitute indirect transfers of participating interests.

Four types of income are excluded from the imposition of final tax for transfers of indirectly held participating interests:

i.	gains or losses from transfers of share ownership are calculated as per the provisions under Article 4 paragraph (1) subparagraph d and Article 6 paragraph (1) subparagraph d of Law No. 7 of 1983 concerning Income Taxes as amended by Law No. 11 of 2020 concerning Job Creation (Income Tax Law);
ii.	constituting taxable objects of final tax in Indonesia as per applicable regulations;
iii.	carried out in the context of restructuring and has obtained approval to use book value as per applicable provisions; and/or
iv.	carried out in the context of restructuring which is not intended to seek profit and does not change the contractor’s head office (ultimate parent entity).

To fulfill the four provisions above, contractors must notify data and/or information to the Directorate General of Taxes (DGT) no later than four months after the end of the taxable year of the transfer of share ownership. In the event that the DGT obtains different data and/or information from the data and/or information submitted by the contractors, the DGT may conduct an audit to test compliance with the fulfillment of tax obligations as per applicable regulations.

Further, there are two income tax bases on transfers of directly held participating interests. First, the actual amount received by the contractor including the amount of all reimbursements for a transfer of participating interests in whatever name and form.

Second, the amount that the contractor should otherwise receive in the event of an affiliation. In contrast, the income tax base on a transfer of indirectly held participating interests is the portion of shares transferred at the market price of ownership over the working area.

This regulation also stipulates when income tax becomes payable for a transfer of directly and indirectly held participating interests. Income tax on a transfer of participating interests becomes payable at the time of payment, the effective transfer of participating interests, or upon approval from the Minister of Energy and Mineral Resources for the transfer of participating interests. Income tax becomes payable on a transfer of indirectly held participating interests at the end of the taxable year of the transfer of share ownership.

With the enactment of Gov. Reg. 93/2021, Article 1 number 14, Article 27 paragraph (2), paragraph (2a), and paragraph (3) as well as Article 28 of Gov. Reg. 79/2010 as amended by Gov. Reg. 27/2017 are revoked and declared invalid. In addition, Article 1 number 16, Article 19 paragraph (3) and paragraph (4) and Article 20 under Gov. Reg. 53/2017 are revoked and declared invalid.

However, all implementing regulations of Gov. Reg. 79/2010 as amended by Gov. Reg. 27/2017 and Gov. Reg. 53/2017 are declared to remain valid insofar as they do not conflict with this regulation. This government regulation has come into force as of 31 August 2021.

Income Tax on Transfers of Participating Interests in Upstream Oil and Gas Activities