Mining Fiscal Regimes To Support Downstream Mining Industries

1. Mining Fiscal Regimes To Support Downstream Mining Industries Goro EkantoDirector of Center for State Revenue Policy Fiscal Policy Agency Ministry of Finance The Peninsula Manila, Manila,5 Oktober 2016

2. Maps of Indonesia and Mineral Reserves • Indonesia is an archipelago state with more than 17.00 islands and shares land borders with Papua New Guinea, East Timor, and the eastern part of Malaysia and neighbors with Philippines. • Located on Ring of Fire, Indonesia is exposed vulnerably with natural disaster (earthquakes, eruptions, and tsunami) and also endowed with many natural resources such as oil and gas, coal, nickel, copper, tin, and other mineral. • Indonesia is known as one of the biggest producers and exporters for some minerals like coal, nickel, tin, ferro, and bauxite.

3. Government Revenue From Mining Sector • In general, Indonesia still relies on natural resources revenue (esp. oil and gas) which holds more than 20% of total revenue. • In addition to that, most of natural resources revenue derives from exporting raw product such as oil and gas, coal, and many mineral ores to industry countries like Japan and China. Along with rising commodity prices that is peaked in 2011, mining revenue is increased and GDP growth is still high. Mining revenue consists of royalty, income tax, value added tax, and export duty. • In 2012, Indonesia is implementing high export duty policy to restrain a very significant mineral ore export since government is going to implement mineral export ban in 2014 as Coal and Mineral Law’s mandate. This policy is effective to control massive mineral ore export which mining revenue drops from Rp 89,1 trillion to Rp 78, 6 trillion • In 2014 Indonesia is firm to implement mineral export ban policy. This policy causes mining revenue in 2014 drops 20% from 2011 even though in 2015 the government revenue rebounds. This increasing is caused by government intensification of non-compliance company. • The export duty policy in 2012, the export mineral ban policy in 2014 and the decreasing trend of commodities price and demand until today have led to the decline of government revenue. Also, it is impact on the decline of GDP Growth from 6,2% in 2010 to 4,79% in 2015. Export duty Mineral export ban

4. Grand Design Coal and Mineral Law To Enhance Value Added Mineral • Coal and Mineral Law mandates: • value added mineral production by Mineral ore export ban; and • to develop any kind of smelter establishment in order to produce mineral refined product (value added mineral) and to absorb domestic mineral ore; Fiscal Policy Mix to attract downstream mining investment: • Providing Fiscal Incentives for smelter: • Investment Allowance; and • import duty and value added tax exemption on imported goods • Setting up Fiscal Protective through export duty policy for some mineralthat is linked to the construction stage of those mineral smelter. • However, those exporters who do not build smelter is imposed very high export duty. • Preparing royalty tariff policy(on progress): • For companies that do not have smelter is imposed higher royalty tariffthan integrated mining companies • Royalty is not charged to smelter company that do not have mining area. Support Goal Developing Downstream Mining Industry • Existing Smelter: • Copper  1 unit • Nickel  2 units • Bauxite  none • Alumina  1 unit • Ferro  1 unit • Lead and Zinc  none

5. Mining : Existing Fiscal Incentives & Protection Fiscal Incentives • Investment Allowance(Govt Regulation9/2016) for building smelter of iron ore, iron sand, uranium, thorium, tin ore, black tin ore, bauxite, copper, nickel ore, manganese, zinc, and zircon  for downstream mineral mining. The facilities are: • Reduced net income tax for 30% of total investment (5% a year for 6 years). • Accelerated depreciation. • 10% or lower income tax ratebased on tax treaty, on dividend paid to non-resident tax payer. • Extention of Compensation for losses from 5 to 10 years. • Exemption of Value Added Tax for import of machinery and equipment, excluding spare part(Government Regulation No 31/2007) for both upstream and downstream mining activity • Exemption of Import Duty for machinery, goods, and materials for construction and development. (Ministry of Finance Regulation No 176/PMK.011/2009) Fiscal Incentives & Protection Fiscal Protection Export duty on concentrate of copper, iron, manganese, zinc, titanium, and lead (Ministry of Finance Regulation No 140/PMK.010/2016). This policy is correlated to the construction stage of those mineral smelter. For those exporters who do not build smelter, export duty tariff are varied between 25% -60%. On the contrary, for exporters who build smelters, the export duty tariff are varied between 0% - 7,5%.

6. Other Strategic Non Fiscal Policy Based on Coal And Mineral Law and Fiscal Policy After Coal and Mineral Law (Law No 4/2009) Before Coal and Mineral Law (Law No 4 /2009) Non Fiscal Non Fiscal • Mining activity approval is based on contract (There are 106 Contract of Work and Coal Contract of Work) • Mining activity approval is based on Mining License. • Government is honored the contract until the period is ended. • However, Coal and Mineral Law mandates that there is an adjustment on 6 issues which are mining area, contract extension form, smelter establishment obligation, divestment obligation, government revenue, and local content. Fiscal • Company obligation to pay taxes and non tax based on contract. (nailed down) • No incentives to establish refineries plant. Fiscal • For mining license, Company obligation to pay taxes and non taxes based on tax and non tax regulation.(prevailing laws) • Government is honored company obligation to pay taxes and non taxes based on contract until the period is ended. • There are fiscal incentives for company who establish the refinery plant. • Government is setting fiscal protection, which is export duty policy, to give export relaxation for some mineral that is linked with smelter progress. Renegotiating contract (from 2012)

7. Existing Mining Fiscal Regimes Based on Coal & Mining Law Renegotiation • Note: • Indonesia has 2 types of contract, which are Contract of Work for mineral and Coal Contract of Work. • Recently, more than 100 contracts are still valid. The renegotiation is started in 2012 and still progressing.

8. Mining : Royalty • In mining, Indonesia applies consession system where company has to pay royalty to central government. • Mineral royalty tariff in Indonesia varies and depends on the type of mineral products. There are 66 mineral commodities which tarriffs are imposed. For example: • For coal, tariff depends on the quality rank of coal and the mining method.

9. Mining: Fiscal Administration • Fiscal administration for royalty revenue, central revenue, and local revenueis different. • Royalty revenue is administered by central government through Directorate General of Mineral and Coal MEMR and the revenue will be distributed to province and local government in every 3 months. • Central revenues, which are income tax, value added tax and land and building tax on mining production, are administered by central government through Directorate General of Taxes MoF. The revenues from land and building tax on mining production are distributed to province and local government. • Central revenues, which are import and export duty are administered by central government through Directorate General of Customs and Excises MoF • Local revenues, which are land and building tax and groundwater tax, are administered local government.

10. Progress Downstream Mining Investment under Coal and Mineral Law Deadline Concentrate export relaxation The obligation of processing and refining Mineral Ore Export Ban Coal and Mineral Law stipulated Export duty policy stipulated Contract Renegotiation • Existing Smelter: • Copper  1 unit • Nickel  2 unit • Bauxite  none • Alumina  1 unit • Ferro  1 unit • Lead and Zinc  none

11. Thank You Kementerian Keuangan Republik Indonesia Jl. Dr. Wahidin Raya No. I Jakarta Pusat 10710 www.kemenkeu.go.id