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Impacts of the Job Creation Law on the Mining Sector

Impacts of the Job Creation Law on the Mining Sector

The Indonesian government and the House of Representatives (“ DPR ”) passed the Draft Omnibus Law (“ Job Creation Law ”) in early October 2020. This regulation was issued to increase employment in the midst of increasingly competitive global competition. As written at the opening of the Job Creation Law, the state needs to make various efforts to fulfill the rights of citizens to work and live a decent life for humanity through job creation. This Law reforms various aspects in order to facilitate investment, such as business licensing, employment and taxation especially in the mining sector. But, before the omnibus law was passed, the rule of law regarding the mining sector had undergone changes. DPR, together with the Indonesian Government, also approved the Bill on Amendments to Law No. 4 of 2009 concerning Mineral and Coal Mining, namely Law No. 3 of 2020 as of May 2020. These changes have an overall impact on the environment and activities of the Indonesian mining industry. It is important to recognize and understand each of the impacts and changes of the law in carrying out mining activities as the law has changed recently.

 

New Provisions on the Minerba Law

As the Minerba Law has been amended and the newest regulation has been passed, the Job Creation Law has changed, removed, or stipulated new regulations in several related articles in this regulation.

Downstream Coal

Through the Job creation Law, the government continues to give full attention to mineral and coal mining companies. The Job Creation Law regulates downstream coal issues. Article 39 states that there is 1 (one) article inserted between Articles 128 and 129 of the Minerba Law, namely Article 128A. It states that business actors who increase the added-value of coal can get royalty charges of up to 0%. This provision will be regulated further in government regulation. Citing a release published on the Ministry of Energy and Mineral Resources (“ Kementerian ESDM ”) website, it is revealed that seven coal downstream schemes are being developed by the government.

The seven coal downstream schemes are coal gasification, coke making, underground coal gasification, coal liquefaction, coal quality improvement, briquette manufacturing, and coal slurry/coal water mixture. These Seven downstream activities are held as an effort to support energy in Indonesia and the world. In an effort to accelerate the downstream process, the government has prepared fiscal and non-fiscal incentives to make downstream projects more economical. The non-fiscal incentive is in the form of business permits lasting for as long as the life of the mine. This means that mining business permits are no longer limited to 20 years. Meanwhile, the fiscal incentive is in the form of royalty exemption for coal that is used as raw material for downstreaming. It is believed that the 0% royalty will not reduce state revenue. This is because downstreaming can have multiple effects i.e. opening up jobs and driving the regional economy. With this multiplier effect, state revenues lost from zero percent royalty will be substituted. This new regulation is different from Government Regulation (Peraturan Pemerintah or “ PP ”) Number 81 of 2019 concerningsTypes and Tariffs on Types of Non-Tax State Revenues (“Penerimaan Negara Bukan Pajak” or “ PNBP ”) Applicable to the Ministry of Energy and Mineral Resources. It stipulates that the royalty rate for nickel ore, for instance, is 10% of the selling price per tonne. This is a two-fold increase from the previous rate of only 5%, as regulated in Government Regulation Number 9 of 2012.

On the other side, some bystanders see this article as benefiting coal mining players who carry out downstream activities because mining royalties are part of state revenue received from coal mining companies. Some of them are only included as regional revenue sharing funds (Dana Bagi Hasil or “ DBH ”). The DBH received by West Kalimantan province from this management is IDR 9 trillion in 2019; South Kalimantan Rp. 6 trillion; Papua IDR 3 trillion; and South Sumatra Rp. 2.5 trillion. If the incentive is in the form of imposition of 0 percent control, then the number of local governments that own coal mines will decrease drastically due to losses.

 

Sanctions for obstructing or disrupting mining activities

Related to amendments to Article 162 of the Mineral and Coal Mining Law, some observers judge that this provision has increasingly emphasized the criminalization of people who are deemed to refuse, obstruct or interfere with mining business activities that have licenses such as Mining Business License (Izin Usaha Pertambangan or “ IUP ”); Community Mining License (Izin Pertambangan Rakyat or “ IPR ”); Special Mining Business License (Izin Usaha Pertambangan Khusus or “ IUPK ”) and Authorization Letter for Rock Mining (Surat Izin Penambangan Batuan or “ SIPB ”). The sanction threat is in the form of a maximum imprisonment of 1 year or a maximum fine of Rp. 100 million.

 

Determination of Coal Commodities as Taxable Objects

Another notable provision in the Job Creation Law for the mining sector is the exclusion of coal mining products from the definition of natural resources products that are not subject to value-added tax (“ VAT ”) as mentioned in article 112 of the Job Creation Law amending Article 4A paragraph (2) of Law 42 of 2009 concerning VAT for goods and services and Sales Tax on Luxury Goods (“Pajak Penjualan atas Barang Mewah” or “ PPNBM ”). Consequently, coal mining companies should consider:

  • Registering as entrepreneurs that are subject to VAT;
  • Charging 10% VAT on their domestic sales;
  • reporting their export sales as subject to 0% VAT; and
  • claiming input VAT for their coal mining business.

It is obvious that the changes under the Omnibus Law immediately affect the tax provision under existing coal contracts of work (“ CCOW ”). However, the transitional provisions of the Job Creation Law do not specifically address how these changes will affect CCOW.

 

New provisions on the Migas Law

The Job Creation Law also changes a number of regulations related to oil and gas business activities that have been regulated in Law No.22 of 2001.

The Existence of Regulatory Agency in Oil and Gas Activities

In the downstream sector of oil and gas (oil and gas), Article 46 states that supervision of the implementation of supply and distribution of fuel oil (Bahan Bakar Minyak or “ BBM ”) and transportation of natural gas by pipeline is carried out by the regulatory agency currently known as the Downstream Oil and Gas Regulatory Agency (Badan Pengatur Hilir Minyak dan Gas Bumi or “ BPH MIGAS ”). In addition to regulating, the agency’s duties are also to determine the availability and distribution of fuel, national fuel reserves, utilization of fuel transportation and storage facilities, tariffs for transportation of natural gas through pipelines, prices for natural gas for households and small customers, and the operation of natural gas transmission and distribution.

 

Business license From The central Government

Amendments to the Oil and Gas Law in the Omnibus Law is stated in Article 5 by adding 1 new Paragraph (Point 1). The Job Creation Law emphasizes that oil and gas business activities are carried out based on a Business License from the Central Government. This licensing matter is an amendment from Article 5 of Law No.22 of 2001 concerning Oil and Gas (Migas). In the previous Oil and Gas Law, there was no clause on this matter. One of the petroleum associations ensured that the provisions of changing the oil and gas contract scheme to a business license in the Job Creation Law do not change the current practice. The Ministry of Energy and Mineral Resources stated that nothing has changed because a business license is the legality given to a business actor to start and run a business and/or its activities.

Meanwhile, the contract scheme adopted for upstream oil and gas is still based on cooperation contracts. In addition, there are no fundamental changes to the current oil and gas operational practices. the transition from a contract scheme to a business license also has no impact on the operating period of the oil and gas company in the oil and gas Working Area (Wilayah Kerja or “ WK ”). Article 6 paragraph (1) of the Oil and Gas Law stipulates that upstream business activities are carried out and controlled through a cooperation contract. One Member of the Legislation Body (Badan Legislasi or “ Baleg ”) said that the changes were intended to simplify the bureaucracy, which later on, this licensing process would also be integrated with online single submission (“ OSS ”) in order to simplify and facilitate the bureaucratic process.

 

ADCO Law earns the trust to represent clients from multinational companies to emerging entities across a wide range of industries to achieve their business objectives in Indonesia.

By combining commercial sensibilities and legal expertise, ADCO as a Law Firm Jakarta assists the clients to structure, organize and implement their business ventures and investments, including structuring, financing, and securing investments as well as establishing new foreign companies in Indonesia. Should you have more queries regarding this matter, please do not hesitate to contact us.

Dendi Adisuryo
dendi.adisuryo@adcolaw.com

Liza Mashita
liza@adcolaw.com

@2020 ADCO Law. All rights reserved.
This publication has been prepared for general informational purposes only to provide clients with information on recent legal developments and is not intended as legal advice or opinion.