Long-awaited new mining law requires rapid government action

After three years of deliberations, the House of Representatives has finalized the draft of the new law on coal and mineral mining, and on Jan. 16, 2009, the new mining law, Law No. 4/2009 came into effect, substituting for the previous law No. 11/1967 on the main mining policies. Under the new law, the previous system of mining contracts - namely mining concessions (KP), contracts of work (KK), and coal contracts of work (PKP2B) - are to be replaced with a license. 

Rather than entering into an agreement with the government, all coal and mineral mining companies wishing to undertake mining activities in Indonesia must now request a mining business license called an IUP from the government. Previous restrictions on foreign ownership are eased under the IUP system. Previously, foreign ownership was allowed only if the concessions were in the form of KK or PKP2B (foreign entities could not hold KP concessions). 

Under the new law however, foreign parties are required to divest their interests within five years after the company begins production. Another positive thing about the IUP system is that the bureaucracy is now more streamlined. Mining companies now simply need to obtain two licenses - namely the IUP license for exploration and the IUP license for production - instead of five. 

It should be noted however, that the licenses are valid for a shorter period of time than the contracts under the old system. The new law is also intended to lead to improved management of Indonesia's reserves of non-renewable resources and to prevent them from being depleted too rapidly, as seen in the new stipulations regarding the maximum size of the mining area for coal and for each type of mineral mined (see the following table for the specific arrangements for coal and metal mining). 

In the same regard, the new law also covers matters pertaining to levels of production in addition to export quotas. 

This gives the government the power to manage the balance of production and the allocation for the domestic market, something which the previous law did not specify. 

By doing so, the government will further ensure - among other things - the required coal supplies for the state electricity company. Fairness is another objective the new law is trying to achieve. 

The stipulation on how the IUP license is granted provides an excellent example of this, as it will be awarded upon the result of a competitive tender process. 

This is a significant departure from the previous law when concessions were granted by the relevant issuing authority upon application. 

Since the IUP gives the holder the right to mine one type of mineral only, the discovery of other minerals will require the issue of a new IUP license, and this new license may be issued to other parties who wish to mine the minerals. 

Compared to the previous law which stipulated that the initial concession holder was given priority rights to other minerals in the same area. the new law shows more effort to promote fairness. Nevertheless, such a stipulation may create potential conflicts when implemented. If the minerals lie on the same land, how can two different companies conduct mining activities at the same site at the same time? It would be difficult - if not impossible - and also inefficient. 

Another issue concerning the new law is whether mining companies are prepared to invest more to build new processing and refinery facilities in Indonesia. According to the new law, IUP license holders will be obliged to undertake processing and refining activities in Indonesia. 

It takes a big investment to build such facilities and not all mining companies have the financial and management ability and most of all the willingness to do so. 

It is also not going to be easy to get existing contract holders (especially KK and PKP2B contract holders which are already in the exploration, feasibility study, construction, or operation/production stages) to comply with the new law. They may argue that the government has broken the earlier contract by making new requirements. 

In this case they may opt to file a lawsuit against the government with an international court. 

Some existing contract holders have voiced objections to the new law due to a lack of clarity and uncertainties regarding its implementation. 

Although complaints are normal when a new law is issued, the government should address them seriously and issue the accompanying implementation regulation as soon as possible. According to Law no. 4/2009, the implementation regulation should be available within one year after the law is introduced and effective. It will certainly be better if the government can issue the regulation much faster and provide the legal certainties that are demanded by investors. Otherwise investors may be discouraged from investing in this sector.

Source:Metty Fauziah Wardhani , Analyst | Thu, 02/19/2009 2:11 PM | Business 

Income tax incentives to be extended to more sectors

The government is considering including other business sectors, in addition to labor-intensive ones, in its plan to help cover the income tax of workers (usually paid by their companies) to help cope with the impact of the global economic crisis. 

Finance Ministry director general of taxation Darmin Nasution said Thursday the tax office might include other business sectors as being eligible for this concession - the elimination of income tax under article 21 in the income tax law - to help ease the burden on firms. 

"Along with the *ministry's* fiscal policy agency, we'll visit several departments to look at alternative sectors *to extend the tax incentive*," he said. 

Previously, the tax office hinted the incentives would only apply to labor-intensive business sectors. 

Besides choosing the business sectors, the tax office will determine the salary range that will be elgible for the tax incentive, he added. 

"We don't want a director with a Rp 30 million (US$2,500) salary to get the incentive," said Darmin. 

The tax office expects to issue a new regulation on the tax incentive within 10 days. 

The regulation will ease the burden of companies paying their workers' income tax amid the global economic slowdown. 

Unlike in many countries, most companies in Indonesia cover their workers' income tax payments. 

Whole or part reduction of workers' income tax costs may also make companies reconsider plans to cut their staff salaries as the incentive will reduce business costs. 

Some companies have stopped giving bonuses to their workers, and have halted pay rises, as revenue started dropping late last year. 

Sofjan Wanandi, the chairman of Indonesian Employers Association (Apindo), said businesses could not maintain their workforce if demand dropped markedly due to the global economic slowdown. 

"If we don't get any orders, how can we not lay off our workers?" 

He said that since January demand had dropped by between 15 percent and 20 percent on average for all business sectors - which the government should address. 

Sofjan urged the government and the House of Representatives to immediately wrap up the revision of the details of the 2009 state budget and start implementing the agreed economic stimulus package. 

The tax incentive is part of the government economic stimulus package to counter the impact of global economic slowdown. 

Last week, the tax office issued a regulation allowing eligible companies to get a reduction of up to 25 percent to their income tax for the January-June period. 

All these measures are part of the planned Rp 71.3 trillion (about US$6.31 billion) of economic stimulus provided by the government to keep the economy growing at not less than 4.5 percent growth. 

Businesses have warned that massive layoffs are inevitable, if companies are not given tax incentives to help ease their financial burden.

Source: Aditya Suharmoko , THE JAKARTA POST , JAKARTA | Fri, 02/20/2009 2:54 PM | Business 

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