New Tax Rules in Indonesia to Speed Up Freeport Indonesia Deal
After the much publicized signing by the Indonesian government and US mining giant Freeport McMoRan of the Heads of Agreement regarding the sale of a stake in Freeport Indonesia (the operator of the lucrative Grasberg mine in Papua) on 12 July 2018, we have not heard much about the deal that is valued at USD $3.85 billion.
However, since the Indonesian government issued new tax regulations - earlier this month - that aim at providing more fiscal certainty for those miners that convert their existing Contracts of Work (CoW) into special mining permits (IUPK), chances have increased of seeing a quick end to the Freeport Indonesia deal.
The deal that was clinched on 12 July 2018 was non-binding and therefore we feel that the Indonesian government actually "oversold" the Heads of Agreement to the public. We do believe, however, that both sides - the Indonesian government and Freeport McMoraRan - have come a long way since 2014 when Freeport Indonesia's copper concentrate exports ceased altogether for six months after the Indonesian government (partially) imposed a ban on exports of unprocessed minerals (part of the controversial 2009 mining law that introduced various protectionist measures in Indonesia's mining sector), culminating in the Heads of Agreement.
The light at the end of the tunnel is even becoming brighter with the latest tax regulations. Through Government Regulation No. 37/2018 on Tax Treatment and/or Non-Tax Government Revenue in the Mineral Mining Sector, the government sets a new corporate tax rate of 25 percent, while miners will also need to pay a 4 percent levy on net profit to the central government and a 6 percent levy to the local government. These rates, along with other obligations (including royalties and land taxes), will not change during the duration of the permit, hence providing certainty to miners.
Although some argue that state revenue will decline because the corporate income tax has been lowered to 25 percent for IUPKs (down from 35 percent under the CoW), it should be emphasized that the 4 percent and 6 percent levies on IUPK-holders' net income (to the central and regional governments) are new. Therefore, the central government will indeed see less revenue but the regional governments will earn more from mining activities.
Based on the Freeport Indonesia deal that was clinched on 12 July 2018, the Indonesian government will allow a 20 year extension for Freeport Indonesia to operate the Grasberg mine up to 2041, provided (1) state-owned mining company Inalum and the local Papua government obtain a 51 percent stake, (2) Freeport Indonesia invests in the construction of a new smelter, and (3) Freeport Indonesia converts its CoW into a IUPK.
Rendi A. Witular, Head of Corporate Communication at Inalum, said there is progress being made related to the Freeport Indonesia deal. However, there are also some challenges. For example administrative hurdles related to the establishment of a joint venture between Inalum and the local Papua government.
A detailed analysis of the Freeport Indonesia "deal" that was clinched on 12 July 2018 is available in the July 2018 edition of Indonesia Investments' research report.