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Indonesia Scraps Land Tax on Oil & Gas Exploration

Source: Reuters 1/16/2015, Location: Asia

Indonesia has scrapped a land tax that companies pay while exploring for oil and gas, a move that might encourage exploration at a time of concern that it could fall sharply due to tumbling oil prices. According to a ministerial decree posted on the Finance Ministry's website, the tax office is no longer assessing a 0.5 percent 'land and building tax' charged on the area in which companies are carrying out exploration activities, effective from Jan. 1.

Wahju Tumakaka, spokesman for the ministry's tax office, said the interpretation used for taxing exploration areas was wrong, thus the ministry amended the regulation. The tax 'is supposed to be applied for those using Indonesian land. In terms of the oil and gas sector, it should only be applied during production stage,' Tumakaka told Reuters. He said that in 2014, the land and building tax from oil and gas exploration and production work brought in about 18 trillion rupiah ($1.43 billion), or 1.2 percent of total government revenue. No breakdown of what percentage came from just oil exploration was available.

In December, the Indonesian Petroleum Association said that spending on oil and gas exploration and production in the country could fall by up to 20 percent this year. Indonesia, a former OPEC member, was self-sufficient in oil for decades, but is now a net importer. Output in the Southeast Asian nation has declined since a 1995 peak, and is projected to fall to 700,000 barrels a day (bpd) in 2019 from an estimated 849,000 bpd this year.

To attract more investment, the energy ministry has been asking for tax incentives for exploration for several years. An analyst who follows the oil industry said the tax change is 'quite important' and could encourage companies to invest more in exploration. Among oil companies, the tax was 'their number one gripe, it's the first thing they wanted to change,' he said, adding that it was positive that the government is listening to the industry and being 'more investor friendly'.

Oil and gas companies operating in Indonesia include Chevron Corp, Exxon Mobil Corp, ConocoPhillips, and state-owned Pertamina.

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