VAT on import of goods for oil and gas industry borne by the government

The Minister of Finance on 28 December 2007 issued Regulation No. 178/PMK.011/2007, stipulating that the Government is Bearing the Value Added Tax on the Imports of Goods for the Commercial Upstream Exploration of Oil and Gas and Geothermal Energy (“Regulation 178”). The purpose of the regulation is to provide the industry with an incentive to increase the production.The VAT referred to by Regulation 178 is the VAT on the importation of the equipment/goods needed by entrepreneurs in the business field of oil and gas and geothermal energy, for their upstream exploration. The goods which importation qualifies for the incentive are: (i) equipment not yet produced domestically, and (ii) goods that are already produced domestically but the quality or quantity of the domestically produced goods is inadequate. On the other hand, the entrepreneurs who are qualified for the incentive are (i) those who are already in a cooperation contract with the government based on the provisions of Law No. 22 of 2001 regarding Oil and Gas, and (ii) those who are conducting geothermal exploration and have signed a contract with the government or have obtained a geothermal mining license after 31 December 1994.One important feature of Regulation 178 is the provision that the facility granted by the government is not eligible for reimbursement and cannot be entered as recoverable cost.Aside from Regulation 178, the Minister of Finance also issued two other regulations, No. 177 and 179, regarding import duties on oil and gas equipment.Regulation 178 was issued on 28 December 2007 and is effective for the period as from 1 January 2008 to 31 December 2008.