During the first quarter of 2014, raw ore output and exports
plummeted, mass worker layoffs were reported, and Foreign Direct
Investment rose only 9.8% on a year-on-year basis, to hit US$6.2
billion. This was far below the 25% increase recorded in the
previous quarter, and was attributed to a combination of the raw
ore export ban and jitters leading up to the Presidential elections
in July. The impact of the ban seems to be hitting home.
The general feeling in the mining community is that the export
ban and the onshore processing requirements were
"steamrolled" onto it. However, the Government is now
considering a change in approach, in which incentives will be
There are two prongs to the proposed new approach:
a relaxation in divestment obligations for smelting companies;
relief from raw ore export tax, which was a last-minute
"compromise" as the widely-criticised ban came into
In September 2013 (Further Restrictions on Foreign Investment in Indonesian
Mining), we reported that requirements for foreign
shareholders to divest shares in mining companies to Indonesian
interests had become stricter. Under the September rules, where a
foreign investor acquires shares in a mining company which is 100%
at exploration, the maximum foreign investment is 75%.
Previously, this was unregulated; and
at production, the maximum foreign investment is 49%, no matter
what stage the mine is at. Previously, divestment to 49% was
required only at the tenth year of commercial production.
The Ministry of Energy and Mineral Resources
(MEMR) recently circulated a draft regulation that
would change divestment requirements for smelter companies in
favour of foreign investors.
Under the draft:
a company with foreign investors which engages only in
processing and refining will not be subject to any divestment;
the foreign shareholders of a company which holds a mining
permit and is also engaged in processing and refining will now be
required to divest up to 40% of its shares to Indonesian interests
by the 15th year of commercial production. This compares to 51%
divestment for companies which do not have smelters, required
immediately if foreigners acquire shares in a 100% locally owned
company, and over ten years if the target company already has
Preferential tax treatment for smelter companies
The last-minute "compromise" to the January ban
provided that, among other measures, certain concentrates with
minimum purity of 15% may continue to be exported until 2017.
However, export taxes start at 20%, and escalate to a hefty 60% by
July 2016. The right to continue exports of raw ore was contingent
on a commitment to build a smelter, either alone or in cooperation
with another party.
The Government has now proposed also to provide tax relief to
smelter companies. Under the plan, the evidenced commitment of
companies to build smelters, and the level of progress of smelter
construction, would impact on the level of export tax payable on
raw ore exports. In other words, the more advanced the development
of the smelter, the less export tax would be payable. At this
stage, the formula for tax reductions has not been disclosed
– and it will ultimately need to be committed to
We emphasise that the above are only proposals at this stage,
and we will have to wait to see whether they are ultimately
regulated. However, it is encouraging to see a progressive
technique of the carrot as well as the stick being used when it
comes to mining regulations. We will monitor these proposals and
provide an update as matters develop.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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