Local Content Requirement in Indonesian Oil and Gas Industry

Local content (Tingkat Komponen Dalam Negeri/TDKN) under Indonesian laws means the assessment of local product component being used on goods, services and combination of goods and services. Therefore local content can be categorized as; (i) local content of goods, (ii) local content on services and (iii) local content combination. In relation to oil and gas industry, the relevant prevailing regulations are Local Content Decree No 15, BP Migas PTK 007 Revision II and SKK Migas Decree 066 as the latest revision for BP Migas PTK 007 Revision II. These regulations also includes offshore drilling contract services as part of exploration and exploitation on oil and gas industry which must be obliged by the parties involved.

Component considered as local content on goods includes the use of raw materials, construction and manufacturing, fabrication, assembling and final finishing on works originated from and conducted within the territory. Component considered as local content on services is the use of services of labor resources including experts until completion of project, expert tools, soft ware and supporting instruments originating from and conducted within the territory. Component considered as combination local content is the combination of the above contents originating from and conducted within the territory.

Local Content on Goods

The calculation on local content on goods is made based on comparison between the local cost of product against its the total value, in general the whole costs for production until costs of delivery to factory/workshop location. Therefore the costs includes direct material costs, direct labor costs, indirect factory overhead costs, excluding profit, company overhead costs and value added tax in regards to transfer of goods. The calculation itself for each product of goods is using the method in which the total cost (direct material costs, direct labor costs, and factory overhead) minus the foreign component costs on each aspect divided with total costs, resulting in the percentage of local content on goods. Also must be taken into consideration is that the local and foreign content of each aspect must also be known and calculated.

Local Content on Services

The calculation on local content on services is made based on comparison between the local services cost against the total services cost, in general the whole costs for services until costs on site. Therefore the costs includes used material costs, labor and consultant costs, tools/facilities costs and common services costs, excluding profit, company overhead costs and value added tax. The calculation itself for each product of goods is using the method in which the total cost (used material costs, labor and consultant costs, tools/facilities costs and common services costs) minus the foreign component costs on each aspect divided with total costs, resulting in the percentage of local content on services. Also must be taken into consideration is that the local and foreign content of each aspect must also be known and calculated.

For calculation purposes, Local Content Regulation also specifies that for tools/working facilities costs, the local content must be evaluated as follows:

a. Tools produced within Indonesia by Local Company or Indonesian nationality is valued at 100% local content;
b. Tools produced within Indonesia by National Company is valued at 75% local content;
c. Tools produced within Indonesia by Foreign Company or foreign nationality is valued at 50% local content;
d. Tools produced outside Indonesia by Local Company or Indonesian nationality is valued at 75% local content;
e. Tools produced outside Indonesia by National Company is valued at 50% local content;
f. Tools produced outside Indonesia by Foreign Company or foreign nationality is valued at 0% local content.

Local Content on Goods and Services

The calculation on combination of local content on goods and services is made combining the calculation of goods and services up to the point of on site.

Local Content Regulation sets out the target objective of local content percentage for commodities used on oil and gas industry for the next 10 years as seen below:

Local-Content-Requirement-in-Indonesian-Oil-and-Gas-Industry-07-2014-1
Taxation on Local Content

Value added tax is excluded to be categorized as local content. Such restriction is the consequence of sale and purchase transaction and its related transport costs including packaging, insurance and handling, profit, also other costs which are not direct component on production of goods or services. Apart from value added tax, the other duties/taxation imposed are import tax (should the product is imported from outside Indonesia) and/or income tax for labor and/or consultant and/or expert for services content.

Author:

Daniel Alfredo
Partner – d.alfredo@legisperitus.co.id

 



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