Indonesia to Relax Tax Burden on Mineral Exports

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The Indonesian government is finalizing a set of new regulations that will reduce the export tax on mineral concentrates for mining companies operating in the country. In order to avail the reduced export taxes, eligible mining companies must agree to build a smelter in the country. Additionally, the policy would also include tax incentives for the construction of smelters within the country. The new policy is designed to increase the economic activity of mining companies in Indonesia and boost the industry’s domestic economic value added.

The Indonesian government introduced a new tax structure for the export of minerals earlier this year, while also prohibiting the export of raw mineral ores. Under the current policy, which went into effect January 12, mineral concentrates may still be exported, but the export tax to do so will be gradual increased each year until 2017, when these exports will also be banned.

For example, the current export tax rate on Indonesian copper concentrates is 25 percent. This will be increased to 35 percent in 2015, and a full 60 percent by 2016.

These tax rate increases have hit the country’s mining sector hard, with Newmont Mining Corp, Freeport McMoRan Copper, and Gold Inc – which together make up 97 percent of the country’s market – halting their export operations under the new tax regime.

RELATED: Indonesia’s Ban on Raw Mineral Exports Takes Effect

Despite these concerns, the Indonesian government has explained that the new tax structure is designed to boost domestic activity by discouraging production for the sole purpose of export, but added that the new tax breaks on the export of goods for companies who invest in the country’s mining infrastructure should strike a good balance for those companies most impacted by the progressive export tax regime.

Under the proposed tax break policy, those companies that commit to investing in the construction of a domestic smelter will receive a preferential export tax rate of 10 percent on mineral concentrates. Additional benefits will be added, including an import duty exemption for materials used for construction of the smelters and an additional income tax allowance for those companies that utilize the plan, according to Deputy Minister of Finance Bambang Brodjonegoro.

Chris Devonshire-Ellis of Dezan Shira & Associates comments, “These moves – a typical carrot and stick approach – are designed to add more local value to Indonesia’s mining industry. Rather than just sell minerals straight out of the ground for value to be added in other countries, they are forcing foreign investors to properly commit to the country in investing in processing facilities. This is fair and countries such as Mongolia would do well to examine this example.”

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