Indonesia: Omnibus Law - Impacts on Mining Sector

In brief

On 5 October, the Indonesian parliament approved the job creation law (RUU Cipta Kerja or "Omnibus Law"), with the primary objective of creating more jobs by improving the ease of doing business.

Mining is one of the business sectors that will be affected by the enactment of the Omnibus Law.  In relation to mining, the Omnibus Law introduces certain policy changes with respect to:

  1. Incentives for coal value-added activities
  2. Assurance of protection with regard to land settlement
  3. Changes to the requirements relating to forestry area utilization
  4. Determination of coal commodity as a taxable object
  5. Integration of licenses related to mining
  6. Relaxation of requirements to hire foreign construction workers 

Actions to consider 

Given the recently enacted amendments to the Mining Law, we did not expect the Omnibus Law to make significant changes in this area. However, the clarification of the position with regard to royalty on coal sales for downstream activities, and the ability of coal companies to register for VAT, is beneficial; so too is the greater centralization of licensing authorities (which again was foreshadowed in the Mining Law). The changes to the forestry regime, while potentially controversial, may lead to some welcome easing of restrictions around the issuance of forestry permits, which may have a significant impact on mining operations around Indonesia. Clearly, much of the devil is in the details, and accordingly it will be necessary to monitor the relevant implementing regulations - not only in relation to the Omnibus Law, but also in relation to the Mining Law.  In light of this, mining companies should:

  • if they are coal mining companies - register for VAT and identify opportunities for downstream value added related activities
  • continue to monitor implementing regulations that impact their mining business activities
  • review their licenses to identify which ones may need to be reissued by the central government and to identify what changes may need to be made in respect of their environmental permits
  • evaluate to what extent the law may enable them to resolve any pending forestry issues (having regard, among other things, to investor issues)

What's new on mining?

The Omnibus Law only includes two changes to Law No. 4 of 2009 on Mineral and Coal Mining ("Mining Law"), following the issuance of Law No. 3 of 2020 this June. However, there are a number of other changes stipulated in the Omnibus Law in relation to other sectors such as forestry and environment that may impact mining activities, as further discussed in our Omnibus Law - Impacts on Environment and Forestry Client Alert.

1. Incentives for Coal Value Added Activities

Given the softening outlook for thermal coal demand, the government is seeking to encourage coal companies to further develop downstream coal activities to optimize the economic benefits of onshore processing.

Under the Omnibus Law, business actors that carry out coal value-added activities may be given a fiscal incentive in the form of 0% royalty.  Based on the Mining Law, coal value-added activities can be implemented through coal upgrading, coal briquetting, coking (pembuatan kokas), coal liquefaction, coal gasification, and/or coal slurry/coal water mixture. It remains to be seen whether this benefit will only apply to integrated coal mining companies, or whether sales between affiliated downstream companies, or even sales to third party downstream companies, will also be able to benefit from this exemption.

The removal of royalty for downstream coal sales raises a question about the treatment of downstream mineral/metal refining activities. The position here, unfortunately, continues to be ambiguous.

2. Determination of Coal Commodity as a Taxable Object

Another notable provision in the Omnibus Law for the mining sector is the exclusion of coal mining products from the definition of natural resources products that are not subject to value added-tax ("VAT"). As a consequence, coal mining companies should consider:

  1. registering as entrepreneurs that are subject to VAT 
  2. charging 10% VAT on their domestic sales
  3. reporting their export sales as subject to 0% VAT
  4. claiming input VAT for their coal mining business

It remains to be seen whether the changes under the Omnibus Law will immediately affect the tax provisions under existing coal contracts of work ("CCOW"), as the transitional provisions of the Omnibus Law do not specifically address how these changes will affect CCOWs. Unless further regulated through implementing regulations, we would expect these changes to be subject to the relevant provisions in the CCOW.

3. Integration of Licenses Related to Mining

The Omnibus Law shifts a substantial portion of the local governments' licensing authority to the central government. While clearly this may be a welcome development for many investors, we expect this to be one of the challenges of the Omnibus Law going forward. In relation to this, although the local governments can still issue regional government approvals (for instance, in the environment sector, e.g., environmental feasibility approval (AMDAL approval) or B3 waste management permit), it will be subject to the standards, procedures and criteria determined by the central government.

Additionally, and presumably as an expansion of the one-stop shop concept being introduced through the Online Single Submission ("OSS") system, the Omnibus Law is seeking to introduce a new integrated single business licensing scheme/perizinan berusaha. As a result, environmental permits will be integrated into a single business license (this is detailed more fully in our client alert). Mining companies will presumably need to adjust their current licenses to comply with this new scheme. While this should be a relatively straightforward, administrative process, as we have experienced with the OSS scheme, we anticipate that there may be 'teething' problems initially, as companies seek to get their licenses re-registered.

4. Assurance of Protection with Regard to Land Settlement

The Omnibus Law restates the provisions of the Mining Law in relation to the sanctions applicable to anyone who obstructs or interferes with the mining business activities of mining business license (IUP), special mining business license (IUPK), people mining license (IPR) and rock mining business license ("SIPB") holders, in the form of imprisonment of up to one year and monetary fines of up to IDR 100 million.  In order for such sanctions to apply, the mining license holders must have completed the land settlement process with landowners in accordance with the prevailing laws.

These provisions do not add anything material to what is already included in the Mining Law.  However, the Omnibus Law expands these provisions to benefit holders of SIPB as well.

General Impacts

1. Changes to the Requirements Relating to Forestry Area Utilization

Article 18 of the Forestry Law previously required the total forest area within each river basin (daerah aliran sungai) and/or island to be maintained at 30% of the total land area. This was to minimize disturbance to the water system, and to prevent floods, erosion, sedimentation and water shortages.

This requirement has been removed by the Omnibus Law. The central government is authorized to determine the extent of the forest area to be maintained (including designating areas for national strategic projects) in accordance with the physical and geographical conditions of the river basin and the islands. The total forest area to be maintained will be further stipulated under a government regulation.

In addition, the Omnibus Law provides that the use of a forest area will be done through a borrow-use (pinjam pakai) arrangement (not specifically a permit) with the central government, and that changes to the designation of forest areas and functions that have a significant impact, wide scope and strategic value will no longer require the prior approval of parliament. Please refer to our Omnibus Law - Impacts on Environment and Forestry Client Alert.

2. Relaxation of Requirements to Hire Foreign Construction Workers

Law No. 2 of 2017 on Construction Services ("2017 Construction Law") sets out a number of requirements and limitations for foreign construction workers. They must (i) have certification from their country of origin; (ii) be registered at the Ministry of Public Works and Housing; (iii) undertake knowledge transfer; and (iv) take up only certain limited positions. Failure to comply with any of these requirements may subject the foreign workers to administrative sanctions.

These restrictions have been completely removed from the 2017 Construction Law. It is clear from the wording of the Omnibus Law that the use of foreign construction workers will be allowed, for example, to build processing or refining facilities. Please refer to our Indonesia: Omnibus Law on Job Creation (Undang-undang Cipta Kerja) Approved by Parliament - Employment Cluster Client Alert for further details on the impacts of the Omnibus Law on manpower related issues.

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This Client Alert was prepared based on a draft of the Omnibus Law that we received from different sources. We have not been able to obtain confirmation that the draft we received is the final text of the Omnibus Law. Even though the House of Representatives passed the Omnibus Law on 5 October, the government has not issued the official final text of the Omnibus Law. We assume the draft that we have received materially reflects the final version of the Omnibus Law, but we are waiting for the government to issue the final ratified Omnibus Law. Therefore, this Client Alert is subject to change and will be updated accordingly.

This client alert was issued by HHP Law Firm (Hadiputranto, Hadinoto & Partners), a member firm of Baker McKenzie International, a global law firm with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a "partner" means a person who is a partner or equivalent in such a law firm. Similarly, reference to an "office" means an office of any such law firm. This may qualify as "Attorney Advertising" requiring notice in some jurisdictions. Prior results do not guarantee a similar outcome."

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