Compared with other sources of energy, oil and gas continue to become primary sources of energy in Indonesia with the highest level of consumption. Apart from propping up almost one third of national revenue, oil and gas also significantly contribute to create job opportunities, supply the need of fuel, petrochemical industry which in turn effectively enhances investment and economy. As a natural resource contained within the bowel of the earth, the constitution of the Republic of Indonesia asserts that the ownership and enterpreneurship of national oil and gas industry is controlled by the state and immensely benefitted to the welfare of people accordingly (constitution 1945, article 33). Furthermore, it is asserted through the law 22/2001 on oil and gas that the control by the state is administered by the government as the holder of mining right. It means, the government is entitled with authority to administer the exploration and exploitation of oil and gas throughout Indonesian territory.

1. Revenue and Fiscal
System of Oil and Gas
in Indonesia
By. Maryati Abdullah

2. PWYP Indonesia2 -
Revenue and Fiscal System of Oil and Gas in Indonesia
By. Maryati Abdullah1
Compared with other sources of energy, oil and gas continue to become primary sources of energy in Indonesia
with the highest level of consumption. Apart from propping up almost one third of national revenue, oil and gas also
significantly contribute to create job opportunities, supply the need of fuel, petrochemical industry which in turn
effectively enhances investment and economy.
As a natural resource contained within the bowel of the earth, the constitution of the Republic of Indonesia asserts
that the ownership and enterpreneurship of national oil and gas industry is controlled by the state and immensely
benefitted to the welfare of people accordingly (constitution 1945, article 33). Furthermore, it is asserted through the law
22/2001 on oil and gas that the control by the state is administered by the government as the holder of mining right. It
means, the government is entitled with authority to administer the exploration and exploitation of oil and gas throughout
Indonesian territory.
The oil and gas business activity is divided into two subsectors, namely upstream business activity and downstream
business activity. Upstream business activity rests on exploration and exploitation, whereas downstream business
activity rests on processing, transporting, storing, and trading. Upstream business activity is administered by a Business
Entity (Badan Usaha/BU)2
or a Permanent Business Entity (Badan Usaha Tetap/BUT)3
which are controlled and supervised
by Government through Cooperation Contract (KKS), which mostly are use Production Sharing Contract (PSC) model. In
this case, the Business Entity (BU) /Permanent Business Entity (BUT) act as a contractor.
This essay will explicate the fiscal system of oil and gas revenue, particularly the ones obtained from oil and gas
upstream industry (the ones related to exploration4
and exploitation5
) in Indonesia. The fiscal system will be exemplified
in the form of revenue in accordance with fiscal term contract, state financial management system as well as description
of the profit sharing mechanism at the subnational level.
Production Sharing Contract and Its Fiscal System
The contract of oil and gas entrepreneurship around the world is generally distinguished by two different systems
that is royalty system/tax system (concession) and contract system. The contract system is divided into service contract
and production sharing contract (Partowidagdo, 2009. P.73). Under the former system, the contractor does not bear
the risk, whereas under the latter system, the contractor bears the risk over the success of the project. Under contract
system, the expenditures incurred by the contractor will not be reimbursed if the exploration and exploitation fail to
produce the expected oil and gas.
So far, Indonesia has been embracing Production Sharing Contract (PSC) system. This concept was initially raised
in 1960’s in Venezuela by Ibnu Sutowo. At that time, the substance of the contract offered by Ibnu Sutowo contained;
management control was held by state-owned enterprises; the contract was based on profit sharing; the contractor bore
the pre-production risk and oil cost recovery was limited to maximum of 40% per year from the total oil production, if
such case was found. The remaining 60% of the total production would be allocated with the following composition –
65% for state-owned enterprises and the rest for contractors. Right to the properties bought by the contractors would be
transferred to the state-owned enterprises once those properties entered Indonesian territory, and the costs would be
covered by cost recovery formula (Salim, 2008, P.312).
The main reason for the Government of Indonesia to embrace the PSC system (rather than royalty/tax system) is
because the ownership as well as the entrepreneurship rights remain in the hands of the state corresponding to article
33 of the Constitution of the Republic of Indonesia, where the transfer of hydrocarbon ownership is done at the point of
export (not on the wellhead); the ownership of business facilities/assets are transferred to government; and the profit
on the financial accountancy is recorded as oil profile and not as taxable income in the same manner as in royalty/tax
system. This is different from royalty/tax system, where government gives rights to investors/contractors to explore,
produce, operate and sell oil and the government receives royalty and income tax in return. Under PSC system, the
operational control remains at the government’s hands, while under tax/royalty systems the operational control is fully
possessed by contractors/investors.
PSC system in Indonesia was officially implemented since 1964, regulated through Law 14/1960 on Oil and Natural
Gas Mining Jo Law 8/1971 on Pertamina (State Oil and Natural Gas Mining Company). The PSC model implemented in
Indonesia has undergone several changes which generally can be divided into four generations. The PSC principles of
each generation are described by Salim (2008) in the following table 1.
1
National Coordinator, Publish What You Pay Indonesia
2
Business Entity (BU) is incorporated company that runs permanent and constant business activities, and is established in accordance with the prevailing
constitution and is operating and domiciled in the Indonesian territory (article 1 No. 17, Law No. 22/2001 on Oil and Gas)
3
Permanent Business Entity (BUT) is a business entity that is established and is incorporated outside the territory of the Republic of Indonesia, doing activi-
ties in the territory of the Republic of Indonesia and shall comply with the prevailing laws and regulations of the Republic of Indonesia (article 1 No 18,
Law No.22/2001 on Oil and Gas).
4
Exploration is an activity that aims to obtain information about the geological conditions; to find and to obtain estimation of oil and gas reserves; and to
determine the place of work area.
5
Exploitation is a series of activities that aim to produce oil and gas; to determine the place of work area that consists of drilling and completion of wells,
construction and means of transportation, storage and processing, separation and purification of oil and gas in the field as well as other supporting
activities.

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Table 1. The comparison of inter-generation PSC in Indonesia (Salim, 2008)
PSC Generation Main Principles
Generation I
(1964-1977)
1. Operational management was controlled by Pertamina; the contractors provided
the entire oil operational costs.
2. The contractors would regain entire costs recovery with the provisions of a
maximum of 40% each year.
3. Of the 60%, it was divided into 65% for Petamina and the remaining 35% is for
contractors.
4. Pertamina paid the contractors’ income tax to government.
5. Contractors must fulfil the domestic need of fuel oil proportionally (maximum of
25% share) with the price of US$ 0.20/barrel.
6. All properties and facilities purchased by the contractors became Pertamina’s
asset
7. The interested contractors were offered to state-owned enterprises after declared
as commercial
8. Since 1974 to 1977, the contractors had to give additional payment to
government (as there was world oil price hike)
Generation II
(1978-1987)
1. There was no limit for cost recovery taken into account by contractors. This is
because of the application of GAAP (Generally Accepted Accounting Procedure)
2. After deduced by expenses, the profit sharing for oil became; 65.91 % for
Pertamina; 34.09 % for contractors. Whereas for natural gas; 31. 80 % for
Pertamina; 68.20 % for contractors.
3. Contractors paid 65% tax directly to government. It because in 1976, the
government of the U.S. issued IRS ruling which, among others, determined that
the 60% deposit of Net Operating Income of PSC was considered to be royalty, so
the contractors were advised to pay taxes directly to the government.
4. Contractors got incentive after the first five year of production, i.e. full export
price of Domestic Market Obligation (DMO) of oil
5. 20% development incentive from the capital spent for production facility.
Generation III
(1988-2002)
1. Contractors paid 48% taxes. The provisions of the new tax rate had been issued
by the government since 1984, however, the new rules could only be applied to
the contract that was signed in 1988, because in the negotiation, the contractors
still inclined to use the old tax rules.
2. The provision for profit sharing was: 71.15% oil for Pertamina; 28.85% oil
for contractors. Whereas for natural gas, 42.31% for Pertamina; 57.69% for
contractors.
Generation IV
(2002-sekarang)
1. The contracting parties are Organizing Board (BPMIGAS) with a Business Entity
(BU) or a Permanent Business Entity (BUT)
2. Profit sharing provision: 85% oil for the Organizing Board and 15% for contractors
(BU/BUT). For natural gas, 70% for the Organizing Board and 30% for contractors
(BU/BUT)
3. Contractors pay income tax with amount of 48%.
4. Contractors must fulfil Domestic Market Obligation (DMO) amounting to 25%
from contractors’ share.
5. There is provision for participating interest amounting to 10% for local
government.
Reference: HS Salim, 2008.
The PSC is signed up by contractors with government as the embodiment of the state as the holder of mining rights.
The PSC contract period is of maximum of 30 years and can be extended twice for 10 years. The 30 year contract period
includes exploration phase (maximum of 6 + 4 years) and exploitation period (20 years). Maximum of 6 months after the
signing of the PSC, the mining operations must be started. If within a maximum of 6 + 4 year exploration period have
not produced oil, then the contract will automatically end.
After the signing of PSC, contractors are required to make the field development plan or POD (Plan of Development)
I which must be approved by the Ministry of Energy and Mineral Resources. This POD I at least contains the drilling plan,
central processing facility/CPF development plan, production target, estimated price and economic value, investment/
financing plan and so on, including capital investment plan by Local Governments. The POD I can be renewed by POD
II and so forth. Every year, contractors are also required to make Annual Work Program and Budget (WP&B), as the
derivation of POD. Quarterly, the authorization of contractors’ expenditure, i.e. AFE (Acquisition for Expenditure) must
get approval from government.
Formerly, the board which represents the Government in signing the contract as well as in supervising and controlling
the upstream business is called BPMIGAS (Organizing Board for Oil and Gas). As per November 13 2012, the role of
BPMIGAS which serves as the Organizing Board responsible for guidance and control of upstream activities is returned to
the Government through the Ministry of Energy and Mineral Resources (ESDM). It is based on the decision of Constitutional
Court (No 36/PUU- X/2012) which asserts that the existence of BPMIGAS that was established on the basis of Oil and Gas
Law (No 22/2001) does not correspond to the Constitution of the Republic of Indonesia. Through the Presidential Decree
No. 95/2012 and so established the Provisional Task Force for Upstream Oil and Gas Business Activities (SKMIGAS), this
then renewed by SKKMIGAS (Special Task Force for Upstream Oil and Gas Business Activities) through Presidential Decree
No. 9/2013.

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Revenue Flow & Calculation
State revenue is defined as funds deposited to state treasury. Thus, revenue flow in this case is defined as the flow of
money to the state treasury that is obtained from Oil and Gas upstream business activities, which begun from the signing
of the PSC, oil profit sharing, recording of the non-tax revenue, tax payment, until the profit sharing to producing regions
where oil and gas fields operate.
The revenues generated from oil and gas upstream sector consists of Non-Tax State Revenues (PNPB) and tax revenue
in the form of oil and gas income tax (Pph Migas). Non-Tax State Revenues (PNPB) are net proceeds from the government’s
entitlement of oil/gas after deduced by upstream oil and gas fees, taxes and provincial levies (PDRD) as well as other
elements such as deduction over / under lifting. Before the attainment of government entitlement, oil production at the
Custody Transfer Point is first calculated by subtracting elements in the form of FTP (First Trance Petroleum) at certain
PSC, cost recovery and investment credit. It is this Non-tax State Revenue (PNPB) which then will be profit-shared to
regions with certain percentage. On the other hand, oil and gas income tax (Pph Migas) is formed over individual income
tax as well as corporate dividend/branch profit tax. The flows, types, calculation mechanisms as well as the collecting
agencies from upstream oil and gas revenues are described in table 3.
Table 3. Types and flows of oil and gas revenues
Stages of Revenue Flow and Calculation Method
1 The Signature Bonus
1.1 Paid after the signing of the PSC and only once within the contract period
1.2 Calculated in accordance with the agreement between the Contractors and the Government
1.3 Recorded as other non-tax revenues in the state budget, remitted to the Ministry of Energy and Mineral Resources (ESDM)
2 The Profit Sharing of FTP (First Trance Petroleum) - In kind
2.1
Set aside 20% of gross production, then divided between the Government-Contractor corresponding to percentages of
equity split listed in the PSC.
2.2 At certain PSC, there is profit sharing which is only paid to the Government by 10% of the gross production
2.3 Applies to certain PSC having FTP scheme6
.
2.4 Including the types of non-tax state revenues (PNPB) that are profit-shared to the Local Government
3 Government Entitlement/Government Take
3.1
Government Entitlement = Government equity split x Equity to be Split (ETBS)
ETBS = Gross Production (GP) - Cost Recovery (CR) - Investment Credit (IC)
3.2
Oil sales of the government’s share is remitted to the Provisional Oil and Gas Account of the Ministry of Finance (No.
600.000411980 at the Central Bank of Indonesia)
3.3 Including the types of gross non-tax state revenues, before deduced by of the subtracting components
3.4 This kind revenue is recorded by SKKMIGAS and the Ministry of Finance (Directorate of PNPB)
4 Non-Tax State Revenue (PNBP)
4.1
PNBP Net = Government Take - taxes and provincial levies (PDRD) – upstream oil and gas fees – taxes (value added taxes,
property taxes, duties) – production bonus – over/under lifting
4.2 PDRD levied by the local government and paid back by the Ministry of Finance to the Contractor
4.3 Upstream Oil and Gas Fees are used for operational need of SKKMIGAS
4.4
Taxes in the form of value added taxes (PPN), property taxes (PBB) as well as duties are paid back by government to
contractor
4.5 Production bonus is calculated in accordance with the achievement of production targets
4.6
Over / Under Lifting is part of each party which becomes the adjustment factor (subtracter or enumerator) in the PNPB.
Applies in the FQR that determines the calculation of the government as well as contractors’ split
4.7 This revenue is calculated and recorded by the Ministry of Finance (Directorate General of Budget)
4.8
It is recorded as oil and gas non-tax state revenue (PNPB) in the State Budget, located in the Bank Account of PNPB Oil
and Gas KUN Valas (No. 502.411980 at the Central Bank of Indonesia)
5 Oil and Gas Profit Sharing Funds (DBH Migas)
5.1 DBH Migas is transferred to Local Government Treasury (Regency/Province)
5.2
Divided from net of non-tax state revenue by certain percentage for the producing regions, other regencies within the
same province and also for provincial government.
5.3 It is recorded as Oil and Natural Gas Resources Profit Sharing Funds in the State Budget
6 Fee of DMO (Domestic Market Obligation)
6.1 Contractors are required to sell 25% of their entitlement to the needs of the domestic market
6.2
Proceeds from Sales of DMO Crude Oil deduced by DMO fees paid to contractors are other Non-Tax State Revenues remit-
ted to State Treasury
6.3 DMO Fee is calculated at 10% of market price. DMO fee is paid by Government to Contractor
6
There is also a type of PSC with no FTP provisions, and also a type of FTP which is only paid to the Government by 10% of the Gross Production.

5. PWYP Indonesia - 5
6.4
To trigger the production of oil and gas, the Government sometimes give incentives to the contractor in the form of DMO
Holiday, that is, during the first 5 years of its production, the Government will pay the DMO fee in line with the market
price
7 Oil and Gas Income Tax (Pph Migas)
7.1 Oil and Gas Income tax = Income tax of employees + Income tax of Company (Divident/Branch Profit Tax)
7.2
Calculated at 48% of the Contractor’s entitlement (FTP + Contractor entitlement) after deduced by DMO, recorded by the
Ministry of Finance (Directorate General of PNPB)
7.3 It is recorded as Oil and Gas Income Tax in the State Budget
Source : Formulated from various source.
In general, the flow of oil and gas revenues adopts the standard model of PSC with the final profit sharing 85:15, as
described by the following chart:
Revenue Sharing to Subnational
As a consequence of the financial decentralization policy, then the revenue from natural resources is calculated as
revenue which is profit-shared to Local Government in the form of Natural Resources Profit Sharing Funds (DBH SDA).
The percentage and mechanism of DBH SDA are regulated by Law No. 55/2005 on Financial Balance. The principle of
DBH SDA is shared on the basis of the origin or location of the producing region and is calculated by revenue realization
of Oil and Gas production in certain fiscal year. The portion of DBH SDA according to the producing areas is described
in following Table 4.
Table 4. Composition of DBH SDA at Subnational Level in Indonesia
Source: Self-Prepared from Governmental Ordinance (PP) No. 55/2005.
Note: * = for primary education purpose
Though the profit sharing fund to regions is calculated and divided by principle of origin and realization, but in this
case, the provision of financial balance applies. Whereas, other areas that do not have natural resources including oil and
gas or those that do not belong to the producing regions also get a share from the oil and gas production, that is 6%
(oil) which is shared equally to all other districts within the same province as the producing region. As for the gas, the
allotment is 12% with provision of the same allotment as oil. Indeed, other non-producing districts or provinces should
also indirectly enjoy the outcome of oil and gas production, i.e. through other fund balances in the form of General

6. PWYP Indonesia6 -
Allocation Funds (DAU) as well as Special Allocation Funds (DAK).
The calculation and stipulation mechanism of profit sharing funds is authorized to the Ministry of Finance, especially
to Directorate General of Financial Balance. The Ministry of Finance (Directorate General of Financial Balance) along with
Technical Ministries (the Ministry of Energy and Mineral Resources and the Ministry of Home Affairs) stipulate Ministerial
Decree (Permen) every year on the producing regions and also estimation for oil and gas DBH SDA for every region
(Regency/City/Province/Special Autonomous Region) in one fiscal year. Every quarterly, reconciliation forum between
the central government and local governments is held twice. The twice-held reconciliation forum consists of production
reconciliation and state revenue reconciliation. The achievement result of oil and gas production is presented in the forum,
as well as the result of state revenue. The complaint that local governments often do not have the data for comparison
in the reconciliation is still frequently encountered, this is due to limited access to production data and revenue of the
company or of the central government. Apart from attended by the central government and local governments, the
reconciliation forum is also frequently attended by companies upon request and as needed.
Oil and gas DBH SDA is transferred to the bank account of Local Government treasury every quarterly based on the
estimation and realization data of oil and gas production. In the first and the second quarterly, 20% of prognosis of oil
and gas DBH SDA is transferred, then in the third and the fourth quarterly, the prognosis is calculated in accordance with
the realization of oil and gas production from each producing region. After the DBH is remitted to Local Government
treasury, it is calculated as provincial revenue along with other types of revenue in the Provincial Budget mechanism. The
usage and expenditure mechanism of DBH oil and gas follows the rules and mechanisms that apply in each region. In
some regency, there are some special provisions in the form of special regional policy regulating the usage/expenditure
from the sector of oil and gas revenue, for example in Nangroe Aceh Darusalam province, and also in Bojonegoro
Regency East Java. In fact, there has been special policy in Bojonegoro which regulates the distribution of oil and gas
revenue up to village level.
Reporting & Auditing Mechanism
The mechanism for reporting and auditing of oil and gas revenues would be done by both contractor and Government.
Every quarterly, the contractor creates financial report to SKKMIGAS (Special Task Force for Upstream Oil and Gas Business
Activities) in the form of FQR (Financial Quarterly Report) which includes the report of the realization of production volume
as well as oil and gas earnings (lifting), amount of FTP, cost recovery, and also the profit sharing between Government
and Contractor along with DMO. The illustration of FQR is described in the following table 4.
Table 4. Illustration of Financial Quarterly Report (FQR) of PSC Oil and Gas
Description US $
GROSS REVENUE/LIFTING
LESS : FTP (20%)
420,000
84,000
GROSS REVENUE/LIFTING AFTER FTP 336,000
COST RECOVERY :
- Cost Recovery
- Investment Credit
240,000
6.000
TOTAL COST RECOVERY 246,000
EQUITY TO BE SPLIT 90,000
SKKMIGAS SHARE :
- SKKMIGAS’ Share on FTP
- SKKMIGAS’ Share on Equity
- Lifting Price Variance
- Government Tax Entitlement
55,380
59,340
26,949
14,268
ADD : DMO 35,760
LESS : Domestic Market Adjustment -22,908
TOTAL SKKMIGAS SHARE 168,789
CONTRACTOR SHARE
- Contractor’s Share on FTP
- Contractor’s Share on Equity
- Lifting Price Variance
28,620
30,660
-26,949
LESS : DMO -35,760
ADD: DOMESTIC MARKET ADJUSTMENT 22,908
LESS : GOVERNMENT TAX ENTITLEMENT -14,268
ADD : TOTAL RECOVERABLES 246,000
TOTAL CONTRACTOR SHARE 251,211
Source: Price Waterhouse and Coopers, Oil and Gas in Indonesia-Investment and Taxation Guide, 2010.
Financial report of oil and gas revenues is audited by SKKMIGAS and BPKP ( Government Audit Board) and sometimes
by BPK (Audit Board of the Republic of Indonesia) which is an independent audit body mandated by constitution. In recent
years the Indonesian Tax Office (ITO) has however, re-asserted its general Income Tax Law right to audit. ITO audits in
the upstream sector have been occurring since 2003 with WHT and VAT liabilities being their main area of focus. Several

7. PWYP Indonesia - 7
ITO assessment arising from these audits have already been issued.
If PSC Contractor engages an independent auditor for the purpose of its worldwide audit, these costs are generally
recoverable if all participants of the PSC are perceived to have received a benefit from the audit, but recovery of audit fees
have been disallowed if the audit only benefits the operator (Price Waterhouse Coopers, 2010).
EITI Report
Indonesia has been the EITI (Extractive Industries Transparency Initiative) implementing country since 2010 based on
Presidential Decree No. 23/2010 on state and provincial revenue transparency from the sectors of oil and gas and mining
extractive industries. Where oil and gas (Migas) is one of the commodities of extractive industry that is required to report
its various flow of revenues paid by the company to the state, which then reconciled with the revenue report conveyed by
Government. This EITI is implemented through a multi-stakeholder decision-making, consisting of Government elements,
extractive companies and of civil society organizations.
In the first phase of EITI Indonesia report, i.e. in the 2009 fiscal year, as many as 28 oil and gas companies (total of 57
operators/production units/KKS contractors) are required to report their oil and gas payment flows to EITI Indonesia. A
total of 88 partners of the operator are also required to submit a report to the EITI, primarily for the payment of corporate
and dividend tax. The stipulation of the number of companies is based on the materiality limits of state revenues that are
deposited by each unit of production, i.e. at least USD 5.000.000 per year. The report then reconciled with reconciliation
materiality limit of USD 500.000 or 5.000 barrel. The coverage of revenue flow types is delivered in the first phase of the
EITI report, which can be seen through the following table 6.
Table 6. Revenue flow types reported in the first phase of the EITI report.
References:
Salim, HS. 2008. Hukum Pertambangan di Indonesia. Jakarta: Radjawali Pers
Yusgiantoro, Purnomo. 2000. Ekonomi Energi : Teori dan Praktik. Jakarta: Pustaka LP3ES
Abdullah, Maryati & Cahyani, Ambarsari Dwi. (2010). Memahami Aliran Pendapatan untuk Transparansi Migas. Jakarta:
PATTIRO
Karyadi, Jimmy. (2011). Revenue Accounting in Indonesian PSC and Other Fiscal System. Jakarta: Experiental and
Professional Training
Mulyani, Sri. (2010). Seminar Nasional Migas ICW: Transparansi Penerimaan Migas. Jakarta: Kementerian Keuangan.
Partowidagdo, Widjajono. (2009). Migas dan Energi di Indonesia: Permasalahan dan Analisis Kebijakan. Bandung:
Development Studies Foundation
Risyana, Cecilia. (2010). FGD Scoping Study EITI: Perhitungan DBH SDA Migas. Jakarta: Kementerian Keuangan.

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