•  

Opinion: New Mining Royalty Payment Requirements

  • Hadiputranto, Hadinoto & Partners
  • www.hhp.co.id

By: Hadiputranto, Hadinoto & Partners (www.hhp.co.id)

Introduction

On 4 July 2013, the Indonesian Directorate General of Minerals and Coal ("Directorate General") issued Circular Letter No 04 E/DJB/2013 regarding Optimising of Non-Tax State Revenue ("Circular Letter 04/2013"). Amongst other things, the Circular Letter 04/2013 requires mining companies to pay royalties upfront before shipping or transporting mining commodities.

  • Mining companies need to ensure that they have sufficient funds to pay the royalties upfront as the royalty payments may be due before they receive any payment from offtakers; "
  • However, payment of the royalties will ensure that mining companies have good title to the minerals or coal which they can then transfer to offtakers; "
  • To ensure good title is received, offtakers should require evidence of payment of the royalties as one of the documents which are pre-requisites for payment; and "
  • Existing offtake agreements should be reviewed to ensure consistency with the new requirements"

Further information about the new requirements is set out in more detail below.

When does the mining company have to pay?

Deadrent

Circular Letter 04/2013 does not make any changes to the procedure for the payment of deadrent. Holders of IUPs are required to pay deadrent upfront within one month from the issuance of their IUPs, and the same procedure applies for the payment of deadrent for subsequent years (e.g. deadrent for the second year of the IUP must be made within one month of that second year).

The formula to calculate deadrent is as follows:

Area x Tariff

Royalties

Unlike the previous requirement to pay royalties within one month after shipment or transportation, Circular Letter 04/2013 requires the payment of royalties to be made before the mining commodity is shipped or transported, with adjustment for overpayment or underpayment of previous royalty amounts, presumably based on the actual weight determined when the cargo is loaded compared to the contracted amount upon which the royalty payment was initially calculated and paid prior to shipment or transportation.

On one side, this requirement will have an impact on the cashflow of mining companies, as they need to ensure that they have sufficient funds to pay the royalties upfront before they receive any payment from the offtakers. But on the other hand:

  • this requirement ensures that mining companies have already obtained good title over the mining commodities before transferring them to the offtakers, which is consistent with Article 92 of the Mining Law which provides that the holders of IUPs obtain title to the coal or minerals that they have produced only after the royalties have been paid; and"
  • for prepayment arrangements, a fiduciary security created over a stockpile will have a stronger legal basis because the mining company (as the fiduciary grantor) would have already received good title to the coal or ore in the stockpile at the time they provide the fiduciary security (provided they have already paid the royalties)."

For offtakers, it is prudent to require evidence of payment of royalties from mining companies as one of the documents which are pre-requisites for payment, to ensure that the mining companies have good title over the mining commodities before they purport to transfer that title to the offtaker. In addition, existing offtake agreements should be revisited to ensure that they are consistent with the new requirements.

The formula to calculate royalties is as follows:

Mining commodities sold x Tariff x Sales price

Sales Price

Circular Letter 04/2013 requires the sales price of mining commodities to be in accordance with the prevailing international market price and/or the benchmark price stipulated by the Government. Our view is that the sales price would be the "higher of" either the prevailing international market price or the benchmark price, which would be consistent with the benchmark pricing regulations.

Sanctions

Holders of IUPs that have been served with a warning are given a grace period of one month from the issuance of Circular Letter 04/2013 to pay any outstanding deadrent and/or royalties. They will be banned from shipping/transporting their mining commodities for failing to pay any outstanding deadrent or royalties. Harsher sanctions of imprisonment from one to six years and penalties of two to four times the outstanding amount of deadrent or royalties can be imposed on IUP holders who neglect or deliberately fail to comply with the payment requirements.

For further information, please contact:

Luke Devine
+62 21 515 4909
luke.devine@bakernet.com

Norman Bissett
+62 21 2960 8678
norman.bissett@bakernet.com

Muhammad Karnova
+62 21 2960 8699
muhammad.karnova@bakernet.com

Milan Radman
+65 6434 2641
milan.radman@bakermckenzie.com

Frans Sihasale
+65 6434 2617
frans.sihasale@bakermckenzie.com

Hadiputranto, Hadinoto & Partners
www.hhp.co.id
Baker & McKenzie.Wong & Leow
?www.bakermckenzie.com/Singapore

Posted by : N/A