Finance & Projects Jakarta Singapore Client Alert June 2012 Contacts: Luke Devine +62 21 515 4909 luke.devine@bakernet.com Norman Bissett +62 21 515 5350 norman.bissett@bakernet.com Milan Radman +65 6434 2641 milan.radman@bakermckenzie.com Muhammad Karnova +62 21 515 4869 muhammad.karnova@bakernet.com Andika Sefatia Mendrofa +62 21 515 4839 andika.s.mendrofa@bakernet.com Hadiputranto, Hadinoto & Partners* The Indonesia Stock Exchange Building Tower II, 21st Floor Sudirman Central Business District Jl. Jendral Sudirman Kav. 52-53 Jakarta 12190 Indonesia Baker & McKenzie.Wong & Leow* 8 Marina Boulevard #05-01 Marina Bay Financial Centre Tower 1 Singapore 018981 * Hadiputranto, Hadinoto & Partners and Baker & McKenzie.Wong & Leow are member firms of Baker & McKenzie International Export of Mineral Ores While Indonesia has had a long-held policy of trying to encourage domestic processing and refining of its mineral resources, the Government has now chosen to try to turn that policy into reality. The regulatory changes in relation to mineral processing have been so swift that the best way to understand them is to look at them chronologically: - on 6 February 2012, the Minister of Energy and Mineral Resources issued Ministerial Regulation 7 of 2012 ( MR7/2012 ) which contained a ban on export of raw ore from 6 May 2012; - on 4 May 2012, the Government then took a step backwards from an outright ban and announced that three new regulations would be issued (each discussed below); - (the first of the three regulations) on 7 May 2012, the Minister of Trade issued Ministerial Regulation 29/M-DAG/PER/5/2012 ("MR29/2012"). The effect of MR29/2012 is that: - export of mineral products (non-processed minerals and rocks, but not coal) can only be carried out by entities recognised as "Registered Mining Product Exporters" (Eksportir Terdaftar Produk Pertambangan or "ET-Mining Products") that have obtained an approval for exporting mining products ("Export Approval"); - to apply to become an ET-Mining Products and to obtain an Export Approval, an IUP holder must, amongst other things (discussed further below), obtain recommendations from the Directorate General of Minerals and Coal; - (the second of the three regulations) on 11 May 2012, the Director General of Minerals and Coal issued Regulation 574.K/30/DJB/2012 ( DG574.K/2012 ) which sets out the terms and conditions for obtaining the recommendation mentioned above. It is a condition of the application process for the recommendation that (amongst other things) a "Clean and Clear Certificate" be provided in relation to the IUP; - where minerals producers are not able to meet the upgrading requirements in MR7/2012, they can consult with the Directorate General of Minerals and Coal and submit a plan as to how they plan to meet the requirements in the future. After this consultation has been done, they are able to apply to be the ET-Mining Products for a period through to 12 January 2014 (more details about this are given below); - (the third of the three regulations) to complete the set of three regulations, on 16 May 2012 the Minister of Finance issued Ministerial Regulation 75/PMK.011/2012 ("MR75/2012") in relation to the
determination of goods subject to export duties, which introduced a 20% customs tariff on the export of raw mineral ores (not coal); - on 16 May 2012, an amendment to MR7/2012 was promulgated (i.e. Ministerial Regulation 11 of 2012) to make it consistent with the above three regulations (that is, to stop the export ban from coming into effect on 6 May 2012 for those who had achieved the status of ET-Mining Products). One important side-effect of the above regulations is that if an IUP for minerals is not on the Clean and Clear List, no mineral ores will be able to be exported. Requirements for exporting A mining company can export mineral ores after it has obtained the following from the Directorate General of Foreign Trade of the Ministry of Trade: (a) an acknowledgment as the ET-Mining Products; and (b) the Export Approval. Both the ET-Mining Products and the Export Approval require the applicant to firstly obtain recommendations from the Directorate General of Minerals and Coal. However, there is an inconsistency between the Ministry of Trade regulation (MR29/2012) and the regulation issued by the Directorate General of Minerals and Coal (DG574.K/2012). Based on the Ministry of Trade regulation, in addition to the holders of IUPs, the holders of Contracts of Work (Kontrak Karya) are required to obtain an ET-Mining Products and Export Approval for exporting mineral ores while under the Directorate General of Minerals and Coal regulation, there is no reference to Contract of Work holders. This means that Contract of Work holders are left in the curious situation that they are required to obtain an export approval, but that there is no method for them to fulfill the requirement to obtain a recommendation from the Directorate General of Minerals and Coal to obtain that approval. Of course, this leaves aside the question of whether Contract of Work holders should consider themselves bound by these new processing requirements at all, as opposed to the (generally lesser) requirements under their Contracts of Work. Steps for obtaining export documents The following are the steps to obtain the required export documents: (a) Directorate General of Minerals and Coal recommendation for ET-Mining Products DG574.K/2012 requires the mining company to submit: a written application, in a form described in DG574.K/2012; production operation IUP clear and clean certificate; integrity pact (pakta integritas), in a form described in DG574.K/2012 (under which the mining company commits to implementing the processing and upgrading of minerals); 2 Client Alert June 2012
(vi) (vii) any memorandum of understanding with other IUP holders with respect to the construction of processing and refining facilities, as applicable; a work plan and/or cooperation plan with respect to the construction of processing and refining facilities, as applicable; offtake agreement with end user/buyer; NPWP (tax payer registration number); and (viii) TDP (company registration certificate). By law, this recommendation is required to be issued within five working days of complete and correct application documents being received. (b) ET-Mining Products MR29/2012 requires the mining company to submit: written application; production operation IUP; NPWP; TDP; and Directorate General of Minerals and Coal recommendation for ET- Mining Products. By law, this acknowledgment should be issued within five working days from complete and correct application documents being received and will be valid for two years. (c) Directorate General of Minerals and Coal recommendation for Export Approval DG574.K/2012 requires the mining company to submit the following: (vi) (vii) a written application, in a form described in DG574.K/2012; details of export plan; data on resources, reserve and production; off take agreement with end user; evidence of placement of reclamation guarantee; evidence of dead rent payments for the last year; and evidence of royalty payments for last year. By law, this recommendation is required to be issued within five working days from the time that complete and correct application documents are received and will be valid for one shipment only. Client Alert June 2012 3
In order to obtain a new recommendation for the next shipment, the mining company needs to submit: (vi) (vii) a written application, in a form described in DG574.K/2012; a report on the implementation of the construction of onshore processing and refining facilities plan; evidence of the payment of the export duty payment; the results of laboratory analysis of the minerals ores to be exported; details of export plan; evidence of the latest dead rent payment; evidence of royalty payments for the last three months; and (viii) the off take agreement with end user. (d) Export Approval MR29/2012 requires the mining company to submit: a written application; the production operation IUP; NPWP; TDP; and Directorate General of Minerals and Coal recommendation for Export Approval. By law, this acknowledgment should be issued within five working days from the time complete and correct application documents are received and arguably, will be valid for one shipment only. In addition to the above documentation, the exported mining products should also be verified (technical verification) by a surveyor appointed by the Directorate General of Foreign Trade, the survey report of which shall be issued within one day after the verification is conducted and which will be valid for one shipment, only. Consequences The Government has now allowed mining companies to export mineral ores for an interim period ending on 12 January 2014 but only if they can convince the Government that there are genuine plans for domestic processing and refining after this date. The requirements for obtaining export recommendations and approvals are onerous. It appears that the Government has taken the view that a mining company that will export mineral ores must have good title over the mine, that it must have fulfilled its payment obligations and that it must also have a solid plan for onshore processing and/or refining. Further, as approval is required for shipments of mineral ores on a shipment-by-shipment basis, the 4 Client Alert June 2012
Government can track the progress of a mining company s plan to fulfill its onshore processing and refining obligations. Integrity Pact In order to obtain the recommendation for ET-Mining Products from the Directorate General of Minerals and Coal, one of the requirements is that the President Director of the mining company must sign an integrity pact (pakta integritas) which sets out the mining company s commitment to, among other things: (a) do onshore processing and/or refining and set up processing and/or refining facilities at the latest by 12 January 2014; (b) report on the progress of construction of onshore processing and/or refining facilities on a quarterly basis; (c) pay export duty and other non-tax government payments; (d) comply with the domestic market obligation; and (e) if the mining company intends to conduct an initial public offering, to conduct this in Indonesia. In relation to (d), there is not actually a domestic market obligation for minerals in force yet. Item (e) is also an unusual requirement which seems out of place in these regulations. We have had discussions with officials who have suggested that the requirement only applies to the company holding the IUP, not an ultimate holding company. Export duty As part of the regulatory package to implement the onshore mineral processing policy, the Government has also enacted MR75/2012 which subjects the exported mineral ores to a 20% export duty based on a reference price. As yet, there is no reference price for mineral exports. The reference price is to be determined by the Ministry of Trade after coordinating with the relevant minister (in this case, the Minister of Energy and Mineral Resources). This, however, is contrary with the provisions of Government Regulation No. 23/2010 which says that the reference sales price for minerals should be determined by the Minister of Energy and Mineral Resources (for metal based minerals and by the Governor/Regent for non-metal based minerals). Consequently it is not yet clear how this export duty will work in practice. We note that a similar export duty was imposed on coal in the past and was subsequently declared by the courts to be invalid on the basis that the royalty should have been increased rather than a new export duty imposed. This raises the question of whether these regulations may also be subject to challenge. Conclusion The speed at which the regulations mentioned above have been issued (and also amended) is unusual. It is clear that the Government has taken a strong policy stance in relation to domestic processing and refining of minerals following on from requirements under the 2009 Mining Law. It remains to be Client Alert June 2012 5
seen what the economic impact of imposing such rapid regulatory changes will be. Please feel free to contact any one of our Finance & Projects team members should you require further details. www.bakermckenzie.com 2012 Baker & McKenzie. All rights reserved. Baker & McKenzie International, a Swiss Verein 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. 6 Client Alert June 2012