Ship Finance in Indonesia: Update and Trends

SSEK Indonesian Legal Consultants founding partner Dyah Soewito, senior foreign legal advisor Michael D. Twomey and Stephen Igor Warokka, an associate at the firm, have contributed the Indonesia chapter of the new Getting the Deal Through global guide to Ship Finance. SSEK Legal Consultants has one of the leading shipping practices in Indonesia. SSEK advises multinational and joint venture shipping and offshore drilling companies on all aspects of their operations in Indonesia, including advising on the establishment of joint venture companies, the opening of representative offices and the acquisition and sale of vessels. SSEK is ranked as a tier-one shipping firm by The Legal 500 and is highly recommended for its shipping practice by Asialaw. The following is an excerpt from the Indonesia chapter of the Getting the Deal Through global guide to Ship Finance written by SSEK Legal Consultants. Bank Indonesia recently issued BI Regulation 17, which requires cash and non-cash domestic transactions to use Indonesian rupiah, and Regulation 16/21 requires borrowers of offshore loans to comply with hedging, liquidity and credit rating requirements in certain instances. BI Regulation 17 became effective as of March 31, 2015. In January 2015, the Minister of Transportation (MOT) issued MOT Regulation No. PM 10 of 2015 (PM 10/15), which is the second amendment of MOT Regulation No. PM 10 of 2014 (PM 10/14). PM 10/14 sets out those activities that may be conducted in Indonesian waters by foreign-flagged vessels and the procedure to be followed for a foreign vessel to obtain an exemption from Indonesia’s cabotage requirements. A foreign-flag dispensation is called a Foreign Vessel Utilization Permit (IPKA). Under PM 10/15 the validity period for an IPKA is now a maximum of one year. The regulation is silent as to whether it can be extended. Under PM 10/14, the IPKA was valid for six months and extendable. Further, PM 10/15 expanded the activities that could be conducted using foreign-flagged vessels so that now offshore support vessels are eligible to obtain an IPKA for a maximum period of one year (until the end of 2015), in addition to drilling rigs, oil and natural gas survey vessels, offshore construction vessels, dredgers, and vessels for salvage and underwater works. Toward the end of 2015, it will be necessary to ascertain the activities that foreign-flagged vessels are entitled to conduct and the procedure to obtain an IPKA in 2016 and afterward. Historically, all vessels imported by a Sea Transportation Company Business License (SIUPAL) holder were granted VAT and article 22 income tax exemptions on the import of vessels. However, tax officials have recently been taking the view that only vessels engaged in the transportation of goods or people should be granted these exemptions while vessels involved in the provision of services should not. Further, the Tax Office is also looking into the services being performed by vessels owned by a SIUPAL holder to determine whether the services should be subject to a 1.2 per cent final tax or regular corporate tax. While it is clear that income earned on the transportation of goods and people will be subject to a 1.2 per cent final tax, it is uncertain whether the provision of other services will be taxed at this rate. The issue as to which vessels owned by SIUPAL holders should be granted tax exemptions and subject to a 1.2 percent final tax is further complicated because the tax treatments are decided by local tax offices and the local offices do not share the same view regarding the granting of these exemptions and the use of the final tax regime. As a result, at present, there is a question as to whether vessels owned by a SIUPAL holder and involved in the provision of services other than the transportation of goods and people can be imported free of VAT and article 22 tax or at what rate their income will be taxed. To read the full guide to ship finance in Indonesia, click here.