Wednesday, May 29, 2024

How-to understand processing obligation, export restriction in Indonesia’s mining business

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Along with the development of the mining business, the government feels that exports of mining products resulting from processing and refining need to be adjusted to legal conditions and needs. Based on these considerations and to provide business certainty and increase the added value of mining product exports, it is necessary to regulate the provisions on the export of mining products resulting from processing and refining.

Governing law and regulation 

  • Law No. 4/2009 concerning Mining
  • Law No. 3/2020 concerning Amendment to the Mining Law as amended by Law No. 11/2020 concerning Job Creation
  • The Ministry of Energy and Mineral Resources Regulation (Permen ESDM) No. 25/2018 concerning Mineral and Coal Mining Business as amended several times with the latest amendment by the Minister of Energy and Mineral Resources (Permen ESDM) No. 17/2020 concerning the Third Amendment to the Regulation of the Minister of Energy and Mineral Resources (Permen ESDM) No. 25/2018 concerning Mineral and Coal Mining

In-Country processing obligation 

Holders of coal Mining Business License (IUP) and Special Mining Business License (IUPK) are required to carry out processing to increase the added value of the coal they produce, either directly or in collaboration with other companies, IUP holders and IUPK holders. The processing for production operations includes the following activities:

  • Coal Upgrading: Coal liquefaction
  • Coal Briquetting: Coal gasification, including underground coal gasification
  • Coke Making: Coal slurry/coal water mixture 

Holders of IUP and IUPK minerals are required to carry out domestic processing and refining in order to increase the added value of the minerals they produce, either directly or in collaboration with other companies, IUP holders, and IUPK holders. Permen ESDM No. 25/2018 specifically regulates requirements for domestic mineral processing and refining. Here are the time frames:

  1. Minerals for which the added value can be increased include metal minerals, non-metal minerals, and Rocks.
  2. Processing includes activities to improve the quality of minerals or rocks, without changing their physical and chemical properties, such as conversion into metal mineral concentrates or polished rock. Refining is defined as an activity that improves the quality of metallic minerals, through extraction processes and by increasing the purity of minerals, to produce products with different physical and chemical properties from the original, such as metals and alloys. 
  3. The increase in the value that is added to minerals shall be achieved through the processing and refining of metal minerals, processing of non-metal minerals, and processing of rocks.
  4. Holders of an Operation Production Mining Business License (IUP-OP), Operation Production Special Mining Business License (IUPK-OP) or a Processing and Refining IUP are required to meet the minimum in-country processing and refining requirements for various types of metal minerals, non-metal minerals, certain rocks, as well as the by-products, and residues from the refining of metal mineral mining commodities (in the form of copper, tin, lead, and zinc), and the by-products or residues from the refining of lead concentrates in slag form. 
  5. Processing and refining can be conducted in cooperation with other IUP and IUPK holders, as well as the holders of Processing and/or Refining IUPs. This cooperation may be in the form of sales and purchases of ore/concentrates or processing and/or refining activities. 
  6. Sanctions for not complying with this requirement could take the form of written warnings, license freezing, or license revocation, depending on which provisions are being violated.

Investment in processing or refining facilities

In the event that a mining company intends to build a smelter in Indonesia, some of the main considerations for investors to consider in investing in processing/refining facilities and related infrastructure are as follows:

  • Is it profitable to include processing/refining facilities and infrastructure within the IUP-OP parent company (i.e. mining company) or under a separate company holding the Processing and/or Refining IUP-OP?
  • If a separate company is to be established, what is the most favorable arrangement with a mining company? Are trade arrangements or processing services preferred?
  • Are tax facilities available, such as tax holiday facilities or import facilities.
  • Relevant tax considerations relating to Engineering, Procurement and Construction (EPC) contracts.
  • How financing can be arranged in the most tax effective way.
  • Appropriate cooperation model between shareholders (mining companies, off takers, financial investors, domestic, foreign, etc.)

Export restrictions

With the issuance of the Amendment to the Mining Law, raw metallic minerals (in certain levels and the total amount of processed metallic minerals) can continue their export activities three years after the enactment of the Amendment to the Mining Law (ie until June 2023)  for the holders of Contract of Work (KK), IUP, on metal minerals which have undergone processing and refining activities (and/or are building facilities and/or cooperating for processing and refining activities) provided that the holders:

  • Changing the existing KK (a form of mining authorization granted prior to the 2009 Mining Law) into an IUPK Special Mining Business Permit) based on the 2009 Mining Law;
  • Request export approval from the Ministry of Trade every year; and
  • Fulfill their domestic supply obligations to local refineries and processing plants. It is hoped that further changes to the provisions regarding the sale of unprocessed metal minerals are expected in a Ministerial Regulation.

Export approval from the Director General of Foreign Trade or Direktur Jenderal Perdagangan Luar Negeri (DGoFT) is given after receiving a recommendation from the Director General of Mineral and Coal or Direktur Jenderal Mineral dan Batubara (DGoMC). As regulated in Permen ESDM No. 25/2018, to obtain a recommendation, holders of IUP-OP, IUPK-OP and IUP Processing and/or Purification must submit a recommendation application to the Ministry of Energy and Mineral Resources, for the attention of the DGoMC. The DGoMC will evaluate the application for export recommendations and, based on this evaluation, the DGoMC, on behalf of the energy ministry, will approve or reject the application within 14 working days after the application is received. The energy ministry has already indicated that the policy intent of these new regulations was to stay faithful to the objectives of the Mining Law 2009. Accordingly, permission to export unrefined mineral concentrates will only be granted to those mining companies that hold an IUPK or IUP and that can demonstrate that they have made progress on the development of their refineries and processing infrastructure. The energy ministry has indicated that the policy intent of this new regulation is to stay true to the objectives of the 2009 Mining Law. Therefore, raw mineral concentrate export permits are only granted to mining companies that have an IUPK or IUP and can demonstrate that they have made progress on the development of their refineries and processing infrastructure. The energy ministry has also indicated that these export permits will be reviewed every six months and these permits will be revoked if it is deemed that the miner has made insufficient progress with its development activities.

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