VZCZCXYZ0001
RR RUEHWEB

DE RUEHJA #3480/01 3480913
ZNR UUUUU ZZH
R 140913Z DEC 06
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 2455
INFO RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS JAKARTA 013480 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EAP/MTS, EB/OIA, AND OBO/PD/PMB/CPB 
DEPT PASS OPIC FOR SIMON/PITNEY 
 
E.O. 12958: NA 
TAGS: EFIN PREL KCOR ID
SUBJECT: FINANCE MINISTER ON OPIC, TAX ISSUES, AND NEC 
 
¶1. (SBU) Finance Minister Sri Mulyani Indrawati told the Ambassador 
on December 14 that the Directorate General of Taxation (DG Tax) 
would need to finalize a review of Indonesia's international tax 
agreements before moving forward on an Overseas Private Investment 
Corporation (OPIC) Investment Support Agreement.  She anticipated 
this would be completed by the end of December 2006.  The same 
review should help the Government of Indonesia (GOI) resolve tax 
questions surrounding USAID's Aceh road project.  Mulyani also said 
determining a price for two parcels of land currently occupied by 
the Embassy should be "straightforward," but that the actual 
transfer of the property could need to follow an elaborate new 
regulation.  The Ambassador emphasized the unacceptability of U.S. 
foreign assistance projects being subject to multi-million dollar 
Indonesian tax bills.  End Summary. 
 
Moving Forward on an OPIC Agreement 
----------------------------------- 
 
¶2. (SBU) The Ambassador said the U.S. is puzzled about how to 
proceed on the draft OPIC Investment Support Agreement (ISA).   The 
U.S. had worked hard since July 2006 on the agreement, and had 
thought that reaching a deal by the President's November 20 visit 
would be excellent publicity for Indonesia's efforts to attract 
investment.  But in the end, we had made very little progress, the 
Ambassador noted, and we are no longer sure if Indonesia wants a new 
agreement.  We are looking for your guidance, the Ambassador told 
the Minister.  It would be helpful if Indonesia could appoint a lead 
negotiator with authority to negotiate. 
 
¶3. (SBU) Mulyani's response focused on the tax exempt provisions of 
the ISA, and their relation to Indonesia's tax law and international 
tax agreements.  She said the ISA is an "ad hoc" initiative, and 
said the U.S. position that OPIC had long operated on a tax-exempt 
basis, and should continue to do so, is "fair enough."  However, 
before moving forward on the ISA, she added that she had asked the 
DG Tax to review Indonesia's international tax treaties and "tax 
free arrangements," some of which appear not to be based on 
Indonesian law or a "basic understanding of what Indonesia wants." 
As part of this process, DG Tax is also reviewing the 
Japan-Indonesia tax treaty.  Mulyani said the Ministry of Finance 
(MOF) also wants to discuss how to treat the revenue of companies 
operating across international borders with Parliament. (Note:  She 
did not distinguish between private companies and the USG-owned 
OPIC.) 
 
¶4. (SBU) Mulyani continued that DG Tax has established a unit to 
conduct the review, but that it is staffed at too low a level.  She 
said she had held a meeting yesterday with the Echelon I officials 
at MOF, and had instructed DG Tax to add more senior staff to the 
unit and to finish a report by the end of 2006.  Mulyani added that 
she hopes to have a meeting this year with DG Tax staff to discuss 
the results of the review.  An additional factor is the ongoing 
discussion in Parliament of draft laws on tax procedures, income 
taxes, and value added taxes.  This may also result in changes to 
the Government's assessment of Indonesia's international tax 
agreements.  Mulyani concluded by noting that the Government is 
aware of the importance of reaching a new ISA, and wants to settle 
the matter as quickly as possible. 
 
USAID Partners Face Growing Tax Problems 
---------------------------------------- 
 
¶5. (SBU) Following up on Mulyani's discussion of tax issues, the 
Ambassador informed the Minister that a DG Tax official had sent a 
letter informing Parsons, the construction supervisor for the 
USG-funded Aceh road, that its operations were fully taxable under 
Indonesian law.  Parsons estimates that if this opinion stands, its 
tax liability could exceed $10 million.  Taxes on the construction 
portion of the road could exceed $40 million.  For the U.S., this is 
straightforward--we can't pay $50 million in taxes for a $240 
million project.  This would be simply outrageous, the Ambassador 
stated, and if it stands, would provoke a fierce reaction in 
Congress.  Land acquisition delays by the Government have already 
slowed the road project, and an adverse tax ruling could threaten 
the road's future.  The Government's logic is faulty, the Ambassador 
continued--USAID and its partners have operated on a tax and 
duty-free basis since 1955 under a bilateral agreement.  Someone 
needs to "stand back, look at the whole picture, and say 'no way,'" 
the Ambassador concluded.  This is particularly important since the 
problem is spilling over to other USAID projects, also threatening 
them. 
 
¶6. (SBU) Mulyani responded that the MOF's tax treatment on loans and 
grants for Aceh reconstruction "had not been based on a strong legal 
foundation."  Our interpretation of the law "forces us to conclude 
that it may be a taxable activity."  The problem is "logically 
solveable," Mulyani continued, and the MOF should not create unfair 
treatment for affected projects.  The law is "very ambiguous and 
subject to interpretation," and a decree by the Minister of Finance 
or Director General for Taxation should be able to solve the 
problem.  After conferring briefly with her aides, Mulyani concluded 
by noting "it can be solved.  The tax will be born by the 
Government."  (Comment:  The Minister's comment appeared to be in 
the context of either a special regulation granting import duty and 
tax exemptions for Aceh reconstruction projects, or an amended 1995 
regulation providing tax and duty exemptions for Government-related 
projects financed by grants and international loans, both of which 
provide narrower tax and duty exemptions than USAID's standard 
Strategic Grant Operating Agreements (SOAGs).  As such, her comment 
may not be as reassuring as it sounds, particularly for USAID 
projects operating outside of Aceh. End Comment.) 
 
Land Acquisition for the New Embassy Compound 
--------------------------------------------- 
 
¶7. (SBU) The Ambassador stressed the need for a response before the 
end of this month to the Department's renewed request for a 
determination of the value of MMS 3, and a confirmation of the value 
of MMS 4 - the two parcels of land the Embassy currently sits on 
which belong to the Government.  The Minister said that the MOF is 
charged with managing Indonesian state assets, and that determining 
the cost should be relatively straightforward.  However, a 
forthcoming Presidential Regulation issued under the 2004 State 
Treasury Law (Law 1/2004) establishes elaborate procedures for 
selling Government property, although she accepted the Ambassador's 
point that the law appears to make an exception for land that is to 
be used for offices of foreign countries.  Nonetheless, in 
principle, settling on values for the two parcels "can be and should 
be done," she said.  Mulyani also said she believed there would be 
no legal barriers to swapping the property for another. 
 
¶8. (SBU) The Ambassador replied that the USG would be happy to 
consider the possibility of a land swap if that was preferable, but 
that we would still need a valuation of the properties before we 
could enter into such discussions.  The Minister asked the Embassy 
staff to be in touch with Mr. Hadiyanto, the MOF's new Director 
General for State, and asked for assurances that the Governor of 
Jakarta's office is supportive of the Embassy's plan to re-build our 
Chancery on the existing property.  The Ambassador noted that the 
Embassy has worked closely with the Governor's office on the NEC 
project and has received repeated statements of support, and agreed 
to seek a note from the Governor's Office, expressing its support. 
Vice President Kalla, the Embassy's next-door neighbor, has also 
indicated he supports the project. 
 
PASCOE