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Cablegate: Finance Minister On Opic, Tax Issues, and Nec


DE RUEHJA #3480/01 3480913
R 140913Z DEC 06





E.O. 12958: NA

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

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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

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

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.


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