On 6 March 2018, Timor-Leste and Australia signed a treaty permanently agreeing certain maritime boundaries in the Timor Sea (the MBT). The MBT was ratified by both countries in August 2019. The MBT succeeds the Timor Sea Treaty (TST) and the International Unitisation Agreement (IUA). The MBT results in the former Joint Petroleum Development Area (JPDA), as well as territory covering a number of non-JPDA fields (e.g. Buffalo, parts of Greater Sunrise), falling under exclusive Timor-Leste control. As a result, Timor-Leste’s taxing rights in relation to the effected upstream activities have increased.
The MBT provides the following:
- Permanently deals with the maritime boundary between Timor-Leste and Australia (although not necessarily third countries, such as Indonesia).
- Establishes a Special Regime for the Greater Sunrise gas field. This includes revenue-sharing arrangements on the upstream revenue allocation, which will vary according to the development concept (essentially the location of the liquefaction facilities) ultimately chosen for the Greater Sunrise gas resource.
On 27 August 2019, Timor-Leste issued Law No.5/2019 (Law No. 5). Based upon an unofficial translation (of the Portuguese version), Law No. 5 operates to amend the following tax-related laws:
- With regard to the Taxation of Bayu-Undan Contractors Act (ToBUCA), Law No. 5 provides that:
- the VAT rate is formally reduced from 10% to 9% (per Article 3(4)(a))
- the (Indonesian) 'estimated net income' upon which Article 23(1)(c)(2) withholding tax (WHT) is based (including payments for 'drilling support services') is formally reduced by 90% (per Article 7(2))
- the (Indonesian) Article 23(1)(a)(3) WHT that applies to payments for interest, dividends, royalties, etc. is formally reduced from 6% to 5.4% (per Article 8(1))
- the (Indonesian) Article 4(2) WHT that applies to payments for construction and certain consulting services is formally reduced from 0.8% and 1.6%, to 0.72% and 1.44%, respectively (per Article 8(2))
- the (Indonesian) Article 26(1)(c) WHT that applies to payments of royalties, rent, etc. to non-residents is formally reduced from 8% to 7.2% (per Article 8(3))
- the (Indonesian) Article 26(1)(d) WHT that applies to payments for services provided by non-residents is formally reduced from 8% to 7.2% (per Article 8(3)), and
- the (Indonesian) Article 26(1)(d) WHT that applies to payments for dependent services by non-resident employees is formally reduced from 20% to 18% (per Article 8(4)).
- With regard to the Taxes and Duties Act (TDA), which represents the legislative framework for Timor-Leste’s general tax rules other than for the Bayu-Undan and Greater Sunrise Projects, a number of amendments are made so as to continue the 'ring fencing' of the Bayu-Undan and Greater Sunrise projects out of the TDA.