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Private and confidential Ichwan Sukardi PT Medco Energi Internasional Tbk The Energy Building 53th floor SCBD

Lot 10 Jakarta Selatan

Your ref Our ref Contact L-KH 0672.03.13/CHT Turino Suyatman / Otto Sumaryoto / Catherine Thong

18 March 2013

Final Draft

Dear Mr Ichwan,

Tax Implications of the Aircraft Change Operatorship


Set out herein is our opinion regarding the tax implications of the aircraft change operatorship from PT Airfast Indonesia (Airfast) into other commercial airline. This is in response to the meeting held at the PT Medco Energi Internasional Tbk (The Company) office on 15 March 2013. Our memo is organized according to these categories: I. II. III. IV. V. I. Executive Summary Background Request of The Company Legal basis Our comments Executive Summary

The owner of the aircraft (Fortico) intends to change the operatorship from Airfast to other commercial airline. The change of operatorship consists of two schemes of transactions. The first scheme is the operating lease of aircraft between Fortico (Cayman Islands company) and Airfast (Indonesian company) based on the Operating Lease Agreement, and the second scheme is the change of operatorship, from Airfast to other commercial airline, made by Fortico.

PT Medco Energy Internasional Tbk Tax Implications of the Aircraft Change Operatorship 18 March 2013

Scheme 1 Luxury Sales Tax (PPn BM). On August 2009, Airfast has imported the aircraft and got the 50% PPn BM exemption (facility). However, the facility would be cancelled and Airfast must pay PPn BM that previously has been exempted if the aircraft is transferred (dipindahtangankan) or used for the purpose other than the initial one. Value Added Tax (VAT). Airfast has paid the 10% VAT import, and it has been fully refunded and transferred back to the Company (PT MEI).

Scheme 2 Substantially, we consider that the change of the operatorship could be characterized as the transfer of rights and obligations in relation to the operatorship of the aircraft (transfer of rights and obligations). It should not be characterized as the transfer of title/ownership of the aircraft or the transfer of the entitlement for used or the right to use the aircraft. Luxury Sales Tax (PPn BM) Basically, as the transfer of rights and obligations should fall under scope of the definition of transferred (dipindahtangankan) or used for the purpose other than the initial one, then we would consider that the change of operatorship could potentially make Airfast obligated to pay PPn BM which was previously exempted at the time of the importation of the aircraft. Value Added Tax (VAT) Substantially, VAT should be imposed on the transfer (penyerahan) of the ownership/title of taxable goods and/or the provision of taxable services. The change of operatorship should be characterized as the transfer of rights and obligations in relation to the operatorship of the aircraft, not the transfer of the ownership of the aircraft, and therefore, it should not be subject to VAT. In the case of the change of the operatorship, we would anticipate that VAT import which was refunded by Airfast could be subject to question of the ITO. This is based on the consideration that VAT Law substantially stipulates that VAT input should not be allowed to be credited against VAT output if it does not have direct relationship with business activities of the company. We indicate that Airfast has already paid VAT import and VAT on the lease payment. As VAT input which has direct relationship with the business activities of the Airfast should be only VAT input on the lease payment to Fortico, not VAT import of the aircraft, then it is possible that ITO would consider VAT import of the aircraft as the one that should not be allowed to be credited or refunded by Airfast.

PT Medco Energy Internasional Tbk Tax Implications of the Aircraft Change Operatorship 18 March 2013

Tax implication if the aircraft is owned Airfast Corporate Income Tax. As the aircraft is recognized as the asset of Airfast, the change of operatorship from Airfast to other commercial airlines should be characterized as the transfer of ownership, and therefore capital gain resulting from the change of operatorship (if any) should be subject to 25% Corporate Income Tax. Value Added Tax. The change of operatorship should be characterized as the transfer of Taxable Goods which is subject to 10% VAT. However, we would anticipate that based on the Operating Lease Agreement between Fortico and Airfast, it is possible that ITO would consider that VAT input paid by other commercial airlines cannot be credited or refunded. This is based on the consideration that it is not related to the acquisition of the aircraft, but rather the transfer of rights and obligations of the aircraft, made by Fortico, from Airfast to such other commercial airlines. ITO would consider that the aircraft is still owned by Fortico, not by other commercial airlines. Luxury Sales Tax (PPn BM). The transfer of ownership/title should fall under the definition of the word transferred (dipindahtangankan). Therefore, if Airfast transfer the title/ownership of the aircraft to other commercial airlines, then it is likely that PPn BM exemption which was previously applicable to the importation of the aircraft by Airfast would be cancelled, and Airfast must pay PPn BM which was previously exempted.

Possible Solution We are of the view that the potential tax exposure as a result of the change of operatorship could be minimized through the procedures of re-exporting the aircraft back to Fortico, and then Fortico could deliver the aircraft to other commercial airlines in Indonesia through the Temporary Import procedures. Through these procedures, other commercial airlines could obtain tax facilities in the form of: a. VAT import exemption; b. Income Tax Article 22 Import exemption; and c. PPn BM exemption

II. Background
Overview of Transaction Magnate International Investment Pte. Ltd. (Magnate), a company incorporated under the laws of Singapore, leased the aircraft to Airfast pursuant to an aircraft lease agreement dated on 8 May 2006. On 11 January 2011, Magnate sold the aircraft to Fortico International Limited (Fortico), a company incorporated under the laws of the Cayman Islands. Fortico is one of subsidiary of the Company. The agreement between Magnate and Fortico was signed on 11 March 2011 and the effective date of the transaction was on 11 January 2011.

PT Medco Energy Internasional Tbk Tax Implications of the Aircraft Change Operatorship 18 March 2013

As a new owner, Fortico has agreed to assume all rights, benefits and obligations of Magnate as lessor under the Original Lease Agreement that arise after the effective date and to act as the new lessor in place of Magnate. Airfast, as a lessee, acts as the Operator agreed to charter the aircraft to the Company pursuant to a charter agreement dated on 8 May 2006, whereby Airfast provides to the Company the aircraft and services related to the operation and maintenance of the aircraft.

Content of Agreement Rights and Obligations As stated in the Operating Lease Agreement between Fortico (Lessor) and Airfast (Lessee), the following are relevant provisions which are considered important to understand for analyzing tax implication on the change of operatorship from Airfast to other commercial airline: a. Type of Lease Agreement : Operating Lease b. Delivery of aircraft : The possession, use and operation of the Aircraft shall be at the call risk and expenses of the Lessee. The lessee acknowledges that it accepts full operational control of the Aircraft. c. Maintenance : Lessee shall maintain the aircraft according Article 8 of the agreement. d. Return of aircraft : Upon the Termination Date, the Lessee will return the Aircraft according to Article 9 of the agreement. e. Title : The Lessee acknowledges that during the Lease Term full legal title to the aircraft shall remain vested in Owner notwithstanding the possession and use thereof by the Lessee. f. Ownership : The Lessee must ensure, subject the terms of the Novation Agreement, at all times during the Lease Term, there is affixed in a reasonably prominent position on the flight deck or cockpit, and on each of the engines of the aircraft, a fire proof plate reading as follows: This Aircraft/Engine is owned by Fortico International Limited and is leased to PT Airfast Indonesia and may not be or remain in the possession of, or be operated by any other person without the prior consent of Fortico International Limited.

Relevant information Related to Taxes that Have Been Paid by Airfast in Relation to the Import of Aircraft On August 2009, Airfast has permanently imported the aircraft and settled the 10% VAT and art.22 income tax at 2.5% on behalf of the Company. The 10% VAT has been fully refunded by Airfast from the Tax Office and repaid back to the Company. The 50% PPnBM was exempted from the permanent import since Airfast is a commercial airline company.

PT Medco Energy Internasional Tbk Tax Implications of the Aircraft Change Operatorship 18 March 2013

III. Request of The Company


The owner of the aircraft is now considering changing the operatorship from Airfast into other commercial airline. We are requested to provide our comments on tax implication specifically on: a. The import tax of Income Tax Article 22. b. The exclusion of 50% PPnBM as stipulated in GR No. 7/2002. c. VAT 10% payable based on Art. 16D of VAT Law. d. Exemption from VAT based on GR No. 38/2003 e. Other tax implications that might occur other than mentioned above.

IV. Legal Basis a. Article 1 paragraph 5 letter b of Government Regulation No. 7 Year 2002 regarding Second Amendment of Government Regulation Number 145 Year 2000 regarding Luxury Taxable Goods that are Subject to Luxury Sales Tax (GR No. 7/2002), Luxury taxable goods other than motor vehicles that are subject to luxury sales tax at a tariff of 50% (fifty percent) sales tax for luxury goods shall be [...] b. categories of aircraft other than those referred to in paragraph (4), except for state or commercial air transport purpose. b. Article 1A paragraph 1 of GR No. 7/2002, In respect of luxury taxable goods other than motor vehicles that are exempt from the imposition of luxury sales tax which, within 5 (five) years as of import and/or acquisition, are transferred (dipindahtangankan) OR used for purposes other than the original purpose, the luxury sales tax which was previously not payable on their import or acquisition shall become payable and must be paid within 1 (one) month of the date on which said goods are transferred or used for purposes other than their original purpose. c. The paragraph 2 of the same regulation, If the outstanding luxury sales tax is not paid or is underpaid within the 1 (one) month period as intended in paragraph 1, the Directorate General of Taxation (DGT) shall issue an Underpaid Tax Assessment (SKPKB) and impose sanctions in accordance with the prevailing provision.

Based on those regulations, in substance, the import or acquisition of aircraft for state or commercial air transport purpose is exempted from 50% Luxury Sales Tax (PPn BM). However, to anticipate the improper use (penyalahgunaan) of exemption of 50% PPn BM on the import of the acquisition of aircraft, according to Article 1A (1) GR-70/2002 and its

PT Medco Energy Internasional Tbk Tax Implications of the Aircraft Change Operatorship 18 March 2013

elucidation, importer or buyer of the aircraft which is exempted from 50% PPn BM shall be subject to penalty/sanction to pay PPn BM which is previously exempted from 50% PPn BM.

The penalty is applicable to the importer/buyer if within 5 years as of import and/or acquisition the aircraft is: a. The Transferred (dipindahtangankan); OR b. Used for the purpose other than the initial one. It should be noted that GR-7/2002 does not refer to the transfer of ownership/title of the aircraft (perpindahan kepemilikan/hak), but rather refers to the word of transferred (dipindahtangankan). Additionally, GR-7/2002 refer to the word OR rather than AND between two conditions for the application of the penalty. Therefore, if one of the two conditions is satisfied than the penalty should be applied.

V. Our Comments
As far as we understand Fortico intend to change the operatorship from Airfast to other commercial airline. Substantially the change of operatorship consists of two schemes of transactions. The first scheme is the operating lease of aircraft between Fortico (Cayman Islands company) and Airfast (Indonesian company) based on the Operating Lease Agreement. The second scheme is the change of operatorship, from Airfast to other commercial airline, made by Fortico. We would analyze following potential tax implications of those two schemes.

1. Scheme 1 Characterization of transaction There should be options available of characterization of the transaction under Operating Lease Agreement made between Fortico and Airfast (Operating Lease Agreement 1). Based on our analysis, we have found that compensation of such transaction could be characterized as lease payment, rent or royalty. We would conclude that the transaction should be characterized as the payment of rent or royalty, not as lease payment. Below are the following our detail analysis of our conclusion. Under applicable tax regulations, leasing is a financing activitie in the form of the capital goods supply under financial lease or operating lease used by Lessee within certain period and based on frequent payment.

We describe following provisions of such regulation which are important to understand:

PT Medco Energy Internasional Tbk Tax Implications of the Aircraft Change Operatorship 18 March 2013

a. Lessee is not allowed to sub-lease the leased capital goods to other Lessee; and b. Lessor is required to put a label or placard that shows that capital goods used are clearly known as leased assets. It is our understanding that Fortico leases the aircraft to Airfast and followed by Airfast leases it to the Company (sub-lease). As we have known based on the above, this practice should not be considered comply with the tax regulation mentioned above. Therefore, we consider that there should be potential tax risk that Indonesian Tax Office (ITO) would assume or deem it is not leasing activity.

Further, under Income Tax Law (ITL) and its implementing regulations, rent (sewa) of assets other than land and/or building is income received or accrued in relation to the agreement of providing the right to use within certain period so that the assets may only be used by the receiving right within the agreed period. In addition, royalty can be defined as income received or accrued as a consideration for the use of or the right to use industrial, commercial and/or scientific equipment. Therefore, we would conclude that the payment made by Airfast to Fortico should be characterized as rent or royalty.

Corporate Income Tax (CIT) As the Operating Lease Agreement A should be considered as the agreement of rent or that of the use of or the right to use aircraft rather than (operating) lease agreement then the delivery (pengiriman) of aircraft done by Fortico to Airfast (Airfast import the aircraft), should not be recognized as the transfer of title/ownership (penyerahan/penjualan) of aircraft. Consequently, we conclude that: a. Lessor (Fortico) should not recognize it as the sales of aircraft to Airfast, and it only has to record rent or royalty income; the aircraft remain recorded as Lessors asset; there should be no CIT payable as there is no capital gain recognized; b. Lessee (Airfast) should not recognize and record the aircraft as its asset, and it only has the right to deduct rent/royalty expense for tax purpose, not depreciation of the aircraft; it also responsible to withhold 20% Income Tax Article 26.

Income Tax Article 22 Import We have been informed that Airfast has already paid Income Tax Article 22 Import of the import of aircraft, but we have not known whether or not it was already credited by Airfast. However, the eligibility to credit Income Tax Article 22 Import against Corporate Income Tax of Airfast should be connected to the aircraft imported by Airfast. We have mentioned above that Airfast should not recognize and record the aircraft as its asset, and therefore it should not have the right to credit Income Tax Article 22 Import. This is because the lease income received by Airfast from the Company (PTMEI) is related to the lease expense paid by Airfast to Fortico, not the aircraft which is remain owned by Fortico.

PT Medco Energy Internasional Tbk Tax Implications of the Aircraft Change Operatorship 18 March 2013

Value Added Tax (VAT) We have been informed that Airfast has paid VAT import of the aircraft, and it has already been refunded. Funds received from the VAT refund further transferred to the Company. We would anticipate that it could be subject to question by ITO being that ITO would assume that VAT import should not be allowed to be credited against VAT output of Airfast, and it should not have been refunded accordingly. Below is our detail analysis on the eligibility to credit VAT input of aircraft import by Airfast. In case of the Operating Lease Agreement 1, there are two types of VAT input which was paid by Airfast, namely: a. VAT import of the aircraft, and b. VAT input on the lease payment to Fortico. In general, all of VAT input is allowed to be credited against VAT output. However, specific provision of VAT Law stipulates that VAT input in relation to the expenditure which does not have direct relationship with business activities of the company is not allowed to be credited. In this case, we consider that only VAT input related to to the lease payment made based on the operating lease agreement between Airfast and the Company (Operating Lease Agreement 2) is allowed to be credited by Airfast. VAT import of the aircraft should not be allowed to be credited by Airfast because it is related to the aircraft owned and recorded as the asset of Fortico, not the asset of Airfast.

Luxury Sales Tax (PPn BM) As earlier mentioned, Airfast has utilized PPn BM exemption on the aircraft import. We will analyse deeply the tax implication of the change of operatorship in the scheme 2.

2. Scheme 2 Characterization of the change of operatorship As far as we understand, Fortico, not Airfast, intends to change the operatorship to other commercial airlines. This means that Fortico will terminate Operating Lease Agreement 1 earlier than the period stipulated in the agreement, and it will sign new Operating Lease Agreement with other commercial airlines (Operating Lease Agreement 3). There should be three options of characterization of the change of operatorship: a. First, the transfer of rights and obligations in relation to the aircraft; b. Second, the transfer the use or the right to use aircraft; or c. The transfer of aircraft. We indicate that the change of operatorship could reasonably be characterized as the transfer of rights and obligations in relation to the operatorship of aircraft because of the following reasons:

PT Medco Energy Internasional Tbk Tax Implications of the Aircraft Change Operatorship 18 March 2013

a. The legal ownership of the aircraft is remain in the hands of Fortico, not Airfast; accordingly b. Airfast should not be able to transfer the title or ownership of the aircraft to other commercial airlines; c. Airfast should also not be able to issue invoice to other commercial airlines in relation to the delivery of (pemindahtanganan), not the transfer of title of, the aircraft to other commercial airlines; and consequently d. There should not be any inflow of income to Airfast in relation to delivery of the aircraft to other commercial airlines (no compensation received or accrued by Airfast); further e. Operating Lease Agreement 3 is made between Fortico and other commercial airlines, not by Airfast and other commercial airlines; and as earlier analyzed f. The Operating Lease Agreement 3 should in substance be characterized as rent agreement or agreement to provide the use of or the right to use aircraft, not lease agreement; therefore g. Operating Lease Agreement 3 should be viewed as delivery of (pemindahtanganan) the aircraft done by Fortico, from Airfast to other commercial airlines; and consequently h. It should be characterized as the transfer of rights and obligation of the aircraft without any compensation received either Fortico or Airfast; and as a result i. It should not be characterized as the transfer of ownership/title of the aircraft. In our view, income which would possibly be received by Airfast should be income as a consideration of termination of Operating Lease Agreement 1 earlier than the agreed period.

Corporate Income Tax (CIT) Under Indonesian Income Tax Law (ITL), one of type of income subject to Corporate Income Tax (CIT) is capital gain recognized (received or accrued) as a result of the transfer/sale of title/ownership asset. In case of the change of operatorship, we have conclude that it should not be characterized as the transfer of title of the aircraft, but rather the transfer of right and obligation in relation the aircraft. Therefore, there should not be any recognition of income (capital gain) received or accrued, either by Lessee (Airfast) or by Lessor (Fortico). Consequently, there should not be CIT payable, either in the hands of Airfast or Fortico. However, we would anticipate that the singing of the Operating Lease Agreement 3 (between Fortico and other commercial airlines) would terminate Operating Lease Agreement 1 (between Fortico and Airfast) earlier than the agreed period. Therefore, there should be compensation should be paid by Fortico to Airfast for this termination (if Fortico do so). This compensation, in our view, should be subject to CIT in the hands of of Airfast. It should be tax deductible expense in the hands of Fortico.

Status of Income Tax Article 22 Import as tax credit

PT Medco Energy Internasional Tbk Tax Implications of the Aircraft Change Operatorship 18 March 2013

Income Tax Article 22 Import is allowed to be credited by a Taxpayer, against its CIT payable of such Taxpayer, if it is related to an asset imported and legally owned by such Taxpayer, which in the future will generate income that is subject to CIT. In that case, such asset should be recognized, recorded and disclosed as the asset of the Taxpayer in its Financial Statements. On the contrary, Income Tax Article 22 Import should not be allowed to be credited by a Taxpayer, against its CIT payable, if it is related to an asset imported by such Taxpayer but it is legally owned by other Taxpayer, not by the first mentioned Taxpayer (importing Taxpayer). The importing Taxpayer does not have legal ownership of the imported asset, and it does not have the right to recognize, record and disclose it in its Financial Statements. The assets should be recognized, recorded and disclosed in the Taxpayer that has legal ownership of such asset. In the future, the imported asset will generate income for the Taxpayer that has legal ownership of the imported asset. Consequently, Income Tax Article 22 Import should only be allowed to be credited by such Taxpayer, not by Importing Taxpayer. In the case of the Operating Lease Agreement 1 (between Fortico and Airfast), Income Tax Article 22 Import of the imported aircraft should not be allowed to credited by Airfast, against its CIT payable, because legal ownership of the imported aircraft is Fortico, even if the import of the aircraft and the payment of Income Tax Article 22 Import was done by Airfast. In the case of the change of operatorship under the Operating Lease Agreement 3 (between Fortico and other commercial airlines), it is possible that ITO would question on the eligibility of Airfast on the right to credit Income Tax Article 22 Import of the aircraft which previously already been credited by Airfast (if Airfast has done so). This is because under the agreement there could possibly be revealed that: a. Income Tax Article 22 Import on the import of the aircraft has already been credited by Airfast; while b. The ownership of the aircraft is still in the hands of Fortico, not Airfast. Therefore, even if remote, we would anticipate that ITO would consider Income Tax Article 22 Import is not allowed to be credited by Airfast.

Withholding Tax For Airfast, possible income received by it from Fortico, as a consideration for the termination of the Operating Lease Agreement 1 earlier than the agreed period, should not be subject to Withholding Tax (WHT). For Fortico, as delivery of aircraft by it, from Airfast to other commercial airlines, is in substance not the sale or the transfer of ownership of the aircraft then there should be no recognition of income which is subject to WHT.

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PT Medco Energy Internasional Tbk Tax Implications of the Aircraft Change Operatorship 18 March 2013

For other commercial airlines, subsequent to the signing of the Operating Lease Agreement 3, lease payment made by it to Fortico, which in substance is rent/royalty, will be subject to 20% WHT Article 26. As there is no tax treaty concluded between Indonesia and Cayman Island then the 20% such WHT will be fully applicable to such payment.

Income Tax Article 22 Import Based on Income Tax and its implementing regulations, Income Tax Article 22 Import is imposed on the import of goods conduct by Taxpayer. As we have mentioned earlier, the change of operatorship is the transfer of rights and obligations, not the import of goods. Therefore, we may conclude that the change of operatorship should not lead to the obligation pay Income Tax Article 22 Import.

Customs Duty Under Customs Law, goods imported into Customs Area are considered as Imported Goods, and they are subject to customs duty (bea masuk). The change of operatorship is the transfer of rights and obligations, and it should not be considered as the activity of importing goods into Customs Area, accordingly, it should not be subject to customs duty.

Value Added Tax (VAT) Under VAT Law, VAT is payable on the transfer of Taxable Goods and/or provision of Taxable Services by Entrepreneur in the Customs Area. VAT is also payable on the import of Taxable Goods. a. The change of operatorship The change of operatorship should be characterized as the transfer of right and obligations (conclusion of new Operating Lease Agreement 3 between Fortico and other commercial airlines), not including the transfer (penyerahan) of ownership/title of aircraft and the transfer of the entitlement to use of or the right to use aircraft. Therefore, as: There is no transfer of title/ownership of the aircraft; or There is no transfer of the entitlement to use or the right to use of the aircraft; accordingly There should be no invoice issued, either by Airfast or Fortico; and consequently There should be no compensation received, either by Airfast or Fortico, then we may conclude that the change of operatorship should not be subject to VAT.

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PT Medco Energy Internasional Tbk Tax Implications of the Aircraft Change Operatorship 18 March 2013

Of course we also may conclude that as the change of operatorship should not be characterized as the transfer of ownership/title of the aircraft then: Article 16D of VAT Law, which is in substance the imposition of VAT on the transfer title/ownership (penyerahan) of non-inventory assets; and Article 2 (6) of Government Regulation No. 38/2003, which is in substance the VAT exemption on the transfer title/ownership (penyerahan) of aircraft, should not be applicable to it.

b. The lease payment made by the Company (PTMEI) to other commercial airlines The lease payment made by the Company, either it is characterized as lease payment, rent or royalty should be subject to 10% VAT (VAT-output).

c. The lease payment made by other commercial airlines to Fortico As we have previously analysed, since the lease payment made by other commercial airlines to Fortico should be characterized as rent or royalty then it should be subject to 10% VAT (VAT-input), and it should be allowed to be credited against VAT-output.

Luxury Sales Tax (PPn BM) As earlier mentioned, importer/buyer of the aircraft would be subject to penalty/sanction to pay PPn BM which was previously exempted if the aircraft is: transferred (dipindahtangankan); OR used for the purpose other than the initial one.

Therefore, to analyse whether or not the change of operatorship can potentially lead to such penalty, we would analyse whether or not the change of operatorship satisfies one of the two conditions of the applicability of such penalty. a. Characterization of the change of operatorship We have made conclusion that the change of operatorship should be characterized as the transfer (pemindahan) of the rights and obligations in relation to the aircraft, made by Fortico, from Airfast to other commercial airlines. It should not be characterized as the transfer of ownership/title of the aircraft or the transfer of the entitlement for use or the right to use the aircraft.

b. Definition of the transferred (dipindahtangankan) under GR-7/2002

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PT Medco Energy Internasional Tbk Tax Implications of the Aircraft Change Operatorship 18 March 2013

As Government Regulation Number 7/2002 (GR-7/2002) and its elucidation use sentence if within 5 years from the importation and or acquisition of the asset in connection with the word transferred (dipindahtangankan) then the interpretation of word transferred (dipindahtangankan) as mentioned in Article 1A (1) of GR-7/2002 should be linked to import and/or acquisition of the exempted asset. Under Customs Law, import means delivery activities of goods into Customs Area (no transfer of ownership/title requirement), while acquisition could be defined as the transfer of ownership/title of an asset. Therefore, we may conclude that the word transferred (dipindahtangankan) mentioned in GR-7/2002 should be interpreted: in the case of acquisition, as the transfer of ownership/title of an asset; and In the case of import, as the delivery of an asset, including the transfer of rights and obligation in relation to such asset, but not including the transfer of ownership/title of such asset. Based on the above, we may conclude that the transfer of rights and obligations as a result of the change of operatorship should fall under the word transferred (dipindahtangankan). Consequently, the change of operatorship could potentially give rise the obligation for Airfast to pay Luxury Sales Tax (PPn BM) which was previously exempted. c. Definition of the used for the purpose other than the initial one under GR-7/2002 Moreover, the term of used for the purpose other than the initial one as stipulated in GR7/2002 should be interpreted in relation to: The purpose of Operating Lease Agreement 1 (between Fortico and Airfast), not the purpose of other operating lease agreement; and The purpose of GR-7/2002 to provide PPn BM exemption on the import of the aircraft (PPn BM exemption).

Based on the Operating Lease Agreement 1, we consider that initially the imported aircraft shall be used and operated solely by Airfast, not by other commercial airlines. Therefore the change of operatorship should give rise to the use of imported aircraft different from initially intended in the Operating Lease Agreement 1. GR-7/2002 intends to provide PPn BM exemption only on the import of aircraft for commercial air transport purpose. We may conclude that: As initially the import of aircraft was done by, and solely used for commercial air transport by Airfast, not by other commercial airlines; and the change of operatorship can make the imported aircraft used by other commercial airlines, not by Airfast anymore (as the initial importing party); then

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PT Medco Energy Internasional Tbk Tax Implications of the Aircraft Change Operatorship 18 March 2013

the change of operatorship should be interpreted as the use of imported aircraft for the purpose other than the initial one.

Of course, there is possible interpretation that the change of operatorship in substance does not change the initial purpose of the import of the aircraft (it is still used for commercial air transport), and therefore the change of operatorship does not lead to the cancelation of PPn BM exemption. However, it should be noted that: as GR-7/2002 provides PPn BM exemption only to the importation of the aircraft, not the activities other than the import; and as the importation of the aircraft initially shall only be done by the importing party (Airfast), not by other commercial airlines; then the provision of PPn BM exemption should be linked not only to the purpose of the importation of the aircraft (used for commercial air transport) but also to the importing party (Airfast).

Based on the above, we may conclude that the change of operatorship should also be interpreted as the use of imported aircraft for the purpose other than the initial one. d. Conclusion The change of operatorship should be characterized as the transfer of rights and obligations in relation to the imported aircraft. Under GR-7/2002, the transfer of rights and obligations in relation to the imported aircraft should fall under the scope of the word transferred (dipindahtangankan). Further, under GR-7/2002, the change of operatorship should also fall under the scope of phrase used for the purpose other than the initial one. Therefore, we would conclude that: since importer/buyer of the aircraft would be subject to penalty/sanction to pay PPn BM which was previously exempted if the aircraft is transferred (dipindahtangankan) OR used for the purpose other than the initial one; and the change of operatorship falls under those conditions, then it is likely that the change of operatorship could make Airfast subject to penalty/sanction to pay PPn BM which was previously exempted at the time it imported such aircraft. However, in order to obtain legal certainty regarding the tax implication of the change of operatorship, specifically for the possibility of the PPn BM exemption cancelation, we would suggest the Company submit the request for private ruling on it to ITO. We are pleased to assist in this case. Customs Duty

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PT Medco Energy Internasional Tbk Tax Implications of the Aircraft Change Operatorship 18 March 2013

Under Custom Law, goods are imported into Custom Area is considered as Imported Goods and they are subject to custom duty (bea masuk). The change of operatorship should not be considered as the activity of importing goods into Customs Area, and accordingly it should not be subject to customs duty. 3. Tax implication if the aircraft is recorded as the asset of Airfast As Airfast has refunded VAT Import on the importation of the aircraft, we would anticipate the following potential tax implication of the contemplated change of operatorship.

Recognition of the aircraft as the asset of Airfast As Airfast has refunded VAT Import on the imported aircraft, it is possible that Airfast has already recognized, recorded and disclosed the aircraft as its asset in its Financial Statements. Therefore, the real economic substance should prevail over the Operating Lease Agreement 1. In other words, Airfast actually has already acquired the aircraft from Fortico, and Fortico does not have control over the aircraft anymore, economically and legally.

Tax implication of the change of operatorship a. Corporate Income Tax (CIT) As earlier analyzed, as the aircraft has already been acquired by Airfast, and Fortico does not control anymore on the aircraft, then the change of operatorship from Airfast to other commercial airlines should be characterized as the transfer of ownership/title of the aircraft. In this case, Airfast should recognized capital gain (if any), and it should be subject to CIT. To support this characterization, Airfast should issue invoice to other commercial airlines in relation to such transfer, and record it as follows:

(If the sales proceed is greater than book value) (DR) (DR) (CR) (CR) (CR) Account Receivable/Bank Accumulated Depreciation of Aircraft Aircraft sold Capital Gain on the sale of Aircraft VAT payable aircraft sold xxx xxx xxx xxx xxx

(If the sales proceed is less than book value)

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PT Medco Energy Internasional Tbk Tax Implications of the Aircraft Change Operatorship 18 March 2013

(DR) (DR) (DR) (CR) (CR)

Account Receivable/Bank Accumulated Depreciation of Aircraft Capital Loss on the sale of Aircraft Aircraft sold VAT payable aircraft sold

xxx xxx xxx xxx xxx

For other commercial airlines, the change of operatorship should be recognized as the acquisition of the aircraft, and the aircraft should be recorded and disclosed as its asset. There should be no income recognition in this case. The transaction should be recorded as follows: (DR) (DR) (CR) Aircraft VAT-input (Aircraft) Cash/Accounts Payable - Aircraft xxx xxx xxx

b. Value Added Tax (VAT) For Airfast, it should issue VAT invoice and collect VAT from other commercial airlines. In other side, other commercial airlines should pay VAT on the acquisition of the aircraft, and subsequently it has the right to credit it against its VAT-output, and refund it accordingly. However, it should be noted that if in reality other commercial airlines does not acquire the aircraft but it conclude the Operating Lease Agreement with Fortico (Operating Lease Agreement 3), then we would anticipate that ITO could question the eligibility of other commercial airline to credit its VAT-input (as a result of the change of operatorship) against its VAT-output. In this case, it is possible that ITO would consider that such VAT-input cannot be credited (and refunded) because it is not related to the acquisition of the aircraft, but rather the transfer of rights and obligations of the aircraft, made by Fortico, from Airfast to such other commercial airlines. It is likely that, based on the Operating Lease Agreement 3, ITO would consider that the aircraft is still owned by Fortico, not by other commercial airlines.

c. Luxury Sales Tax (PPn BM) As already been analyzed in the scheme 2, the transfer of ownership/title should fall under the definition of the word transferred (dipindahtangankan). Therefore, if Airfast transfer the title/ownership of the aircraft to other commercial airlines, then it is likely that

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PT Medco Energy Internasional Tbk Tax Implications of the Aircraft Change Operatorship 18 March 2013

PPn BM exemption which was previously applicable to the importation of the aircraft by Airfast would be cancelled, and Airfast must pay PPn BM which was previously exempted.

4. Possible solution We would consider several matters in relation to the imported aircraft as follows: a. As an export of the aircraft should be subject to 0% of VAT; and b. It should not fall under conditions of the cancelation of PPn BM exemption on the importation of the aircraft; as well as c. It should also not cause the recognition of income (capital gain) in the hands of Airfast; then d. Airfast should first re-export the aircraft back to Fortico before the change of operatorship is implemented. After re-export the aircraft, and at the time of the implementation of the change of operatorship, other commercial airlines may do temporary import based on the following considerations: a. The import may be eligible to the exemption of Income Tax Article 22 Import under Minister of Finance Regulation No. 224/PMK.011/2012; b. It is eligible to the VAT Import exemption under Government Regulation No. 38/2003; and c. It is eligible to the PPn BM exemption under Government Regulation No. 145/2000 as lastly amended by Government Regulation No. 12/2006. However, to mitigate potential tax risk in relation to the change of operatorship in the future or other transaction in relation to the imported aircraft, Fortico and other commercial airlines should synchronize economic substance of the transaction with proper documentation as well as provision of the agreement made by Fortico and other commercial airlines. In this case, we would suggest that the temporary import of the aircraft should also be accompanied by following considerations: a. Fortico should still recognize, record and disclose the imported aircraft as its asset; b. Other commercial airlines should not recognize, record and disclose the imported aircraft as its asset; c. The period of operating lease agreement between Fortico and other commercial airlines should not be more than 3 years; d. The agreement should clearly states that: The title/ownership of the imported aircraft is Fortico; The period of the agreement is not more than 3 year; After 3 years other commercial airlines will immediately re-export the aircraft back to Fortico. To obtain legal certainty on this transaction structure plan, we would suggest that the Company submit the request for private ruling on it to ITO.

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PT Medco Energy Internasional Tbk Tax Implications of the Aircraft Change Operatorship 18 March 2013

Scope of advice
The above advice is limited to the responses specifically set forth herein and is based on the completeness and accuracy of the above-stated facts, assumptions and representations. If any of the foregoing facts, assumptions or representations is not entirely complete or accurate, it is imperative that we be informed immediately, as the inaccuracy and incompleteness could have a material effect on our conclusions. We are relying upon the relevant tax provisions applicable to Indonesia, including Tax Laws 1983 as amended, the regulations thereunder, the administrative guidance published by the Indonesian tax authorities. These provisions and interpretation may be subject to changes in interpretation, retroactively and or prospectively and any such changes could affect the validity of our conclusions. Unless special arrangements are made, this advice will not be updated to take account of subsequent changes to the tax legislation, case law, rulings and determinations issued by the Indonesian tax authorities. It is your responsibility to take further advice, if you are to rely on our advice at a later dated. It should be noted that there have been occasions in the past when the tax officials have taken a different position to the one we have expected based on our reading of the legislation. Accordingly, we are, of course, unable to give any guarantee that our interpretation will ultimately be sustained in the event of challenge by the tax authority. If you still have any questions, please feel free to contact us. Yours faithfully

Turino Suyatman Partner

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