Petronas withdraws appeal over landmark Sarawak tax ruling

National oil company to pay Sarawak state govt as both appeal and cross appeal struck out and High Court decision affirmed


PETROLIAM Nasional Bhd (Petronas) has withdrawn an appeal to the Court of Appeal over a disputed RM1.3 billion tax bill, leaving in place a landmark court ruling siding state laws that could shape the way oil and gas resources are managed in the country.

The decision followed an out-of-court deal reached between Petronas, the Sarawak state government and the state’s comptroller of state sales tax.

Petronas counsel Alvin Chong informed the court, via a video conference, that it sought to withdraw its appeal against a High Court ruling to award Sarawak payment of backdated sales tax on oil products and for legal costs to be borne by each party.

Sarawak state counsel Datuk Seri JC Fong informed the three-member bench that it would also retract its cross appeal and sought for the High Court decision to be affirmed. Justice Datuk Abdul Karim Abdul Jalil subsequently ruled that both the appeal and cross appeal be struck out and for the decision of the High Court to be affirmed.

The other judges on the panel were Justice Datuk Hadhariah Syed Ismail and Justice Datuk Indera Mohd Sofian Abd Razak. The court mention was conducted online on grounds that parties from Sarawak are restricted from being present in Putrajaya, given the state’s red zone status. State Attorney General Datuk Talat Mahmood Abdul Rashid and legal officer Nur Azhar Bujang appeared for the state government.

With the appeal withdrawn, the Kuching High Court ruling on March 13, which found that provisions under the Federal Constitution overrode the Petroleum Development Act (PDA) 1974, is affirmed. This meant that Sarawak’s right to collect tax extended beyond the state list to include petroleum products.

The closely watched case is a first test of how Petronas will deal with mounting pressures from oil-rich states which have long demanded a bigger share of the country’s oil money. The PDA currently stipulates that oil-producing states Sarawak, Sabah, Terengganu and Kelantan get a 5% royalty.

Asia School of Business assistant professor of business and society Dr Renato Lima de Oliveira said it would only be logical for other states to up their demand, following the outcome of the dispute.

“I do think other states will follow suit — by their own interest to raise revenues or by bottom-up pressure from constituencies pressuring representatives to get similar deals which would come at the expense of Petronas’ dividend, the federal government and the company’s ability to reinvest in exploration and development of new fields,” he told The Malaysian Reserve.

The compromise could see a reduction in the amount Petronas can contribute to the federal government. Petronas accounted for more than 15% of the government’s revenue over the last five years.

AxiCorp Financial Services Pte Ltd chief global market strategist Stephen Innes said investors would be relieved to have the tax issue out of the way although new concerns will rise.

“For earnings, this will be a straight line hit to Petronas and it will be viewed in a negative light.”

Earlier in April, Fitch Ratings Inc revised the outlook on Petronas to ‘Negative’ from ‘Stable’ and affirmed its ‘A-‘ long-term foreign and local currency issuer credit ratings on the national oil company.

S&P Global Ratings also made similar revisions, saying Petronas will remain sensitive to potentially negative government intervention if Putrajaya faces financial distress.