Risk analysis of tax consolidation application in frontier areas on government income

A country needs stronger incentives to increase exploration investment in high-risk isolated frontier and deepwater areas. tax consolidation is one of the possible incentives to raise exploration investment level in those frontier areas. tax consolidation means that expenditures of non-producing contract(s) can be deducted from the income of producing contracts of the same contractor(s) for determination of taxable income. from the government point of view, the application of tax consolidation represents its current investment for future income. in this study, risk analysis of the application of tax consolidation in frontier areas was taken with monte carlo simulation to identify its impact on the government of indonesia (goi) income and on the profitability of contractor as well as quantifying the risk involves respectively. the result showed, that from contractor’s financial aspect, tax consolidation was more attractive incentive compared to increase in production sharing split. on the other hand, it was less attractive to the goi, not only because it reduced goi’s npv, but it also posed high risk to the goi.