This article first appeared in The Edge Financial Daily on November 26, 2019 - December 2, 2019

KUALA LUMPUR: It appears Petroliam Nasional Bhd (Petronas) is prepared to go to court to battle it out with the Sarawak state government, which initiated a lawsuit to claim the non-payment of sales tax on petroleum products from the national oil and gas (O&G) company.

“Petronas confirms that the comptroller of state sales tax of Sarawak and government of the state of Sarawak  filed an action suit against Petronas before the High Court of Kuching on Nov 21, for the non-payment of Sarawak sales tax on petroleum products,” the national O&G company said in a one-paragraph statement yesterday, without elaborating.

The legal action comes amid rising demands from Sabah and Sarawak for the federal government to honour its electoral pledge to increase oil royalties by Petronas, Putrajaya’s largest cash cow, for the two states. Prime Minister Tun Dr Mahathir Mohamad, at an event in New York last month, said Putrajaya was trying to work out how to give Sarawak and Sabah “more money without undermining Petronas’ own strength”.

He had previously said Pakatan Harapan’s election pledge to increase royalties for oil-producing states from 5% currently to 20% was not workable, and could “kill” Petronas. “We don’t want to kill Petronas. If we take 40% for oil royalties from its operating cost, Petronas will lose money,” he was reported as saying in September last year.

Sarawak, according to a news report in late-October citing a key negotiator in the issue, was supposedly willing to drop its demand for a quadrupling of the royalties paid by Petronas, providing it gets production sharing and other agreements.  However, Sarawak has denied it was going to do so, saying the report is misleading, and that its current negotiations with Putrajaya are still based on the 20% royalty.

Sarawak’s lawsuit against Petronas, meanwhile, was reported by Bernama last Thursday.

“As have been mentioned several times before this, Petronas [has] not paid the state [the] sales tax for petroleum products under the State Sales Tax Ordinance 1998 which is due to the state.

“As a result, the state government is left with no choice but to commence legal action for the recovery of the unpaid taxes due,” Sarawak Assistant Minister in the Chief Minister’s Department (Law, State-Federal Relations and Project Monitoring) Datuk Sharifah Hasidah Sayeed Aman Ghazali was quoted as saying in the report.

The 5% state sales tax was imposed on Jan 1, and Petronas is said to be the only O&G company operating in the state which has not paid the tax.

As recent as Nov 15 this year, Petronas chairman Datuk Ahmad Nizam Salleh was reported as saying that Petronas was still negotiating with the Sarawak government, together with the federal government, concerning the payment of sales tax on  petroleum products that it owes the state government, which it had been given until Oct 31 to do so.

Sarawak Chief Minister Datuk Patinggi Abang Johari Tun Openg had previously said if Petronas wanted to reduce the rate of sales tax it owed — said to be around RM1.2 billion, according to some news reports — then the shortfall must be compensated by the federal government through an arrangement with Petronas. On Sunday, Abang Johari declined to reveal the actual amount owed, according to a Borneo Post report. “Wait for [the] court, we follow the law. I cannot tell now, sub judice,” he told reporters after an event in Lundu.