By A. Ananthalakshmi and Joseph Sipalan
KUALA LUMPUR (Reuters) - The board and management of Malaysian national energy giant Petronas have urged the prime minister to drop a planned tax settlement with a state that is run by his political allies, three sources close to the company said.
Petronas' chief executive, Wan Zulkiflee Wan Ariffin, resigned in opposition to the deal, sources told Reuters last week, and he is set to leave the company this month after 37 years.
But, sources told Reuters the rest of the management were still trying to convince Prime Minister Muhyiddin Yassin to block the pay-out to Sarawak, a resource rich state on Borneo island.
Muhyiddin's decision will have big implications for Petronas and the national budget, and will be closely watched by foreign investors, on guard over corporate governance and financial transparency in Malaysia following the mega-scandal at sovereign fund, 1Malaysia Development Bhd (1MDB).
"The Petronas board and management are totally against the deal. Management is drawing up fresh representation for the PM in a bid to convince him to see things their way," said one source.
Another said Petronas executives recently briefed Muhyiddin, telling him the deal was not viable and would set a bad precedent, but he refused to budge.
The prime minister's office and Petronas did not immediately respond to requests for comment.
At the centre of the disagreement is Sarawak's demand for a sales tax payment, which went to the courts last year, before Muhyiddin took office on March 1. Petronas, which already pays federal taxes, had filed a challenge to the tax claim, questioning Sarawak's right to impose such a tax.
A court ruled that Sarawak can impose the tax, but Petronas had appealed that decision at the federal court.
A $470 million settlement was announced last month, although Sarawak later said it was still pursuing the case, with state officials saying Sarawak was now seeking nearly $680 million.
Petronas also this week filed to withdraw the federal court appeal, though sources close to Petronas said the board did not want to end the legal fight with Sarawak.
"The decision is out of Petronas' hands. It's being driven by the prime minister," said one source.
By law, the prime minister has the final say on matters involving wholly state-owned Petronas, the world's fourth biggest liquefied natural gas exporter and Malaysia's only Fortune 500 company. It had revenue of $56 billion last year.
Previous Malaysian governments have held out against demands from energy rich states for a bigger share of oil and gas revenues.
But Muhyiddin needs support from Sarawak state's political bloc - Gabungan Parti Sarawak - to assure his single-digit majority in parliament, as he remains in a shaky position nearly four months after emerging as prime minister following the shock resignation of Mahathir Mohamad.
Mahathir had opposed giving more oil money to the states.
And the Petronas board and management are concerned that the settlement with Sarawak would encourage other oil and gas rich states to make similar demands, the sources said.
In addition to paying the sales tax, sources close to the negotiations have earlier said Muhyiddin had shown he was potentially open to increasing royalty payments to Sarawak and Sabah states - which could run into billions of dollars a year.
