Tax regimes increasingly complex for the oil and gas industry
- Governments capitalize on high oil prices to maximize oil-related tax revenues
- Mature oil and gas countries revise legislation to stimulate development
- New frontier countries work towards designing national tax regimes to attract investment
LONDON, 23 June 2011 – The last 12 months have seen many countries around the world make significant changes to their tax regimes that have directly impacted the oil and gas industry, according to Ernst & Young who today release the Global oil and gas guide 2011. The guide summarizes the oil and gas corporate tax regimes in 61 countries.
Alexey Kondrashov, Global Oil & Gas Tax Leader for Ernst & Young, comments: “It is clear that, due to high oil prices, many governments have made efforts to increase the tax burden on the oil and gas industry. The danger is that governments do not take into account the growing costs of businesses, which are already heavily taxed. The combination of increasing taxes and costs may inhibit their ability to explore and drill for new oil and gas – the lifeblood of the industry.”
Increases have been seen in a number of countries, including the UK, where the supplementary charge rose from 20% to 32% from 24 March 2011. As a result, the effective tax rate on UK upstream profits is now 62% (for non-PRT paying fields) or 81% (for PRT paying fields). There has been an increase on Mineral Use Tax in Russia, where combined marginal Royalty (Export duty and Mineral Use Tax) rate is getting close to 90%. Kazakhstan has seen an increase of Export duty Rate to USD40/bbl. Elsewhere, a reintroduction of certain surcharges in China and the repealing of Capital Investment Allowances in Columbia is altering the tax landscape.
When this is taken into account alongside discussions regarding the repealing of Intangible Drilling Costs tax (IDC) in the US and Australian Government plans to apply Petroleum Resource Rent Tax (PRRT) to all oil and gas projects, the trend has been an increase to the tax burden of the industry. This is not universal, however. At the same time, Australia and other countries such as New Zealand, UK, Canada and Ecuador have reduced the rates of Central (Corporate) Income Tax.
Production sharing agreements remain popular
Production Sharing agreement regimes have proved to be a reliable form of oil and gas contract and still are widely used across the world, both by countries with long oil and gas production history (such as, Azerbaijan, Indonesia, Malaysia, The Philippines and Vietnam), as well as new industry entrants (such as, Greenland and some African countries, which promote oil and gas exploration). Brazil has found it necessary to introduce a Production Sharing Contract into the framework of its Oil and Gas legislation. This step has been undertaken by the Brazilian Government to be used in the future bidding rounds for the exploration and development of pre-salt and other strategic areas.
New tax regimes stimulate investment
Many governments have introduced, or are currently elaborating on, new tax regimes to stimulate investment into new areas, for example, capital allowances to stimulate oil sand operations in Canada. In Russia, the Government is working on the introduction of a new regime, with the aim of stimulating development of new oil fields.
Shale industry prompts changes
As we see the shale industry develop and mature, we are likely to see a further raft of changes. Due to potential shale gas explorations, we have seen several newcomers to the oil and gas industry, including Poland and the Ukraine. It is likely that these countries will make changes to their tax regimes as the industry develops.
Kondrashov concludes: “There is no best or worst tax system on the global oil and gas map. Government decisions on taxation are influenced by many factors. But, as we see, smart governments take a longer term approach, giving companies the ability to increase their level of production and explore for new hydrocarbons. Tax legislation should be changing to shift the tax burden to the cash-flow, or profit, generating stage.”
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