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Tax incentives for Late-Life Assets (LLA) Production Sharing contracts
In Budget 2022, to attract oil and gas companies to invest and venture into LLA, several incentives were proposed, including the following:
(a) Accelerated capital allowances (ACA),
(b) Petroleum income tax rate of 25%, and
(c) Carry back of losses from decommissioning activities, to be utilized against income for two consecutive immediate-preceding YAs. Any remaining losses, i.e., losses which cannot be utilized in the two consecutive immediate-preceding YAs, will be disregarded.
To legislate the above-mentioned proposals, the subsidiary legislations discussed below were gazetted on 27 September 2022 and are deemed to have come into operation on 1 January 2020. For the purpose of the legislations, the Minister may determine a project as an LLA project, which is a brownfield oil or gas field (i.e., an oil or gas field that has been developed and has reached a peak level of oil or gas production rate) that has an economic lifespan not exceeding ten years commencing from the year the LLA production sharing (LLAPS) contract is signed.
Petroleum (Income Tax) (Accelerated Capital Allowances) (Late-Life Assets Production Sharing Contract) Rules 2022 [P.U.(A) 301]
The Rules provide that a chargeable person will be given ACA (20% initial allowance and 40% annual allowance) in respect of qualifying plant expenditure incurred for the purpose of carrying out petroleum operations in relation to LLAPS contracts.
The Rules shall apply to a chargeable person who:
(a) Has signed an LLAPS contract between 1 January 2020 and 31 December 2029, and
(b) In the basis period for a YA has incurred qualifying plant expenditure under the Second Schedule to the Petroleum (Income Tax) Act 1967 (PITA) solely for the purpose of carrying out petroleum operations in relation to that LLAPS contract
If an asset which qualifies for the ACA is disposed-of within one year from its date of acquisition, the allowance given under the Rules shall be withdrawn.
Such allowance shall be withdrawn in the basis period for the YA in which the asset is disposed of.
The non-application provisos stipulate that the Rules shall not apply where the chargeable person:
- Has been granted ACA under the Petroleum (Income Tax) (Accelerated Capital Allowances) (Marginal Field) Rules 2013,
- Has been granted investment allowance under the Petroleum (Income Tax) (Investment Allowance) Regulations 2013,
- Has been granted tax exemption under the Petroleum (Income Tax) (Exemption) Order 2013,
- Has been granted ACA under the Petroleum (Income Tax) (Accelerated Capital Allowances) (PETRONAS Marginal Field) Rules 2014,
- Has been granted tax exemption under the Petroleum (Income Tax) (Exemption) Order 2014,
- Has been granted investment allowance under the Petroleum (Income Tax) (Investment Allowance for PETRONAS) Regulations 2021,
- Carries on petroleum operations in the Joint Development Area, or
- Carries on petroleum operations in an area under any agreement or arrangement made by the Government with any government of any territory outside Malaysia for the joint exploration and exploitation of petroleum in overlapping areas.
Petroleum (Income Tax) (Exemption) Order 2022 [P.U.(A) 302]
The Order provides that a chargeable person will be partially exempted from the payment of petroleum income tax in respect of statutory income derived from petroleum operations in relation to LLAPS contracts. The statutory income exempted is determined in accordance with the formula below, resulting in a reduction of the tax rate from 38% to 25%.
A / B x C
where:
A is the chargeable tax of the chargeable person in respect of its petroleum operations in relation to the LLAPS contract which is equal to 38% of its chargeable income reduced by the chargeable tax which is equal to 25% of its chargeable income
B is the chargeable tax of the chargeable person in respect of the petroleum operation in relation to the LLAPS contract which is equal to 38% of its chargeable income, and
C is the amount of such chargeable income
The exemption is provided on condition that the chargeable person has signed an LLAPS contract with Petroliam Nasional Berhad (PETRONAS) between 1 January 2020 and 31 December 2029.
The non-application provisos are similar to P.U.(A) 301 (refer above). The Order also stipulates that the exemption granted does not absolve the chargeable person from any requirement to submit any return, statement of accounts or any other information as required under the PITA.
Petroleum (Income Tax) (Adjusted Loss from Oil or Gas Field Decommissioning Activity) (Late-Life Assets Production Sharing Contract) Regulations [P.U.(A) 303]
The Regulations provide that a chargeable person may deduct the amount of adjusted loss from oil and gas field decommissioning activities (as defined) in ascertaining his assessable income from his petroleum operations in relation to LLAPS contracts in a basis period for a YA. The adjusted loss shall be allowed as a deduction as follows:
(a) Firstly, in ascertaining the assessable income of a chargeable person for the YA immediately preceding the YA where the adjusted loss is ascertained under Section 19 of the PITA,
(b) Secondly, any balance of the adjusted loss after taking into account the deduction under Point (a) above shall be utilized as a deduction in ascertaining the assessable income of that person for the second YA immediately preceding the YA where the adjusted loss is ascertained
Any adjusted loss which is not utilized in the two YAs described above shall be disregarded.
The Regulations shall apply to a chargeable person who has signed an LLAPS contract between 1 January 2020 and 31 December 2029.