Taxation of Minerals, Oil and Gas
Taxation Options
Taxation Options
A very wide variety of tax instruments and combinations of
instruments.
1. Taxes on Income or Profit
2. Taxes on Output
3. Quasi taxes
But stepping back to company decision
making
Tax impact on companies willingness to invest via impact
on:
• P/I ratios (Post Tax Profit/Pre Tax Investment)
• Internal Rate of Return (IRR)
• Materiality
Which can be modelled and estimated under different tax
assumptions
Company Decision Making Project
Economics
Financial and decision making criteria easy to model but final
decision has to take into account:
• Technical risks and potential cost over-runs e.g. HPHT where
technical problems can be very costly
• Political Risk – e.g. Venezuela and the risk of expropriation or
BP’s Russian experiences
An Uncertain world
Huge Variation in outcomes and
opportunities
Variation in project profitability – an
illustration of economic constraints
P/I
P/I RATIOS AND PRODUCTION - BASE CASE PRICES
3.0
3,000
2.5
2,500
2.0
2,000
1.5
1,500
1.0
1,000
0.5
500
0.0
0
181
176
171
166
161
156
151
146
141
136
131
126
116
121
106
111
101
96
91
86
81
76
71
66
61
56
51
46
41
36
31
26
21
16
11
6
1
Field/Incremental Project
P/I Ratio
Illustrative P/I thresholds
Total Reserves (mmboe)
Cumulative Total Reserves (mmboe)
Taxes on Income
1. Corporate Income Tax
• Very widely used
• In some cases, adapted to include stepped rates
(Progressive profit taxes)
• Or a higher flat rate for petroleum companies
• May be on measure of profit before or after
accumulated depreciation
• Ability to use existing legislation and framework
• Trend towards lower general CIT rates
• May be imposed on a project basis rather than on the
entity
CT base: Key Decisions
System requires rules on:
• Income streaming? (in a schedular system like UK)
• Loss carry forward/carry back
• Tax deductibility
• Group relief
• Rollover relief for capital gains and indexing
Taxes on Income
2. Resource Revenue Tax
• Often a supplemental tax on top of general corporate
income tax
• May be very closely aligned with economic rent
[Example – Tanzania experience]
Example - Zambia’s windfall tax
• Windfall tax – introduced 2008
• Withdrawn 2009
• 25% windfall tax and 15% profit tax on income over 8%
R-Factor Tax
• Links taxation to the investment pay-back ratio
• i.e. Ratio of cumulative receipts over cumulative cost
• Tax only when R-Factor exceeds 1.
• Used by e.g. South Africa, Columbia, Russia (Sakhalin
II), Tunisia, India
Cash-Flow Variant
• Cash-flow based tax linked to the real rate of return
• Based on current value of cash flows
• Applies after the target rate of return has been achieved
• Target rate of return should be equal the supply price of
capital, taking into account risk premiums
Withholding Taxes
1 . Withholding tax on dividends
• Encourages retention of capital
2 . Withholding taxes on interest
• Encourages retention of capital
3. Withholding taxes on consultancy fees and services
• Encourages use of local services
• Can offset transfer pricing
• May be DTA issues
Royalties
1. Royalties on production volume
2. Royalties on production value (may be progressive)
• Valuation issues and transfer pricing
• But very widely used
3. Royalties based on profit
Profit royalties
•
•
•
•
•
•
•
Preferred by companies
More risk to government
Delay to tax receipts
Responsive to pricing/profit fluctuations
More complex administration
More scope for disagreement
May be progressive
(South Africa profit royalties - 0.5% to 5% - deferred until 2010)
Customs Duties
Typically:
• very substantial level of equipment imports in early
phase
• Giving rise to significant early-year liability to duties
Many countries exempt specific mining equipment from
import duties.
VAT
Frequently:
• Exports are zero-rated
• Giving rise to significant repayments re VAT paid on
imports
• .. So some countries will exempt industry-specific
imported capital goods and some imported raw materials
from VAT
Quasi-Tax Instruments
1. Prospecting fee
2. Rental fee
3. Signature or discovery fees (oil)
4. Production bonus
5. Land-use fee
6. Production sharing ( mostly used in oil, where may be
more domestic demand than for other minerals)
Quasi-tax instruments
7. Service contracts (mostly used for oil)
8. Equity sharing – for example:
• paid-up equity on commercial terms
• paid-up equity on preferential terms
UK regime – why not use a mix?
The fiscal regime which applies to exploration for and
extraction of oil and gas from the UK and the UK
Continental Shelf (UKCS) consists of three elements:
• "Ring Fence" Corporation Tax (CT)
• Supplementary Charge ( a stepped rate)
• Petroleum Revenue Tax (PRT) – a rent resource tax that
applies to fields developed before 1993
• But mix like this not ideal if you can avoid it! (And we
used to have royalties.)
Mixed Regimes
• Complexity
• Distorts investment decisions on incremental investment
decisions
• Unwinding can creates winners and losers arbitrarily
• Adding incentives can create further undesirable
distortions
Myths – Government needs to own the
oil
• Popular debate often assumes that allowing IOCs to
operate results in loss of control, e.g. in Iraq over new oil
law
• Little evidence that this is true in practice as UK shows
that regulation of production in terms of e.g. field
development plan sign off can be dealt with separately
from taxation.