Oil and gas in various tax systems. What's the best?
The question of the title receives a response from the outset: There is no "best" tax system, as there is no worst tax system applied to the oil and gas industry. However, we can guess where the "worst" worst destructive tax system for any industry and especially for oil and gas: the regime, far from facilitating economic development, a strangling, driving away foreign direct investment and training capital. In reverse, we feel that a favorable fiscal regime is one that stimulates industry to develop new investment projects, allocate funds as large in new technologies, and create new areas of production and new jobs. Radu Dudau expert says that taking as a fundamental principle, a "best fit" tax system for oil and gas industry is the one that manages to maximizing the return to the state and to attract and retain investment capital and technology. What happens then to the oil and gas industry worldwide? But at European level?
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Recently a study was published by one of the big audit firms and the Big Four consulting (Deloitte). Based on public data, its experts analyzed the actual level of fees and similar taxes as a percentage of revenues from exploration and production activities of oil and natural gas ("upstream") in Europe. Thus, Romania has a share of around 13.9%, while the European average is only 12.2%. If the European average is excluded from this deposit Groningen (the largest natural gas deposit in Europe and 10th in the world), this average falls to 9.6%. We cannot speak of a worldwide royalty, since each country has its own specific characteristics in terms of both its deposits and taxation regime or energy strategy. However, in political rhetoric we often hear soon populist claiming royalties applied examples of industry in Arab countries or the United States, Britain and Norway. According to the same Radu Dudau, such comparisons put Romania in a position to be unfavorable, but done incorrectly analyzed "in Arab countries, the royalty is between 80 and 90% of the final cost of the oil. In Norway, oil and gas taxation reaches 80% ". Dudau argues it considers the comparison "incomplete, inaccurate and misleading": the user's annual E & Y, entitled Global Oil and Tax Guide, shows that the tax treatment of Iraq is based on royalties, but taxation with 35% of profits from the production oil and gas. And Saudi Arabia imposes an income tax of 85% for oil, plus royalties individually negotiated concession agreements. Norway does not have royalty, but requires a unique resource rent (resource rent tax) of 50%, plus 28% income tax. UK oil and gas production charge to corporation tax of 30% plus additional 32% flat tax. And mentions directory EPG Radu Dudău, although these values taxation seem favorable Member exemplified in comparison to the fees and taxes collected by the Romanian state, have mandatory noted that in all these countries exist in parallel and general system of deductions (Capital Allowances) and tax incentives. All these deductions and tax breaks apply "to encourage investment in the development of deposits small or difficult conditions of production (offshore deepwater, heavy oil, mature fields), which would otherwise not be profitable," explains Vasile Yuga, Country Managing Partner PwC. All these deductions, rebates and tax exemptions lowers profit to which the charge applies initial, so, despite nominal rates higher tax real rates of taxation are considerably diminished - sometimes to zero, encouraging fact the industry is sustainable.
We cannot speak of a worldwide royalty, since each country has its own specific characteristics in terms of both its deposits and taxation regime or energy strategy
Romania has a unique production profile in Europe, while the industry has over 150 years of oil exploration and extraction over 100 years and capitalizing on natural gas. But with all this rich history, today's oil and gas Romanian has negative aspects: production is steadily declining, deposits are mature, small, fragmented production per well is among the lowest in Europe, the cost of production oil barrel is among the highest in Europe. Romanian oil industry development depends heavily on major investments and high risk in what experts call being depleted border: from the bottom of the Black Sea, obtained from deep sea drilling onshore, those requiring redevelopment. With all the risks and pressures to which it is subject, oil and gas industry is a growth engine for sustainable development. And, to go on expert judgment Radu Dudău that the state should be able to maximize the gain from the development of this industry, it must first of all to ensure continuity and to participate more fully in the realization of gains and to attract and facilitate investment. It's true that it's easy to ask or even to impose a favorable situation for the state, maybe even for consumers, but for economic sustainability and to gain reciprocal state consumer-industry, the state is obliged to create a favorable situation for oil companies .
Deductions and tax incentives apply to encourage investment in the development of small deposits with difficult production conditions (deep offshore, heavy oil, mature fields), which would otherwise not be profitable, Vasile Yuga, Country Managing Partner PwC
Here are the challenges Romanian oil: fields are mature and fragmented, oil has a low quality and the gases have high costs of processing are high costs of growth projects, long payback, technical risks and geological raised both onshore and offshore market risks (ex. the price volatility). With all these challenges and risks, oil and gas brings many benefits to the national economy: energy security, additional income considerable state budget, participate in significant proportion to GDP growth, help create and maintain jobs, gives Romania a real potential to become a regional power pole, access to new technologies, infrastructure development, has positive impact on the local workforce, suppliers and communities. The sustainable development of this sector cannot be achieved without investment, which requires special conditions: fiscal and regulatory regime attractive and stable open and competitive markets.
Romania has one of the lowest levels of productivity probe at European and world level. Here's the average production of oil and gas well (boe / d) in Europe: Norway 2350, Netherlands 1242, Denmark 965, Ireland 390 United Kingdom 364, Spain 334, Italy 272, Germany 155, Greece 67, Czech Republic 61 Croatia 53, Austria 49, Hungary 48, Serbia 43, Albania 41, France 36, Poland 34, Turkey 31, Lithuania 30 and Romania 20.
A comparison of tax systems is a step more complex than a simple
analysis of the nominal charge. According to several experts, among which
are found both cited (Radu Dudau Vasile Yuga) can be defined several criteria
for comparability of tax systems: the type of resource and method of operation
(ex. Oil / gas, onshore / offshore Conventional methods /
non-standard); maturity and fragmentation of deposits; well productivity; operated
oil quality; geological and technical conditions of production; the
cost of discovery, development and operation of deposits; prospectivitatea
country in terms of new resources that can be discovered and exploited commercially; the
degree of development of transport infrastructure of hydrocarbons; level
of development and the liberalization of the oil market.
If we look at effective tax rate of Romania, we find that is above that of comparable countries and the EU average, the overall European average is 9.6% (excluding deposit Groeningen; values according to the Deloitte study, published in January 2015). In December 2014, the effective tax rate is 15.1% of Romania, and the average rate of 13.9%. By simple comparison, here's how other European countries who are based taxation systems: Poland 1.0%, France 3.9%, Bulgaria 7, 7%, Lithuania 9,6%, Turkey 12.5%. From the examples offered so far the average rate is 6.9%. Other such tax systems in Europe are: Serbia 2.8%, Czech Republic 4.7% and Slovakia 5%, Croatia 10%, Italy 14.4%, Austria 17.6%, Germany 18.6% NS SH Germany remainder 3.6%, Hungary 25.3%. Systems based on taxation of profits: Spain 1.6%, UK (depleted before 1993) 11.3%, Denmark 19.6%, Norway 22.5%.
A simple conclusion is obvious to here: Romania should provide a royalty tax regime and stable regulatory and competitive to attract investment. Romania needs significant investments to meet the challenges and to attract market opportunities. This requires several conditions:
- Royalty regime stability. Agreements existing concession subject to current royalty regime during the concession. Royalty regime changes are applicable to new concession agreements. Benefits royalty regime stability is boosting long-term investment and maintaining investor confidence and involvement. Therefore, the fee system should be stable throughout the duration of the concession.
- Tax treatment of royalties and stable regulatory and competitive. Investment decisions are based on the existing tax at the beginning of the project. Investor confidence should be maintained by providing a predictable regulatory and tax regime and stable throughout the life of the project. Fiscal and regulatory regime must become competitive to attract investments and reflect, significant geological risks, technical risks of cost and market prices that they assume investors. Additional revenues to the state budget should come from additional production obtained, not on a high level of royalties, which discourages investment.
- Open and competitive markets. Gas market should be open and liberalized under the laws of energy infrastructure must be developed, both the transmission and gas storage and pipeline interconnections between national borders.
Therefore, I believe that the basis of the relationship with the state oil and gas industry must stand a legislative and fiscal system to be built on some clear principles. I believe that any tax system must achieve a perfect balance between the interests of three basic parts: (1) citizens of the state - so consumers; (2) the private economy of the country - so suppliers 'market'; (3) State. In the case of royalties, their regime must also meet the needs of both the state and the needs of industry and consumers. From a consumer perspective it must be made competitive access to security of supply and energy products. From the industry perspective, oil and gas sector, the system that must be adopted and provide a regulatory and fiscal framework to ensure continuity of production and investment to maximize value for shareholders.
- UPSTREAM OIL corporate profit taxation, the principle of taxation UPSTREAM.
Here is the position ROPEPCA (Romanian Association of Petroleum Exploration and Production Companies) on the draft corporate profit tax from oil and gas industry:
- Taxation of additional profits (ISP) should be a neutral tool, so that projects that are profitable before taxes to remain profitable after such a charge is applied (to not discourage investment);
- The state must receive a reasonable share of the profits of upstream petroleum activities;
- ISP, including the rest of taxes must be competitive compared to other jurisdictions similar and reflect risk sharing profitability between the state and investors, local conditions (eg. The natural production decline, fields mature, locating and accessibility of technologies used, surface or deep operations etc.);
- The system must be flexible and viable for all upstream projects and to consider specific features (eg. High capitalization level, high-risk projects, market volatility etc.);
- Regime stable, predictable in terms of legal and fiscal existing concession agreements;
- Boosting the sector in line with Romania's energy strategy;
- Flexible administrative process.
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