Energy taxation raking in big $$

Prior to the reform which involved an amendment to the Finance Bill 2005 and enacted last July, the tax regime focused essentially on the development of crude oil while returns from the expanded gas sector were not being reflected on a fair basis.

With gas taking on a more prominent role in the country’s economic landscape over oil, Government’s decision to re-base its national accounts with the year 2000 as the base year captured the importance of the gas and gas-based sub-sector which emerged during the last decade.

Previously, the country’s gas and oil businesses were inextricably linked with taxation from natural gas representing only 49.0 percent of the total petroleum tax receipts even though its income contributed approximately 62.0 percent of petroleum revenue.

"Accordingly, oil and gas revenues were not optimised. Technological developments in the petroleum and gas sectors have now enabled us to separate and identify revenues and expenditure stemming from both oil and gas production," Enill said at an oil and gas forum last week.

International markets for oil and gas are also becoming distinct and separate.

" In fact, we are now seeing the emergence of a true world gas market similar to that for the oil market. It was these considerations which enabled the Government to establish separate tax regimes for oil and gas," he said.

Income from oil production is taxed through a Petroleum Profits Tax (PPT), a Supplementary Profits Tax (SPT) and the Unemployment Levy. The PPT yields about 60 percent of the tax and the SPT about 30 percent.

Under the old regime, the tax base for the SPT was determined after deducting capital allowances which invariably included expenses in respect of both oil and gas exploration and development.

Under the new regime, SPT would be computed on gross crude oil income with no allowances except for the royalty allowance, but at slightly lower rates.

Prime Minister Patrick Manning in his budget presentation last month said in order to compensate for the increase in the taxable base, the rate of tax has been lowered. The rate reduction is somewhat larger at oil prices below US$21 per barrel than at higher oil prices. The trigger price at which SPT becomes payable has also been increased slightly.

Under the new regime, SPT payments are now based on a weighted average price of crude calculated quarterly instead of annually. Previously, SPT was assessed annually but paid on a quarterly basis and often reduced the Government’s cash-flow pending end-of-year adjustments, Manning said.

The prime minister described the major advantages of the new regime as being simple to administer and would provide a more predictable, stable and transparent revenue flow, as oil prices increase; the Government will realise a greater share of the additional revenues than previously and a company’s increase/decrease in exploration and development expenditure will not affect the SPT take.

Regarding the PPT, the amendments to the existing regime involve the removal of the first year allowance for both tangible and intangible expenditure.

It also calls for the postponement of annual allowances to year two or until commencement of commercial products or whichever is earlier, a shift to quarterly tax payments calculated on a current year basis; non-deferral of capital allowances and allowing decommissioning and abandonment costs only when they are incurred and limiting deductible management charges to two percent of expenditure.

Enill said with energy sector output on the rise and separate tax regimes for oil and gas now balancing the economic and financial interests of both producers, the recent and enduring increases in oil prices are generating substantial oil and gas revenues.

In 2006, oil and gas revenues are estimated at $19.4 billion or almost six times the comparable revenues in 2000 and 63.0 percent greater than the 2005. "The growth in revenues resulting from energy output expansion and from a reformed tax regime for the energy sector is helped by the high international energy prices prevailing for some time and which are expected to prevail over the medium-term, " he said last week.

Between 2002-2006, oil and gas revenues will have totalled approximately $47 billion.

"We are of the view that we have established the right long-term policy framework for managing our oil and gas revenues. While we intend to save our oil and gas surpluses in a manner which would benefit both current and future generations, we will always ensure that our expenditure remains appropriate, sustainable and prudent," the junior finance minister said.