Petroleum Resource Rent Tax Research Articles

Taxation aspects of climate change management measures

Climate change is undoubtedly one of the greatest economic, social, and environmental challenges now facing the world. The present Australian Government is committed to acting on climate change and Australia’s progress towards its emissions reduction targets is being closely watched internationally. To contribute effectively to global climate change action, Australia must demonstrate its ability to implement robust and sustainable domestic emissions management legislation. The Carbon Pollution Reduction Scheme (CPRS), modelled after the cap-and-trade system, continues to be debated by our policymakers, as the Government moves to re-introduce its preferred CPRS legislative package for the third time. The advent of climate change legislation is inevitable and its impact will be far-reaching. This paper reviews the fiscal aspects of the proposed CPRS legislation in the context of the oil and gas industry, and whether it is conducive to creating incentives for appropriate climate change response by the industry. In particular, this paper will consider: the direct and indirect tax features specifically covered in the proposed CPRS legislation and their implications; the areas of taxation that remain uncanvassed in the proposed CPRS legislation and aspects requiring clarification from the tax administration; the interaction between Petroleum Resource Rent Tax (PRRT) and the CPRS measures; the flow-on impacts to taxation outcomes resulting from proposed accounting and financial reporting responses to the CPRS legislation; the income tax and PRRT treatment of selected abatement measures; and, elements of a good CPRS tax strategy and compliance action plan.

PETROLEUM RESOURCE RENT TAX ISSUES AFFECTING THE USE OF DEDUCTIONS

Careful planning is necessary when buying or selling an interest in an offshore petroleum area, farming into a project or setting up operating arrangements for a project within the petroleum resource rent tax (PRRT) net, to ensure maximum use of deductions for exploration expenditure and other costs of the project.The rules dealing with transfers of interests in petroleum projects and with the transfer of undeducted exploration expenditure from an unprofitable project to a profitable one, encourage participants to ensure that they hold an interest in the relevant area before they commence exploration activity.There are special rules applying in the PRRT context to the transfer of interests in a project from one person to another. It is important to understand how these rules apply as they can impact both upon who is liable to pay PRRT on the project and the ability to use and transfer exploration expenditure.Certain head-office costs are excluded from deductibility when calculating the taxable profit of a project. The manner in which a project is structured may impact on the practical implications of this exclusion.This paper provides an overview of the PRRT regime, the implications of the transfer of an interest in a project and the requirements which must be satisfied in order to transfer exploration expenditure between projects. The paper then contains a discussion of a number of issues in relation to deductibility and use of exploration expenditure, the transfer of interests in permits and the use of contractors to undertake activities on behalf of joint venture participants maximising the scope of available deductions.

GREENHOUSE GAS ISSUES—ONE FOR THE AUSTRALIAN TAXATION OFFICE?

In the 21st century we are constantly bombarded with issues on the need to do more to protect the environment and deal with greenhouse gas issues. The petroleum industry world-wide has come under fire for the emissions produced as a by-product of the petroleum refining industry and all primary producers and refiners must develop strategies to reduce atmospheric carbon dioxide emissions. While it is probably fair to say Australia’s appetite for production and consumption of natural gas or LNG is much more environmentally friendly than the days of fossil fuel sources such as coal, there is still a long way to go to minimise emissions in the industry.Global oil and gas companies operating in Australia are leading the way to develop ways to reduce greenhouse emissions. Two examples are Gorgon joint venture plans for carbon dioxide sequestration for its gas development project and perhaps BHP Billiton’s comments that it sees potential for similar sequestration into coal seams onshore Australia in Queensland, South Australia or New South Wales.The costs of projects to re-use or re-inject or sequestrate greenhouse gases are likely to be significant. But are these operating costs of the taxpaying entities in question and would they qualify for tax relief for income tax or petroleum resource rent tax purposes? This paper looks at some of the projects now underway in Australia to reduce greenhouse emissions in the petroleum sector and assesses whether the type of costs likely to be incurred in such projects might qualify for tax relief under existing legislation.

TAXATION OF THE AUSTRALIAN OFFSHORE INDUSTRY: A PERSPECTIVE

There is an extensive list of taxes (direct and indirect) that potentially apply to companies that explore and produce oil, gas or other hydrocarbons in Australia’s offshore waters. These taxes can include income tax, petroleum resource rent tax, royalties, goods and services tax, customs duties and fringe benefits tax. However, are such companies that produce in Australia taxed more than their counterparts in offshore locations elsewhere around the globe? This paper provides an insight into the principal forms of direct taxation that apply to the Australian offshore production industry. It examines the nature of the taxes applied, the rate of taxation and how the tax take has moved over the years since the first offshore exploration permits were granted in Australia in the late 1950s. The paper gives examples of how in practice each of the relevant taxes would apply throughout the life of a field and compares the taxation burden in Australia to that in other key offshore producing jurisdictions such as the UK, US and Norway. The paper concludes by looking at some of the economic and political factors that must be addressed by the Australian Government if Australia is to maintain a fiscally balanced tax regime to encourage further investment in our offshore industry.

THE COMPETITIVENESS OF THE AUSTRALIAN FISCAL REGIMES FOR OIL, GAS AND LNG COMPARED TO PRODUCTION SHARING CONTRACTS IN SOUTHEAST ASIA

With uncertain energy markets in Asia, each energy exporting country needs to be aware of the competitiveness of its fiscal regime. Oil and gas companies are quick to find fault with fiscal regimes, while governments can be slow to react to industry demands.Companies are using increasingly sophisticated methods of project selection. Therefore, if governments wish to encourage exploration and development while ensuring a fair return to the nation, they must constantly analyse fiscal terms and their impact on cash flows for the most common forms of oil and gas projects in the country.This paper takes an objective look at the competitiveness of Australia's Petroleum Resource Rent Tax and royalty/excise fiscal regimes for oil, gas and LNG projects against fiscal regimes in Indonesia, Malaysia and Papua New Guinea. Worked examples have been calculated for each regime to compare Australia's system relative to the other major producing countries in the region.Australia's onshore and offshore regimes are shown to be very competitive with respect to net present value. In addition, Petroleum Resource Rent Tax is one of the more progressive regimes in the region. However, Production Sharing Contracts in Indonesia and Malaysia are seen to be potentially more flexible when considering the varying nature of oil and gas projects, and they can provide a greater degree of certainty as the negotiated terms remain fixed for the life of contracts.

COMMONWEALTH PERSPECTIVE ON PETROLEUM TAXATION

In 1997 the petroleum industry sought modifications to the petroleum resource rent tax (PRRT) regime which applies to all Commonwealth offshore areas except the North West Shelf Project area. Industry argued that the PRRT impeded deepwater exploration and development activity and the exploitation of large stranded gas deposits suitable for conversion to liquids such as LNG. Industry suggested that a more appropriate risk/reward balance in the tax structure could be achieved by providing a volume based PRRT exemption for projects located in water depth greater than 400 m and by increasing the uplift rates for unrealised losses. It was proposed that the risk premium for the general (development) expenditure carry forward rate be increased by five percentage points to the long term bond rate (LTRR) plus 10 percentage points. Another industry recommendation was that exploration expenditures incurred more than five years before the issue of a production license (PL), which currently attract the lower GDP factor rate (the five year rule), be uplifted at the long-term bond rate for the period prior to the five year mark and then rolled forward at LTBR plus 15 percentage points. In addition, industry asked that the reference date for the five year rule should be based on the application date for a PL and not the issue date. For integrated gas to liquid projects, industry requested clarification of the basis for valuing feedstock gas for determining gas liability.In response, the Commonwealth decided to adopt a gas transfer price (GTP) methodology based on a combination of established cost plus and net back formulas to be applied to the up and downstream stages of the project respectively. The difference in the price outcome of the two methods, the residual price, is split 50:50 to obtain the GTP. Details of how the residual price method will be applied are currently being finalised with a view to enacting legislation in 1999-2000. The Commonwealth also responded positively to the industry suggestion that the reference date of the five year rule be applied from the date of application for the PL on the proviso that the appropriate authority receives all information pertaining to a successful application. Recommended changes to the PRRT for deepwater areas and proposed increases to the carry forward rates of undeducted losses were rejected mainly on economic efficiency grounds.