Article from: OGEL 4 (2015), in Editorial
It is now eleven years since the founding editor, Thomas W. Wälde, edited OGEL's first special issue on taxation and his opening statement at that time was that the taxation of oil, gas and energy had become a very specialised business. The message back then was that taxation in the energy sector was complex, with very difficult tax questions, ongoing tax disputes, complex interactions between national tax legislation and operating contracts and the absence of in-depth examination of topics like decommissioning.
Since then, the tax climate has been changing - for the worse. Multinational corporations are exposed to sky-high tax risks internationally and the cumulative risks are increasing day by day. The compliance requirements are increasing and the daily administrative burdens and requirements for more detailed and thorough documentation continue to apply. The OECD, EU, UN, and of course every single country, are exerting more pressure on multinational corporations.
The tax authorities are becoming increasingly tougher, they are more trained, they are challenging large corporations and they are showing a willingness to fight and exercise the use of resources and power in order to collect the right amount of tax. Multinational corporations are now frequently facing tax adjustments and penalties, which often amount to millions or billions of USD. Unfortunately, we have not seen the worst of it yet: the tax climate will become much tougher and corporations need to be prepared.
This special tax issue covers a large variety of tax topics within the energy sector and topics from all over the world:
Uğur Erman Özgür's article Taxation of Foreign Investments under International Law: Article 21 of the Energy Charter Treaty in Context discusses limits to states' sovereign prerogatives to tax foreign investments under customary international law and international treaties. It considers carve-out mechanisms on taxation in general and focuses on mechanisms under some Bilateral Investment Treaties, Double Taxation Treaties and FTAs. The paper reviews arbitral cases in which carve-out provisions in various international treaties were invoked and it reviews the Tribunals' interpretations of Article 21 and outlines the scope of the general carve-out provisions. It argues that Article 21 provides a fair balance between the conflicting objectives of host states and foreign investors. The author emphasises that the rather incautious drafting gives rise to concrete problems in its application and interpretation.
In the next article, Global oil price plunge shakes up the way governments do taxes, Meredith McBride analyses how authorities around the world have responded with sectorial tax changes. W ith prices hovering around a possible 'new normal', governments are drastically reassessing how they collect revenues - but opinions are split. In a recent Fitch Ratings poll, 50% of the respondents said that the decline in oil prices would be temporary, while 50% said that oil price plunges have redefined the economics of the oil market and will persist. Countries have to cut costs and look to other methods to recoup lost revenue.
A.A. Konoplyanik's article Economic Growth and Investment Regimes in Subsoil Use and its consequences for Russia discusses the idea that countries at the earlier stages of formation of their investment legislation, which usually corresponds to a lower level of economic development of such states and, therefore, to a wider range and higher level of non-commercial risks relating to project development within such countries, usually choose PSA as a mechanism for minimizing the investment risks of their subsoil (upstream) projects.
Jędrzej Górski discuses in his article From ownership by state treasury to taxation of private business in times of austerity: Remodelling governments' rents from the production of hydrocarbons in Poland the reform of the Polish system of taxation for oil and gas upstream businesses, and assesses the reform against how the above premises have been balanced. He concludes that it is obvious that the new system will be neither exclusive nor simple and that the reform does not meet the postulate of equity and universality of taxation.
The next article by Oluseye Arowolo, Marginal Field Operations in Nigeria and the Challenge of Uncertain Tax Regimes: What Are the Available Options draws attention to critical matters that will effect on the economics of the operations' post-acquisitions for the bullish, idealist or purely unsuspecting purchaser. The focus of this article examines the angles of the uncertainty in the applicable tax regime on MFO and evaluates what options may be available for existing indigenous concession holders to pursue and the lessons for those who will participate in the fresh licensing round. He concludes that the oil and gas sector is already highly capital intensive and the economics of its projects and/or operations cannot be left exposed to the vagaries of fiscal uncertainty.
Mexico - New Oil and Gas Tax Regime by Enrique Perez Grovas considers the Mexican Constitution amendment designed to allow private investors to carry out, among other things, the exploration and production of hydrocarbon activities in Mexico. This amendment represents the much expected and awaited end of the Mexican Government's monopoly to carry out such activities that lasted for almost eighty years. However, reform loosened control of other aspects of the energy industry including midstream, downstream and all the electricity industry, allowing private investment in almost all areas in a fairly free environment.
Petroleum contracts and taxation: Is East Africa prepared by Thuo Njoroge Daniel raises the enormous challenges that are faced by oil and gas exploration and production companies in Africa, ranging from gang extortion in local communities to government regulation and taxation. This makes it crucial for any company in the oil and gas sector to have long-range and strategic planning to counter the various risks encountered in the sector. The major challenges faced by oil and gas companies that are linked to regulations and taxation include delays in passing important laws and legislation and having segmented and uncoordinated tax regimes. These challenges deter investment and growth in the oil and gas sector.
Chad O'Hare demonstrate in his article Petroleum taxation in the Canadian arctic: unlocking quiescent hydrocarbons through fiscal reform that Canada lacks a competitive fiscal regime relative to its Arctic brethren. Neighbouring jurisdictions typically offer more attractive investment opportunities due to higher geological prospectively, lower development costs, closer proximity to markets and access to infrastructure. In order for Canada to rekindle interest in its northern hydrocarbons and maximise its resource potential, the government must embrace fiscal reform and enact a bespoke Arctic taxation policy in order to promote investment.
Tax Implications of Petroleum Arrangements in Nigeria by Kamoru Taiwo Lawal examines the various taxes as they relate to individual arrangements in the oil sector. The article further examines the various oil and gas contracts and/or arrangements. Further, a comparative analysis is made, with reference to the proposed Petroleum Industry Bill, 2012, to show the fiscal innovations contained in the proposed bill.
Matthew A. Skelton points to the fact that problems have arisen when international oil companies have tried to sell their interests in Product Sharing Agreements, as the companies believe that they are protected either from or not subject to local tax laws. The Trend in Taxing Capital Gains on Transfers of Interests in Production Sharing Agreements explains that t he Emerging Market Countries unexpectedly apply capital gains taxes in a legally questionable manner. Emerging Market Countries have been doing this on a more frequent basis in recent years. This trend is a manifestation of the current cycle of resource nationalism and illustrates the competing goals between governments and investors. The trend is of concern because, if it becomes widespread, it has the potential to increase uncertainty, discourage investment and adversely affect the global energy market.
João Dácio Rolim's and Frederico Fonseca's article The international convergence of the Brazilian legal and accounting standards and the tax effects arisen from the new accounting method of the electricity sector concessions analyses the changes arising from the international accounting alignment that impacted the concessionaires in the Brazilian electric energy sector. The authors state that the globalization process and increase in commercial transactions involving different jurisdictions resulted in the necessary international alignment of the corporate, legal and accounting practices, because the different standards adopted by each country reduced the comparability, transparency and reliability of the financial statements.
The next in line is Josh Lom and Aurell Taussig with their article entitled The use of contractual and legislative measures to provide stability in relation to the taxation of energy projects: developments in the UK energy sector and signs of a new emphasis on bilateral stability. The auditor emphasises that the existence of a stable fiscal regime is often a key concern for investors in energy projects. Further, the article describes how contractual protection against changes to fiscal regimes is typically framed, before considering in more detail two recent UK legislative measures aimed at promoting investments on the UK Continental Shelf, the introduction of Decommissioning Relief Deeds and the provision of the Investment Allowance.
Oliver Treidler's article, The OECD BEPS Action Plan - Implications for the Tax Viability of Centre-Led Transfer Pricing Structures states that the Base Erosion and Profit Shifting (BEPS) will have a significant impact on international taxation. It states that the BEPS reform will be comprehensive, adopted and rigorously enforced by (most) national tax authorities, affecting the tax viability of existing transfer pricing structures and resulting in an additional compliance burden as well as potential tax risks for taxpayers.
Moritz Wüstenberg's Border Tax Adjustments for Energy Intensive Goods: Case Study of Iron and Steel Imports from the Russian Federation present a methodology to adjust energy intensive products at the border by applying an energy-based tax. This is argued to be trade law compliant and practical as it is product based and can be calculated for most goods, contributing a possible avenue to reducing the negative effects of carbon leakage.
The article Tax Transparency in the Energy Sector, by Evelyn Dietsche discusses the call for greater tax transparency, which has been underpinned by several questions, including ' what resources revenues have governments been paid'; 'are host countries getting a fair share'; and 'how are resources revenues distributed'. Touching on each of these three questions, this article summarizes recent developments and discusses some challenges and options. She also raise the important question whether the potential benefits of additional reporting is outweighed by the costs associated with collecting, collating and presenting additional data.
Finally, J. O. Spieler's and T. Monge Øia's article Plug and abandonment status on the Norwegian continental shelf inclusive tax consequences focuses on the plugging and abandonment obligations petroleum operators face. In additional, the article covers the financial & tax consequences of these obligations for both the operators and for the Norwegian Government, and estimates the total cost of plugging and abandonment of the wells to be between 43 and 76 USD billion. A consequences of the high petroleum taxation in Norway, is that the Government will have to bear 78 % of these cost, which constitutes up to 59 USD billion or up to10 % of the Government Pension Fund.
I would like to thank all the contributors for their contributions. Without them, this special issue would not have been possible.