How does the government derive value from oil and gas resources (royalties/production sharing/taxes)? Are there any special tax deductions or incentives offered?

Oil & Gas

Brazil Small Flag Brazil

The government take in Brazil could be summarized as follows:

  • Signature bonus;
  • Royalties;
  • Special participation (which is an extraordinary financial compensation in cases of fields with high production or profitability, calculated through progressive rates that vary according to location, lifetime of the field and production volumes); and
  • Annual occupation or retention fee (Landowners are entitled to receive a monthly fee in local currency between 0.5% and 1% of the total hydrocarbon production in the area).

The federal, state and local governments are also entitled to a share of the Profit Oil under the production sharing regime.

Croatia Small Flag Croatia

The investor has to pay a fee for the exploration and production of hydrocarbons which may consist of a monetary fee and of a share of the produced hydrocarbons.

The monetary fee consists of different fees and royalties (for the exploration block, for the determined exploitation field area, for the conclusion of the Agreement on the Exploration and Production of Hydrocarbons, for the produced quantities, for the realized hydrocarbon production and for administrative costs). The criteria for determination of the fees and some of the fees are specified in the Regulation on Fees for Exploration and Production of Hydrocarbons.

The Republic of Croatia may also receive a share of the produced hydrocarbons.

According to the template PSA, royalties are calculated on a monthly basis as a percentage of the value of all recovered petroleum. The investor may sell that petroleum to fulfil its obligation to pay the royalty. Also, under the PSA, the recovery of investor’s costs has a cost recovery ceiling.

Tax deductions or incentives may be offered to the investors pursuant to tax legislations.

Greece Small Flag Greece

The Greek State receives the following revenues from contract areas:

  • Signature bonus: The amount is biddable and is tax deductible for the concessionaire. No limits are applied

  • Depending on the contract, there can be stipulated payment of a surface rental fee which varies per exploration sub-phase and during the exploitation stage and is a fixed amount per Km2 of contract area. The amount is tax deductible
  • Royalties: These are based on the R-factor, whereby: R equals the cumulative gross inflows divided by the cumulative total outflows. In this context, there applies a sliding scale as follows, with the  corresponding royalty rate being negotiable:
    -              R ≤ 0.5
    -              0.5 < R ≤ 1
    -              1 < R ≤ 1.5
    -              1.5 < R ≤ 2
    -              R  > 2
    The royalty amount is tax deductible.
  • Production bonus, which is linked to the daily production and is biddable and tax deductible
  • The net taxable income earned by each Co-Lessee’s share in the operations (i.e. each Co-Lessee in a joint-operation agreement is obliged to keep separate books and records to reflect its transactions, per each exploration or exploitation area) is subject to a special income tax of 20% and to a regional tax of 5%.  All the works, the purchases of fixed asserts and the other expenses incurred in line with the lease agreement are carried out by the operator in its name but on behalf of the Co-Lessees. Each month the operator will issue a clearance document allocating the expenses incurred to each Co-Lessee in accordance with their percentage in the joint operation agreement. The taxable income is ring-fenced in respect of each contract area. With that being said, up to 50% of the expenses of a contract area which is still in the exploration stage can be combined with the expenses of a contract area of the same Lessee or Co-Lessee for which for which exploitation has already began. Annual tax  depreciation for infrastructure, other fixed assets and for expenses incurred prior to the commercial production date may not exceed the lower between, on the one hand, 40-70% of the relevant hydrocarbon production, with the exact rate being biddable, and, on the other,  the amount of the relevant capital expenditure and pre-exploitation accumulated expenses.  There apply limitations as regards the tax deductible amount of interest on loans, which may not include any excessive amount of interest over and above the application of a reasonable interest rate, according to the arm’s length standard and amounts corresponding to the financing of capital investments during the exploitation stage. There also apply limitations as regards the tax deductibility of general administrative expenses incurred abroad. On the other hand, reserves built for satisfying the lessee’s obligations relating to the termination of Hydrocarbon exploitation are tax deductible, whereby any unutilized amounts shall be taxed upon termination of the exploitation.
    In terms of tax incentives, apart from the accelerated depreciation of fixed assets, according to the rate falling within the range set out above and agreed in the lease agreement, no profit repatriation taxation nor dividend withholding tax applies. In addition, according to the terms of a lease agreement and Hydrocarbons Law further tax exemptions may be provided for the income of the employees of contractors and subcontractors, even when such employees are tax residents of Greece.

Italy Small Flag Italy

Licence-holders must comply with works programmes and pay fees in proportion to the surface area covered by mineral rights and royalties, in proportion to the quantity of hydrocarbons produced.

With respect to hydrocarbon exploration and production, the royalties are applied on the basis of the value of production. The royalties for onshore production are currently 10% (7% royalty and 3% to the oil prices reduction fund) if 20,000 tonnes per year are exceeded, while for offshore production they are 7% (4% royalty and 3% safety and environmental share) if they exceed 50,000 tonnes per year for oil, and are applied to the sale value of the quantities produced. Royalties for the production of onshore hydrocarbons are split, as follows: 55% to the Regions; 30% to the State; and 15% to the Municipalities.

However, for the Regions included in Objective 1 (the Regions of southern Italy including Basilicata, the main Italian oil producer), the State’s share of 30% is also assigned directly to the Regions. The rate of 3% for offshore permits is paid in full to the State and is 50% allocated to the MATTM to ensure the full performance of the monitoring and fight against sea pollution activities. The remaining 50% is allocated to the MiSE to ensure the full performance of the monitoring activities and safety checks, including environmental ones for offshore exploration and production plants.

Moreover, under Italian law, upstream oil and gas operators are subject to the following tax regime: (i) general corporate income tax (IRES); (ii) regional tax on productive activities (IRAP); and (iii) value-added tax (VAT).

Mexico Small Flag Mexico

As mentioned previously, the relevant taxes, royalties, and other consideration are determined by a combination of the offer made in the bidding procedure, the rules set out in the Hydrocarbons Revenue Law, and the rules set out in bidding procedures. Finally, different fees and royalties apply, depending on the contract type, whether licence contract, production sharing contract, or profit-sharing contract. The contractual rates cannot be modified as they form an integral part of the contract.

Licence contracts

The following apply:

  • Contractual fee for the exploration phase. For the first 60 months (five years), this is MXN1,150 per square kilometre, and MXN2,750 after the first 60 months.
  • Royalties. This is calculated by applying a formula to the contractual spot price of hydrocarbons. Each participant must provide an additional royalty value.
  • Variable consideration. The minimum variable consideration is determined by the Finance Ministry. Bidders, when filing their economic proposals, offer a variable consideration. The consideration proposed by the successful bidder applies to the contract.
  • Exploration and production activities tax. This is payable at MXN1,500 per square kilometre during exploration, and MXN6,000 per square kilometre during extraction.
  • Duties for environmental protection. These can vary depending on the exploration and extraction scheme.
  • Duties for supervision and administration of contracts. These are determined by the government.
  • Adjustment mechanism. This is calculated according to a formula defined in the Rules of Bidding Procedures.
  • Corporate Income Tax. This is payable at 30% of income.
  • States and Municipalities Tax. This varies depending on the state and municipality.
  • Employee's profit share. This is variable.
  • Signature bonus. Under the Hydrocarbons Revenue Law, this bonus is determined by the Finance Ministry for each contract.
  •  

Production sharing contracts

The following apply:

  • Corporate Income Tax. This is payable at 30% of income.
  • Contractual fee for the exploration phase. For the first 60 months (five years), this is MXN1,150 per square kilometre, and MXN2,750 after the first 60 months.
  • Exploration and production activities tax. This is payable at MXN1,500 per square kilometre during exploration, and MXN6,000 per square kilometre during extraction.
  • Cost recovery limit. This relates to all related costs, expenses and investments included in the working programmes which can be recovered by a contractor under the contract and guidelines that will be issued by the Finance Ministry.
  • Royalties. This is calculated by applying a formula to the contractual spot price of hydrocarbons.
  • Variable consideration. The minimum variable consideration is determined by the Finance Ministry. Bidders, when filing their economic proposals, offer a variable consideration. The consideration proposed by the successful bidder applies to the contract.
  • Duties for environmental protection. These can vary depending on the exploration and extraction scheme.
  • Duties for supervision and administration of contracts. These are determined by the government.
  • Adjustment mechanism. This is calculated according to a formula defined in the Rules of Bidding Procedures.
  • States and Municipalities Tax. This varies depending on the state and municipality.
  • Employee's profit share. This is variable.
  • Government's production share. The CNH provides minimum values for the government's consideration in the operative profit; greater amounts can be agreed in the auction.

Morocco Small Flag Morocco

The State, through ONHYM, holds participating interests (limited to 25%) under the relevant petroleum agreement and related exploration permits and concessions. It therefore benefits from the proceeds of any oil and gas exploitation activity.

The State also benefits from the development of any exploration and exploitation activity through the levy of applicable taxes and royalties. The payment of these royalties is made by the various holders of participating interests in the concession in proportion to their respective interests.

Moreover, petroleum agreements entered into between ONHYM and private partners provides for training commitments for the benefit of Moroccan nationals.

Mozambique Small Flag Mozambique

The Government obtains its revenue from bonus payments, training programmes, relinquishment fund and other financial obligations set out in the concession contracts.

In addition to that, entities entitled to perform petroleum operations are subject to the following general taxes: income tax; value added tax; municipal tax (when applicable); and also to the specific petroleum tax regime.

The petroleum tax regime levies a Production Tax (Imposto sobre a produção do petróleo – “IPP”) on oil and gas produced in each concession area. The IPP payment is triggered when the oil or gas is extracted.

The cost recovery and production sharing mechanisms are also regulated, drawing on the traditional concepts of cost oil, available oil, profit oil and produced oil. Costs incurred by the concessionaire on oil operations, excluding interest and other financial costs, are recovered from 60% of the annual available oil – the portion exceeding this limit is transferred to the following years. In turn, profit oil is shared between the State and the concessionaire according to a variable scale, the result of which is obtained through a mathematical formula.

The special rules foreseen to determine the Personal Income Tax (Imposto sobre o Rendimento das Pessoas Singulares – “IRPS”) or Corporate Income Tax (Imposto sobre o Rendimento das Pessoas Colectivas – “IRPC”) due on the income obtained from oil operations include, namely: (i) the characterisation of deductible and non-deductible costs and expenses; (ii) amortisation rules; (iii) thin capitalisation rules; (iv) registration of inventory; and (v) a withholding flat tax rate of 10% on the payment of services related to concession agreements undertaken by non-resident entities.

Transfer pricing rules are also further developed, including the application of the arm’s length principle to the transfer of assets between different concession agreements held by the same concessionaire.

The tax regime also tightens the ring-fencing rules and clarifies that the IRPC of entities running petroleum operations under a concession agreement should, as a general rule, be calculated individually for every concession area (costs and income should also be determined separately in relation to each area).

Nigeria Small Flag Nigeria

Value is derived from oil and gas resources through remittances of taxes, royalties and depot fees. The Nigerian Government goes into certain arrangements with different International Oil companies through certain government parastatals i.e. Nigerian National Petroleum Company (NNPC).

The Predominant arrangements entered into between the Government and investors are Joint Venture agreements, Product Sharing Contracts (PSC), Service Contracts and Marginal Field Concessions. Each arrangement has its own modalities for profit and loss sharing.

With respect to tax payable on Oil and gas resources, the relevant tax rates for exploration and production companies ranges between 65.75% to 85%. The various types of arrangements shortlisted above determines the tax payable. The Government also generates revenue from penalties charged for gas flaring.

The payment of Royalties on Oil and Gas products in Nigeria is imposed and regulated by the Petroleum (Drilling and Production) regulations. These Royalties are however payable at production stage not after sales. For oil products, there isn't a fixed rate, but it is determinable during each production due to certain factors which include:

i. The API gravity of the crude oil which is the measurement of the quality of the crude oil extracted.
ii. The depth of the well
iii. The quantity of production
iv. Distance of the well from shore.

This means that, Royalties are not charged for deep shore fields of more than 1000metres reservoir depth from the seabed. If the depth of the sea is above 1000M, no royalty is payable. This is however currently being reviewed under the PIGB. The Royalty payable is determined by the quantity of production, royalty rate and the price of crude. This is all calculated, and the figure is then paid to the government.

For gas products, the royalty paid is on sales and it is fixed at 7% for onshore and 5% for offshore plants. It is determined by the Royalty rate and the sales made.

With regard to incentives, there aren't any specifically. But the Production Sharing Contracts (PSC) arrangement offers a lower tax remittance to be paid to the Government. This is done to support indigenous companies which are called marginal field operators. These organisations go into PSC's with the NNPC.

Royalties are made at production not after sales.

Bulgaria Small Flag Bulgaria

Royalties due for oil and gas production in Bulgaria are defined under a sliding scale. They may be a percentage from the gross production or from the total revenues. Royalties may be in-kind or monetary. Bulgarian practice so far sticks to the monetary payments.

Exploration expenses are carried over and are discounted from the production revenue for tax purposes. Currently there are no preferential or special taxes for upstream oil and gas activities.

Indonesia Small Flag Indonesia

Indonesia does not impose royalties on PSCs. In Cost Recovery PSCs, the State’s minimum income is secured through FTP. FTP is the first take of oil or gas immediately after production in a work area in one calendar year received by the State prior to cost recovery and profit calculation. The amount of FTP is determined in the relevant Cost Recovery PSC.

Taxes applicable to PSCs include income tax, VAT, import duties, regional taxes and other levies. The PSC can stipulate whether the tax laws and regulations applicable at the time the PSC is executed shall apply (stabilised) or whether the PSC will follow every tax law and regulation issued over time. In addition, Contractors are required to pay non-tax State revenues such as exploration and exploitation fees and bonuses, including signing bonus and production bonus.

Oil is typically split 85:15 and gas 70:30 between the Government and the Contractor under a Cost Recovery PSC. In a Gross Split PSC, the initial split between the Government and the Contractor is 57:43 for oil and 52:48 for gas.

Government Regulation No. 27 of 2017 (“GR 27”), which amends Government Regulation No. 79 of 2010 regarding Recoverable Operating Costs and Income Tax Treatment in the Upstream Oil and Gas Sector, provides for tax deductions during the exploration and exploitation phases. For Gross Split PSCs, Government Regulation No. 52 of 2017 (“GR 52”) eliminates taxes during exploration until the first year of production.

United Kingdom Small Flag United Kingdom

Corporate tax is the principal means by which the Government derives revenue from upstream oil and gas production.

A uniform taxation system applies to all fields in the UK and the UKCS, although, as discussed below, some special tax deductions are available for fields which would not otherwise be commercially attractive.

The Ring Fence Corporation Tax (RFCT) applies to profits from oil and gas extraction activities and rights in the UK and UKCS instead of normal Corporation Tax. It applies regardless of when development consent was given, and aims to prevent profits from these activities being reduced for tax purposes by the setting off of losses from other trading activities. The profits from oil and gas extraction activities and rights are "ring fenced" and treated for tax purposes as a separate trade, so that only losses derived from these activities can be set off against profits from these activities. The current rate of RFCT is 30 per cent (as opposed to the 19 per cent rate of normal Corporation Tax, falling to 17 per cent from 1 April 2020). RFCT liabilities are based on the book profits of the company which are then adjusted to arrive at the taxable profits. Deductions are available for items such as capital expenditure, plant and machinery allowances, research and development, expenditure on mineral exploration and access, and decommissioning.

A Supplementary Charge is also imposed on profits arising from any ring fenced activities. The Charge was first introduced in 2002, at a rate of 10 per cent. In 2011, the Government raised the rate of the Supplementary Charge from 20 per cent to 32 per cent. The Government justified this increases on the basis that the rise in oil prices had provided unexpected profits for oil and gas companies. Subsequently the Supplementary Charge was reduced again and since 1 January 2016 it has been set at 10 per cent.

A Petroleum Revenue Tax (PRT) previously applied to the net income from oil and gas extraction, and even after the new tax regime described above was introduced, PRT still applied in respect of those fields for which development consent was given prior to 16 March 1993. However, the rate of PRT was reduced to zero from 1 January 2016.

In 2009 the Government introduced a tax incentive regime in the form of "field allowances" to apply to small or new, technically challenging fields. A field allowance reduces the amount of adjusted ring fence profits for the licensee’s accounting period on which the company’s Supplementary Charge is charged.

In recent years the Government has focused on tax reforms aimed at helping oil and gas companies manage the burden posed by liabilities to carry out decommissioning. In particular, the Government introduced a Decommissioning Relief Deed regime to provides certainty for oil and gas companies over the tax relief they will receive when decommissioning assets in the future, and the the Finance Act 2019 makes provision for a transferable tax history mechanism, by which a seller of oil and gas assets may, on a joint election with a buyer, transfer its tax history to the buyer.

Licensees are also required to make annual payments (known as licence rental fees), which are calculated on the basis of the area under licence and incorporate an escalating scale of pre-determined rates per square kilometre. This is to encourage licensee companies to relinquish acreage not undergoing productive activity, thus making it available for relicensing to other potential interested applicants.

Turkey Small Flag Turkey

The government collects taxes from those companies generating revenues from oil and gas resources. In addition to this, government also receives royalties from extraction of crude oil and natural gas. The amount of the royalty is 1/8 of the value of the extracted natural gas or crude oil as per s.9(1) of TPA 6491.

There are several tax incentives for companies operating in the upstream oil and gas market. As per TPA 6491 s.13(1), Import or local purchase materials, equipment (such as oil rigs), fuel oil, transportation vehicles (whether land, air or sea), subject to General Directorate’s approval, are exempt from customs tax, duties and documents drawn up in this respect are exempt from stamp tax. Furthermore, there is a cap on the total taxes payable by petroleum right holders. According to TPA 6491 s.12(1) the taxes that they are required to pay over their net revenues and income tax withholdings cannot exceed %55.

Israel Small Flag Israel

Royalties:
The Petroleum Commissioner is tasked with the collection of royalties and fees, in addition to his other responsibilities regulating the oil and gas industry. Under the Petroleum Law, holder of a petroleum right ("the holder") must pay the Israeli government a royalty equal to one-eighth (12.5%) of the wellhead value of the petroleum produced from the leased area, subject to certain exclusions set forth in the Petroleum Law. The Petroleum Commissioner may elect to collect the royalties in cash or in kind. Additionally, the holder is required to pay a small lease fee on the area covered by the lease. In the event that the holder fails to make timely payment of any fees or royalties, the Petroleum Commissioner is entitled to place a lien on all of the rights to such holder’s stored petroleum, facilities and equipment and to seize anything so attached until payment is made.

Tax:
There are three key elements of taxation relevant to the oil and gas industry in Israel. The first element relates to the royalties that a holder must pay to the Israeli government in the amount of one-eighth (12.5%) of the wellhead value of the petroleum produced from the leased area, as further described above.

The second element is a levy imposed on profits derived from the sale of petroleum pursuant to the Petroleum Profits Tax Law 2011). The levy applies only to the profits from petroleum production (upstream operations) and is not intended to apply to the midstream and downstream segments of the petroleum chain. The levy is calculated and imposed separately for each project and each holder of a petroleum right in a petroleum project is required to pay the levy according to its proportionate share in the petroleum right. Any levy actually paid is also recognized as a deductible expense for income tax purposes.

The third element is Corporate Income tax at a rate of 23% for 2019. Historically, holders of petroleum rights incorporated as a partnership so as to be transparent for tax purposes. Accordingly, search expenses attributed to the holder's lease are considered as deductible expenses or a deductible asset. Any levy actually paid according to the Petroleum Profits Tax Law 2011 is also recognized as a deductible expense for income tax purposes.

Foreign entities operating in the Israeli Petroleum industry are obligated to establish a branch in Israel that is then defined as the entity's Permanent Establishment in Israel.

Further, pursuant to the Framework, as discussed in more depth in Question 18 below, qualifying loans from foreign lenders in the financing of natural gas projects may be subject to a five percent tax withholding rate on interest payments (unless a lower rate applies due to a tax treaty). The intention of this leniency was to encourage foreign investments and diversify sources of funding.

Norway Small Flag Norway

United States Small Flag United States

The U.S. does not have a national tax regime for the production of oil and/or gas. Rather, individual states may place a tax on the property and/or on extraction of oil and/or gas that is produced in the state. In some instances, where a local, state or federal government entity is the owner and leases its rights for development in the oil and/or gas, the lease conveying the rights to an operator will include a production royalty. Such royalty is then payable to the respective person or entity that owns the property. Therefore, government entities only derive direct economic benefits from the ownership and development of oil and gas estates through royalties obtained from production on government-owned lands and property taxes.

Updated: January 14, 2020