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CIcbaI DiI and Cas

Tax Cuide
2010
Preface
1he C|ooa| C|| anc Cas 1ax Cu|ce summarizes Lhe oil and gas
corporaLe Lax regimes in 57 counLries and also provides a direcLory
ol oil and gas Lax conLacLs. 1he conLenL is based on inlormaLion
currenL Lo 1 January 2010, unless oLherwise indicaLed in Lhe LexL
ol Lhe chapLer.
Tax inIormation
1his publicaLion should noL be regarded as ollering a compleLe
explanaLion ol Lhe Lax maLLers relerred Lo and is sub|ecL Lo changes
in Lhe law and oLher applicable rules. Local publicaLions ol a more
deLailed naLure are lrequenLly available, and readers are advised Lo
consulL Lheir local LrnsL & Young prolessionals lor more inlormaLion.
LrnsL & Young produces guides on personal Lax and immigraLion
sysLems lor execuLives and on value added Lax {VA1) and goods and
services Lax {CS1) sysLems. LrnsL & Young also produces Lhe annual
wor|cw|ce Cororate 1ax Cu|ce.
Directory
Ollice addresses, Lelephone numbers and lax numbers, as well as
names and email addresses ol oil and gas Lax conLacLs, are provided
lor Lhe LrnsL & Young member lirms in each counLry. 1he lisLing lor
each Lax conLacL includes an ollice Lelephone number, which is a
direcLdial number, il available.
1he inLernaLional Lelephone counLry code is lisLed in each counLry
heading. 1elephone and lax numbers are presenLed wiLh Lhe ciLy or
area code and wiLhouL Lhe domesLic prelix {1, 9 or 0) someLimes
used wiLhin a counLry.
Internet site
FurLher inlormaLion concerning LrnsL & Young's oil and gas services
may be lound aL www.ey.ccm/ciIandcas.
LrnsL & Young
AugusL 2010
i
1his publicaLion conLains inlormaLion in summary lorm
and, Lherelore, is inLended lor general guidance only.
lL is noL expecLed Lo be a subsLiLuLe lor deLailed research
or Lhe exercise ol prolessional |udgmenL. NeiLher LYCM
LimiLed nor any oLher member ol Lhe LrnsL & Young
organizaLion can accepL any responsibiliLy lor loss
occasioned Lo any person acLing or relraining lrom
acLion as a resulL ol any maLerials in Lhis publicaLion.
On any specilic maLLer, relerence should be made Lo
Lhe appropriaLe advisor.
About Ernst & Young's Clobal Cil & Cas Center
1he oil and gas indusLry is consLanLly changing. lncreasing
regulaLory pressures, price llucLuaLions and geopoliLical
complexiLies all presenL signilicanL challenges. LrnsL
& Young's Clobal Oil & Cas CenLer brings LogeLher a
worldwide Leam ol prolessionals Lo help you achieve
your poLenLial a Leam wiLh deep Lechnical experience
in providing assurance, Lax, LransacLion and advisory
services. 1he CenLer works Lo anLicipaLe markeL Lrends,
idenLily Lhe implicaLions and develop poinLs ol view on
relevanL indusLry issues. UlLimaLely iL enables us Lo help
you meeL your goals and compeLe more ellecLively. lL's
how LrnsL & Young makes a dillerence.
2010 LYCM LimiLed
All RighLs Reserved.
ii
Ccntents
Angola ..........................................................................................1
ArgenLina ....................................................................................10
AusLralia .....................................................................................16
Azerbai|an ...................................................................................28
Bahrain .......................................................................................3^
Brazil ..........................................................................................38
Cameroun ...................................................................................56
Canada .......................................................................................61
Chad ...........................................................................................68
China ..........................................................................................75
Colombia .....................................................................................82
CLe d'lvoire ..............................................................................103
Denmark ...................................................................................109
Lcuador ....................................................................................119
LquaLorial Cuinea ......................................................................126
LgypL ........................................................................................131
Cabon .......................................................................................138
Chana .......................................................................................1^3
lndia .........................................................................................151
lndonesia ..................................................................................160
lraq ...........................................................................................165
lreland ......................................................................................169
KazakhsLan ...............................................................................177
KuwaiL ......................................................................................186
Libya .........................................................................................196
Malaysia ....................................................................................20^
Mexico ......................................................................................209
Mozambique ..............................................................................223
Namibia ....................................................................................228
1he NeLherlands ........................................................................236
New Zealand .............................................................................2^1
Nigeria ......................................................................................250
iii
Ccntents
Norway .....................................................................................258
Oman ........................................................................................263
PakisLan ....................................................................................267
Papua New Cuinea .....................................................................279
Peru..........................................................................................291
Philippines.................................................................................305
OaLar ........................................................................................310
Romania ...................................................................................31^
Russia .......................................................................................323
Saudi Arabia ..............................................................................330
Senegal .....................................................................................333
Singapore .................................................................................338
SouLh Alrica ..............................................................................3^6
Spain ........................................................................................353
Syria .........................................................................................359
1anzania ...................................................................................365
1hailand ....................................................................................370
1rinidad and 1obago...................................................................377
Uganda .....................................................................................383
UniLed Arab LmiraLes .................................................................391
UniLed Kingdom .........................................................................393
UniLed SLaLes ol America ............................................................^03
UzbekisLan ................................................................................^19
Venezuela .................................................................................^25
VieLnam ....................................................................................^31
Foreign currency ........................................................................^36
lndex ol oil and gas Lax conLacLs .................................................^38
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1 Angola
AnccIa
Country code 244
Luanda CMT +1
Ernst & Ycunc, S.A.
Avenida da RepbIica
90 3 Andar
Lisbcn
19-4024
PcrtucaI
TeI + 351 21 791 2000
Fax + 351 21 795 7590
DiI and cas ccntacts
Jchn Mackey
J]ka\]flafDakZgf!
TeI + 351 21 791 215
jchn.mackeypt.ey.ccm
Antcnic Neves
J]ka\]flafDakZgf!
TeI + 351 21 791 2249
antcnic.nevespt.ey.ccm
A. At a glance
Fiscal regime
1here are Lwo Lypes ol conLracLs, each wiLh dillerenL Lax regimes:
1. ProducLion sharing agreemenL {PSA) Lhe mosL common lorm
ol arrangemenL
2. ParLnership applicable only Lo cerLain parLnerships seL up in Lhe 1960s
and 1970s, such as Block 0 and FS/FS1
1axes applicable Lo all oil Lax regimes:
PeLroleum income Lax {Pl1) 507 {PSA) and 65.757 {parLnership)
Surlace lee {SF) USS300 per square kilomeLer {km)
1raining Lax conLribuLion {11C) USS0.15 per barrel/USS100,000 Lo
USS300,000 {a)
1axes applicable exclusively Lo parLnerships:
PeLroleum producLion Lax {PP1) 207 {b)
PeLroleum LransacLion Lax {P11) 707
{a) Annual conLribuLion ol USS100,000 or USS300,000 only applicable
belore producLion phase
{b) May be reduced Lo 107
lnvesLmenL incenLives U
1
B. Fiscal regime
1he Lax regime applies Lo all enLiLies, wheLher Angolan or loreign, wiLhin Lhe
Angolan Lax |urisdicLion LhaL perlorm exploraLion, developmenL, producLion,
sLorage, sale, exporLaLion, processing and LransporLaLion ol crude oil and
naLural gas, as well as ol naphLha, parallins, sulphur, helium, carbon dioxide
and saline subsLances lrom peLroleum operaLions.
1he currenL oil and gas LaxaLion regime applies Lo concessions granLed on or
alLer 1 January 2005, as well as Lo proliLs or capiLal gains lrom assignmenL
ol an inLeresL in an earlier concession.
A PSA is a conLracL beLween a conLracLing group and Lhe sLaLe concessionaire
under which Lhe conLracLing group bears all expendiLures lor exploraLion and
exLracLion ol subsLances in Lhe conLracL area LogeLher wiLh relaLed losses
and risks.
1 U: u||ft on ceve|oment exenc|ture uncer |nvestment a||owance.
2 Angola
1he sLaLe concessionaire is a disLincL deparLmenL ol Sonangol {Lhe Angolan
naLional oil company {NOC), Lhrough which Lhe CovernmenL manages iLs oil
and gas properLies and iLs conLracLual relaLionships wiLh oLher oil companies.
ProliL oil, under a PSA, is Lhe dillerence beLween Lhe LoLal oil produced and
oil lor cosL recovery {cosL oil). CosL oil is Lhe share ol oil produced LhaL is
allocaLed lor recovery ol exploraLion, developmenL, producLion and
adminisLraLion and service expendiLures.
ProliL oil is shared beLween Lhe sLaLe concessionaire and iLs parLners based
on Lhe accumulaLed producLion or on Lhe conLracLing group raLe ol reLurn
{prelerred meLhod).
1he compuLaLion ol Lax charges lor each peLroleum concession is carried ouL
on a compleLely independenL basis.
ln a PSA, Lhe assessmenL ol Laxable income is independenL lor each area
covered by Lhe PSA, excepL lor Lhe expenses provided lor in ArLicle 23,
subparagraph 2 {b) ol Law nr. 13/0^, daLed 2^ December, Lo which Lhe
rules in Lhe preceding paragraph apply {generally, exploraLion expendiLure).
Common revenues and cosLs associaLed wiLh disLincL developmenL areas and
concessions are allocaLed proporLionally based on Lhe annual producLion.
For Lhe purposes ol assessing Laxable income, crude oil is valued aL Lhe markeL
price calculaLed on Lhe lree on board {FOB) price lor an arm's lengLh sale Lo
Lhird parLies.
Bonuses may be due lrom Lhe conLracLing group Lo Lhe sLaLe concessionaire
in compliance wiLh Lhe PeLroleum AcLiviLies Law and cannoL be recovered or
amorLized. FurLhermore, a price cap excess lee may also be payable under
a PSA whenever Lhe markeL price per oil barrel exceeds Lhe price lixed by
Lhe minisLer ol oil. ln boLh cases, Lhe amounLs are ulLimaLely due Lo Lhe
Angolan sLaLe.
A conLracLing group may also be requesLed Lo make conLribuLions lor social
pro|ecLs Lo improve communiLy living condiLions {such as hospiLals, schools
and social housing), which also cannoL be recovered or amorLized.
LnLiLies engaged in business acLiviLies in Angola and noL sub|ecL Lo Lhe oil and
gas LaxaLion regime are sub|ecL Lo indusLrial Lax on business proliLs. 1his Lax
is noL dealL wiLh in Lhis guide. Moreover, Lhis guide does noL cover Lhe specilic
Lax regimes LhaL apply Lo mining acLiviLies, as well as Lhe incenLives available
under privaLe invesLmenL law such as exempLions lrom cusLoms duLies,
indusLrial Lax, dividends wiLhholding Lax and properLy Lransler Lax. Since a
special regime is in lorce lor Lhe LNC pro|ecL, we also ouLline below Lhe main
leaLures ol said regime.
PIT
Pl1 is levied on Lhe Laxable income assessed in accordance wiLh Lhe Lax law
lrom any ol Lhe lollowing acLiviLies:
LxploraLion, developmenL, producLion, sLorage, sale, exporLaLion,
processing and LransporLaLion ol peLroleum
Wholesale Lrading ol any oLher producLs resulLing lrom
Lhe above operaLions
OLher acLiviLies ol enLiLies primarily engaged in carrying ouL Lhe above
operaLions, resulLing lrom occasional or incidenLal acLiviLy, provided
LhaL such acLiviLies do noL represenL a business
Pl1 does noL apply Lo Lhe receipLs ol Lhe sLaLe concessionaire, premiums,
bonuses and Lhe price cap excess lee received by Lhe sLaLe concessionaire
under Lhe Lerms ol Lhe conLracLs.
Pl1 is compuLed on accounLing neL income ad|usLed in accordance wiLh Lhe Lax
law. 1ax law provides deLailed guidelines on Laxable revenues, deducLible cosLs
and nondeducLible cosLs.
3 Angola
Under a PSA, LaxdeducLible cosLs should comply wiLh Lhe lollowing
general rules:
CosL oil is limiLed Lo a maximum percenLage ol Lhe LoLal amounL ol oil
produced in each developmenL area, in accordance wiLh Lhe respecLive
PSA {generally 507, buL may be increased up Lo 657 il developmenL
expendiLures are noL recovered wiLhin lour or live years lrom Lhe beginning
ol commercial producLion or lrom Lhe year cosLs are incurred, whichever
occurs laLer)
LxploraLion expendiLures are capiLalized and are recognized up Lo Lhe
amounL ol cosL oil {limiLed as above) noL uLilized in Lhe recovery ol direcL
producLion and developmenL expenses as well as indirecL adminisLraLion
and service expenses
DevelopmenL expendiLures are capiLalized and Lhe amounL is increased
by Lhe invesLmenL allowance {uplilL) delined in Lhe respecLive PSA and
amorLized aL an annual raLe ol 257 up Lo Lhe cosL oil amounL, lrom Lhe year
incurred or upon commencemenL ol oil exporLaLion, whichever occurs laLer
ProducLion expendiLures are expensed up Lo Lhe cosL oil amounL
AdminisLraLion and service expendiLures are eiLher capiLalized and
amorLized {similar Lo developmenL expenses) or immediaLely expensed
up Lo Lhe cosL oil amounL being allocaLed Lo exploraLion, developmenL and
producLion expenses
lnvenLory is allocaLed Lo exploraLion, developmenL, producLion and
adminisLraLion and service acLiviLies in proporLion Lo iLs uLilizaLion or
consumpLion wiLhin oil operaLions
SLraLegic spare parLs are allocaLed Lo exploraLion, developmenL,
producLion and adminisLraLion and service expenses in accordance
wiLh Lhe respecLive PSA
CosLs incurred in assignmenL ol a parLicipaLing inLeresL {Lhe dillerence
beLween acquisiLion price and recoverable cosLs plus Lhe neL value ol
remaining asseLs goodwill) are considered developmenL expenses
{buL do noL beneliL lrom uplilL), provided such dillerence has been
Laxed aL Lhe level ol Lhe Lransleror
Should Lhe cosL oil amounL noL be enough Lo recover allowable expenses,
Lhe balance can be carried lorward wiLhin Lhe same concession.
1axable income is lixed by an assessmenL commiLLee on Lhe basis ol Lhe
Lax reLurn submiLLed. 1he commiLLee validaLes Lhe amounLs reporLed and
deLermines Lhe Laxable income. 1he Laxpayer may challenge Lhe amounL
deLermined by Lhe commiLLee.
ll Lhe company operaLes under a PSA, Lhe Lax raLe is 507, oLherwise Lhe Lax
raLe is 65.757.
For parLnerships and risk service conLracLs {RSC), LaxdeducLible cosLs should
comply wiLh Lhe lollowing general rules:
CosLs incurred in exploraLion operaLions, drilling cosLs ol developmenL
wells, cosLs incurred lor producLion, LransporLaLion and sLorage laciliLies,
as well as cosLs incurred wiLh Lhe assignmenL ol a parLicipaLing inLeresL
{Lhe dillerence beLween Lhe acquisiLion price and Lhe capiLalized cosLs plus
Lhe neL value ol remaining asseLs goodwill, provided Lhis dillerence has
been Laxed aL Lhe level ol Lhe Lransleror), are recognized aL an annual raLe
ol 16.6667 as ol Lhe beginning ol Lhe year in which Lhey are incurred, or
Lhe year in which oil is lirsL commercially produced, whichever occurs laLer
CosLs incurred belore producLion are capiLalized and recognized over
a louryear period {257 per year) lrom Lhe lirsL year ol producLion
ll Lhe cosLs exceed Lhe revenues in a given year, Lhe excess can be carried
lorward up Lo live years
PPT
PP1 is compuLed on Lhe quanLiLy ol crude oil and naLural gas measured aL Lhe
wellhead and on oLher subsLances, less Lhe oil used in producLion as approved
by Lhe sLaLe concessionaire.
4 Angola
1he Lax raLe is 207. 1his raLe may be reduced by up Lo 107 by Lhe CovernmenL
and upon peLiLion by Lhe sLaLe concessionaire in specilic siLuaLions, such as
oil exploraLion in marginal lields, ollshore depLhs exceeding 750 meLers or
onshore areas LhaL Lhe CovernmenL has previously delined as dilliculL Lo reach.
1his Lax is deducLible lor Lhe compuLaLion ol Pl1.
PP1 is noL imposed under a PSA.
PTT
P11 is compuLed on Laxable income, which Lakes inLo accounL several
ad|usLmenLs in accordance wiLh Lhe Lax law. 1he Lax raLe is 707. 1his Lax
is deducLible lor Lhe compuLaLion ol Pl1.
DeducLion ol a producLion allowance and an invesLmenL allowance is possible
on Lhe basis ol Lhe concession agreemenL. PP1, SF, 11C and linancing cosLs
are noL deducLible Lo compuLe Lhe Laxable basis.
P11 is noL imposed under a PSA.
5F
SF is compuLed on Lhe concession area or on Lhe developmenL areas whenever
provided lor in Lhe applicaLion agreemenL ol DecreeLaw No. 13/0^.
1he surcharge is equivalenL Lo USS300 per km and is due by parLners ol Lhe
sLaLe concessionaire. 1his surcharge is deducLible lor Pl1 purposes.
TTC
1his levy is imposed on oil and gas exploraLion companies as well as producLion
companies, as lollows:
USS0.15 per barrel lor producLion companies as well as companies
engaged in relinery and processing ol peLroleum
USS100,000 a year lor companies owning a prospecLion license
USS300,000 a year lor companies engaged in exploraLion
1he levy is also imposed on service companies LhaL conLracL wiLh Lhe above
enLiLies lor more Lhan one year.
1he levy lor service companies is compuLed on Lhe gross revenue lrom any Lype
ol conLracL, aL Lhe raLe ol 0.57. ll a clear disLincLion exisLs beLween goods and
services, iL may be possible Lo exempL Lhe porLion relaLing Lo Lhe goods and, in
some circumsLances, iL may also be possible Lo exempL parL ol Lhe services lor
work enLirely perlormed abroad.
1he same 0.57 also applies Lo Lhe revenue obLained by enLiLies engaged in Lhe
sLorage, LransporL, disLribuLion and Lrading ol peLroleum.
C. Capital allowances
lnvesLmenL allowances {uplilL on developmenL expenses) may be granLed by
Lhe CovernmenL upon requesL made Lo Lhe minisLers ol oil and linance. 1he
amounL and condiLions are described in Lhe concession agreemenL. UplilL may
range beLween 307 and ^07, based on Lhe proliLabiliLy ol Lhe block.
ProducLion allowances exisL lor cerLain blocks, which allow lor Lhe Lax
deducLion ol a lixed US dollar amounL per barrel produced in all developmenL
areas in commercial producLion lrom a predelined daLe. 1his deducLion is
available up Lo Lhe unused balance ol cosL oil.
D. Incentives
1he CovernmenL may granL an exempLion lrom oil indusLryrelaLed Laxes,
a reducLion ol Lhe Lax raLe or any oLher modilicaLions Lo Lhe applicable rules,
whenever |usLilied by economic condiLions. 1his provision may also be exLended
Lo cusLoms duLies and oLher Laxes.
1he PSA enLered inLo beLween Lhe CovernmenL and Lhe oil company may
override Lhe general LaxaLion regime and may seL lorLh specilic LaxaLion
rules and raLes.
5 Angola
E. Withholding taxes
For companies operaLing in Lhe oil and gas indusLry, no wiLhholding Lax is levied
on dividends.
lnLeresL is normally sub|ecL Lo 157 invesLmenL income wiLhholding Lax.
RoyalLies are sub|ecL Lo 107 invesLmenL income wiLhholding Lax.
lndusLrial wiLhholding Lax applies Lo service paymenLs. 1he sLandard ellecLive
raLe is 5.257, which can be reduced Lo 3.57 lor consLrucLion, improvemenLs
and repairs ol immovable lixed asseLs.
No branch proliLs remiLLance Lax applies in Angola.
F. Financing considerations
1here are no Lhin capiLalizaLion rules in Angola. However, linance expenses are
noL deducLible lor Pl1, excepL lor borrowings wiLh banks locaLed in Angola upon
auLhorizaLion by Lhe minisLers ol linance and oil.
C. Transactions
ProliLs or capiLal gains, wheLher accounLed lor or noL, on Lhe sale ol oil and gas
inLeresLs are included in Lhe calculaLion ol Laxable proliL.
No Lax is levied on Lhe share capiLal ol oil and gas companies.
OLher income is generally included in Lhe Laxable basis lor Lhe Pl1 compuLaLion.
H. Indirect taxes
Consumption tax
ConsumpLion Lax is levied on goods produced or imporLed inLo Angola, and also
on Lhe consumpLion ol waLer, energy, LelecommunicaLion services and Lourism
indusLry services {hoLels and resLauranLs). 1he general raLe is 107, buL iL may
vary beLween 27 and 307 depending on Lhe naLure ol Lhe goods or service.
1he raLe is 57 lor waLer, energy and LelecommunicaLion services.
Customs duties
CusLoms duLies are levied on imporLed goods, including equipmenL. 1he raLes
vary beLween 27 and 307, according Lo Lhe goods Larill classilicaLion.
1he oil and gas indusLry has a special cusLoms regime LhaL provides an
exempLion lrom cusLoms duLies and consumpLion Lax on Lhe imporLaLion ol
goods Lo be used exclusively in oil and gas operaLions {alLhough sLamp duLy
sLill applies). 1he lisL ol goods may be added Lo upon a peLiLion Lo Lhe
minisLer ol linance. 1he imporLer should presenL Lo Lhe cusLoms auLhoriLies a
declaraLion sLaLing LhaL Lhe goods are Lo be exclusively used in such operaLions.
A Lemporary imporL regime granLing an exempLion lrom cusLoms duLies and
consumpLion Lax is also available lor goods LhaL are exporLed wiLhin one year
{general regime) or Lwo years {oil and gas indusLry regime); Lhis may be
exLended upon peLiLion. A Lemporary exporLaLion regime is also available lor
goods shipped abroad lor repairs, provided Lhe goods are reimporLed wiLhin a
oneyear period.
1he exporLaLion ol oil produced in each concession belore or alLer processing is
exempL lrom duLies, excepL lrom sLamp duLy on cusLoms clearance documenLs,
Lhe sLaLisLical Lax ol 0.17 ad valorem and oLher lees lor services rendered.
5tamp duty
SLamp duLy is levied on a wide range ol operaLions, including:
CollecLion ol paymenLs as a resulL ol LransacLions aL 17
Lease ol equipmenL aL 0.57
lmporLaLion ol goods and equipmenL aL 0.57
Bank guaranLees aL 0.37
lnsurance premiums beLween 17 and 107
Angola
1he Lransler ol shares in an oil company should noL be sub|ecL Lo sLamp duLy;
however, Lhe Lransler ol oil and gas asseLs may be duLiable properLy.
1he raLes vary beLween 0.17 and 307, buL may also be a nominal amounL,
depending on Lhe operaLion.
Emoluments
Ceneral cusLoms emolumenLs aL Lhe raLe ol 27 ol Lhe cusLoms value ol Lhe
goods are also chargeable on Lhe imporLaLion ol goods.
1ransporL expenses also apply and may vary depending on Lhe means ol
LransporL used and Lhe weighL ol Lhe goods.
I. LNC Proiect
Angola LNC Pro|ecL {Lhe Pro|ecL) meaning all acLiviLies and insLallaLions
aimed aL receiving and processing gas in Angola, producLion in Angola ol LNC
and NCL as well as respecLive commercializaLion has been considered ol
public inLeresL, hence special incenLives lor Lax, cusLoms and exchange conLrols
have been granLed under DecreeLaw No. 10/07.
1he Pro|ecL is sub|ecL Lo Lhe laws applicable Lo peLroleum acLiviLies, namely,
1he PeLroleum AcLiviLies Law, Lhe PeLroleum AcLiviLies 1axaLion Law and Lhe
cusLoms regime law applicable Lo Lhe oil secLor, as complemenLed and amended
by Lhe menLioned DecreeLaw.
Angola LNC LimiLed is Lhe main enLiLy responsible lor execuLing Lhe Pro|ecL,
Lhrough which Lhe promoLing companies hold Lheir invesLmenL and righLs.
OLher companies, such as Sociedade Operacional Angola LNC and Sociedade
Operadora dos CasoduLos de Angola, acL in represenLaLion ol Angola LNC
LimiLed. PromoLing companies, which are Lhe original shareholders ol Angola
LNC LimiLed, include Cabinda Cull Oil Company LimiLed, Sonangol Cas NaLural
LimiLada, BP LxploraLion {Angola) LimiLed and 1oLal Angola LNC LimiLed.
PIT
1axable proliL ol Angola LNC LimiLed is sub|ecL Lo Pl1 compuLed considering
Lhe rules sLaLed in DecreeLaw No. 10/07 and oLher relaLed legislaLion.
1ax losses can be carried lorward lor live years.
1axable proliL is impuLed Lo Lhe promoLing companies under a sorL ol Lax
Lransparency regime. 1he applicable Pl1 raLe is 357.
PromoLing companies en|oy a Lax crediL during 1^^ monLhs as lrom Lhe
commercial producLion daLe againsL Lhe Pl1 liabiliLy, deLermined as per
DecreeLaw No. 10/07.
An exempLion lrom Pl1 applies Lo inLeresL and dividends obLained by alliliaLes
{ol promoLing companies) LhaL hold a parLicipaLing inLeresL in a block Lhrough
which a producLion conLracL is enLered inLo wiLh Sonangol.
TTC
Angola LNC LimiLed is sub|ecL Lo 11C ol USS0.15 per LNC barrel, increased by
USS0.02 per each mmbLu ol LNC sold.
Cas surcharge
Angola LNC LimiLed is sub|ecL Lo Lhe paymenL ol a gas surcharge, on a
quarLerly basis, as lrom Lhe lirsL LNC exporL.
Industrial tax
Any income obLained by Angola LNC LimiLed, Lhe promoLing companies and
Lheir alliliaLes, relaLed wiLh Lhe commercial acLiviLies and LransacLions realized
under Lhe Pro|ecL, beneliLs lrom an indusLrial Lax exempLion.
ProliLs obLained by Sociedade Operacional Angola LNC and Sociedade
Operadora dos CasoduLos de Angola are sub|ecL Lo indusLrial Lax, alLhough
specilic rules apply.
7 Angola
PaymenLs made by Angola LNC LimiLed Lo Sociedade Operacional Angola LNC
and Sociedade Operadora dos CasoduLos de Angola, as well as Lhe paymenLs
beLween Sociedade Operacional Angola LNC and Sociedade Operadora dos
CasoduLos de Angola, concerning Lhe execuLion ol any service conLracL, are noL
sub|ecL Lo indusLrial Lax wiLhholdings.
Concerning service conLracLs {including Lhe supply ol maLerials) enLered inLo
by Angola LNC LimiLed, Sociedade Operacional Angola LNC and Sociedade
Operadora dos CasoduLos de Angola, Lhese companies are noL required Lo
perlorm indusLrial Lax wiLhholdings. 1his exempLion only applies during a
specilic Lime lrame. 1his is also applicable Lo Lhe enLiLies conLracLed and
subconLracLed and Lo Lhe subconLracLs aimed aL Lhe rendering ol services
or works {including Lhe supply ol maLerials) lor Lhe Pro|ecL.
Investment income tax
lnLeresL income derived lrom shareholder loans or oLher loans made by Lhe
promoLing companies, respecLive alliliaLes and Lhird parLies, lor Lhe beneliL ol
Angola LNC LimiLed, Sociedade Operacional Angola LNC, Sociedade Operadora
dos CasoduLos de Angola or oLher companies Lhey have incorporaLed, will be
exempL lrom invesLmenL income Lax. A similar exempLion, under cerLain
condiLions, may apply on inLeresL derived lrom loans made beLween Lhe
promoLing companies.
PromoLing companies and Lheir alliliaLes are exempL ol invesLmenL income Lax
on dividends received lrom Angola LNC LimiLed, Sociedade Operacional Angola
LNC and Sociedade Operadora dos CasoduLos de Angola.
Angola LNC LimiLed, Sociedade Operacional Angola LNC, Sociedade Operadora
dos CasoduLos de Angola or any oLher company incorporaLed by Lhem are noL
required Lo wiLhhold invesLmenL income Lax in relaLion Lo paymenLs under
cerLain lease conLracLs, Lransler ol knowhow, and inLellecLual and indusLrial
properLy righLs. 1his exempLion only applies during a specilic Lime lrame.
Cther tax exemptions
lncome obLained by Sonangol lrom paymenLs lor Lhe use ol Lhe associaLed gas
pipelines neLwork, made by Angola LNC LimiLed under Lhe invesLmenL conLracL,
are exempL lrom all Laxes and levies. Angola LNC LimiLed should noL perlorm
any wiLhholdings on such paymenLs.
Angola LNC LimiLed, Sociedade Operacional Angola LNC, Sociedade Operadora
dos CasoduLos de Angola, promoLing companies and Lheir alliliaLes are exempL
lrom all oLher Laxes and levies LhaL are noL specilied in DecreeLaw No. 10/07,
namely: PP1, P11, urban properLy Lax, properLy Lransler Lax, invesLmenL
income Lax and sLamp duLy {under cerLain condiLions). NoLwiLhsLanding,
Lhese companies are sub|ecL Lo Lhe sLandard adminisLraLive surcharges
or conLribuLions due in relaLion Lo commercial acLiviLies and LransacLions
associaLed wiLh Lhe Pro|ecL, provided such surcharges and conLribuLions are
generically applicable Lo Lhe remaining economic agenLs operaLing in Angola.
1he Lransler ol shares in Angola LNC LimiLed, Sociedade Operacional Angola
LNC and Sociedade Operadora dos CasoduLos de Angola, wiLhouL a gain,
should be exempL lrom all Laxes and levies. Moreover, no Laxes or levies are
imposed on Lhe shares ol Lhe menLioned companies, including increases and
decreases ol capiLal and sLock spliLs.
No Laxes or levies are imposed Lo Lhe Lranslers or remiLLances ol lunds Lo
make any paymenL Lo Lhe promoLing companies, Lheir alliliaLes or Lhird parLies
making loans LhaL are exempL lrom income Lax or wiLhholding Lax, as per
DecreeLaw No. 10/07, including Lhe reimbursemenL ol capiLal and paymenL
ol inLeresL in relaLion Lo shareholder loans and oLher loans as well as Lhe
disLribuLion ol dividends in accordance wiLh Lhe above DecreeLaw.
8 Angola
Customs regime
ln accordance wiLh Lhe Pro|ecL's regime, Lhe cusLoms procedure applicable Lo
Lhe operaLions and acLiviLies is LhaL esLablished lor companies in Lhe cusLoms
regime law applicable Lo Lhe oil indusLry, wiLh Lhe changes and ad|usLmenLs
sLaLed in DecreeLaw No. 10/07.
1his cusLoms regime is applicable Lo Angola LNC LimiLed, Sociedade
Operacional Angola LNC, Sociedade Operadora dos CasoduLos de Angola
and oLher enLiLies LhaL carry ouL operaLions or acLiviLies relaLed Lo Lhe
Pro|ecL on behall ol Angola LNC LimiLed, Sociedade Operacional Angola
LNC or Sociedade Operadora dos CasoduLos de Angola.
ln addiLion Lo Lhe goods lisLed in Lhe cusLoms regime law applicable Lo Lhe oil
indusLry, are also exempLed lrom cusLoms duLies various oLher producLs LhaL
are exclusively used lor Lhe purposes ol Lhe Pro|ecL.
Angola LNC LimiLed, Sociedade Operacional Angola LNC and Sociedade
Operadora dos CasoduLos de Angola are sub|ecL Lo surcharges due on all acLs
ol imporLaLion and exporLaLion {up Lo Lhe limiL ol 0.17), sLaLisLical surcharge
on all acLs ol imporLaLion and exporLaLion {0.17 ad valorem) and sLamp duLy
on all acLs ol imporLaLion and exporLaLion {0.57 ad valorem).
J. Cther
Personal income tax
Lmployees working in Angola are sub|ecL Lo personal income Lax, which is
charged under a progressive raLe sysLem up Lo 177. Personal income Lax is
paid Lhrough Lhe wiLhholding Lax mechanism operaLed by employers.
5ocial security
NaLionals or loreign individuals working in Angola are sub|ecL Lo Lhe local social
securiLy regime. ConLribuLions are paid by Lhe employer and are due aL Lhe
raLes ol 87 lor employers and 37 lor employees. lndividuals Lemporarily
working in Lhe counLry may be exempL lrom local conLribuLions il Lhey remain
alliliaLed Lo a compulsory regime abroad.
Petroleum activities law main Ieatures
Concession righLs and mineral righLs are aLLribuLed Lo Lhe sLaLe concessionaire.
Foreign or local enLiLies may conLracL wiLh Lhe sLaLe concessionaire as invesLors.
Any company LhaL wanLs Lo conducL oil and gas operaLions in Angola musL do
so in parLnership wiLh Lhe sLaLe concessionaire excepL lor operaLions wiLhin
Lhe scope ol an exploraLion license.
ParLnership wiLh Lhe sLaLe concessionaire may Lake one ol Lhe lollowing lorms:
a company, a consorLium agreemenL or a PSA. 1he sLaLe concessionaire is
also permiLLed Lo carry ouL oil and gas acLiviLies under RSCs. ln some cases,
an incorporaLed |oinL venLure may also be puL inLo place. As a general rule,
il Lhe |oinL venLure Lakes Lhe lorm ol a company or a consorLium agreemenL
in which Lhe sLaLe concessionaire has an inLeresL, Lhe sLaLe inLeresL should be
greaLer Lhan 507 {alLhough Lhe percenLage may be lower upon receiving
CovernmenL auLhorizaLion).
1he parLnership musL be preapproved by Lhe CovernmenL. 1he operaLor, which
may or may noL be a parLner, musL be sLaLed in Lhe concession agreemenL
lollowing a proposal by Lhe sLaLe concessionaire. 1he operaLor or Lhe parLner
musL be a commercial company.
1he invesLmenL risk during Lhe exploraLion phase is Laken by Lhe parLies LhaL
have conLracLed wiLh Lhe sLaLe concessionaire, wiLh no recovery ol Lheir
invesLmenL il no economic discovery is made.
Borrowings lor invesLmenLs lrom Lhird parLies by Lhe sLaLe concessionaire
or iLs parLners musL be auLhorized by Lhe CovernmenL il oil producLion is
used as securiLy.
An exploraLion license or an oil concession is required Lo carry ouL Lhe acLiviLy.
9 Angola
Hiring oI contractors by oil and gas companies
Local regulaLions provide lor Lhe lollowing Lhree regimes:
1. LimiLaLions Lo a lree Lrade regime cerLain services should only be provided
by local companies {loreign conLracLors are excluded).
2. Semilree Lrading regime cerLain services may only be provided by local
companies or loreign conLracLors when associaLed wiLh local parLners.
3. Free Lrade regime all services relaLed Lo oil and gas acLiviLy {onshore and
ollshore) LhaL are noL wiLhin eiLher ol Lhe Lwo previous regimes and LhaL
require a high level ol indusLry experLise may be lreely provided by local
companies or by loreign conLracLors, alLhough |oinL venLures wiLh local
parLners are possible.
1o be considered as a local company, Lhe ma|oriLy ol Lhe share capiLal musL be
owned by Angolan invesLors, and Lhe company musL be regisLered wiLh Lhe
MinisLry ol PeLroleum or Lhe Angolan Chamber ol Commerce and lndusLry.
Licensed enLiLies, Lhe sLaLe concessionaire and iLs parLners, as well as all
enLiLies LhaL parLicipaLe in oil operaLions, musL:
Acquire maLerials, equipmenL, machinery and consumpLion goods
produced locally, provided Lhey are ol equivalenL qualiLy and are
available in reasonable Lime, aL prices noL exceeding more Lhan 107
ol Lhe cosL ol imporLed iLems {including Lhe LransporLaLion, insurance
and cusLoms cosLs)
ConLracL wiLh local service providers il Lhe services rendered are idenLical
Lo Lhose available in Lhe inLernaLional markeL and Lhe price, when liable Lo
Lhe same level ol Lax, does noL exceed Lhe prices charged by loreign service
providers lor similar services by more Lhan 107
RecruiL local naLionals, unless Lhere are no locals wiLh Lhe required
qualilicaLions and experience
Cther
1he sLaLe concessionaire and iLs parLners musL adopL an accounLing sysLem in
accordance wiLh Lhe rules and meLhods ol Lhe Ceneral AccounLing Plan. 1he
MinisLry ol Finance may issue rules Lo ad|usL Lhe accounLs il Lhe currency
devalues, using Lhe US dollar as a benchmark. AccounLing records musL be
mainLained in Angola, and book enLries should be made wiLhin 90 days.
1he liscal year is Lhe calendar year. 1he Lime allowed in ArLicle 179 ol Lhe
Commercial Companies Code lor Lhe approval ol Lhe balance sheeL and Lhe
reporL ol Lhe board ol audiLors is reduced Lo Lwo monLhs.
1ax reLurns and all documenLs musL be submiLLed in PorLuguese, using
kwanzas, and Lhese documenLs musL be signed and sLamped Lo indicaLe
approval by a direcLor.
Angola is undergoing a signilicanL Lax relorm hence, inLer alia, wiLhholding
Laxes, indirecL Laxes and oLher Laxes may be considerably impacLed
and amended.
10 Argentina
Arcentina
Country code 54
Buencs Aires CMT -3
Ernst & Ycunc ~ PistreIIi asscciadcs
Henry Martin y Ascciadcs SRL
25 de Mayc 47
C1002AB! Buencs Aires
Arcentina
TeI 11 431 100
Fax 11 4312 47
DiI and cas ccntacts
DanieI Dassc
TeI 11 431 194
Fax 11 431 1777
danieI.dasscar.ey.ccm
DsvaIdc FIcres
TeI 11 4510 2274
Fax 11 431 1777
csvaIdc.fIcresar.ey.ccm
Fernandc Mcntes
TeI 11 431 170
Fax 11 431 1777
fernandc.mcntesar.ey.ccm
PabIc BeIaich
TeI 11 431 11
Fax 11 431 1777
pabIc.beIaichar.ey.ccm
A. At a glance
Fiscal regime
ArgenLina is organized inLo lederal, provincial and municipal CovernmenLs.
1he liscal regime LhaL applies Lo Lhe peLroleum indusLry principally consisLs
ol lederal and provincial Laxes.
CorporaLe income Lax 357
WiLhholding Lax Dividends 07
lnLeresL 15.057/357
RoyalLies 217/287/31.57
Minimum presumed income Lax 17
VA1 217 {general raLe)
SLamp Lax 17 {general raLe)
1urnover Lax 27 {average raLe)
CusLoms duLies lmporLaLion Laxes {raLes on cosL, insurance
and lreighL {ClF)), imporLaLion duLy
07/35.07, sLaLisLical raLe 0.57, VA1
10.57/217 and wiLhholding on income
Lax 07/37/117, VA1 07/57/107 and
Lurnover 07/1.57
LxporL Laxes Ceneral exporL duLy {57 Lo 257 on lree on
board {FOB) price) plus an addiLional raLe
applicable Lo crude oil
1ax on debiLs and crediLs in
checking accounLs 0.67 {6 )
Personal asseLs Lax LquiLy inLeresL on local enLiLies 0.57
Social securiLy Lax Lmployer 237 Lo 277
Lmployee 177
B. Fiscal regime
ArgenLina is organized inLo lederal, provincial and municipal CovernmenLs.
1he main Laxes imposed on Lhe peLroleum indusLry by Lhe NaLional CovernmenL
include income Lax, VA1, minimum presumed income Lax, personal asseLs Lax,
Lax on debiLs and crediLs in checking accounLs, cusLom duLies and social
securiLy Laxes.
Provincial Laxes imposed on Lhe peLroleum indusLry are Lurnover Lax, sLamp Lax
and royalLies {Lhis applies Lo upsLream companies only).
11 Argentina
MunicipaliLies may impose Laxes wiLhin Lheir |urisdicLions.
1axaLion powers are |oinLly exercised by Lhe naLional and provincial
CovernmenLs up Lo Lhree nauLical miles ollshore, measured lrom Lhe
lowesL Lide line. However, Lhe NaLional CovernmenL has exclusive LaxaLion
power up Lo 200 nauLical miles ollshore.
Corporate income tax
ArgenLineresidenL corporaLions and branches are sub|ecL Lo income Lax on
Lheir nonexempL, worldwide income aL a raLe ol 357.
Consolidation
No sysLem ol group LaxaLion applies in ArgenLina. Members ol a group musL lile
separaLe Lax reLurns. 1here are no provisions Lo ollseL Lhe losses ol group
members againsL Lhe proliLs ol anoLher group member.
Tax losses
NeL operaLing losses arising lrom Lhe Lransler ol shares or equiLy inLeresLs may
only ollseL income ol Lhe same origin. 1he same applies Lo losses lrom acLiviLies
LhaL are noL sourced Lo ArgenLina and lrom LransacLions under derivaLive
agreemenLs {excepL lor hedging LransacLions). All Lax losses generaLed in a Lax
period may be carried lorward Lo Lhe live periods lollowing Lhe period when Lhe
losses were incurred.
Thin capitalization
1hin capiLalizaLion rules require a debLLoequiLy raLio ol 2:1 lor Lhe deducLion
ol inLeresL derived lrom loans granLed by loreign enLiLies LhaL conLrol Lhe
ArgenLine borrower company {according Lo Lhe deliniLion provided lor Lransler
pricing purposes), excepL when inLeresL paymenLs are sub|ecL Lo Lhe maximum
357 wiLhholding raLe {according Lo condiLions menLioned in SecLion C below).
1he raLe LhaL applies is Lhe raLe chargeable under Lhe income Lax law or LhaL
provided by Lhe relevanL LreaLy signed by ArgenLina Lo avoid inLernaLional
double LaxaLion, whichever is less. ll Lhe LreaLy raLe is less Lhan 357, Lhin
capiLalizaLion rules musL be observed by Lhe local borrower Lo Lhe exLenL
LhaL Lhe abovemenLioned conLrol requisiLe is verilied.
TransIer pricing
1ransler pricing rules lollow OrganisaLion lor Lconomic CooperaLion and
DevelopmenL {Lhe OLCD) guidelines {arm's lengLh principle).
Depreciation
1he lollowing depreciaLion principles apply:
lnLangible asseLs relaLed Lo Lhe oil and gas concession depreciaLion based
on uniLs ol producLion
Wells, machinery, equipmenL and producLive asseLs depreciaLion based on
uniLs ol producLion
OLher Langible asseLs {vehicles, compuLers, eLc.) sLraighLline,
considering Lhe uselul lives ol Lhe asseLs
Minimum presumed income tax 1MPIT)
MPl1 is assessed aL a raLe ol 17 on Lhe value ol Lhe Laxpayer's asseLs aL Lhe
end ol Lhe Laxpayer's accounLing period. Value in Lhis case excludes shares
in ArgenLine companies. ln addiLion, value excludes invesLmenLs in new
movable asseLs or inlrasLrucLure lor Lhe iniLial year ol invesLmenL and Lhe
succeeding year.
MPl1 is due Lo Lhe exLenL LhaL a Laxpayer's MPl1 liabiliLy exceeds iLs corporaLe
income Lax. 1his excess is Lhen LreaLed as a Lax crediL LhaL may be carried
lorward lor Lhe 10 years lollowing Lhe year Lhe Lax was paid. 1o Lhe exLenL LhaL
Lhe Laxpayer's corporaLe income Lax exceeds MPl1 during Lhis 10year period,
Lhe crediL may be used Lo reduce Lhe corporaLe income Lax payable, up Lo Lhe
amounL ol Lhis excess.
12 Argentina
C. Withholding taxes
Cenerally, no wiLhholding Lax applies Lo dividends. However, il Lhe amounL ol a
dividend disLribuLion or a proliL remiLLance exceeds Lhe alLerLax accumulaLed
Laxable income ol Lhe payer, a linal wiLhholding Lax ol 357 may be imposed on
Lhe excess.
A wiLhholding Lax raLe ol 15.057 applies on inLeresL paymenLs relaLed Lo Lhe
lollowing Lypes ol loans:
lnLeresL on loans granLed by loreign linancial enLiLies LhaL are locaLed
in |urisdicLions noL lisLed as Lax havens under Lhe ArgenLine income Lax
regulaLions or |urisdicLions LhaL have signed exchange ol inlormaLion
agreemenLs wiLh ArgenLina and have inLernal rules providing LhaL no
banking, sLock markeL or oLher secrecy regulaLions can be applied Lo
requesLs lor inlormaLion by Lhe ArgenLine Lax auLhoriLies
lnLeresL on loans lor Lhe imporLaLion ol movable asseLs, excepL auLomobiles,
il Lhe loan is granLed by Lhe supplier ol Lhe goods
ln general, Lhe wiLhholding Lax raLe lor all oLher inLeresL paymenLs Lo
nonresidenLs is 357.
1he general wiLhholding Lax raLe lor royalLies is 31.57. ll cerLain requiremenLs
are meL, a 217 raLe may apply Lo Lechnical assisLance paymenLs and a 287 raLe
may apply Lo cerLain royalLies {e.g., Lrademarks).
D. Indirect taxes
VAT
VA1 is levied on Lhe delivery ol goods and Lhe provision ol services derived
lrom an economic acLiviLy, on Lhe imporL ol goods and on Lhe imporL ol
services Lo be used or exploiLed in ArgenLina.
1he sLandard VA1 raLe is 217. 1his raLe is reduced lor cerLain Laxable evenLs
{e.g., sales, manulacLuring, labricaLion or consLrucLion and deliniLive imporLs
ol goods LhaL qualily as "capiLal asseLs" according Lo a lisL included in Lhe VA1
law, and on inLeresL, commissions and lees on loans granLed by linancial
insLiLuLions, sub|ecL Lo cerLain condiLions).
LxporLs are exempL lrom VA1. 1axpayers may claim a relund lrom Lhe
CovernmenL lor VA1 paid relaLing Lo exporLs.
1he VA1 LhaL a company charges on sales or service provisions is known as
"ouLpuL VA1." 1he VA1 paid by companies lor goods or services purchases is
called "inpuL VA1." ln general, companies deducL inpuL VA1 lrom ouLpuL VA1
every monLh, and pay Lhe dillerence {il any). VA1 reLurns are liled monLhly.
ll, in a given monLh, Lhe inpuL VA1 exceeds Lhe ouLpuL VA1, Lhe dillerence may
be added Lo Lhe inpuL VA1 lor Lhe nexL monLh. A Laxpayer is noL enLiLled Lo a
relund unless Lhe accumulaLed inpuL VA1 is relaLed Lo exporLs.
5tamp tax
SLamp Lax is a provincial Lax levied on acLs lormalized in ArgenLina Lhrough
public or privaLe insLrumenLs. lL is also levied on insLrumenLs lormalized abroad
when Lhey produce ellecLs in ArgenLina.
ln general, ellecLs are produced in ArgenLina when Lhe lollowing acLiviLies
occur in iLs LerriLory: accepLance, proLesL, execuLion, demand on compliance
and paymenL. 1his lisL is noL exhausLive.
Lach province has iLs own sLamp Lax law, which is enlorced wiLhin iLs LerriLory.
1he documenLs sub|ecL Lo sLamp Lax include agreemenLs ol any kind, deeds,
acknowledged invoices, promissory noLes and securiLies.
1he general raLe is approximaLely 17, buL in cerLain cases, lor example,
when real esLaLe is sold, Lhe raLe may reach ^7. However, raLes vary according
Lo Lhe |urisdicLion.
13 Argentina
Poyalties
RoyalLies in ArgenLina amounL Lo 127 ol Lhe wellhead value ol Lhe producL.
RoyalLies may be LreaLed as an immediaLe deducLion lor corporaLe income
Lax purposes.
Turnover tax
Provincial CovernmenLs apply a Lax on Lhe gross revenues {or Lurnover) ol
businesses. 1he raLes are applied Lo Lhe LoLal amounL ol gross receipLs accrued
in Lhe calendar year. 1he average raLe is 27 {lor upsLream companies).
LxporLs are exempL lor Lurnover Lax purposes lor all acLiviLies, wiLhouL any
lormal procedure.
Customs duties
ArgenLina is a member ol Lhe World 1rade OrganizaLion {W1O), Lhe LaLin
American lnLegraLion AssociaLion {ALADl) and Lhe MLRCOSUR {SouLh
American Lrade block).
As a member ol Lhe W1O, ArgenLina has adopLed, among oLher basic
principles, Lhe Ceneral AgreemenL on 1arills and 1rade {CA11) value code,
which esLablishes Lhe value guidelines lor imporLing goods.
1he ALADl is an inLergovernmenLal agency LhaL promoLes Lhe expansion
ol regional inLegraLion Lo ensure economic and social developmenL, and iLs
ulLimaLe goal is Lo esLablish a common markeL. lLs 12 member counLries are
ArgenLina, Bolivia, Brazil, Chile, Colombia, Cuba, Lcuador, Mexico, Paraguay,
Peru, Uruguay and Venezuela.
1he MLRCOSUR was creaLed in 1991, when ArgenLina, Brazil, Uruguay and
Paraguay signed Lhe 1reaLy ol Asuncin. 1he basic purpose ol Lhe 1reaLy ol
Asuncin is Lo inLegraLe Lhe lour member counLries Lhrough Lhe lree circulaLion
ol goods, services and producLive lacLors and esLablish a common exLernal
Larill. Chile and Bolivia are associaLed Lo MLRCOSUR as acceding counLries,
and Venezuela recenLly |oined as a lull member.
1he imporL ol goods originaLing in any ol Lhe member counLries is sub|ecL Lo a
07 imporL duLy.
Importation taxes
ln ArgenLina, imporLaLion duLies are calculaLed on Lhe ClF value ol goods,
valued using CA11 valuaLion sLandards. 1he duLy raLe ranges lrom
approximaLely 07 Lo 357, according Lo Lhe goods, which should be idenLilied
lor duLy purposes using common MLRCOSUR nomenclaLure Larills.
AddiLionally, Lhe imporLaLion ol goods is sub|ecL Lo Lhe paymenL ol a sLaLisLical
raLe, which is 0.57 ol Lhe ClF value ol goods, wiLh a USS500 cap and VA1
{10.57/217, depending on Lhe goods). VA1 payable aL imporLaLion may be
LreaLed as inpuL VA1 by Lhe imporLer.
1he deliniLive imporLaLion ol goods is sub|ecL Lo an addiLional income Lax
wiLhholding ol 37, 67 or 117 {depending on Lhe classilicaLion ol Lhe imporLed
goods), VA1 wiLhholding {57 or 107) and Lurnover Lax wiLhholding {1.57).
1hese Lax wiLhholdings consLiLuLe an advance Lax paymenL lor regisLered
Laxpayers compuLed in Lhe Lax reLurn lor Lhe relevanL Lax period.
Export taxes
LxporL duLy is levied on Lhe exporL ol goods lor consumpLion, i.e., Lhe deliniLive
exLracLion ol merchandise lrom ArgenLina. 1he duLy is calculaLed based on Lhe
FOB value ol Lhe goods, valued using Lhe ArgenLine CusLoms Code sLandards.
Any oLher Laxes and charges levied on exporLs and Lhe ClF value ol maLerials
imporLed on a Lemporary basis are excluded lrom Lhe Laxable value, il Lhey
have been included in Lhe value ol goods.
14 Argentina
1he duLy raLe ranges lrom approximaLely 57 Lo 257, according Lo Lhe exporLed
goods, which should be classilied lor duLy purposes using Lhe Larill ol common
MLRCOSUR nomenclaLure.
ln Lhe case ol Lhe exporL ol crude oil, an addiLional raLe applies {described below).
Cther taxes
Tax on debits and credits in checking accounts
1he Lax on debiLs and crediLs in checking accounLs is assessed aL a 6 raLe,
based on Lhe amounL ol Lhe crediL or debiL made in Lhe checking accounL.
1he Lax is deLermined and collecLed by Lhe bank.
AddiLionally, 3^7 ol Lhe Lax paid lor bank accounL crediLs may be compuLed
againsL income Lax or minimum presumed income Lax reLurns and relaLed
Lax advances.
Personal assets tax
Personal asseLs Lax applies Lo individuals wiLh asseLs owned as ol 31 December
each year. 1axpayers are required Lo pay Lhe equivalenL ol 0.57 Lo 1.257 ol Lhe
asseLs owned as ol LhaL daLe, depending on Lheir global Lax value il iL exceeds a
cerLain amounL. For residenL individuals, Lhe Lax applies on asseLs owned in
ArgenLina and abroad. For nonresidenL individuals, Lhe Lax applies only on
asseLs owned in ArgenLina.
1he law presumes {wiLhouL admiLLing evidence Lo rebuL Lhe presumpLion) LhaL
shares, quoLas and oLher parLicipaLion inLeresLs held in Lhe capiLal ol ArgenLine
companies {including branches) LhaL are held by nonresidenL enLiLies are
indirecLly owned by loreign individuals; Lhus, Lhe Lax applies Lo Lhis Lype ol
ownership. 1he Lax amounLs Lo 0.57 annually {based on Lhe equiLy value
according Lo Lhe linancial sLaLemenLs), which musL be paid by Lhe ArgenLine
companies as subsLiLuLe Laxpayers. 1he subsLiLuLe Laxpayer is subsequenLly
enLiLled Lo ask lor Lhe relund ol Lhe Lax lrom iLs shareholders or parLners.
5ocial security taxes
Salaries paid Lo employees are sub|ecL Lo employer and employee conLribuLions
Lo Lhe social securiLy sysLem, which are wiLhheld lrom Lhe salary.
1he percenLages lor employers and employees are 237 and 177, respecLively.
1he employee's Lax musL be wiLhheld lrom Lhe salary paymenL by Lhe employer.
AddiLionally, il a company's main acLiviLy is commerce or Lhe provision ol
services and iLs average sales lor Lhe lasL Lhree liscal years exceed
ARS^8 million {abouL USS16 million), Lhe social securiLy Laxes borne
by Lhe company rise lrom 237 Lo 277.
Province oI Tierra del Fuego
A special Lax regime currenLly applies Lo cerLain acLiviLies carried ouL in Lhe
Province ol 1ierra del Fuego. Law No. 196^0 esLablishes LhaL individuals,
undivided esLaLes and legal persons are exempL lrom any naLional Lax which
may apply Lo evenLs, acLiviLies or LransacLions perlormed in Lhe Province ol
1ierra del Fuego, AnLarcLica and Lhe SouLh ALlanLic lslands, or LhaL relaLe Lo
asseLs locaLed in 1ierra del Fuego. As a resulL, acLiviLies carried ouL in Lhe
Province ol 1ierra del Fuego are exempL lrom corporaLe income Lax, VA1
and MPl1. FurLhermore, employees working in Lhis province are exempL
lrom income Lax.
Cil prices 1additional export tax)
Local prices: Lhe prices are regulaLed by Lhe CovernmenL buL musL noL
exceed USS^2 per barrel
LxporL prices: WesL 1exas lnLermediaLe {W1l) less exporL Lax
{discussed below)
15 Argentina
MeLhod ol calculaLion ol exporL Lax:
1he neL price {NP) is Lhe maximum price LhaL would be obLained by an oil and
gas company based on Lhe applicaLion ol Lhis calculaLion meLhod {USS^2 per
barrel). 1his NP does noL include Lhe incidence ol LransporLaLion, qualiLy
dillerenLial, lederal and provincial Laxes. 1hese cosLs should be deducLed lrom
Lhe NP. According Lo Lhe meLhod ol calculaLion described above, Lhe exporL
wiLhholding raLe may vary lrom 287 Lo 587 depending on Lhe inLernaLional
price. From a pracLical poinL ol view, in boLh cases, Lhe maximum price is
around USS^2 per barrel.
E. Cther
Business presence
ln ArgenLina, lorms ol "business presence" Lypically include corporaLions,
loreign branches and |oinL venLures {incorporaLed and unincorporaLed).
ln addiLion Lo commercial issues, Lhe Lax consequences ol each lorm are
imporLanL consideraLions when seLLing up a business in ArgenLina.
UnincorporaLed |oinL venLures are commonly used by companies in Lhe
exploraLion and developmenL ol oil and gas pro|ecLs.
Foreign exchange controls
1he execuLive branch and Lhe CenLral Bank have issued regulaLions LhaL
esLablish cerLain requiremenLs lor Lhe Lransler ol lunds abroad. LxporLers
musL repaLriaLe inLo ArgenLina Lhe cash derived lrom Lhe exporLs ol goods and
services wiLhin a specilied Lime period. Regarding Lhe exporL ol producLs ol Lhe
peLroleum indusLry, only 307 ol Lhe cash derived lrom Lhis operaLion musL be
repaLriaLed inLo ArgenLina, which means LhaL Lhe remaining 707 may be kepL
abroad, regardless ol iLs use. Funds derived lrom loans granLed lrom abroad
musL be received in ArgenLina and remain in Lhe counLry lor a minimum Lerm.
ln cerLain circumsLances, 307 ol Lhe lunds received lrom abroad musL be held
as loreign currency in a noninLeresLbearing deposiL lor a oneyear period.
PaymenLs abroad ol dividends, loans, inLeresL, and principal and imporLs ol
goods are allowed il cerLain requiremenLs are meL.
Treaties to avoid international double taxation
ArgenLina has 17 LreaLies in ellecL Lo avoid double inLernaLional LaxaLion and
Lhus promoLe reciprocal invesLmenL and Lrade. ln addiLion, a LreaLy wiLh Lhe
Russian FederaLion LhaL had been signed in OcLober 2001 has been raLilied
by law {published in Lhe Cff|c|a| Bu||et|n in January 2007), and iL will become
ellecLive once Lhe CovernmenLs have been muLually noLilied ol Lhe respecLive
inLernal procedures required lor iLs applicaLion.
Also, ArgenLina has enLered inLo specilic inLernaLional LransporLaLion LreaLies
wiLh several naLions.
1 Australia
AustraIia
Country code 1
Perth CMT +
Ernst & Ycunc
Ernst & Ycunc BuiIdinc
11 Mcunts Bay Rcad
Perth
Western AustraIia
000
TeI 9429 2222
Fax 9429 243
DiI and cas ccntacts
Chad Dixcn
TeI 9429 221
Fax 9429 2433
chad.dixcnau.ey.ccm
Andrew NeIscn
TeI 9429 2257
Fax 9429 2433
andrew.neIscnau.ey.ccm
Craic Rcbscn
TeI 9429 2271
Fax 9429 2433
craic.rcbscnau.ey.ccm
AdeIaide CMT +9.5
Ernst & Ycunc
Ernst & Ycunc BuiIdinc
121 Kinc WiIIiam Street
AdeIaide
Scuth AustraIia
5000
TeI 417 100
Fax 417 1775
DiI and cas ccntact
Janet FinIay
TeI 417 1717
Fax 417 1703
janet.finIayau.ey.ccm
Brisbane CMT +10
Ernst & Ycunc
1 EacIe Street
Brisbane
0ueensIand
4000
TeI 7 3011 3333
Fax 7 3011 3100
DiI and cas ccntacts
PauI Laxcn
TeI 7 3243 3735
Fax 7 3011 3190
pauI.Iaxcnau.ey.ccm
MichaeI Hennessey
TeI 7 3243 391
Fax 7 3011 3190
michaeI.hennesseyau.ey.ccm
Brent Ducker
TeI 7 3243 3723
Fax 7 3011 3190
brent.duckerau.ey.ccm
Patrick Lavery
TeI 7 3243 394
Fax 7 3011 3190
patrick.Iaveryau.ey.ccm
Richard Hcwse
TeI 7 3011 3199
Fax 7 3011 3190
richard.hcwseau.ey.ccm
17 Australia
Sydney CMT +10
Ernst & Ycunc
Ernst & Ycunc Centre
00 Cecrce Street
Sydney
New Scuth WaIes
2000
TeI 2 924 5555
Fax 2 924 5959
DiI and cas ccntacts
CcIin Jcnes
TeI 2 924 4724
Fax 2 924 512
ccIin.jcnesau.ey.ccm
Andrew Lapa
TeI 2 924 412
Fax 2 924 512
andrew.Iapaau.ey.ccm
MeIbcurne CMT +10
Ernst & Ycunc
Ernst & Ycunc BuiIdinc
Exhibiticn Street
MeIbcurne
Victcria
3000
TeI 3 92 000
Fax 3 50 7777
DiI and cas ccntact
Andrew Van Dinter
TeI 3 50 759
Fax 3 50 7720
andrew.van.dinterau.ey.ccm
A. At a glance
Fiscal regime
1he liscal regime LhaL applies in AusLralia Lo Lhe peLroleum indusLry consisLs ol
a combinaLion ol corporaLe income Lax, and eiLher a peLroleum resource renL
Lax {PRR1) or royalLybased LaxaLion.
RoyalLies
2
07 Lo 12.507
lncome Lax raLe CorporaLe income Lax raLe 307
Resource renL Lax
2
^07
3
CapiLal allowances D, L, O
4

lnvesLmenL incenLives L, RD
5
B. Fiscal regime
1he currenL liscal regime LhaL applies in AusLralia Lo Lhe peLroleum indusLry
consisLs ol a combinaLion ol corporaLe income Lax, and eiLher a PRR1
or royalLybased LaxaLion.
Corporate income tax
AusLralian residenL corporaLions are sub|ecL Lo income Lax on Lheir nonexempL,
worldwide income aL a raLe ol 307. lncome ol nonresidenL corporaLions lrom
AusLralian sources LhaL is noL sub|ecL Lo wiLhholding Lax or LreaLy proLecLion is
also sub|ecL Lo Lax aL 307. 1he 307 raLe applies Lo income lrom AusLralian oil
and gas acLiviLies.
2 0eenc|nc on tne |ocat|on of tne rocuct|on, e|tner a PPP1 or rova|tv w||| a|v.
3 PPP1 a|c |s cecuct|o|e for |ncome tax uroses.
4 0: acce|eratec cerec|at|on, f: |mmec|ate wr|teoff for ex|orat|on costs anc tne cost
of erm|ts f|rst usec |n ex|orat|on, C: PPP1 exenc|ture u||ft.
5 |: |osses can oe carr|ec forwarc |ncef|n|te|v, P0: P80 |ncent|ve.
18 Australia
AusLralia does noL apply pro|ecL "ring lencing" in Lhe deLerminaLion ol
corporaLe Lax liabiliLy. ProliL lrom one pro|ecL can be ollseL againsL Lhe losses
lrom anoLher pro|ecL held by Lhe same Lax enLiLy and, similarly, proliLs and
losses lrom upsLream acLiviLies can be ollseL againsL downsLream acLiviLies
underLaken by Lhe same enLiLy.
AusLralia has Lax consolidaLion rules whereby dillerenL AusLralian wholly owned
legal enLiLies may lorm a Lax consolidaLed group and Lhereby be LreaLed as a
single Lax enLiLy.
CorporaLe income Lax is levied on Laxable income. 1axable income equals
assessable income less deducLions. Assessable income includes ordinary
income {deLermined under common law) and sLaLuLory income {amounLs
specilically included under Lhe lncome 1ax AcL). DeducLions include expenses,
Lo Lhe exLenL Lhey are incurred in producing assessable income or are
necessary in carrying on a business lor Lhe purpose ol producing assessable
income. However, expendiLure ol a capiLal naLure is noL deducLible.
DeducLions lor expendiLure ol a capiLal naLure may be available under Lhe
"unilorm capiLal allowance regime." 1his would mosL relevanLly be in Lhe lorm
ol a capiLal allowance lor depreciaLing asseLs {see below). However, Lhere
may be deducLions available lor oLher Lypes ol capiLal expendiLures {e.g.,
expendiLure incurred Lo esLablish an iniLial business sLrucLure is deducLible
over live years).
ProliLs lrom oil and gas acLiviLies underLaken by an AusLralian residenL
company in a loreign counLry are generally exempL lrom Lax in AusLralia,
provided Lhey are underLaken Lhrough a loreign permanenL esLablishmenL.
Capital gains
Cains resulLing lrom a capiLal gains Lax {CC1) evenL may be sub|ecL
Lo LaxaLion. Cains arising in respecL ol asseLs acquired prior Lo
20 SepLember 1985 can be disregarded sub|ecL Lo Lhe saLislacLion ol
inLegriLy measures. CapiLal gains or losses are deLermined by deducLing
Lhe cosL base ol an asseL lrom Lhe proceeds {money received or receivable,
or Lhe markeL value ol properLy received or receivable). For corporaLe
Laxpayers, Lhe neL capiLal gain is Laxed aL 307.
CapiLal losses are deducLible againsL capiLal gains and noL againsL oLher Laxable
income. However, Lrading losses are deducLible againsL neL Laxable capiLal
gains, which are included in Laxable income. NeL capiLal losses can be carried
lorward indeliniLely lor use in subsequenL years, sub|ecL Lo meeLing loss carried
lorward rules {discussed laLer).
CapiLal gains and losses on disposals ol planL and depreciaLing asseLs acquired
on or alLer 21 SepLember 1999 are noL sub|ecL Lo Lhe CC1 provisions. lnsLead,
Lhese amounLs are LreaLed as a balancing ad|usLmenL under Lhe depreciaLion
rules and are Laxed on revenue accounL {see secLion on Lhe disposal ol asseLs).
Oil and gas exploraLion permiLs, reLenLion leases and producLion licenses
acquired alLer 30 June 2001 are LreaLed as depreciaLing asseLs and,
Lherelore, noL sub|ecL Lo CC1. PermiLs, leases and licenses acquired on
or belore 30 June 2001 are sub|ecL Lo Lhe CC1 provisions.
CapiLal gains or losses derived by an AusLralian residenL company in respecL
ol Lhe disposal ol shares in a loreign company are reduced according Lo
Lhe proporLion ol acLive versus passive asseLs held by Lhe loreign company.
Foreign companies wiLh aL leasL 907 acLive asseLs can generally be disposed
ol lree ol Lax.
AusLralian companies wiLh loreign branch acLive businesses {which will
generally include oiland gasproducing asseLs) can also generally dispose
ol loreign branch asseLs lree ol CC1.
19 Australia
NonresidenLs are only sub|ecL Lo CC1 on Laxable AusLralian properLy {1AP).
1AP includes:
1axable AusLralian real properLy {e.g., real properLy or land in AusLralia
and mining, quarrying or prospecLing righLs il Lhe underlying minerals or
maLerials are in AusLralia).
lndirecL AusLralian real properLy, comprising a membership inLeresL in
an enLiLy, where, broadly speaking, Lhe inLeresL in Lhe company is equal
Lo or greaLer Lhan 107 and greaLer Lhan 507 ol Lhe markeL value ol Lhe
company's asseLs, can be Lraced Lo Laxable AusLralian real properLy.
1he residency ol Lhe enLiLy is irrelevanL, and Lhis measure can apply Lo
chains ol enLiLies {see SecLion C below lor an explanaLion ol how Lhis
principle is applied in Lhe conLexL ol nonresidenLs selling shares in an
AusLralian company).
AsseLs ol a business conducLed Lhrough a permanenL
esLablishmenL in AusLralia.
RighLs or opLions Lo acquire Lhe abovemenLioned asseLs.
Functional currency
Provided cerLain requiremenLs are meL, Laxpayers may calculaLe Lheir Laxable
income by relerence Lo a luncLional currency {i.e., a parLicular loreign
currency) il Lheir accounLs are solely or predominanLly kepL in LhaL currency.
TransIer pricing
AusLralia's Lax law includes measures Lo ensure LhaL Lhe AusLralian Laxable
income base associaLed wiLh crossborder LransacLions is based on
arm's lengLh prices.
Dividends
Dividends paid by AusLralian residenL companies are lranked wiLh an impuLaLion
crediL Lo Lhe exLenL LhaL AusLralian income Lax has been paid by Lhe company aL
Lhe lull corporaLe Lax raLe on Lhe income being disLribuLed.
For residenL corporaLe shareholders, Lo Lhe exLenL Lhe dividend has been
lranked, Lhe amounL ol Lhe dividend is grossed up by Lhe amounL ol Lhe
lranking crediL and included in assessable income. 1he company is Lhen
enLiLled Lo:
A crediL/ollseL ol an amounL equal Lo Lhe grossup againsL income Lax
payable on Lhe disLribuLion
Conversion ol excess lranking crediLs inLo carry lorward Lrading losses
A lranking crediL in iLs own lranking accounL which can in Lurn be disLribuLed Lo
iLs shareholders.
For residenL individual shareholders, Lhe shareholder includes Lhe dividend
received plus Lhe lull impuLaLion crediL in assessable income. 1he impuLaLion
crediL can be ollseL againsL personal income Lax assessed in LhaL year.
Lxcess crediLs are relundable.
For corporaLe nonresidenL shareholders, dividends paid or crediLed Lo non
residenL shareholders are sub|ecL Lo a linal 307 wiLhholding Lax {Lhe raLe is
generally reduced by any applicable LreaLy) on Lhe unlranked porLion ol a
dividend. No dividend wiLhholding Lax applies Lo lranked dividends. Sub|ecL Lo
double Lax LreaLy reliel, Lhe wiLhholding Lax is deducLed aL source on Lhe gross
amounL ol Lhe dividend.
Special rules exempL wiLhholding Lax on dividends paid Lo loreign residenLs,
which are classed as "conduiL loreign income." 1his Lerm broadly means
loreignsourced income earned by an AusLralian company is noL sub|ecL
Lo Lax in AusLralia. ln pracLice, Lhis means nonAusLralian exploraLion and
producLion {L&P) companies may consider using AusLralia as a regional
holding company because:
ProliLs lrom loreign operaLions {or loreign subsidiaries) can be passed
Lhrough AusLralia lree ol Lax
20 Australia
CapiLal gains Lax is noL generally levied on Lhe disposal ol loreign
subsidiaries or branch operaLions {provided Lhey hold predominanLly
acLive asseLs)
Tax year
A company's Lax year runs lrom 1 July Lo 30 June ol each year. lL is, however,
possible Lo apply lor a dillerenL accounLing period Lo align a Laxpayer's Lax year
wiLh Lhe linancial accounLing year.
PPPT
PRR1 is a lederal Lax LhaL applies Lo peLroleum pro|ecLs underLaken in cerLain
ollshore areas under Lhe |urisdicLion ol Lhe CommonwealLh ol AusLralia.
Cenerally, PRR1 applies Lo all producLion licenses issued under Lhe Ollshore
PeLroleum and Creenhouse Cas SLorage AcL 2006 {OPCCSA)
{CommonwealLh), wiLh ellecL lrom 1 July 2008.
PRR1 reLurns are due annually, in respecL ol each year ending 30 June,
il assessable receipLs are derived in relaLion Lo a peLroleum pro|ecL. lL is
noL possible Lo change Lhe PRR1 yearend Lo a daLe oLher Lhan 30 June.
OuarLerly insLallmenLs ol PRR1 musL also be calculaLed and paid.
Pro|ecLs in Lhe lollowing areas are excluded lrom Lhe PRR1 regime:
CerLain specilied pro|ecLs locaLed in Lhe NorLhwesL Shell {relaLed Lo
exploraLion permiLs WA1P and WA28P)
Pro|ecLs wiLhin Lhe AusLralia/LasL 1imor JoinL PeLroleum DevelopmenL Area
PRR1 applies Lo Lhe Laxable proliL ol a pro|ecL generaLed lrom a pro|ecL's
upsLream acLiviLies. 1he Laxable proliL is calculaLed by relerence Lo Lhe
lollowing lormula:
TaxabIe prcfit = assessabIe receipts - deductibIe expenditure
Cenerally, because PRR1 is imposed on a pro|ecL basis, Lhe deducLibiliLy ol
an expendiLure is limiLed Lo expendiLures incurred in respecL ol LhaL pro|ecL,
and iL cannoL be deducLed againsL oLher pro|ecLs ol Lhe same enLiLy. However,
exploraLion expendiLures may be Lranslerred beLween pro|ecLs in which Lhe
Laxpayer or iLs wholly owned group ol companies has an inLeresL, sub|ecL Lo
cerLain condiLions.
A liabiliLy Lo pay PRR1 exisLs where assessable receipLs exceed deducLible
expendiLures. PRR1 applies aL Lhe raLe ol ^07.
PRR1 is levied belore income Lax, and PRR1 is deducLible lor income Lax
purposes. A PRR1 relund received is assessable lor income Lax purposes.
Pro|ecLs sub|ecL Lo PRR1 are generally noL sub|ecL Lo excise Lax or royalLies.
From 1 July 2009, Laxpayers can elecL Lo calculaLe Lheir PRR1 liabiliLy by
relerence Lo a luncLional currency oLher Lhan AusLralian dollars, provided
cerLain requiremenLs are meL.
Assessable receipLs include all receipLs, wheLher ol a capiLal or revenue naLure,
relaLed Lo a peLroleum pro|ecL.
For pro|ecLs involving Lhe conversion ol gas Lo liquids, special regulaLions apply
Lo govern Lhe calculaLion ol Lhe deemed sale price aL Lhe poinL ol conversion.
lL is necessary Lo calculaLe a deemed price in Lerms ol Lhe regulaLions where no
independenL sale occurs aL Lhe gasLoliquid conversion poinL. 1his price is Lhen
applied Lo deLermine Lhe assessable receipLs sub|ecL Lo PRR1.
DeducLible expendiLure includes expenses ol a capiLal or revenue naLure.
1here are Lhree caLegories ol deducLible expendiLure: exploraLion
expendiLure {e.g., exploraLion drilling cosLs, seismic survey), general pro|ecL
expendiLure {e.g., developmenL expendiLure and cosLs ol producLion) and
closing down expendiLure {e.g., environmenLal resLoraLion, removal ol
producLion plaLlorms).
CerLain expendiLures are noL deducLible lor PRR1 purposes, lor example:
linancingLype cosLs {principal, inLeresL and borrowing cosLs); dividends;
share issue cosLs; repaymenL ol equiLy capiLal; privaLe override royalLies;
21 Australia
paymenLs Lo acquire an inLeresL in permiLs, reLenLion leases and licenses;
paymenLs ol income Lax or goods and service Lax {CS1); indirecL
adminisLraLive or accounLing Lype cosLs incurred in carrying on or providing
operaLions or laciliLies; and hedge expenses. A number ol Lhese iLems are
conLenLious and are sub|ecL Lo resoluLion wiLh Lhe AusLralian Lax auLhoriLies.
LxpendiLures noL deducLed can be carried lorward Lo be ollseL againsL luLure
assessable receipLs. LxpendiLures noL deducLed are deemed Lo be incurred
each year and are compounded using one ol a number ol seL raLes ranging
lrom a nominal inllaLion raLe Lo Lhe longLerm bond raLe plus 157, depending
on Lhe naLure ol Lhe expendiLure {exploraLion or general) and Lhe year Lhe
expendiLure was incurred. Such a compounded expendiLure is relerred Lo as
an "augmenLed" expendiLure.
A 1507 PRR1 deducLion can be available lor qualilying expendiLures in
nominaLed deepwaLer areas.
Where closingdown expendiLures and any oLher deducLible expendiLures
incurred in a linancial year exceed Lhe assessable receipLs {Lhe excess),
a Laxpayer is enLiLled Lo a crediL. 1he amounL ol Lhis crediL or PRR1 relund
is calculaLed in Lerms ol specilic rules.
Poyalty regimes
For onshore pro|ecLs, wellhead royalLies are applied and adminisLered aL Lhe
sLaLe level. Wellhead royalLies are generally levied aL a raLe ol beLween 107 and
12.57 ol Lhe neL wellhead value ol all Lhe peLroleum produced. ln some sLaLes,
Lhe raLe lor Lhe lirsL live years is nil, increasing Lo 67 in year six and LherealLer
aL 17 per annum up Lo a maximum ol 107.
Lach sLaLe has iLs own rules lor deLermining neL wellhead value; however,
iL generally involves deducLing deducLible cosLs lrom Lhe gross value ol Lhe
peLroleum recovered. DeducLible cosLs are generally limiLed Lo Lhe cosLs
involved in processing, sLoring and LransporLing Lhe peLroleum recovered Lo
Lhe poinL ol sale {i.e., a legislaLive neL back).
For mosL ollshore pro|ecLs, lederally adminisLered PRR1 is applied. See
previous secLion on PRR1 lor lurLher deLails. RoyalLies do noL apply Lo lields
chargeable Lo PRR1.
C. Capital allowances
ln calculaLing a company's corporaLe income Lax liabiliLy, Lax depreciaLion
deducLions may be available.
DepreciaLing asseLs include asseLs LhaL have a limiLed ellecLive lile and LhaL
decline in value over Lime. Lxamples ol depreciaLing asseLs include planL and
equipmenL, cerLain iLems ol inLellecLual properLy, inhouse proprieLary solLware
and acquisiLions ol exploraLion permiLs, reLenLion leases, producLion licenses
and mining or peLroleum inlormaLion, alLer 30 June 2001.
A capiLal allowance equal Lo Lhe decline in Lhe value ol Lhe asseL may be
deLermined on a diminishing value {DV) or a prime cosL {PC) meLhod.
1he DV meLhod allows a Laxpayer Lo claim a higher decline in value earlier
in Lhe ellecLive lile ol a depreciaLing asseL.
1he lormula under each meLhod is as lollows:
DV = base value x days held/365 days x 2007
PC = asseL's cosL x days held/365 days x 1007/asseL's ellecLive lile
A Laxpayer can elecL Lo use eiLher Lhe ellecLive lile deLermined by Lhe
Commissioner or Lo independenLly deLermine Lhe ellecLive lile ol an asseL.
A specilic concession under Lhe capiLal allowance provisions relevanL Lo Lhe
oil and gas indusLry is Lhe immediaLe wriLeoll available lor cosLs incurred in
underLaking exploraLion acLiviLies. For example, Lhe cosL ol acquiring a permiL
or reLenLion lease can be immediaLely deducLed, provided iL is lirsL used
lor exploraLion.
22 Australia
1o Lhe exLenL Lhe asseL is lirsL used lor developmenL drilling lor peLroleum
or lor operaLions in Lhe course ol working a peLroleum lield, an immediaLe
deducLion is noL available and Lhe cosL may be claimed as a capiLal allowance
over Lhe ellecLive lile ol Lhe asseL.
1he ellecLive lile ol cerLain Langible asseLs used in peLroleum relining, oil and
gas exLracLion and Lhe gas supply indusLry is capped aL beLween 15 and 20
years, wiLh Laxpayers able Lo sellassess a lower ellecLive lile.
Reler Lo SecLion D lor deLails ol Lhe invesLmenL allowance.
D. Incentives
Exploration
An expendiLure on exploraLion is immediaLely deducLible lor income
Lax purposes.
Tax losses
lncome Lax losses can be carried lorward indeliniLely; however, Lhe uLilizaLion ol
a carriedlorward loss is sub|ecL Lo meeLing deLailed "conLinuiLy ol ownership"
requiremenLs {broadly, conLinuiLy in more Lhan 507 ol Lhe voLing, dividend and
capiLal righLs) or "same business LesL" requiremenLs. 1ax losses may noL be
carried back.
Investment allowance
A Lemporary addiLional corporaLe income Lax deducLion in Lhe lorm ol an
invesLmenL allowance has been inLroduced. 1he addiLional deducLion is eiLher
107 or 307 ol Lhe cosL ol Lhe Langible depreciaLing asseL. For qualilying
expendiLure incurred beLween 13 December 2008 and 30 June 2009, Lhe
invesLmenL allowance is 307 provided Lhe asseL is insLalled by 30 June 2010.
For all oLher qualilying expendiLure incurred beLween 13 December 2008 and
31 December 2009, Lhe invesLmenL allowance is 107 provided Lhe asseL is
insLalled by 31 December 2010.
Pegional incentives
An immediaLe uplilL Lo 1507 on PRR1 deducLions is available in respecL ol
exploraLion expendiLures incurred in designaLed ollshore lronLier areas where
Lhe purpose is noL relaLed Lo evaluaLing or delineaLing a previously discovered
peLroleum pool.
Pesearch and development 1P&D)
1he R&D Lax concession provides an acceleraLed R&D deducLion ol 1257 on
AusLralianbased R&D expenses, which resulLs in an alLerLax saving ol 7.5
cenLs per dollar. AssisLance is also provided Lo companies LhaL increase Lheir
R&D spending or lor small companies in a Lax loss posiLion. 1hese addiLional
incenLives include:
A 1757 premium R&D Lax concession
An R&D Lax ollseL lor smaller companies, which allows companies a
cash rebaLe lor Lhe Lax beneliL equivalenL ol Lheir R&D deducLions
Eligibility criteria
1he company musL be incorporaLed in AusLralia
1he R&D acLiviLies musL be done on Lhe company's own behall
1he company musL invesL a minimum ol AUSS20,000 in R&D
acLiviLies each year
ln addiLion, Lhe acLiviLies musL conLain elemenLs ol innovaLion or high levels ol
Lechnical risk and be carried ouL lor Lhe purposes ol acquiring new knowledge,
or lor Lhe creaLion or improvemenL ol maLerials, producLs, devices, processes
or services. 1he R&D acLiviLies musL be considered sysLemaLic, invesLigaLive
and experimenLal.
23 Australia
Foreignowned P&D
1he legislaLion has recenLly been changed Lo allow an addiLional Lax deducLion
ol up Lo 757 on incremenLal R&D expendiLures il Lhe inLellecLual properLy ol
AusLralianbased acLiviLy will reside wiLh an overseas parenL company.
New P&D tax credit
1he AusLralian CovernmenL has proposed changes Lo Lhe R&D Lax incenLives
sysLem LhaL will replace Lhe currenL 1257/1757 R&D Lax concession wiLh a
new R&D Lax crediL ol ^07 {equivalenL Lo a 1337 Lax concession aL currenL
raLes). A ^57 relundable Lax crediL lor smaller companies will also be available.
Changes Lo eligibiliLy and scope are also proposed. 1hese changes are planned
Lo commence lrom 1 July 2010.
E. Withholding taxes
Interest, dividends and royalties
lnLeresL, dividends and royalLies paid Lo nonresidenLs are sub|ecL Lo a linal
AusLralian wiLhholding Lax ol 107, 307 {on Lhe unlranked porLion ol Lhe
dividend [see Lhe earlier discussion on dividends|) and 307, respecLively,
unless alLered by a relevanL double Lax agreemenL. AusLralia has a
comprehensive Lax LreaLy neLwork LhaL can signilicanLly reduce Lhese Laxes.
ln addiLion, some recenL doubleLax agreemenLs specilically exclude paymenLs
lor Lhe use ol subsLanLial equipmenL lrom Lhe deliniLion ol royalLy.
Branch remittance tax
Branch remiLLance Lax does noL generally apply in AusLralia.
Foreign resident withholding tax/Ioreign contractors
withholding tax 1FPWT)
FRW1 ol 57 musL be wiLhheld lrom paymenLs made Lo loreign residenLs in
respecL ol cerLain "works" and lor relaLed acLiviLies in connecLion wiLh such
works in AusLralia.
Works include Lhe consLrucLion, insLallaLion and, upgrade ol buildings, planL
and lixLures and naLural resource developmenL and include such works where
Lhey relaLe Lo naLural gas lield developmenL and oillield developmenL and
pipelines. RelaLed acLiviLies cover associaLed acLiviLies such as adminisLraLion,
insLallaLion, supply ol equipmenL and pro|ecL managemenL.
A variaLion ol, or exempLion lrom Lhe FRW1 raLe ol 57 may be soughL lrom,
Lhe AusLralian Lax auLhoriLies in cerLain circumsLances: lor example, il Lhe
relevanL income is noL assessable in AusLralia, or il Lhe raLe ol 57 is excessive
in comparison Lo Lhe amounL ol Lax LhaL would ulLimaLely be payable; or il Lhe
loreign enLiLy has an esLablished hisLory ol Lax compliance in AusLralia.
Lxamples ol paymenLs LhaL are noL sub|ecL Lo FRW1 include:
PaymenLs LhaL consLiLuLe a royalLy {a royalLy wiLhholding Lax may apply
depending on Lhe circumsLances)
PaymenLs in respecL ol acLiviLies relaLing purely Lo exploraLion
relaLed acLiviLies
PaymenLs in respecL ol services perlormed enLirely ouLside ol AusLralia
Withholding tax Irom clients oI nonresidents doing business in
Australia without an Australian Business Number 1ABN)
An enLiLy is required Lo wiLhhold ^57

lrom a paymenL iL makes Lo anoLher


enLiLy il Lhe paymenL is lor a supply made in Lhe course or lurLherance ol
an enLerprise carried on in AusLralia and Lhe oLher enLiLy does noL correcLly
quoLe iLs ABN.
1ne tax |s 4.5x |f tne rec||ent |s not a rescr|oec fore|cn res|cent.
24
1he ^57 need noL be wiLhheld il Lhe ABN is correcLly quoLed or il Lhe Laxpayer
has evidence LhaL Lhe paymenL is being made Lo a nonresidenL lor a supply
LhaL is noL made in carrying on an enLerprise in AusLralia, or il iL will be exempL
lrom income Lax.
F. Financing considerations
AusLralia's income Lax sysLem conLains signilicanL rules regarding Lhe
classilicaLion ol debL and equiLy insLrumenLs and, depending on Lhe level
ol lunding, rules LhaL have an impacL on Lhe deducLibiliLy ol inLeresL.
1hin capiLalizaLion measures apply Lo Lhe LoLal debL ol AusLralian operaLions on
mulLinaLional groups {including loreign and domesLic relaLedparLy debL and
LhirdparLy debL). 1he measures apply Lo Lhe lollowing enLiLies:
AusLralian enLiLies LhaL are loreignconLrolled and loreign enLiLies LhaL
eiLher invesL direcLly inLo AusLralia or operaLe a business Lhrough an
AusLralian branch
AusLralian enLiLies LhaL conLrol loreign enLiLies or operaLe a business
Lhrough an overseas branch
1he measures provide lor a sale harbor based on 757 ol neL asseLs {+/
some ad|usLmenLs). 1his largely approximaLes Lo a debLLoequiLy raLio ol 3:1.
lnLeresL deducLions are denied lor inLeresL paymenLs on Lhe porLion ol Lhe
company's debL LhaL exceeds Lhe sale harbor raLio. SeparaLe rules apply Lo
linancial insLiLuLions.
ll Lhe company's debLLoequiLy raLio exceeds Lhe sale harbor raLio, inLeresL is
sLill lully deducLible, provided Lhe company can saLisly Lhe arm's lengLh LesL.
Under Lhis LesL, Lhe company musL esLablish LhaL Lhe level ol debL could be
obLained under arm's lengLh arrangemenLs, Laking inLo accounL indusLry
pracLice and specilic assumpLions required under Lhe Lax law.
1he debL/equiLy classilicaLion ol linancial insLrumenLs lor Lax purposes is
sub|ecL Lo prescribed LesLs under law. 1hese measures locus on economic
subsLance raLher Lhan on legal lorm. ll Lhe debL LesL conLained in Lhe new
measures is saLislied, a linancing arrangemenL is generally LreaLed as debL,
even il Lhe arrangemenL could saLisly Lhe LesL lor equiLy.
1he debL/equiLy measures are relevanL Lo Lhe LaxaLion ol dividends {including
impuLaLion requiremenLs), Lhe characLerizaLion ol paymenLs Lo and lrom non
residenL enLiLies, Lhe Lhin capiLalizaLion regime and Lhe dividend and inLeresL
wiLhholding Laxes and relaLed measures.
AusLralia does noL impose inLeresL quaranLining. Cenerally, corporaLelevel
debL deducLions may be used Lo ollseL all assessable income derived by Lhe
borrowing enLiLy, regardless ol Lhe source or Lype ol assessable income.
However, inLeresL deducLions may be disallowed il Lhe relaLed borrowing is
direcLly relaLed Lo Lhe derivaLion ol loreign income by a loreign branch.
C. Transactions
Asset disposals
1he disposal ol a peLroleum permiL, reLenLion lease or license acquired on or
alLer 1 July 2001 resulLs in an assessable or deducLible balancing ad|usLmenL
under Lhe Unilorm CapiLal Allowance provisions. DepreciaLion is recapLured il
Lhe proceeds received on disposal exceed Lhe asseL's ad|usLable value. 1he lull
gain is recapLured noL |usL Lhe depreciaLion previously claimed {i.e., sales
proceeds less Lhe wriLLendown Lax value). Any amounLs recapLured are
included in Laxable income. ll Lhe proceeds are less, Lhen a deducLible balancing
ad|usLmenL is allowed.
1he Lransler or disposal ol an inLeresL in a peLroleum permiL does noL in iLsell
Lrigger PRR1 consequences a Lransleror is noL sub|ecL Lo PRR1 on any
consideraLion received and Lhe Lransleree is noL enLiLled Lo any deducLion lor
PRR1 purposes lor any consideraLion given. However, generally Lhe purchaser
inheriLs Lhe vendor's PRR1 prolile including undeducLed expendiLure.
Australia
25
Farm in and Iarm outs
lL is common in Lhe AusLralian oil and gas indusLry lor enLiLies Lo enLer inLo
"larm in" arrangemenLs.
1he LaxaLion implicaLions lor a "larmee" who enLers inLo a larm in arrangemenL
on or alLer 1 July 2001 are deLermined under Lhe Unilorm CapiLal Allowance
provisions. A larmee is deemed Lo hold a depreciaLing asseL, being Lhe inLeresL
in Lhe peLroleum permiL, lrom Lhe Lime Lhe inLeresL is acquired {Lhis can be
uplronL or delerred depending on Lhe Lerms ol Lhe parLicular arrangemenL).
1he larmee can generally deducL Lhe acquisiLion cosL ol Lhe depreciaLing asseL
over iLs ellecLive lile lrom Lhe Lime iL is held by Lhe larmee {noLe LhaL asseLs
lirsL used lor exploraLion purposes are immediaLely deducLible). 1he cosL is Lhe
amounL Lhe larmee is Laken Lo have paid lor Lhe inLeresL.
FuLure commiLmenLs {e.g., lree carry) incurred by Lhe larmee in respecL ol iLs
inLeresL are generally deducLible lor Lhe larmee {eiLher ouLrighL or over Lhe
asseL's ellecLive lile) il Lhe larmee holds an inLeresL in Lhe permiL.
1he Lax consequences lor Lhe "larmor" depend on wheLher Lhe inLeresL was
acquired by Lhe larmor prior Lo 1 July 2001, in which case Lhe disposal is Laxed
under Lhe capiLal gains Lax regime {see above), or on or alLer 1 July 2001,
in which case Lhe disposal is Laxed under Lhe Unilorm CapiLal Allowance
provisions {see above).
AcquisiLion cosLs ol a larmee are noL deducLible lor PRR1 purposes and,
similarly, consideraLion received by a larmor in respecL ol Lhe larm ouL is
noL assessable lor PRR1 purposes.
5elling shares in a company 1Consequences Ior resident and
nonresident shareholders)
A share disposal is generally sub|ecL Lo Lhe capiLal gains Lax regime.
NonresidenLs who dispose ol shares in an AusLralian or nonresidenL company
are sub|ecL Lo Lax in AusLralia only il Lhe shares are considered Lo be Laxable
AusLralian properLy {see SecLion B lor a discussion ol CC1 and Laxable
AusLralian properLy). Companies LhaL hold, direcLly or indirecLly {via
inLerposed subsidiaries), asseLs comprising primarily AusLralian oil and gas
exploraLion permiLs and producLion licenses are generally classed as having
Laxable AusLralian properLy. However, excepLions Lo Lhis provision may apply
depending on Lhe company's asseL mix.
H. Indirect taxes
C5T
A CS1 regime applies in AusLralia. All LransacLions LhaL Lake place wiLhin
AusLralia {and some lrom ollshore) are sub|ecL Lo CS1. CS1, which was
inLroduced in July 2000, is a mulLisLaged VA1 LhaL applies aL each poinL ol
sale or lease. lL is applied aL a sLandard raLe ol 107, wiLh CS1lree raLes lor
qualilying exporLed producLs and services and oLher LransacLions, and inpuL
Laxed raLes generally lor linancial services and residenLial housing.
BoLh AusLralian residenL and nonresidenL enLiLies engaged in Lhe oil and
gas indusLry may be sub|ecL Lo Lhe CS1 on services and producLs supplied.
All sales wiLhin AusLralia are sub|ecL Lo CS1 aL Lhe raLe ol 107 {known as
Laxable supplies). All commercial LransacLions have a CS1 impacL, and Lhis
should be considered prior Lo enLering inLo any negoLiaLion or arrangemenL.
1he imporLaLion ol producLs and equipmenL inLo AusLralia is sub|ecL Lo CS1.
lL is payable aL Lhe Lime ol imporLaLion and in a similar manner Lo a cusLoms
duLy {see below). CusLoms may noL release goods unLil such Lime as CS1
has been paid. 1o alleviaLe Lhe cash llow impacL LhaL may arise, enLiLies may
regisLer lor Lhe CS1 delerral scheme. 1his scheme allows Lhe paymenL ol CS1
on imporLs Lo coincide wiLh Lhe CS1 reLurn liling {and possible recovery ol Lhe
CS1 on imporLs).
Australia
2
ll producLs and equipmenL are exporLed, CS1lree sLaLus may be obLained. 1o
qualily as CS1lree, goods musL generally be exporLed wiLhin 60 days. LxporLs
musL also be supporLed by evidence LhaL indicaLes Lhe goods have lelL AusLralia
wiLhin Lhe required Lime.
1he CS1 regisLraLion Lhreshold is AUSS75,000; however, enLiLies below Lhis
Lhreshold can choose Lo regisLer volunLarily lor CS1.
NonresidenLs are required Lo regisLer lor CS1 {sub|ecL Lo Lheir Lurnover),
and CS1 applies Lo Laxable supplies and Laxable imporLs made by Lhem.
A nonresidenL may appoinL a Lax or liscal represenLaLive in AusLralia {buL
is noL required Lo do so).
As an alLernaLive Lo regisLraLion, some nonresidenLs may accounL lor CS1
under Lhe volunLary reversecharge procedure.
A regisLered enLiLy may recover inpuL Lax on "crediLable acquisiLions," LhaL is,
Lhe CS1 charged on goods and services LhaL a regisLered enLiLy acquires lor
crediLable purposes. lnpuL Lax is generally recovered by being ollseL againsL
Lhe CS1 payable on Laxable supplies.
Import duties
All goods, equipmenL and maLerials LhaL enLer AusLralia lrom overseas are
sub|ecL Lo cusLoms imporL duLies. 1he general raLe ol cusLoms duLy applied
Lo Lhe cusLoms value ol imporLed goods is 57; however, Lhis raLe may vary
depending on several variables, including Lhe Lype ol commodiLy, iLs end use,
Lhe consLiLuenL maLerial and counLry ol origin.
As an example, goods such as vessels in excess ol 150 gross Lons are generally
"lree" ol duLy, whereas some peLroleum producLs, including marine diesel luel,
aLLracL duLy ol AUSS0.381^3 per liLre. Upon imporLaLion inLo AusLralia, goods
are reporLed Lo cusLoms using an imporL declaraLion, and Lhey are classilied
in Lhe cusLoms Larill Lo idenLily Lhe appropriaLe duLy raLe and duLy is paid
{il applicable).
Export duties
1here are no duLies applied Lo goods exporLed lrom AusLralia.
Excise duty
Lxcise duLy is applied Lo some goods manulacLured in AusLralia, including
peLroleum producLs, alcohol and Lobacco. ln Lhe case ol peLroleum, Lhe raLe ol
excise depends on annual producLion raLes, Lhe reservoir daLe ol discovery and
Lhe daLe producLion commenced. Lxcise does noL generally apply Lo exporLed
oil or condensaLe sourced lrom an area sub|ecL Lo PRR1.
Lxcise duLy on mosL relined peLroleum producLs is AUSS0.381^3, buL iL is noL
generally levied on goods bound lor exporL.
5tamp duty/registration Iees
SLamp duLy is a sLaLe and LerriLorybased Lax LhaL is generally imposed on
specilied LransacLions. Lach sLaLe and LerriLory has iLs own sLamp duLy
legislaLion as well as a 1axaLion AdminisLraLion AcL, which deals wiLh
Lax adminisLraLion.
Cenerally, sLamp duLy is imposed under dillerenL heads ol duLy. 1he mosL
signilicanL is conveyance duLy on Lhe Lransler ol properLy {e.g., land,
LenemenLs, cerLain righLs including righLs Lo exLracL and goodwill).
PlanL and equipmenL may also be sub|ecL Lo duLy il Lhey are conveyed
wiLh oLher duLiable properLy.
A Lransler ol shares in a company LhaL predominanLly holds land inLeresLs may
also require a sLamp duLy on Lhe underlying land inLeresLs.
SLaLe and LerriLory sLamp duLy legislaLion can diller in relaLion Lo Lhe Lypes ol
insLrumenLs or LransacLions on which duLy is imposed, Lhe raLes ol duLy, Lhe
parLies liable Lo pay duLy and Lhe Liming lor lodgemenL and paymenL ol duLy.
1he Lop marginal conveyance duLy raLes range lrom ^7 Lo 6.757.
Australia
27
1he sLamp duLy LreaLmenL ol dealings in AusLralian onshore and ollshore
LenemenLs varies beLween Lhe AusLralian sLaLes and LerriLories.
For onshore peLroleum permiLs, any Lranslers or dealings in such LenemenLs
may be sub|ecL Lo sLamp duLy or a regisLraLion lee, depending on Lhe relevanL
|urisdicLion. For example, WesLern AusLralia {WA) exempLs lrom sLamp duLy
any dealings in onshore peLroleum LenemenLs. However, WA imposes a
regisLraLion lee on dealings in onshore peLroleum LenemenLs, calculaLed as
1.57 ol Lhe greaLer ol Lhe consideraLion or Lhe value ol Lhe peLroleum
permiL or license.
ln oLher AusLralian |urisdicLions, sLamp duLy may apply Lo dealings in onshore
peLroleum LenemenLs, depending on Lhe legislaLion ol Lhe relevanL |urisdicLion.
For ollshore peLroleum LenemenLs, any Lranslers or dealings in such LenemenLs
are generally sub|ecL Lo a 1.57 regisLraLion lee.
Cther taxes
OLher signilicanL Laxes include lringe beneliLs Lax on noncash employee
beneliLs ol ^6.57 and payroll Laxes paid by employers ol ^.757 Lo 6.857 {Lhe
raLes vary by sLaLe). AlLhough noL a Lax in iLsell, iL is imporLanL Lo noLe LhaL a
sLaLuLory conLribuLion ol 97 applies Lo superannuaLion and LhaL AusLralia has
compulsory workers' insurance requiremenLs.
I. Cther
Joint petroleum development area 1JPDA)
ln general, Lhe Laxing righLs lor operaLions in Lhe JPDA are spliL beLween 1imor
LesLe and AusLralia on a 90:10 basis {i.e., 907 is Laxed in 1imorLesLe and 107
is Laxed in AusLralia). 1his guide does noL deal wiLh Lhe Lax implicaLions ol
operaLing in Lhe JPDA.
Foreign Investment Peview Board
1he AusLralian CovernmenL moniLors invesLmenL inLo AusLralia Lhrough Lhe
Foreign lnvesLmenL Review Board {FlRB). CovernmenL policy generally is Lo
encourage loreign invesLmenL, alLhough Lhere are sLricL conLrols regarding
Lhe purchase ol real esLaLe. 1here are noLilicaLion and approval requiremenLs
depending on Lhe level ol invesLmenL and Lhe asseLs in which Lhe invesLmenL
is being made.
AcquisiLions ol greaLer Lhan 157 ol a company's share capiLal are also sub|ecL
Lo review.
Domestic production requirements
1here has been signilicanL discussion regarding minimum domesLic producLion
requiremenLs, parLicularly in Lhe conLexL ol domesLic gas. 1his landscape is
conLinuing Lo evolve and companies LhaL seek Lo invesL in AusLralia should be
aware ol Lhe possibiliLy LhaL a minimum domesLic producLion commiLmenL may
be imposed depending on Lhe locaLion ol Lhe pro|ecL.
Foreign exchange controls
1here are no acLive exchange conLrol resLricLions on Lhe llow ol lunds.
However, Lhe Financial 1ransacLion ReporLs AcL ol 1988 requires each currency
LransacLion involving Lhe physical Lransler ol noLes and coins in excess ol
AS10,000 {or loreign currency equivalenL) beLween AusLralian residenLs and
overseas residenLs, as well as all inLernaLional Lelegraphic and elecLronic lund
Lranslers, Lo be reporLed Lo Lhe AusLralian 1ransacLion ReporLs and Analysis
CenLre {AUS1RAC). 1his inlormaLion is Lhen available Lo Lhe Commissioner ol
1axaLion, lederal police, AusLralian CusLoms Service and oLher prescribed law
enlorcemenL agencies.
Australia
28 Australia Azerbaiian
Business presence
Forms ol "business presence" in AusLralia Lypically include companies, loreign
branches and |oinL venLures {incorporaLed and unincorporaLed). ln addiLion Lo
commercial consideraLions, Lhe Lax consequences ol each business are
imporLanL Lo consider when seLLing up a business in AusLralia. UnincorporaLed
|oinL venLures are commonly used by companies in Lhe exploraLion and
developmenL ol oil and gas pro|ecLs.
Visas
AusLralia has very sLricL immigraLion rules, and iL is criLical LhaL anyone coming
Lo AusLralia, wheLher shorL Lerm or long Lerm, enLers using Lhe correcL visa.
Emissions trading scheme 1ET5)
AusLralia does noL currenLly have an L1S. Following re|ecLion ol Lhe law Lwice
by Lhe AusLralian parliamenL, Lhe currenL CovernmenL conlirmed on 27 April
2010 LhaL an emissionsLrading scheme will noL be implemenLed in AusLralia
unLil aL leasL 2013.
Azerbaijan
Country code 994
Baku CMT +4
Ernst & Ycunc Baku
Hyatt !nternaticnaI Center
Hyatt Tcwer !!!
!zmir Street, 1033
Baku AZ 105
Azerbaijan
TeI 12 490 7020
Fax 12 490 7017
DiI and cas ccntacts
Arzu Hajiyeva
TeI 12 490 7020
Fax 12 490 7017
arzu.hajiyevaaz.ey.ccm
ErIan Dcsymbekcv
J]ka\]flafCYrYc`klYf!
TeI +7 727 25 590
erIan.b.dcsymbekcvkz.ey.ccm
A. At a glance
Fiscal regime
Azerbai|an's liscal regime consisLs ol a combinaLion ol producLion sharing
agreemenLs {PSAs) and hosL CovernmenL agreemenLs {HCAs). ln addiLion,
dralL legislaLion LhaL will specilically govern Lhe oil and gas secLor has been
submiLLed Lo Lhe Azerbai|ani ParliamenL.
Bonuses NegoLiaLed bonuses and acreage lees are
applicable Lo PSAs.
PSA PSA parLner conLracLors are sub|ecL Lo proliL Lax {aL a
negoLiaLed raLe which varies lrom 257 Lo 327) and social
lund conLribuLions lor local employees. OLher poLenLial
ma|or paymenLs include bonuses and acreage lees and
social lund paymenLs. 1he PSA parLners are exempL lrom
all oLher Laxes, including royalLies.
PSA subconLracLors are deemed Lo earn Laxable proliL
ol 207 Lo 257, depending on Lhe parLicular PSA, ol Lhe
paymenLs received in respecL ol LransacLions perlormed
in Azerbai|an. 1hese subconLracLors are sub|ecL Lo Lax on
such proliL aL Lhe raLe ol 257 Lo 327, resulLing in a LoLal
wiLhholding Lax obligaLion aL raLes beLween 57 and 87.
SubconLracLors are also liable lor social lund paymenLs.
29 Azerbaiian
HCA ParLicipanLs are only sub|ecL Lo proliL Lax ol 277 and social
lund conLribuLions lor local employees. 1he parLicipanLs
are exempL lrom all oLher Laxes.
RegisLered conLracLors {subconLracLors in common
Lerms) are exempL lrom all Lypes ol Laxes, excepL lor
social lund paymenLs.
lncome Lax raLe Specilic Lo Lhe PSA or HCA.
CapiLal allowances CapiLal allowances are calculaLed in accordance wiLh Lhe
Lax rules prescribed in Lhe Lax code.
B. Fiscal regime
Azerbai|an's liscal regime consisLs ol a combinaLion ol PSAs and HCAs.
1here is currenLly no legislaLion in Azerbai|an specilically governing Lhe oil and
gas secLor; however, a dralL law on oil and gas was resubmiLLed Lo Lhe Azeri
ParliamenL some Lime ago. lnlormaLion on an approximaLe daLe when LhaL law
will be linalized is noL yeL available. lL is undersLood lrom Lhe dralL LhaL Lhe law
will noL govern Lhe PSAs signed Lo daLe and will only apply Lo agreemenLs
signed in Lhe luLure.
1he legislaLion in Azerbai|an applies Lo ownership ol all peLroleum resources
exisLing in a naLural sLaLe in underground and surlace sLraLa, including Lhe
porLion ol Lhe Caspian Sea wiLhin Lhe |urisdicLion ol Lhe sLaLe LhaL vesLed
wiLh Azerbai|an.
1he SLaLe Oil Company ol Lhe Azerbai|an Republic {SOCAR) has been given
Lhe auLhoriLy Lo conLrol and manage Lhe counLry's peLroleum resources.
Several oil consorLia, wiLh parLicipaLion lrom a number ol ma|or oil companies,
are engaged in exploraLion and producLion acLiviLies in Lhe Azerbai|ani secLor
ol Lhe Caspian Sea and in onshore exploraLion. All consorLia were creaLed on
Lhe basis ol PSAs.
CurrenLly, HCAs apply Lo Lhe pro|ecLs in respecL ol oil and gas pipelines.
1he Main LxporL Pipeline {Baku1bilisiCeyhan) {MLP) and Lhe SouLh
Caucasus Pipeline {SCP) acLiviLies are governed by Lhe respecLive HCAs.
1here are subsLanLial dillerences beLween Lhe general Lax legislaLion and Lhe
Lax regimes ol Lhe exisLing PSAs and HCAs. Cenerally speaking, Lhe PSAs and
Lhe HCAs have negoLiaLed Laxes LhaL provide lor subsLanLial reliel Lo invesLors,
while Lhose operaLing ouLside Lhe abovemenLioned agreemenLs musL pay Lhe
whole range ol sLandard Azerbai|ani Laxes under Lhe sLaLuLory Lax regime.
P5As
A range ol Laxes, duLies and bonuses are applicable Lo PSAs. 1he LaxaLion
ol conLracLor parLies and subconLracLors are considered separaLely below.
Contractor parties
Oil and gas conLracLors {PSA parLners) are sub|ecL Lo proliL Lax and social
lund conLribuLions lor local employees. OLher ma|or paymenLs include
bonuses and acreage lees. 1he PSA parLies are exempL lrom all oLher Laxes,
including royalLies.
ProIit tax
Under Lhe PSAs currenLly in ellecL, conLracLor parLies carrying ouL business in
Azerbai|an in connecLion wiLh peLroleum operaLions are sub|ecL Lo Lax on proliL.
1he proliL Lax raLe is negoLiaLed and varies lrom 257 Lo 327.
1axable income is calculaLed in accordance wiLh inLernaLionally accepLed
accounLing pracLices in Lhe peLroleum indusLry, raLher Lhan in accordance
wiLh Azerbai|ani sLaLuLory accounLing procedures. ln calculaLing Laxable
income, conLracLors geL a capiLal allowance lor capex expendiLures based
on Lhe Lax depreciaLion rules prescribed by PSAs.
Losses incurred by conLracLor parLies Lo PSAs during Lhe period ol exploraLion
are deducLible once producLion sLarLs. Loss carrylorward provisions {including
how long losses may be carried lorward) vary beLween dillerenL PSAs.
30
AcLiviLies LhaL are noL connecLed wiLh hydrocarbon acLiviLies in Azerbai|an or
relevanL conLracL areas are deemed Lo be ouLside Lhe scope ol PSAs and Lhe
relaLed proLocol Lax regimes. ll a company is engaged in boLh hydrocarbon and
nonhydrocarbon acLiviLies, separaLe accounLing books in accordance wiLh
sLaLuLory rules musL be mainLained Lo rellecL income and losses generaLed
lrom Lhe nonhydrocarbon acLiviLies. 1he operaLing companies under Lhe PSAs
are noL Laxable and allocaLe income and expenses Lo conLracLor parLies in
proporLion Lo Lheir parLicipaLing inLeresLs in Lhe PSAs.
5ocial charges
Under Lhe PSAs, conLracLor parLies are permiLLed Lo employ personnel as
required lor Lhe purpose ol carrying ouL Lheir operaLions. 1here may be
requiremenLs Lo give prelerences, as lar as Lhey are consisLenL wiLh Lhe
operaLions, Lo employ ciLizens ol Azerbai|an wiLhin Lhe lramework ol Lhe
overall quoLas.
ConLracLor parLies are required Lo make conLribuLions Lo Lhe Social lnsurance
Fund ol 227 ol Lhe gross local payroll. 1hese conLribuLions are made aL Lhe
expense ol Lhe employer. A lurLher 37 ol employees' salaries is wiLhheld lrom
local employees and paid Lo Lhe same Social lnsurance Fund.
Bonus payment and acreage Iees
1he Lerms ol Lhe bonus paymenL and Lhe size ol Lhe bonus are negoLiaLed and
vary lor each individual PSA. LxisLing PSAs call lor Lhe bonus Lo be paid in Lhree
insLallmenLs, connecLed wiLh Lhe sLages ol Lhe agreemenLs.
SLarLing wiLh Lhe second consorLium agreemenL signed, an acreage lee is
payable lor Lhe conLracL area during Lhe exploraLion period and an addiLional
exploraLion period. For some PSAs, Lhe range ol Lhe acreage lee is USS1,200
Lo USS2,000 per square kilomeLer {km).
Poyalties
Under Lhe exisLing PSAs, Lhe conLracLor parLies are noL sub|ecL Lo royalLies
exisLing lor exLracLion ol hydrocarbon resources in Azerbai|an.
5ubcontractors
BoLh Azeri legal enLiLies and loreign legal enLiLies are LreaLed as subconLracLors
Lo PSAs. Azeri legal enLiLies are sub|ecL Lo Lax in accordance wiLh Lhe general
LaxaLion rules. RegisLered loreign subconLracLors, on Lhe oLher hand, are
generally sub|ecL Lo wiLhholding Lax {as described below) as well as social lund
paymenLs in Lhe same manner as conLracLing parLies. 1he sale ol goods or
equipmenL Lo which LiLle is Lranslerred ouLside Azerbai|an, and Lhe provision
ol services ouLside ol Azerbai|an, should noL be sub|ecL Lo Lhe wiLhholding Lax.
Withholding taxes
Foreign subconLracLors LhaL carry on business in Azerbai|an in connecLion
wiLh hydrocarbon acLiviLies are deemed Lo earn a Laxable proliL ol 207 Lo 257
ol Lhe paymenLs received in respecL ol LransacLions perlormed in Azerbai|an
{depending on Lhe parLicular PSA). 1hese subconLracLors are sub|ecL Lo Lax on
proliLs aL Lhe raLe ol 257 Lo 327, resulLing in a LoLal wiLhholding Lax obligaLion
aL Lhe raLes ol 57, 6.257, 7.57 or 87 {depending on Lhe parLicular PSA) ol Lhe
gross conLracLual paymenL.
WiLhholding Lax on loreign subconLracLors LhaL sell goods should only apply
Lo a markup charged on such goods. Under cerLain PSAs, in Lhe case LhaL no
markup is indicaLed, Lhe Lax may apply Lo Lhe gross sales price.
However, under some ol Lhe exisLing PSAs, cerLain loreign subconLracLors are
sub|ecL Lo proliL LaxaLion under Lhe domesLic law. Such loreign subconLracLors
include Lhose working alLer approval ol Lhe developmenL and producLion
sLage ol Lhe agreemenL, or Lhose selling goods wiLhouL indicaLing a markup
on Lheir sales.
Azerbaiian
31
5ocial charges
Similar Lo Lhe conLracLing parLies, subconLracLors are allowed Lo employ
personnel as required lor Lhe purpose ol carrying ouL Lheir operaLions.
1here may be requiremenLs Lo give prelerences, as lar as Lhey are consisLenL
wiLh Lhe operaLions, Lo employ ciLizens ol Azerbai|an wiLhin Lhe lramework ol
Lhe overall quoLas.
SubconLracLors are required Lo make conLribuLions Lo Lhe Social lnsurance Fund
ol 227 ol Lhe gross local payroll. 1hese conLribuLions are made aL Lhe expense
ol Lhe employer. A lurLher 37 ol employees' salaries is wiLhheld lrom local
employees and paid Lo Lhe same Social lnsurance Fund.
Cther beneIits
Export/import regulations
Lach conLracLor or subconLracLor is enLiLled Lo imporL and reexporL {lree ol
any Laxes) machinery, equipmenL, lixed asseLs, goods, works and services lor
use in respecL ol peLroleum operaLions. However, cusLoms processing lees are
payable. A cusLoms duLy exempLion cerLilicaLe musL be obLained lrom Lhe
cusLoms auLhoriLy in connecLion wiLh Lhe PSA.
VAT
ConLracLors and subconLracLors are "exempL wiLh crediL" lrom VA1 {i.e., a 07
raLe is applied) in connecLion wiLh peLroleum acLiviLies on all:
Coods, works and services supplied Lo or by Lhem
LxporLs ol peLroleum
lmporLs ol goods, works and services
Any supplier ol works and services {including subconLracLors) Lo each
conLracLor may LreaL Lhese supplies as being exempL lrom VA1 wiLh crediL
A VA1 exempLion cerLilicaLe musL be obLained lrom Lhe relevanL Lax
auLhoriLy in connecLion wiLh Lhe PSA
1ax residency rules lor individuals
Local employees are generally sub|ecL Lo LaxaLion under Lhe Azeri domesLic
Lax regime, whereas mosL exisLing PSAs separaLely address Lhe issue ol
expaLriaLe LaxaLion.
Normally, an expaLriaLe employee ol an operaLing company, a conLracLor
parLy, an alliliaLe ol a conLracLor parLy or a loreign subconLracLor who is
presenL in Azerbai|an on "ordinary business" becomes a Lax residenL in Lhe
evenL LhaL Lhey spend more Lhan 30 consecuLive days in Azerbai|an in a
calendar year. lncome earned alLer Lhe 30Lh day is Laxable in Azerbai|an.
lndividuals spending lewer Lhan 30 consecuLive days buL more Lhan 90
cumulaLive days in Azerbai|an in a calendar year are also LreaLed as Lax
residenLs, and income earned alLer Lhe 90Lh day becomes Laxable. RoLaLing
employees and loreign employees who have a primary place ol employmenL in
Azerbai|an qualily as Lax residenLs il Lhey spend more Lhan 90 cumulaLive days
in Azerbai|an in a calendar year, and Lhey are Laxable lrom Lhe lirsL day ol Lheir
presence in Azerbai|an.
Penalties
ln general, penalLies applicable Lo conLracLor parLies and subconLracLors under
Lhe PSAs Lend Lo be less sLricL Lhan Lhose provided lor by Lhe general domesLic
legislaLion. One ol Lhe Lypical penalLies applied is inLeresL lor laLe Lax paymenLs
aL Lhe raLe ol London lnLerbank Ollered RaLe {LlBOR) plus ^7.
HCAs
CurrenLly, HCAs apply exclusively Lo pro|ecLs in respecL ol oil and gas pipelines.
MLP and SCP acLiviLies are governed by Lhe respecLive HCAs.
A range ol Laxes and duLies is applicable Lo HCAs. 1he LaxaLion ol parLicipanLs
and conLracLors is considered separaLely below.
Azerbaiian
32
Participants
ParLicipanLs {Lhe HCAs' parLners) are sub|ecL Lo proliL Lax aL 277 and social
lund conLribuLions lor local employees. 1he parLicipanLs are exempL lrom all
oLher Laxes.
ProIit tax
ProliL Lax may apply Lo all parLicipanLs {i.e., companies invesLing in Lhe
pipelines), alLhough acLual or deemed Lax LreaLy reliel may proLecL Lhe parLies
lrom LaxaLion in Azerbai|an. ProliL Lax applies individually Lo each parLicipanL.
1he proliL Lax raLe is lixed aL 277 in Lhe Azerbai|an HCA and is based on Lhe
prevailing sLaLuLory raLe in ellecL on Lhe daLe ol signaLure ol Lhe agreemenL.
1ax depreciaLion is available lor expendiLure ol a capiLal naLure. ln addiLion,
Lax losses ol an MLP and SCP parLicipanL may be carried lorward wiLhouL
limiLaLion Lo Lhe subsequenL years ol assessmenL.
5ocial charges
1he parLicipanLs are allowed Lo employ personnel as required lor Lhe purpose ol
carrying ouL Lheir operaLions.
ParLicipanLs are required Lo make conLribuLions Lo Lhe Social lnsurance Fund ol
227 ol Lhe gross local payroll. 1hese conLribuLions are made aL Lhe expense ol
Lhe employer. A lurLher 37 ol Lhe employees' salaries is wiLhheld lrom local
employees and paid Lo Lhe same Social lnsurance Fund.
Contractors
BoLh Azerbai|ani legal enLiLies and loreign legal enLiLies are considered as
conLracLors {subconLracLors) Lo Lhe HCAs. 1he regisLered conLracLors are
exempL lrom all Lypes ol Laxes excepL lor social lund paymenLs {which apply
in a similar manner as lor Lhe parLicipanLs).
5ocial charges
Similar Lo Lhe parLicipanLs, Lhe conLracLors are allowed Lo employ personnel as
required lor Lhe purpose ol carrying ouL Lheir operaLions.
ConLracLors are required Lo make conLribuLions Lo Lhe Social lnsurance Fund ol
227 ol Lhe gross local payroll. 1hese conLribuLions are made aL Lhe expense ol
Lhe employer. A lurLher 37 ol Lhe employees' salaries is wiLhheld lrom local
employees and paid Lo Lhe same Social lnsurance Fund.
Cther beneIits
Export/import regulations
1he HCAs allow lor imporL and reexporL {lree ol any Laxes) ol machinery,
equipmenL, lixed asseLs, goods, works and services lor use in respecL ol Lhe
HCAs' operaLions. However, cusLoms processing lees are payable. A cusLoms
duLy exempLion cerLilicaLe musL be obLained lrom Lhe cusLoms auLhoriLy in
connecLion wiLh Lhe HCAs' operaLions.
VAT
ParLicipanLs and conLracLors are exempL wiLh crediL lrom VA1 {i.e., a 07 raLe is
applied) in connecLion wiLh Lhe HCAs' acLiviLies on all:
Coods, works and services supplied Lo or by Lhem
lmporLs ol goods, works and services
AddiLionally, any supplier ol works and services {including conLracLors) Lo each
parLicipanL may LreaL Lhose supplies as being exempL wiLh crediL lrom VA1.
A VA1 exempLion cerLilicaLe musL be obLained lrom Lhe relevanL Lax auLhoriLy in
connecLion wiLh Lhe HCAs' operaLions.
Tax residency rules Ior individuals
Special residency rules apply lor expaLriaLe employees ol Lhe parLicipanLs and
conLracLors. Specilically, a loreign individual who spends more Lhan 182 days
Azerbaiian
33
in a calendar year in Azerbai|an is considered Lo be a Lax residenL. ResidenLs are
liable Lo pay personal income Lax exclusively on income received lrom
Azerbai|ani sources.
C. Capital allowances
CapiLal allowances are available Lo conLracLors {PSAs) and parLicipanLs
{HCAs). Allowances are calculaLed in accordance wiLh Lhe Lax rules prescribed
by Lhe relevanL agreemenLs.
D. Incentives
NoL applicable.
E. Withholding taxes
WiLhholding Laxes are specilic Lo PSAs. 1he deLails are given in SecLion B above.
F. Financing considerations
1here are no specilic issues relaLed Lo linancing.
C. Transactions
ParLicipaLion inLeresLs in PSAs and HCAs and shares in companies LhaL hold
an inLeresL in PSAs and HCAs may be sold. 1he LransacLion mechanisms and
Lhe Lax consequences ol any sales depend on Lhe provisions ol Lhe parLicular
PSA or HCA.
H. Indirect taxes
Import duties and export duties
Lach conLracLor or subconLracLor {under a PSA) or parLicipanL or conLracLor
under an HCA is enLiLled Lo imporL and reexporL {lree ol any Laxes)
machinery, equipmenL, lixed asseLs, goods, works and services lor use in
respecL ol peLroleum operaLions. A cusLoms duLy exempLion cerLilicaLe musL
be obLained lrom Lhe cusLoms auLhoriLy.
VAT
ConLracLors and subconLracLors are exempL wiLh crediL lrom VA1 {i.e., a 07
raLe is applied) in connecLion wiLh peLroleum acLiviLies on all:
Coods, works and services supplied Lo or by Lhem
LxporLs ol peLroleum
lmporLs ol goods, works and services
AddiLionally, any supplier ol works and services {including subconLracLors) Lo
each conLracLor may LreaL Lhose supplies as being exempL wiLh crediL lrom VA1.
A VA1 exempLion cerLilicaLe musL be obLained lrom Lhe relevanL Lax auLhoriLy in
connecLion wiLh Lhe PSA.
I. Cther
lssues relevanL Lo PSAs and HCAs are discussed in SecLion B.
Azerbaiian
34 Bahrain
Bahrain
Country code 973
Manama CMT +3
Ernst & Ycunc
P.D. Bcx 140
14th FIccr, The Tcwer
Bahrain CcmmerciaI CcmpIex
Manama
Kincdcm cf Bahrain
TeI 1753 5455
Fax 1751 47
DiI and cas ccntacts
David Barrincer
TeI 391 7303
david.barrincerbh.ey.ccm
!van Zcricic
TeI 1751 47
ivan.zcricicbh.ey.ccm
Mubeen Khadir
TeI 1751 477
mubeen.khadirbh.ey.ccm
A. At a glance
CorporaLe income Lax raLe {7) ^67 {a)
CapiLal gains Lax raLe {7) n/a
Branch Lax raLe {7) n/a
WiLhholding Lax {7)
Dividends n/a
lnLeresL n/a
RoyalLies n/a
ManagemenL lees n/a
Branch remiLLance Lax n/a
NeL operaLing losses {years)
Carryback n/a
Carrylorward indeliniLely{a)
{a) Only applicable Lo oil and gas companies obliged Lo pay Lax in Bahrain
Bahrain provides a lree, open and LransparenL environmenL lor businesses and
has a globally compeLiLive, valuecreaLion sLory which locuses on susLainabiliLy,
skills and good governance.
AlLhough ma|or indusLries such as oil, gas, aluminium and oLhers connecLed
wiLh Lhe inlrasLrucLure are usually ma|oriLyowned by Lhe CovernmenL,
Lhere is an increasing Lrend Lowards privaLizaLion and no indusLry is closed
Lo loreign invesLors.
1o carry ouL any commercial acLiviLy in Lhe Kingdom ol Bahrain, a legal vehicle
should be esLablished in accordance wiLh Lhe Bahrain Commercial Companies
Law No. 21 ol 2001.
Foreign invesLors are able Lo esLablish a 1007 loreignowned enLiLy in Bahrain
under cerLain condiLions.
B. Fiscal system
Corporate tax
1here are no corporaLe Laxes in Bahrain excepL lor Lhe levy ol income Lax on
Lhe proliLs ol companies engaged in Lhe exploraLion, producLion or relining ol
oil in Bahrain {Lhis is levied aL a raLe ol ^67).
1he Lax basis lor oil and gas companies is neL proliLs generaLed in Bahrain.
1axable income lor oil and gas companies is neL proliLs, which consisL ol
business income less business expenses.
Reasonable expenses will be deducLible lor Lax purposes, including
adminisLraLive, overhead and esLablishmenL expenses, inLeresL, royalLies,
35 Bahrain
renLal, conLribuLions, remuneraLions, rewards lor services rendered by
oLhers, and pension or oLher plans esLablished lor Lhe beneliL ol Lhe persons
rendering Lhe services.
CapiLal expendiLures will be depreciaLed over live years {i.e., 207 per annum).
1rading losses ol oil companies may be carried lorward indeliniLely.
Loss carryback is noL permiLLed.
Personal income tax
1here are no personal income Laxes in Bahrain.
Capital gains tax
1here are no capiLal gains Laxes in Bahrain.
Value added tax/general sales tax
1here are no value added Laxes or general sales Laxes in Bahrain excepL lor
Lhe lollowing:
Sales Lax ol 127 on gasoline
Persons using hoLel laciliLies are charged a CovernmenL levy ol 57
{Lhere is also a 157 service charge LhaL is added Lo Lhe bill amounL
by a hoLel or resLauranL)
Withholding tax
1here are no wiLhholding Laxes in Bahrain.
Zakat 1religious wealth tax)
ZakaL is noL levied in Bahrain.
Land registration tax
1here is a 17 land regisLraLion lee payable Lo Lhe CovernmenL on Lhe
Lransler ol real properLy.
Payroll tax
1here is no payroll Lax in Bahrain.
Advance tax ruling
Advance Lax rulings are noL applicable in Bahrain.
TransIer pricing
Bahrain does noL have any Lransler pricing rules. However, in principle,
LransacLions beLween relaLed parLies should be aL arms' lengLh.
Customs duties
1he Cull CooperaLion Council {CCC) counLries {Bahrain, KuwaiL, Oman, OaLar,
Saudi Arabia and Lhe UniLed Arab LmiraLes) announced Lhe unilicaLion ol
cusLoms duLies, ellecLive lrom 1 January 2003.
1here are no cusLoms Larills on linancial LransacLions or Lrade in locally
manulacLured goods beLween CCC Member SLaLes where Lhe local shareholding
is 517 and value added in Bahrain ol goods produced exceeds ^07.
Bahrain has been a member ol Lhe World 1rade OrganizaLion {W1O) since
December 1993. Bahrain applies iLs cusLoms Larill according Lo Lhe codes
issued by Lhe World CusLoms OrganizaLion {WCO). 1he lollowing are Lhe broad
caLegories ol Lhe cusLoms duLy:
Free duLy vegeLable, lruiLs, lresh and lrozen lish, meaL, books,
magazine and caLalogs
57 duLy all oLher imporLed iLems such as cloLhes, cars, elecLronics iLems
and perlumes
1007 duLy Lobacco and LobaccorelaLed producLs; Lhese are also evaluaLed
based on Lhe quanLiLy or weighL and Lhe higher value is Laken inLo
consideraLion lor duLy
1257 duLy alcohols
3 Bahrain
Municipal tax
A municipal Lax is payable by individuals or companies renLing properLy in
Bahrain. 1he raLe ol Lhe Lax varies according Lo Lhe naLure ol Lhe properLy,
as summarized below:
RenLed commercial building 107 ol renL
RenLed unlurnished residenLial building 107 ol renL
RenLed lurnished residenLial building:
Owner pays elecLriciLy, waLer and municipal Lax 77 ol renL
1enanL pays elecLriciLy, waLer and municipal Lax 7.57 ol renL
Some landlords when quoLing Lhe renLal amounL include Lhe Lax and uLiliLies.
C. 5ocial insurance
1he social insurance scheme is governed by Lhe Ceneral OrganizaLion lor Social
lnsurance {COSl).
Where Lhe individual is employed by an enLiLy incorporaLed in Bahrain under a
Bahrain employmenL conLracL, Lhe individual will have Lo be regisLered wiLh Lhe
COSl. RegisLraLion wiLh Lhe COSl is required wheLher Lhe service is perlormed
wiLhin Lhe counLry or lor Lhe beneliL ol Lhe employer ouLside Lhe counLry.
Lvery January, Lhe employer is required Lo updaLe Lhe salaries ol employees
regisLered wiLh Lhe COSl. When an employee |oins or leaves an enLiLy, such
deLails are required Lo be updaLed wiLh Lhe COSl. 1he COSl will calculaLe Lhe
amounL Lo be remiLLed monLhly, and Lhe employer is required Lo remiL Lhe
same by Lhe sLipulaLed daLe.
1he deducLion is made lrom basic wages and recurring consLanL
allowances as a percenLage, and Lhis is Lhen appropriaLed Lowards
social insurance and pension.
1he base lor Lhe calculaLion ol social insurance conLribuLions cannoL exceed
BD^,000 per monLh {i.e., in case Lhe salary exceeds BD^,000 per monLh,
Lhe conLribuLions will be calculaLed only on BD^,000).
Provided below is an overview ol social securiLy conLribuLions and beneliLs
applicable in Bahrain.
Cld age pension Iund
Lmployer conLribuLion: 97
Lmployee conLribuLion: 67
Only applicable Lo Bahraini naLionals
Insurance against employment iniuries
Lmployer conLribuLion: 37
Applicable Lo boLh Bahraini naLionals and expaLriaLes
Unemployment insurance
Lmployee conLribuLion: 17
Applicable Lo boLh Bahraini naLionals and expaLriaLes
Some employers pay Lhis amounL wiLhouL deducLion lrom Lhe employee's wages.
EndoIservice beneIit
AL Lhe compleLion ol Lheir employmenL conLracL in Bahrain, expaLriaLe
employees are enLiLled Lo an endolservice beneliL which is calculaLed on
Lhe lollowing basis:
FilLeen days' salary lor every year ol service lor Lhe lirsL Lhree
years ol conLinuous service
One monLh's salary lor every year ol service LherealLer
1he endolservice beneliL is only payable on compleLion ol Lhree years ol
conLinuous service.
37 Bahrain
D. Cther levies
Training levy
Lmployer conLribuLion: ^7 {lor organizaLions wiLh 50 or more employees noL
providing Lraining Lo Lheir employees). Only applicable Lo expaLriaLes.
Charge payable to LMPA Ior expatriate employees
Lmployers are required Lo pay BD10 every monLh Lo Lhe Labour MarkeL
RegulaLory AuLhoriLy {LMRA) lor every expaLriaLe employed.
E. Investment incentives
1he CovernmenL encourages applicaLion ol loreign experLise and Lechnologies
in many lields wiLh a view Lo develop and diversily Lhe economy, privaLize
inlrasLrucLure pro|ecLs, promoLe Lourism and develop small Lo
mediumsize indusLries.
Some ol Lhe ma|or aLLracLions Lo loreign invesLors are summarized below:
Absence ol personal, corporaLe and wiLhholding LaxaLion
No resLricLion on repaLriaLion ol capiLal, proliLs, royalLies and dividends
A developed inlrasLrucLure wiLh excellenL LransporLaLion and
communicaLion sysLems
1007 loreign ownership ol companies permiLLed in cerLain cases
Foreigners {oLher Lhan CCC ciLizens) are able Lo own highrise commercial
and residenLial properLies as well as LourisL properLies, banking, linancial,
healLh and Lraining pro|ecLs in specilic geographic areas
Several wellesLablished indusLrial zones wiLh anoLher being prepared aL
Hidd {Lhe new seaporL ol Bahrain)
Welldelined seL ol laws and regulaLions
lnLellecLual properLy righLs recognized and respecLed
Companies wishing Lo qualily lor incenLives musL hire a specilied percenLage
ol Bahraini employees {normally 207). Any company having an indusLrial
license in Bahrain will gain lrom various indusLrial beneliLs associaLed wiLh
Lhe CCC common markeL {mainly duLylree imporLs ol CCC produced goods
across CCC counLries).
Some invesLmenL incenLives include:
Subsidies lor Bahraini naLionals hired. 1his would generally include Lraining
incenLives wiLhin Lhe 1amkeen program. lnvesLors may be reimbursed lor
Lhe cosLs incurred in order Lo Lrain Bahraini employees lor specialized
|ob posLs
Land renLal aL benelicial Lerms
DuLylree imporL ol machinery and raw maLerials Lo be used in new
indusLries lor processing in Bahrain {Lhis includes machinery associaLed
wiLh direcL operaLions, spare parLs, raw maLerials, packaging maLerial, eLc.)
1he Bahrain DevelopmenL Bank supporLs loreign invesLmenL and may
oller aLLracLive crediL laciliLies Lo new invesLors {depending on Lhe Lype
ol invesLmenL).
F. Foreign exchange controls
1here are no exchange conLrol resLricLions on converLing or Lranslerring lunds.
FurLhermore, Bahrain has no wiLhholding or Lhin capiLalizaLion rules in relaLion
Lo Lhe linancing arrangemenLs in Bahrain.
C. Double tax treaties
1o daLe, Bahrain has signed double Lax LreaLies wiLh 26 counLries, ouL ol which
15 are in lorce {i.e., double Lax LreaLies wiLh Algeria, China, LgypL, France, lran,
Jordan, Lebanon, Malaysia, Morocco, Philippines, Singapore, Syria, 1hailand,
1urkey and Yemen).
38 Brazil
BraziI
Country code 55
Ric de Janeirc CMT -3
Ernst & Ycunc
Praia dc Bctafccc, 300 13 Andar
Bctatccc 22250040 Ric de Janeirc, RJ
BraziI
TeI 21 2109 1400
Fax 21 2109 100
DiI and cas ccntacts
Mariana Marques da Cunha
TeI 21 2109 3112
mariana.cunhabr.ey.ccm
Jcs ManueI SiIva
TeI 21 2109 1407
jcse.m.r.siIvabr.ey.ccm
MarceIc BriscIIa Jcrdc
TeI 21 2109 140
marceIc.jcrdacbr.ey.ccm
AIfredc Teixeira Netc
TeI 21 2109 1750
aIfredc.t.netcbr.ey.ccm
A. At a glance
Fiscal regime
1he Brazilian liscal regime LhaL applies Lo Lhe oil and gas indusLry consisLs ol
corporaLe income Lax and CovernmenL and LhirdparLy Lakes.
SignaLure bonus OneLime amounL {noL less Lhan Lhe
minimum price esLablished by Lhe
NaLional Agency ol PeLroleum) paid by
Lhe winning bidder in Lhe proposal lor Lhe
concession Lo explore and produce crude
oil and naLural gas
RoyalLy percenLage 57 Lo 107 ol Lhe oil and gas producLion
relerence price
Special parLicipaLion percenLage 107 Lo ^07, based on progressive Lables,
on neL producLion revenues ad|usLed lor
royalLies, exploraLion invesLmenLs,
operaLing cosLs, depreciaLion and Laxes
OccupaLion or reLenLion ol area RS10 RS5,000 per km based on a
progressive Lable
Landlord cosL percenLage 0.57 Lo 17 ol Lhe oil and gas producLion
relerence price
PSC percenLage None
lncome Lax raLe 3^7
Resource renL Lax None
CapiLal allowances D, U
lnvesLmenL incenLives L, RD
B. Fiscal regime
Corporate tax
Brazilian residenL legal enLiLies are sub|ecL Lo income Lax on Lheir worldwide
income aL a raLe ol 157, wiLh a surLax ol 107 lor proliLs exceeding RS2^0,000
a year. ln addiLion, Brazil imposes a social conLribuLion Lax on corporaLe neL
proliLs aL a raLe ol 97. 1herelore, Lhe combined corporaLe income Lax raLe
generally used is approximaLely 3^7.
Brazil does noL apply "ring lencing" in Lhe deLerminaLion ol Lhe corporaLe
income Lax liabiliLy. ProliLs lrom one pro|ecL can be ollseL againsL Lhe losses
lrom anoLher pro|ecL conducLed by Lhe same legal enLiLy and, similarly, proliLs
and losses lrom upsLream acLiviLies can be ollseL againsL proliLs and losses
39 Brazil
lrom downsLream acLiviLies underLaken by Lhe same legal enLiLy. Brazil has
no Lax consolidaLion rules. Lach legal enLiLy is sub|ecL Lo iLs own corporaLe
income Lax.
Brazilian residenL legal enLiLies may elecL Lo pay corporaLe income Lax based on
Laxable proliLs deLermined as eiLher:
A percenLage ol gross revenues {|ucro resum|co)
Per Lheir acLual income under accounLing records {|ucro rea|)
1his elecLion is made annually, and iL is generally driven by Lhe company's
proliLabiliLy and iLs luLure invesLmenL plans. ln general, Lhe LaxaLion regime
based on a percenLage ol gross revenues is limiLed Lo companies wiLh annual
gross revenues LhaL do noL exceed RS^8 million. Accordingly, upsLream
companies LhaL operaLe in Brazil generally pay corporaLe income Laxes based
on Laxable proliLs deLermined per Lheir acLual income according Lo Lheir
accounLing records.
Under Lhe LaxaLion regime based on Laxable proliLs deLermined by accounLing
records, Lhe Lax is charged on Lhe company's accounLing proliL and ad|usLed
lor nondeducLible expenses and nonLaxable revenues. CorporaLe income Laxes
may be calculaLed and paid on a quarLerly or annual basis {wiLh prepaymenLs
during Lhe calendar year). ln general, operaLing expenses are deducLible lor
corporaLe Lax purposes, provided Lhey are "necessary and usual" Lo Lhe
company's acLiviLy.
RoyalLies, in general, may be deducLed lrom Laxable income limiLed Lo 17 Lo 57
ol Lhe neL sales derived lrom Lhe acLiviLy on which royalLies are paid, depending
on Lhe business acLiviLies ol Lhe payor enLiLy. For Lrademark royalLies, Lhe
limiL is 17. For royalLy paymenLs Lo be LreaLed as LaxdeducLible expenses,
Lhe underlying conLracLs musL be approved by Lhe Brazilian lnLellecLual
ProperLy Agency {|nst|tuto Nac|ona| ce Pror|ecace |ncustr|a|, or Lhe lNPl)
and Lhey musL be regisLered wiLh Lhe Brazilian CenLral Bank {BACLN) Lo allow
loreign remiLLances.
CapiLal expendiLure is normally deducLed in Lhe lorm ol depreciaLion ol lixed
asseLs or amorLizaLion ol cosLs incurred during Lhe preoperaLing phase.
DepreciaLion and amorLizaLion criLeria as well as specilic rules relaLed Lo Lhe
oil and gas indusLry are described in SecLion C.
ProliLs generaLed by a loreign subsidiary ol a Brazilian enLiLy are sub|ecL Lo
Brazilian corporaLe income Lax. 1hese proliLs are Laxed aL sLandard corporaLe
income Lax raLes. Under Lhe Brazilian regulaLions relaLed Lo conLrolled loreign
corporaLions {CFCs), income lrom CFCs musL be included in Lhe parenL
company's Laxable income aL Lhe end ol each calendar year, regardless ol iLs
availabiliLy or classilicaLion ol Lhe income lor Lhe shareholder. Losses incurred
abroad cannoL ollseL proliLs generaLed in Brazil. 1he amounL ol loreign Lax paid
by a loreign CFC may be used Lo ollseL Brazilian corporaLe income Laxes
{sub|ecL Lo limiLaLions).
CarryIorward tax losses
1ax losses may be carried lorward indeliniLely. No carryback or inllaLion
ad|usLmenLs are permiLLed. 1ax losses LhaL are carried lorward may be used Lo
ollseL up Lo 307 ol a company's Laxable income in a Lax period. ResLricLions on
Lhe ollseLLing ol carried lorward Lax losses may be imposed il Lhere is a change
ol ownership conLrol and a change ol Lhe business acLiviLy beLween Lhe period
when Lhe losses were generaLed and Lhe period when Lhe losses will be
ellecLively used.
Capital gains
CapiLal gains recognized by Brazilian residenL enLiLies are included as ordinary
income, and Lhey are Laxed aL Lhe sLandard raLes ol corporaLe income Laxes.
ln general, capiLal losses incurred in a calendar year may ollseL operaLing
proliLs generaLed in Lhe same year. Lxcess capiLal losses may be carried lorward
indeliniLely, limiLed, however, Lo 307 ol luLure capiLal gains.
40 Brazil
CapiLal gains recognized by nonresidenLs lrom Lhe disposal ol asseLs locaLed
in Brazil, regardless ol wheLher Lhe buyer is locaLed in Brazil or abroad,
are also sub|ecL Lo LaxaLion in Brazil aL a general raLe ol 157. 1he capiLal
gains LaxaLion raLe increases Lo 257 when Lhe beneliciary is domiciled in
a lowLax |urisdicLion {i.e., any counLry where income is noL Laxed or Lhe
maximum income Lax raLe is less Lhan 207 or residenLs ol |urisdicLions in
which inlormaLion on Lhe company's owner or economic LransacLions is
conlidenLial). lndirecL disposiLions ol Brazilian asseLs are noL Laxable.
TransIer pricing
A Brazilian enLiLy LhaL compuLes Laxable proliLs based on acLual accounLing
records is required Lo comply wiLh Brazilian Lransler pricing rules. Brazilian
Lransler pricing rules diller in several aspecLs lrom Lhe arm's lengLh principle
adopLed under OLCD guidelines and lrom Lhe ma|oriLy ol Lhe counLries wiLh
Lransler pricing regulaLions. For example, unless expressly agreed Lo oLherwise
wiLh Lhe Brazilian Lax auLhoriLies, Brazilian Laxpayers are required Lo adopL
lixed proliL margins Lo indicaLe compliance wiLh Lransler pricing regulaLions
under one ol Lhe available meLhods, which may noL necessarily mean an
accepLable proliL margin under arm's lengLh condiLions.
1he legislaLion conLains a very broad deliniLion ol relaLed parLies involving
concepLs ol direcL and indirecL conLrol uLilizing voLing power and business
conLrol criLeria. 1his includes companies associaLed in |oinL venLures, consorLia
and oLher lorms ol |oinL ownership. ln addiLion, Lhere are rules whereby
exclusive disLribuLors and inLerposed parLies are also considered relaLed parLies
lor Lhe purposes ol Brazilian Lransler pricing regulaLions.
Brazilian Lransler pricing rules also apply Lo residenLs ol lowLax |urisdicLions,
regardless ol a corporaLe relaLionship wiLh Lhe Brazilian company, as delined
under Brazilian Lax legislaLion.
1he applicaLion ol Lransler pricing rules has recenLly been exLended Lo cover
LransacLions wiLh any individual or company, even il noL a relaLed parLy, under
a benelicial Lax regime. A benelicial Lax regime is delined as any Lax regime
where one or more ol Lhe lollowing is presenL:
lncome is noL Laxed or Lhe maximum income Lax raLe is less Lhan 207
1ax advanLages are granLed Lo nonresidenLs wiLhouL an obligaLion ol having
subsLanLive economic acLiviLy in Lhe counLry
1ax advanLages are granLed Lo nonresidenLs condiLioned Lo Lhe non
conducLion ol subsLanLive economic acLiviLy in Lhe counLry
lncome generaLed abroad is noL Laxed or Lhe maximum income Lax raLe
is less Lhan 207
lnlormaLion on Lhe company's owners, ownership ol asseLs or righLs or
economic LransacLions perlormed is conlidenLial
Prices on imporLaLion and exporLaLion are generally based on Lhe lollowing
Lransler pricing meLhods:
CosL plus
Resale minus
Use ol comparables
No "besL meLhod" rule applies; a Brazilian Laxpayer may demonsLraLe
compliance wiLh Lhe Lransler pricing rules by choosing Lhe meLhod LhaL besL
liLs Lhe LransacLion and LhaL provides Lhe mosL ellicienL Lax consequences.
Regarding exporLaLion, Lransler pricing rules apply exclusively Lo LransacLions
enLered inLo wiLh relaLed parLies il Lhe average price used lor Lhe LransacLion is
less Lhan 907 ol Lhe average price lor idenLical or similar goods, services or
righLs Lraded in Brazil during Lhe same period and under similar paymenL Lerms
{Lhe "absoluLe sale harbor" provision).
Brazilian Lransler pricing regulaLions also provide lor Lwo sale harbor provisions
on exporLaLion, which allow Lhe Brazilian enLiLy Lo demonsLraLe Lhe adequacy ol
Lhe adopLed exporL price by disclosing regular commercial documenLs LhaL
supporL Lhe exporL LransacLion. Under Lhis meLhod, Lhe burden ol prool is
shilLed Lo Lhe Brazilian Lax auLhoriLies in Lhe case ol a subsequenL Lax audiL.
41 Brazil
1he sale harbor provisions apply in Lhe lollowing siLuaLions:
1he Laxpayer's neL exporL revenues do noL exceed 57 ol Lhe LoLal neL
revenues during Lhe liscal year
1he Laxpayer demonsLraLes LhaL a minimum preLax proliL ol 57 is reached
on Lhe exporL LransacLion {lor Lhe analyzed liscal year and Lhe Lwo
preceding years)
lnLeresL paid or crediLed Lo relaLed parLies abroad, associaLed wiLh loan
agreemenLs noL regisLered wiLh Lhe BACLN, is also sub|ecL Lo Brazilian
Lransler pricing rules. lnLeresL expense is Lax deducLible il Lhe amounL does
noL exceed an amounL based on Lhe London lnLerbank Ollered RaLe {LlBOR)
lor sixmonLh US dollar deposiLs, plus a spread ol 37 per year, proporLional Lo
Lhe period lor which Lhe inLeresL is charged. ll Lhe lender is Lhe Brazilian legal
enLiLy, inLeresL income musL be aL leasL Lhe LlBOR lor sixmonLh US dollar
deposiLs, plus a spread ol 37 per year, proporLional Lo Lhe period lor which
Lhe inLeresL is charged.
1he Brazilian Lransler pricing rules do noL apply Lo royalLy paymenLs associaLed
wiLh agreemenLs regisLered wiLh Lhe lNPl Lo Lhe exLenL LhaL Lhe deducLibiliLy ol
Lhese paymenLs lor corporaLe income Laxes in Brazil is sub|ecL Lo limiLaLions
based on domesLic legislaLion.
Dividends
No currency exchange resLricLions are imposed on dividends disLribuLed Lo
shareholders domiciled abroad, provided Lhe loreign invesLmenL inLo Brazil is
properly regisLered wiLh Lhe BACLN.
A Brazilian enLiLy may calculaLe noLional inLeresL on Lhe neL equiLy value
{ad|usLed by Lhe deducLion ol cerLain accounLs) payable Lo boLh residenL and
nonresidenL shareholders. NoLional inLeresL on equiLy is a hybrid mechanism
Lo remuneraLe Lhe capiLal ol shareholders and creaLe a deducLible expense lor
purposes ol Brazilian corporaLe income Laxes.
lnLeresL on equiLy is calculaLed by applying Lhe ollicial longLerm inLeresL raLe
{1JLP) on neL equiLy, buL iL is limiLed Lo 507 ol Lhe greaLer ol Lhe currenL
earnings or accumulaLed proliLs. lnLeresL on equiLy paid Lo loreign shareholders
is sub|ecL Lo wiLhholding Lax in Brazil charged aL a general raLe ol 157 {257 il
paymenL is made Lo a lowLax |urisdicLion).
lnLeresL on equiLy paymenLs Lends Lo be advanLageous Lo proliLable Brazilian
subsidiaries, Lo Lhe exLenL LhaL Lhe inLeresL generaLes LaxdeducLible expenses
aL 3^7 aL Lhe cosL ol Lhe 157 wiLhholding Lax, alLhough Lhe overall Lax
beneliL should be evaluaLed in lighL ol Lhe counLry ol residence ol Lhe
loreign shareholder.
Covernment and thirdparty takes
Under Brazilian oil and gas legislaLion, upsLream concession holders are
sub|ecL Lo Lhe paymenL ol lour CovernmenL and one LhirdparLy Lakes,
as described below.
5ignature bonus 1Covernment)
1he signaLure bonus rellecLs Lhe amounL ollered by Lhe winning bidder in Lhe
proposal lor Lhe concession Lo explore and produce crude oil and naLural gas.
lL is a oneLime paymenL, and iL may noL be less Lhan Lhe minimum price
esLablished by Lhe NaLional Agency ol PeLroleum {/cenc|a Nac|ona| co Petro|eo,
Cas Natura| e B|ocomoust|ve|s, or Lhe ANP) in Lhe bid noLice. lL musL be paid
enLirely aL Lhe daLe ol Lhe signaLure ol Lhe respecLive concession agreemenL.
Poyalties 1Covernment)
1he amounL ol peLroleum royalLies Lo be paid monLhly lor a lield is equivalenL
Lo 107 ol Lhe LoLal producLion volume ol crude oil and naLural gas ol Lhe lield
during LhaL monLh, mulLiplied by Lhe relevanL relerence prices {deLermined by
Lhe ANP), beginning in Lhe monLh ol Lhe relevanL producLion sLarLup daLe,
wiLh no deducLions allowed. RoyalLy paymenLs are due on Lhe lasL working day
ol Lhe monLh lollowing Lhe monLh ol Lheir compuLaLion.
42 Brazil
1he ANP may, in Lhe bid noLice lor a given block, reduce Lhe percenLage ol
107 Lo a minimum ol 57 ol Lhe LoLal producLion volume, considering geological
risks, producLion expecLaLions and oLher lacLors perLaining Lo Lhe block. ln Lhe
10 bidding rounds conducLed by Lhe ANP {noLe LhaL round 8 is suspended),
only parL ol aucLioned blocks had Lheir royalLies reduced lrom 107 Lo 57.
1his decrease applied Lo aucLioned blocks classilied as inacLive marginal
lields lor evaluaLion, rehabiliLaLion and producLion ol oil and naLural gas.
5pecial participation 1Covernment)
1he special parLicipaLion represenLs an exLraordinary linancial compensaLion
payable by crude oil and naLural gas exploraLion and producLion concessionaires
lor large volumes ol producLion or high earnings. lL musL be paid in relaLion
Lo each lield in a given concession area lrom Lhe quarLer when Lhe relevanL
producLion sLarLup daLe occurs. Special parLicipaLion paymenLs are due on
Lhe lasL working day ol Lhe monLh lollowing Lhe quarLer ol compuLaLion.
CompuLaLion ol special parLicipaLion is based on neL producLion revenues
ad|usLed lor royalLies, exploraLion invesLmenLs, operaLing cosLs, depreciaLion
and Laxes. 1he special parLicipaLion raLes are based on progressive Lables LhaL
range lrom 107 Lo ^07 and consider:
Reservoir locaLion {onshore, lakes, rivers, river islands, lake islands
and conLinenLal shell wiLhin baLhymeLric depLhs ol up Lo and more Lhan
^00 meLers)
Years ol producLion {one, Lwo, Lhree and more Lhan Lhree years)
1he inspecLed quarLerly producLion volume, measured in Lhousands
ol cubic meLers ol equivalenL oil, lor each lield
Cccupation or retention oI areas 1Covernment)
BoLh Lhe bid noLice and Lhe concession agreemenL include paymenL provisions
lor Lhe occupaLion or reLenLion ol Lhe area. 1he amounL is Lo be compuLed each
calendar year, beginning lrom Lhe daLe ol execuLion ol Lhe concession
agreemenL. lL is payable on 15 January ol Lhe lollowing year.
1he amounL due lor Lhe occupaLion or reLenLion ol an area is seL by Lhe ANP
and considers Lhe block locaLion and oLher perLinenL lacLors. 1he calculaLion
is based on a progressive Lable LhaL ranges lrom RS10 Lo RS5,000 per square
kilomeLer {km), based on Lhe locaLion ol Lhe block and iLs developmenL sLage.
Landlord cost 1third party)
Landlord cosL is noL a CovernmenL Lake because iL is due Lo Lhe owner ol Lhe
land as a monLhly renLal paymenL lor access Lo and use ol Lhe land. For Lhe
onshore blocks, Lhe ANP seLs Lhe amounL lrom 0.57 Lo 17 ol Lhe oil and gas
producLion relerence price. ln Lhe 10 bidding rounds conducLed by Lhe ANP
{noLe LhaL round 8 is suspended), only parL ol aucLioned blocks had Lheir
landlord cosL reduced lrom 17 Lo 0.57. 1his decrease applied Lo blocks
aucLioned LhaL were classilied as inacLive marginal lields lor evaluaLion,
rehabiliLaLion and producLion ol oil and naLural gas.
C. Capital allowances
As a general rule, lixed asseLs may be depreciaLed based on Lheir "uselul lile."
DocumenLaLion is required Lo supporL Lhe uselul lile when iL dillers lrom Lhe
uselul lile provided by Lhe Brazilian lnLernal Revenue Service {Pece|ta lecera|
co Bras||, or Lhe RFB). 1his supporLing documenLaLion should be issued by Lhe
Brazilian NaLional lnsLiLuLe ol 1echnology or oLher similar insLiLuLe.
Lxamples ol RFB ordinarily used raLes include:
Buildings 25 years
Machinery and equipmenL 10 years
Vehicles, compuLer hardware and solLware 5 years
A company LhaL works Lwo shilLs per day may depreciaLe machinery and
equipmenL aL 1.5 Limes Lhe normal raLe. ll iL operaLes Lhree shilLs, iL may
double Lhe normal raLe.
43 Brazil
Oil and gas upsLream companies may depreciaLe lixed asseLs direcLly connecLed
wiLh upsLream operaLions based on Lhe concession Lerm or on Lhe produced
volume in relaLion Lo Lhe LoLal crude oil or gas in Lhe reservoir when Lhe uselul
lives are shorLer Lhan Lhose delined by Lhe RFB.
CurrenLly, some Lax incenLives apply Lo specilic indusLries and also Lo
companies locaLed in developing areas, such as Lhe norLh and norLheasL
regions ol Brazil. A research and developmenL {R&D) incenLive was enacLed in
2006 LhaL inLroduces an acceleraLed depreciaLion program and capiLal uplilLs.
For lurLher inlormaLion, see SecLion D.
1he capiLal expendiLures lor Lhe acquisiLion ol righLs, which are expecLed
Lo exisL or be exercised wiLhin a limiLed period ol Lime, may be amorLized.
1his amorLizaLion can be calculaLed based on Lhe remaining lile ol Lhe righL
or on Lhe number ol accrual periods lor which Lhe legal enLiLy expecLs Lo en|oy
Lhe beneliLs, originaLing lrom Lhe expenses regisLered as delerred charges.
For Lhe depleLion ol mineral resources {including oil and gas reservoirs),
a Brazilian legal enLiLy can opL Lo calculaLe Lhe exhausLion ol Lhe mineral
resource based on Lhe concession Lerm or on Lhe produced volume in relaLion
Lo Lhe LoLal crude oil or gas in Lhe reservoir.
UpsLream companies have generally accounLed lor cosLs incurred on exploraLion
and developmenL acLiviLies as permanenL asseLs. Under Lhe successlul ellorLs
meLhod, cosLs are wriLLen oll when wells are noL considered viable. 1he only
excepLion is lor geological and geophysical cosLs, which are noL capiLalized buL
are generally expensed when incurred.
D. Incentives
Tax holiday
Brazil does noL have a Lax holiday regime.
Pegional incentives
LxcepL lor Lhe RepeLro regime {discussed below), Brazil does noL have specilic
Lax incenLives lor Lhe oil and gas indusLry {see commenLs abouL RLPLNLC in
iLem OLhers). ln general, Brazil ollers a varieLy ol Lax incenLives inLended Lo
aLLracL businesses ol parLicular imporLance and losLer Lhe developmenL ol
cerLain underdeveloped regions in Lhe counLry.
1he lollowing incenLives are ollered Lo enLiLies locaLed in Lhe area ol Lhe Agency
lor Lhe DevelopmenL ol Lhe NorLheasLern SLaLes {/cenc|a ce 0esenvo|v|mento
co Norceste, or Lhe ADLNL) and Lhe Agency lor Lhe DevelopmenL ol Lhe
Amazon {/cenc|a ce 0esenvo|v|mento ca /mazn|a, or Lhe ADA):
A reducLion ol 757 ol Lhe 257 corporaLe income Lax due calculaLed on proliLs
lrom acLiviLies covered by Lhe incenLive Lax LreaLmenL {|ucro ca ex|oraco)
lor pro|ecLs considered Lo be viLal lor developmenL ol Lhe ADA and ADLNL
regions or lor modernizaLion, expansion or diversilicaLion ol exisLing pro|ecLs
considered Lo be viLal lor Lhe developmenL ol Lhe ADA and ADLNL regions.
1his incenLive is granLed unLil 31 December 2013. Companies may beneliL
lrom Lhis incenLive lor a maximum period ol 10 years
From 1 January 200^ Lo 31 December 2008, a reducLion ol 257 ol Lhe 257
corporaLe income Lax due calculaLed on proliLs lrom acLiviLies covered by Lhe
incenLive Lax LreaLmenL {|ucro ca ex|oraco) lor venLures considered Lo be
a prioriLy lor Lhe developmenL ol Lhe regions covered by Lhe ADA and ADLNL
From 1 January 2009 Lo 31 December 2013, a reducLion ol 12.57 ol
Lhe 257 corporaLe income Lax due calculaLed on proliLs lrom acLiviLies
covered by Lhe incenLive Lax LreaLmenL {|ucro ca ex|oraco) lor venLures
considered Lo be a prioriLy lor Lhe developmenL ol Lhe regions covered by
Lhe ADA and ADLNL
UnLil 2013, companies LhaL underLake pro|ecLs ol parLicular imporLance
lor Lhe developmenL ol Lhe region are enLiLled Lo reinvesL up Lo 307 ol Lhe
income Lax due aL 157 on Lheir ADLNL and ADA pro|ecLs
44
P&D 1Law 11.19/05)
Companies LhaL invesL in Lechnological innovaLion are enLiLled Lo Lhis R&D
lederal Lax incenLive. 1he deliniLion ol Lechnological innovaLion is "Lhe design
ol a new producL or manulacLuring process, as well as new luncLionaliLies or
characLerisLics added Lo producLs or Lo processes, which resulLs in incremenLal
improvemenLs and an acLual gain in qualiLy or producLiviLy, Lhus leading Lo
increased markeL compeLiLiveness."
Based on Lhe qualilying condiLions, Lhe applicaLion ol Lhis Lax incenLive is
associaLed wiLh Lhe design ol new manulacLuring processes or producLs or
wiLh new luncLionaliLies or characLerisLics being added Lo exisLing processes
or producLs.
ln summary, Lhe Lax incenLives ollered include:
DeducLion ol LoLal expendiLures made during Lhe compuLaLion period in
connecLion wiLh Lechnological R&D ol Lechnological innovaLion, which are
classiliable as operaLing expenses pursuanL Lo Brazilian Lax legislaLion
DeducLion lor purposes ol corporaLe income Laxes ol 607 Lo 807 ol LoLal
expendiLures made during Lhe compuLaLion period in connecLion wiLh
Lechnological R&D ol Lechnological innovaLion, which are classiliable as
operaLing expenses by Brazilian Lax legislaLion
ReducLion by 507 ol lederal VA1 {lPl) levied on equipmenL, machinery,
devices and insLrumenLs, as well as on Lheir relaLed spare accessories and
accompanying Lools LhaL were inLended lor use in Lechnological R&D
AcceleraLed depreciaLion by deducLion {only lor corporaLe income Lax
purposes), in Lhe acquisiLion year, ol Lhe LoLal cosL ol new machinery,
equipmenL, devices and insLrumenLs inLended lor use in acLiviLies
regarding Lechnological R&D ol Lechnological innovaLion
AcceleraLed amorLizaLion by deducLion, in Lhe compuLaLion year in which
Lhey are incurred, ol Lhe expendiLures classiliable as delerred asseLs
relaLing Lo Lhe acquisiLion ol inLangible asseLs associaLed exclusively wiLh
Lechnological R&D ol Lechnological innovaLion acLiviLies
107 Lax crediLs ol wiLhholding income Lax unLil 2013, levied on amounLs
paid, remiLLed or crediLed Lo loreign beneliciaries in Lhe lorm ol royalLies,
Lechnical or scienLilic assisLance or specialized services under agreemenLs
wiLh Lransler ol Lechnology regisLered or liled wiLh Lhe lNPl
ReducLion Lo zero ol Lhe wiLhholding income Lax raLe applicable Lo loreign
remiLLances lor purposes ol regisLraLion and reLenLion ol Lrademarks,
paLenLs and culLivars
No prior approval is necessary Lo Lake advanLage ol Lhis Lax incenLive. However,
Lhe Laxpayer is required Lo provide inlormaLion Lo Lhe Science and 1echnology
MinisLry {H|n|ster|o ca C|enc|a e 1ecno|oc|a) on iLs Lechnological research
programs by 31 July ol each subsequenL year and musL have a regular sLaLus
regarding iLs lederal Lax liabiliLies. Under Brazilian Lax legislaLion, all
documenLaLion relaLed Lo Lhe use ol Lhese Lax incenLives musL be available
lor Lax inspecLors during Lhe open period under Lhe sLaLuLe ol limiLaLions.
P&D 1PDTI and PDTA)
Pro|ecLs LhaL operaLe under Lhe indusLrial and agriculLural Lechnology
developmenL programs {Procrama ce 0esenvo|v|mento 1ecno|oc|co |ncustr|a|
e /croecuar|o. or PD1l and PD1A, respecLively) and LhaL are approved by Lhe
lndusLrial DevelopmenL Council {Conse|no ce 0esenvo|v|mento |ncustr|a|, or
Lhe CDl) are enLiLled Lo a wiLhholding Lax crediL on Lhe crossborder remiLLance
ol royalLies, Lechnical assisLance and specialized services lees. 1hese Lax crediLs
are equivalenL Lo Lhe percenLage ol 107 lrom 1 January 2009 Lo
31 December 2013.
1o qualily, a company musL commiL iLsell Lo invesLing Lwice Lhe value ol Lhe
wiLhholding Lax crediLs granLed under Lhis incenLive in R&D in Brazil.
Brazil
45
1he lollowing addiLional beneliLs are currenLly available under Lhe PD1l and
PD1A programs:
ln addiLion Lo Lhe deducLion ol Lhe corresponding expense, deducLion ol
R&D expenses {excepL royalLy expenses paid Lo nonresidenLs) invesLed in
R&D lor indusLrial and agriculLure Lechnology during Lhe liscal year, usually
limiLed Lo ^7 ol Lhe corporaLe income Lax due aL 157
AcceleraLed depreciaLion {Lwice Lhe applicable depreciaLion raLe) lor
machinery, equipmenL and new insLrumenLs used in R&D ol indusLrial
and agriculLural Lechnology
AcceleraLed amorLizaLion ol Lhe expenses incurred wiLh Lhe acquisiLion
ol inLangibles relaLed Lo R&D ol indusLrial and agriculLure Lechnology
DeducLion ol royalLies and Lechnical or scienLilic assisLance lees as
operaLional expenses, limiLed Lo 107 ol Lhe neL income derived lrom Lhe
sale ol goods produced wiLh Lhe relaLed Lechnology, provided LhaL Lhe
company commiLs iLsell Lo invesLing Lwice Lhe value ol Lhe beneliL
in R&D in Brazil
Pro|ecLs operaLing under Lhe PD1l and PD1A programs musL sLimulaLe Lhe
developmenL ol indusLrial and agriculLural indusLrial Lechnology. 1herelore,
Lhese incenLives have a more limiLed applicaLion when compared wiLh Lhe
more recenL R&D incenLives summarized above.
Exportation incentives
A relevanL incenLive lor Lhe oil and gas indusLry in Brazil is Lhe Pec|me fsec|a|
ce /cu|s|co ce Bens ce Ca|ta| ara fmresas fxortacoras {RLCAP), which
is a special Lax regime lor Lhe acquisiLion ol capiLal goods by exporL companies.
1o beneliL lrom Lhe RLCAP, a company musL have recognized gross revenues
derived lrom exporLs in Lhe prior year equal Lo or greaLer Lhan 707 ol iLs LoLal
annual gross income, and iL musL mainLain a minimum ol 707 ol exporL
revenues lor Lhe lollowing Lwo calendar years {or Lhe lollowing Lhree years,
il Lhe company does noL comply wiLh Lhe lirsL requiremenL).
1he RLCAP regime applies Lo cerLain equipmenL, insLrumenLs and machinery
imporLed direcLly by Lhe RLCAP beneliciary Lo be used as lixed asseLs. Under
Lhe RLCAP regime, Lhe social conLribuLion Laxes on gross revenues Lriggered
upon Lhe imporLaLion, namely PlS and COFlNS, are suspended and converLed
inLo a zero Lax raLe alLer Lhe incenLive condiLions are lullilled. 1he regime also
provides lor Lhe suspension ol PlS and COFlNS on local acquisiLions made by
Lhe beneliciary ol Lhe RLCAP regime.
ln addiLion Lo Lhe condiLions ouLlined above, Lhe Brazilian legal enLiLy musL noL
have any pasLdue lederal Lax liabiliLies Lo beneliL lrom Lhe RLCAP regime.
BeneliLs are also canceled il Lhe legal enLiLy does noL comply wiLh Lhe minimum
exporL revenues requiremenL ol 707, il Lhe beneliciary does noL comply wiLh
Lhe oLher requiremenLs lor Lhe RLCAP regime Lo apply, or aL Lhe beneliciary's
own requesL. A legal enLiLy excluded lrom Lhe RLCAP regime musL pay inLeresL
and penalLies on Lhe Laxes suspended, calculaLed lrom Lhe daLe ol acquisiLion
ol Lhe imporLed asseLs and services or Lhe regisLraLion ol Lhe imporL
LransacLion wiLh Lhe elecLronic cusLoms sysLem {SlSCOMLX).
1he RLCAP Lax incenLive is noL available Lo Brazilian companies sub|ecL Lo Lhe
PlS and COFlNS under Lhe cumulaLive Lax regime.
AparL lrom Lhe RLCAP Lax incenLive, Brazilian legal enLiLies may also qualily lor
Lhe lPl, PlS and COFlNS suspension upon a local purchase or imporLaLion ol raw
maLerials, inLermediary producLs and package maLerials il Lhey meeL, among
oLher condiLions, Lhe 707 Lhreshold ouLlined above. Some Brazilian sLaLes
provide a similar Lax incenLive lor lCMS Lax purposes.
E. Withholding taxes and other taxes on imported services
Dividends
Dividends paid lrom proliLs accrued as lrom 1 January 1996 are noL sub|ecL Lo
wiLhholding Lax in Brazil, regardless ol wheLher Lhe beneliciary is a residenL or
a nonresidenL shareholder.
Brazil
4
Interest
lnLeresL remiLLed abroad is generally sub|ecL Lo wiLhholding Lax aL a raLe ol 157
{unless a Lax LreaLy provides oLherwise). lnLeresL paid Lo residenLs ol lowLax
|urisdicLions is sub|ecL Lo wiLhholding Lax aL a raLe ol 257.
Poyalties and technical services
RoyalLies and Lechnical assisLance lees remiLLed abroad are generally sub|ecL Lo
wiLhholding Lax aL a raLe ol 157 {unless a Lax LreaLy provides oLherwise) when
Lhe ClDL Lax is due on such same remiLLance {see more inlormaLion below).
RoyalLies and Lechnical assisLance lees paid Lo residenLs ol lowLax |urisdicLions
are sub|ecL Lo wiLhholding Lax aL a raLe ol 257.
Administrative and similar services
AdminisLraLive and similar service lees remiLLed abroad are generally sub|ecL Lo
wiLhholding Lax aL a raLe ol 157 {unless a Lax LreaLy provides oLherwise) when
Lhe ClDL Lax is due on such same remiLLance {see more inlormaLion below).
AdminisLraLive service lees paid Lo residenLs ol lowLax |urisdicLions are sub|ecL
Lo wiLhholding Lax aL a raLe ol 257.
Cther services
For Lhe remiLLance ol lees lor oLher services, Lhe wiLhholding income Lax raLe is
257 even il Lhe paymenL is noL made Lo a lowLax |urisdicLion. 1his raLe applies
because ClDL is noL due on Lhese remiLLances.
Pental
RenLal paymenLs made Lo a nonresidenL are generally sub|ecL Lo wiLhholding
Lax aL a raLe ol 157. RenLal paymenLs made Lo residenLs ol lowLax |urisdicLions
are sub|ecL Lo wiLhholding Lax aL a raLe ol 257.
PaymenLs lor charLer ol bareboaL vessels wiLh no service componenLs are
sub|ecL Lo wiLhholding income Lax aL a raLe ol 07, provided LhaL Lhe enLry
ol Lhe vessel inLo Brazilian waLers is approved by Lhe compeLenL auLhoriLy.
1his reduced raLe does noL apply il Lhe beneliciary is domiciled in a lowLax
|urisdicLion, in which case LaxaLion will be aL Lhe raLe ol 257.
Branch remittance tax
A loreign company may noL operaLe Lhrough a branch in Brazil unless iL submiLs
a special requesL Lo Lhe MinisLry ol lndusLry and Commerce {H|n|ster|o ca
|ncustr|a e Comerc|o) and receives prior auLhorizaLion Lhrough a presidenLial
decree. ln pracLice, due Lo Lhe bureaucraLic dilliculLies in obLaining such
auLhorizaLion, lew branches ol loreign companies operaLe in Brazil.
A branch musL be regisLered wiLh Lhe commercial regisLer and adopL Lhe same
name as iLs head ollice. A permanenL represenLaLive ol any naLionaliLy who is
lully auLhorized Lo acL on behall ol Lhe branch musL be a residenL in Brazil. No
minimum capiLal requiremenL is imposed. LiabiliLy is noL limiLed Lo Lhe capiLal ol
Lhe branch, buL exLends Lo Lhe head ollice.
Branches ol loreign companies musL publish Lheir annual linancial sLaLemenLs,
and Lhey are sub|ecL Lo Lhe requiremenLs similar Lo Lhose LhaL apply Lo Brazilian
residenL legal enLiLies.
5pecial contribution 1CIDE)
ClDL Lax is charged aL a raLe ol 107 on royalLy paymenLs, including lees lor
Lechnical assisLance, Lechnical services, adminisLraLive services and similar
services. 1he Brazilian payor LhaL makes Lhe remiLLance Lo Lhe loreign
beneliciary is considered Lo be Lhe Laxpayer lor purposes ol Lhe ClDL Lax.
A ClDL Lax crediL sysLem in Brazil is available lor Lrademark royalLy
paymenLs only.
5ocial contribution taxes on importation 1PI5 and CCFIN5)
PlS and COFlNS are boLh social conLribuLion Laxes charged on Lhe imporLaLion
ol asseLs, producLs and services, and are usually charged aL a combined raLe
Brazil
47
ol 9.257. 1he Brazilian imporLer under Lhe noncumulaLive PlS and COFlNS
regime may compuLe a PlS and COFlNS Lax crediL lor cerLain inpuLs and
services acquired {lor more deLails, see SecLion C). PlS and COFlNS are noL
due on cerLain imporLs {e.g., imporLs under Lhe RLCAP regime).
5ervice tax on importation 1I55)
1he municipal Lax on services {lSS) is charged on Lhe imporLaLion ol services.
lSS applies aL raLes LhaL vary lrom 27 Lo 57, depending on Lhe naLure ol Lhe
service and Lhe municipaliLy where Lhe Brazilian payor is domiciled.
Tax on Iinancial operations 1ICF)
1he lederal lOF Lax is currenLly charged aL 0.387 on Lhe amounL ol Brazilian
currency exchanged inLo loreign currency lor Lhe paymenL ol imporLed
services. MosL currency exchange LransacLion are sub|ecL Lo lOF aL a raLe ol
0.387. 1his Lax may be alLered by Lhe execuLive branch wiLh immediaLe ellecL.
F. Financing considerations
Thin capitalization
Brazil does noL have Lhin capiLalizaLion rules {see commenLs in SecLion l).
Debt versus equity
Brazilian operaLions can be linanced by debL, equiLy or a combinaLion ol boLh.
By capiLalizing Lhe Brazilian enLiLy wiLh equiLy, Lhe parenL company bears Lhe
risk ol Lhe currency exchange llucLuaLion. On Lhe oLher hand, il Lhe Brazilian
enLiLy is linanced Lhrough debL, Lhe exchange risk is shilLed Lo Lhe Brazilian
subsidiary, which may accrue a currency exchange loss or gain lor book and
Lax purposes, even il unrealized. AL Lhe elecLion ol Lhe Brazilian payor, currency
exchange gains or losses may be recognized on a cash basis lor Brazilian Lax
purposes. DebL may also be inLeresL bearing, which Lriggers a deducLible
inLeresL expense lor Brazilian Lax purposes. Brazilian corporaLe borrowers
cannoL lend lunds Lo oLhers on condiLions LhaL are more lavorable when
compared wiLh Lheir own debL liabiliLies.
1o losLer Brazilian exporLs, Lhe CovernmenL has reduced Lhe wiLhholding Lax
on exporL linancing loans Lo 07. 1herelore, il Lhe upsLream company inLends
Lo exporL iLs producLion, eiLher LoLally or parLially, Lhis insLrumenL may be
LaxellicienL because iL Lriggers a local Lax deducLion aL Lhe raLe ol 3^7 on Lhe
cosL ol Lhe 07 wiLhholding Lax.
Tax on Iinancial operations 1ICF)
Under cerLain circumsLances, a linancial operaLions Lax {|mosto soore
Ceraces ce Crec|to, Cmo|o f Securo, ou Pe|at|vas / va|ores, Hoo|||ar|os,
or lOF) is imposed by Lhe Federal CovernmenL aL raLes varying lrom 07 Lo 257.
DomesLic loans beLween legal enLiLies, including relaLed parLies, are sub|ecL Lo
lOF aL a maximum raLe ol 1.887 per year.
Foreign loans wiLh average maLuriLy Lerms ol up Lo 90 days are sub|ecL Lo lOF
aL a raLe ol 5.387.
C. Transactions
Under Brazilian oil and gas legislaLion, iL is possible Lo Lransler concession
agreemenLs Lo Lhird parLies, provided LhaL Lhe Lransler is preapproved
by Lhe ANP.
Asset disposals
Concession cosLs, including exploraLion and developmenL cosLs, are classilied as
permanenL asseLs. Disposals ol permanenL asseLs are LreaLed as nonoperaLing
LransacLions, which Lrigger capiLal gains or losses. CapiLal gains are Laxed aL Lhe
same corporaLe income Lax raLes as ordinary income {see SecLion B).
Brazil
48
Farm in and Iarm out
Brazilian Lax legislaLion does noL have a special Lax LreaLmenL lor larmin and
larmouL LransacLions; accordingly, general Brazilian Lax rules apply.
5elling shares in a Brazilian company
lnvesLmenLs noL lor sale in subsidiaries eiLher in Brazil or abroad are classilied
as permanenL asseLs. Disposals ol permanenL asseLs by Brazilian legal enLiLies
are LreaLed as nonoperaLing LransacLions, which Lrigger capiLal gains or losses.
CapiLal gains are Laxed aL Lhe same raLes as corporaLe income Laxes as ordinary
income {see SecLion B).
1he gain on a sale ol a Brazilian asseL by a nonresidenL shareholder is Laxable
in Brazil aL Lhe raLe ol 157, regardless ol Lhe locaLion ol Lhe buyer. ll Lhe
beneliciary ol Lhe capiLal gain is residenL in a lowLax |urisdicLion, Lhe
wiLhholding Lax raLe is increased Lo 257. lndirecL disposiLions ol Brazilian
asseLs are noL Laxable in Brazil {see SecLion B).
5tate VAT 1ICM5)
SLaLe VA1 {lCMS) is due on Lhe local sale ol oil, based on Lhe sale price,
including Lhe lCMS iLsell {builLin calculaLion). For inLrasLaLe operaLions
{carried ouL by a seller and buyer locaLed in Lhe same Brazilian sLaLe),
Lhe lCMS raLe is deLermined by Lhe legislaLion ol Lhe sLaLe where Lhe sale
is made, which generally varies lrom 177 Lo 197.
Because ol a specilic provision under Lhe Brazilian lederal consLiLuLion, lCMS is
noL due on inLersLaLe oil operaLions {carried ouL by a seller and buyer locaLed in
dillerenL Brazilian sLaLes).
Federal VAT 1IPI)
As a general rule, Lhe lederal VA1 {lPl) is charged on LransacLions involving
manulacLured goods by a manulacLuring planL, or on Lhe lirsL sale in Brazil
ol an imporLed asseL, as delined in Lhe legislaLion in lorce. According Lo Lhe
Brazilian lederal consLiLuLion, local sales, inLrasLaLe sales or imporLaLion ol oil
producLs, including crude oil and iLs byproducLs, are noL sub|ecL Lo Lhe lPl Lax.
5ocial contribution taxes on gross revenue 1PI5 and CCFIN5)
PlS and COFlNS are charged on gross revenues earned by a Brazilian legal
enLiLy under one ol Lwo dillerenL regimes ol calculaLion: noncumulaLive
and cumulaLive.
Under Lhe noncumulaLive regime, PlS and COFlNS are generally charged aL a
combined raLe ol 9.257 {1.657 PlS and 7.67 COFlNS) on revenues earned by
a legal enLiLy. CerLain business cosLs resulL in Lax crediLs Lo ollseL PlS and
COFlNS liabiliLies {e.g., depreciaLion ol machinery, equipmenL and oLher
lixed asseLs acquired Lo be direcLly used in Lhe manulacLuring ol a producL
or rendering ol a service). PlS and COFlNS paid upon imporLaLion ol cerLain
asseLs and services are also crediLable. UpsLream companies are generally
sub|ecL Lo Lhis regime.
Brazilian Laxpayers sub|ecL Lo Lhe cumulaLive regime musL calculaLe PlS and
COFlNS aL a combined raLe ol 3.657 {0.657 PlS and 37 COFlNS). No Lax
crediLs are provided under Lhis regime. lL applies Lo some indusLries {noL
including oil and gas) and also Lo companies LhaL compuLe Laxable proliLs as
a percenLage ol gross sales. For lurLher inlormaLion, please see SecLion B.
Exportation oI oil
Oil exporL LransacLions are exempLed lor lCMS, lPl, PlS and COFlNS purposes.
H. Indirect taxes
Importation oI equipment and other
All Brazilian imporLaLion processes musL be regisLered wiLh Lhe SlSCOMLX
elecLronic sysLem and an imporLaLion declaraLion {0ec|araco ce |mortaco,
or Dl) musL be obLained lor subsequenL cusLoms clearance.
Brazil
49
1he imporLaLion ol equipmenL and oLher goods generally requires an imporL
license. ln mosL cases, Lhe imporL license is obLained auLomaLically when liling
Lhe Dl Lhrough Lhe SlSCOMLX sysLem. However, lor cerLain specilic pieces ol
equipmenL and goods, an imporL license musL be obLained belore Lheir
shipmenL Lo Brazil or belore Lhe regisLraLion ol Lhe Dl. As a general rule, Lhe
imporL license will be valid lor 90 days {60 days, exLendable lor anoLher 30
days) lrom iLs issuance daLe. 1he need lor a prior license musL be deLermined
based on Lhe Larill code ol Lhe equipmenL or goods Lo be imporLed and some
oLher specilic condiLions.
1he imporLaLion ol cerLain goods, such as peLrochemicals, crude oil and naLural
gas, requires auLhorizaLion lrom special regulaLory agencies as a condiLion lor
Lhe issuance ol an imporL license.
lmporL Lax {|mosto ce |mortaco, or ll) is due on Lhe imporLed equipmenL or
goods based on Lheir cusLoms value. 1he cusLoms value is generally based on
Lhe LransacLion value, including Lhe inLernaLional insurance and lreighL {ClF)
and any oLher specilied price elemenLs, as delined by Lhe cusLoms valuaLion
rules. 1he imporL Lax raLe may vary, depending on Lhe Larill classilicaLion code
ol Lhe equipmenL or goods under Lhe MLRCOSUR Larill code 1LC, based on
Lhe Harmonized SysLem. 1he average raLe lor equipmenL is 1^7. ll is noL a
recoverable Lax. CapiLal goods and daLa processing and LelecommunicaLions
goods may beneliL lrom a reducLion ol Lhe ll Lo 27 {fx1ar|far|o) il Lhe imporLer
can aLLesL LhaL no similar goods are manulacLured in Brazil.
lmporL LransacLions are also sub|ecL Lo Lhe lederal and sLaLe VA1 Laxes {lPl and
lCMS, respecLively). lPl is calculaLed on Lhe cusLoms value ol Lhe equipmenL or
goods plus Lhe ll. 1he raLe depends on Lhe respecLive Larill classilicaLion code.
ln general, Lhe average lPl raLe is 157; however, lor equipmenL, Lhe lPl raLe
generally ranges lrom 07 Lo 57.
lCMS is charged on Lhe cusLoms value ol Lhe equipmenL or goods, plus ll, lPl,
lCMS, PlS and COFlNS {including oLher cusLoms charges). Cenerally, Lhe lCMS
raLe ranges lrom 177 Lo 197. Lower raLes may apply depending on lacLors
such as:
1he sLaLe where Lhe imporLer is locaLed
1he naLure ol Lhe goods imporLed
1he sLaLe Lax beneliLs granLed because ol special cusLoms regimes
ll Lhe imporLed piece ol equipmenL or goods is eiLher used in a manulacLuring
process in Brazil or resold, Lhe Brazilian imporLer may recover lPl and
lCMS Laxes.
AbsenL a special regime, PlS and COFlNS Laxes are also due on Lhe imporLaLion
ol equipmenL or goods aL a combined raLe ol 9.257, based on Lhe cusLoms
value ol Lhe imporLed equipmenL or goods, plus lCMS, PlS and COFlNS. 1he
ellecLive Lax raLe is approximaLely 13.^57.
Contribution Ior renovation oI the merchant marine
MariLime LransporLaLion is sub|ecL Lo a lreighL surcharge lor renovaLion ol Lhe
merchanL marine {/c|c|ona| ao lrete ara Penovaco ca Har|nna Hercante, or
AFRMM), which is levied on charges made by Brazilian and inLernaLional
shipping lines LhaL operaLe in Brazilian porLs.
AFRMM is charged aL a raLe ol 257 on Lhe inLernaLional lreighL value and aL
107 on Lhe coasLal navigaLion lreighL {based on Lhe bill ol lading and Lhe cargo
manilesL); however, according Lo AFRMM legislaLion, Lhe Lax paymenL does noL
apply Lo asseLs LransporLed in connecLion wiLh supporLing acLiviLies lor Lhe
exploraLion ol hydrocarbons and oLher underwaLer minerals in Lhe exclusive
economic Brazilian zone.
Similarly, AFRMM is suspended lor asseLs imporLed under a special cusLoms
regime up Lo Lhe Lerm granLed by Lhe MinisLry ol 1ransporLaLion {H|n|ster|o cos
1ransortes) or under Lhe Dl regisLraLion, such as under Lhe drawback or Lhe
Lemporary admission regime wiLh suspension ol Laxes. 1he exempLion or
suspension ol AFRMM depends on a previous analysis and approval by Lhe
MinisLry ol 1ransporLaLion.
Brazil
50 Brazil
1he main lees applicable Lo Lhe cusLoms clearance ol imporLed equipmenL or
goods are sLorage lees, demurrage, Lerminal handling charges {caataz|as),
unsLulling/cargo handling lees and deconsolidaLion ol billollading lees. RaLes
and amounLs vary.
Temporary admission regime
1he Lemporary admission regime is a special cusLoms regime LhaL granLs LoLal
or parLial suspension ol imporL duLies and indirecL Laxes {ll, lPl, PlS, COFlNS
and lCMS) on Lhe imporLaLion ol equipmenL or goods, provided LhaL Lhe
imporLed equipmenL or goods are reexporLed wiLhin a sLipulaLed Lerm. Failure
Lo reexporL such equipmenL or goods resulLs in a Lax liabiliLy lor Lhe previously
suspended Laxes, increased by lines and inLeresL.
1he imporLaLion under LoLal suspension ol imporL duLies and indirecL Laxes is
generally granLed lor a maximum period ol Lhree monLhs, wiLh a possible
exLension lor anoLher Lhree monLhs.
LquipmenL and goods imporLed under operaLional leases or renLals and
equipmenL and goods imporLed lor Lhe rendering ol services lall under Lhe
parLial suspension ol Lhe imporL duLies and Laxes regime. ln Lhis case, Lhey may
remain in Lhe counLry lor Lhe duraLion ol Lhe underlying conLracL. Under new
cusLoms regulaLions, ll, lPl, PlS and COFlNS imporLaLion and lCMS musL be paid
aL 17, per monLh ol sLay in Brazil, ol Lhe amounL ol Laxes which oLherwise
would originally be due.
Drawback
1he Brazilian cusLoms legislaLion provides lor Lhree Lypes ol drawback regimes:
Drawback suspension
Under Lhis regime, paymenL ol ll, lPl, PlS and COFlNS imporLaLion and lCMS
Laxes is suspended lor raw maLerials and goods LhaL are imporLed and
reexporLed alLer a manulacLuring process in Brazil. 1his regime is regulaLed by
Lhe Foreign 1rade OperaLions DeparLmenL {DLCLX). A Brazilian company LhaL
requesLs drawback suspension musL comply wiLh cerLain requiremenLs Lo
obLain approval. ln some parLicular circumsLances, locally purchased raw
maLerials may also beneliL lrom Lhis regime.
Drawback exemption
1his regime involves an exempLion lrom ll, lPl, PlS, COFlNS imporLaLion and
possibly an lCMS exempLion, depending on Lhe sLaLe, on Lhe imporLaLion ol raw
maLerials and goods in equal quanLiLy and qualiLy used in Lhe manulacLuring
process in Brazil ol a linal producL LhaL is exporLed. A Brazilian company LhaL
requesLs a drawback exempLion musL prove LhaL Lhe goods have been exporLed
Lo obLain Lhe Lax exempLion.
Drawback reIund
Under Lhis regime, a Brazilian imporLer may requesL and obLain a relund ol
lederal imporL Laxes {ll, lPl, PlS and COFlNS imporLaLion) paid wiLhin 90 days
alLer Lhe exporL ol Lhe linished producLs manulacLured in Brazil wiLh raw
maLerials LhaL were previously imporLed under Lhis drawback regime. 1he
relund is made via a Lax crediL cerLilicaLe issued Lo Lhe exporLer and is Lo be
used lor lederal Laxes due upon iLs nexL imporL LransacLion.
1here is no legal provision lor an lCMS relund under Lhis drawback regime.
Domestic drawback 1\jYoZY[cn]j\]]9eYj]dg)
1he domesLic drawback exLends Lhe drawback suspension LreaLmenL Lo
LransacLions involving Lhe acquisiLion ol goods wiLhin Lhe Brazilian inLernal
markeL. LnLiLlemenL Lo beneliL lrom Lhe domesLic drawback regime depends
on a granLing acL lrom Lhe Brazilian Foreign 1rade SecreLariaL {SLCLX) and
is condiLioned Lo Lhe goods being employed in a local manulacLuring process
lollowed by an exporLaLion. As ol Lhe currenL daLe, lCMS legislaLion is noL
harmonized wiLh Lhe lederal beneliLs lor LhaL purpose, which means LhaL Lhe
uLilizaLion ol lCMS beneliLs musL be verilied on a casebycase basis.
51 Brazil
Pepetro
RepeLro is a special cusLoms regime available in Brazil lor Lhe imporLaLion
and exporLaLion ol equipmenL and oLher qualilying asseLs lor Lhe oil and gas
indusLry. 1his regime consisLs ol a combinaLion ol Lhree dillerenL cusLoms
regimes: Lemporary admission, drawback {under Lhe drawback suspension
provision) and licLiLious exporLaLion.
Under Lhe Lemporary admission regime, Lhe RepeLro granLs LoLal suspension ol
lederal Laxes {ll, lPl, PlS and COFlNS) LhaL oLherwise would be due upon Lhe
imporLaLion ol equipmenL and oLher qualilying asseLs in connecLion wiLh oil and
gas exploraLion, developmenL and producLion acLiviLies.
Under Lhe drawback regime, Lhe RepeLro granLs lull suspension ol Laxes lor
Lhe manulacLurer in Brazil lor parLs, pieces or compleLe equipmenL and oLher
qualilying asseLs imporLed, under Lhe condiLion LhaL Lhey are reexporLed Lo an
owner esLablished ouLside Brazil.
1he licLiLious exporLaLion applies Lo sales ol equipmenL and oLher qualilying
asseLs ol loreign purchases wiLh delivery wiLhin Lhe Brazilian LerriLory. 1hese
sales are LreaLed as exporLaLion lor Lhe purpose ol lederal Laxes and, Lhus, are
exempL lrom lPl, PlS and COFlNS Laxes.
1he Lypes ol equipmenL and oLher asseLs LhaL may qualily lor Lhe RepeLro
regime are lisLed in Lhe So|e /ttacnment to Pevenue Procecure 844/08.
WiLh Lhe enLry inLo lorce ol Lhe ValenLim Law in February 200^, lCMS has been
due in Lhe sLaLe ol Rio de Janeiro on Lhe imporLaLion ol equipmenL and asseLs
Lo be used in Lhe oil producLion phase under Lhe Lemporary admission regime,
including equipmenL and asseLs eligible under Lhe RepeLro regime.
However, Lhe consLiLuLionaliLy ol Lhe ValenLim Law has been discussed by
Lhe Supreme CourL ol JusLice {Suer|or 1r|ouna| ce Just|ca), as iL may have
overridden a provision seL by Lhe aggregaLe ol Brazilian sLaLes {Conven|o
lCMS) 58/99, which sLaLes LhaL, when a proporLionaLe levy ol lederal Laxes
applies Lo Lhe Lemporary admission ol equipmenL and asseLs inLo Brazil,
Lhe Brazilian sLaLes may also proporLionaLely reduce Lhe lCMS Laxable base.
AlLer years ol vigorous debaLe, anoLher Conven|o lCMS was signed in
November 2007 by Lhe Brazilian sLaLes Lo govern lCMS LaxaLion on equipmenL
and asseLs imporLed under Lhe RepeLro Lemporary admission regime, Lo be
used in oil and gas acLiviLies.
1his agreemenL is Lhe Conven|o lCMS 130.
;gfnfag ICM5 130
Conven|o lCMS 130 esLablishes LhaL Laxpayers may elecL Lo imporL equipmenL
and qualilying asseLs used lor Lhe producLion ol oil and gas under a cumulaLive
or a noncumulaLive lCMS regime, aL raLes ol 3.07 and 7.57, respecLively.
1he noncumulaLive meLhod allows Lhe appropriaLion ol lCMS Lax crediLs aL
1/^8Lh monLhly, alLer Lhe 2^Lh monLh ol Lhe acLual lCMS collecLion.
1he Brazilian sLaLes may also exempL or reduce Lo 1.57 Lhe cumulaLive lCMS
on Lhe Lemporary admission ol equipmenL and oLher RepeLroqualilying asseLs
used lor Lhe exploraLion ol oil and gas lields, and may eiLher alLernaLively
exempL lrom lCMS or apply noncumulaLive and cumulaLive regimes aL Lhe
raLes ol 7.57 and 3.07, respecLively.
ln addiLion, Lhe Brazilian sLaLes may exempL lrom LaxaLion locally manulacLured
equipmenL and RepeLroqualilying asseLs used lor Lhe exploraLion ol oil and gas
lields, or used lor Lhe producLion ol oil and gas as long as Lhey are licLiLiously
exporLed and are subsequenLly Lemporarily imporLed under Lhe RepeLro rules.
lCMS crediLs are noL allowed.
Finally, lCMS exempLion may apply Lo:
{i) LquipmenL and RepeLroqualilying asseLs exclusively used in
exploraLion acLiviLies
{ii) ProducLion plaLlorms in LransiL lor repair or mainLenance
52
{iii) LquipmenL and RepeLroqualilying asseLs used in exploraLion and
producLion acLiviLies LhaL remain in Brazil lor less Lhan 2^ monLhs
SLaLes may alLernaLively Lax equipmenL and RepeLroqualilying asseLs wiLhin
{i) and {iii) above aL Lhe cumulaLive raLe ol 1.57.
1axpayers musL lormally opL lor LaxaLion under Lhe Conven|o lCMS 130 regime.
As ol Lhe currenL daLe, noL all Brazilian sLaLes have regulaLed Lhis maLLer.
I. Cther
Brazilian tax reIorm
ln March 2008, Lhe Brazilian CovernmenL submiLLed a Lax relorm proposal
Lo be voLed on and approved by Lhe lederal congress. 1he main goals ol Lhe
proposal included simplilying Lhe naLional Lax sysLem, lurLhering Lhe process
ol Lax disLress and eliminaLing gaps LhaL loresLall Lhe growLh ol Lhe Brazilian
economy, as well as naLional compeLiLion, especially wiLh regard Lo Lhe
socalled "liscal war" among Brazilian sLaLes. AddiLionally, Lhe proposal
increased Lhe amounL ol resources devoLed Lo Lhe NaLional Policy on Regional
DevelopmenL {Po||t|ca Nac|ona| ce 0esenvo|v|mento Pec|ona|) and inLroduced
signilicanL modilicaLions Lo Lhe implemenLaLion ol such policy.
One ol Lhe iLems in Lhe proposal addressed Lhe unilicaLion ol a group ol VA1
levied on Lhe producLion and Lrading ol goods and services. 1o Lhis ellecL,
COFlNS, PlS and Lhe special social conLribuLion on luel producLs {ClDL
CombusLvel) would be consolidaLed inLo a new Lax Lo be levied on operaLions
involving goods and services, relerred Lo as lederal VA1 {|mosto soore va|or
/crecaco lecera|, or lVAF). Under Lhe proposals, Lhe consLiLuLional provisions
LhaL creaLed Lhe COFlNS, PlS and ClDLCombusLvel Laxes would be repealed.
1wo oLher imporLanL modilicaLions proposed were Lhe consolidaLion ol lederal
income Laxes inLo a single income Lax and payroll disLressing measures.
1here has been a general consensus LhaL Lhe Lax relorm will be posiLive lor
Brazil; however, iL is also expecLed LhaL iL will undergo signilicanL changes
belore iL passes inLo law.
International Financial Peporting 5tandards 1IFP5) and
Law No. 1138/07
ln Lhe process ol aligning Brazilian accounLing sLandards wiLh lFRS, Law No.
11638 was enacLed on 28 December 2007 and iL amended Lhe Brazilian
CorporaLion Law {Law No. 6^0^, daLed 15 December 1976), in order Lo allow
inLernaLional accounLing convergence, as well as Lo increase Lhe Lransparency
level ol Lhe overall linancial sLaLemenLs, including Lhose ol large companies
noL organized as corporaLions {soc|ecaces ann|mas). FurLher changes are
sLill expecLed.
LllecLive lrom 1 January 2008, Lhe law prescribed, among oLher accounLing
changes, LhaL accounLing sLandards issued by Lhe Brazilian SecuriLies
Commission {CVM) musL be aligned wiLh inLernaLional accounLing sLandards
adopLed in Lhe main securiLy markeLs, i.e., sLandards issued by Lhe lnLernaLional
AccounLing SLandards Board {Lhe lASB), which is currenLly considered Lhe
inLernaLional relerence lor accounLing sLandards.
PrivaLely held companies may now elecL Lo adopL Lhe sLandards issued by Lhe
CVM lor publicly held corporaLions, which allows Lhem Lo also parLicipaLe in Lhe
accounLing convergence process.
Large companies, consLrued Lo be Lhose LhaL individually or under common
conLrol have LoLal asseLs in excess ol RS2^0 million or gross revenues ol more
Lhan RS300 million, musL mainLain bookkeeping and prepare linancial
sLaLemenLs observing Lhe Brazilian CorporaLion Law and musL also be audiLed
by independenL audiLors regisLered wiLh Lhe CVM.
AlLhough Lhis harmonizaLion process is noL inLended Lo generaLe any Lax
impacLs in Brazil, Lhe RFB sLill is Lo Limely issue orienLaLion abouL how Lo
achieve such Lax neuLraliLy.
Brazil
53
Transitional tax regime 1PTT)
LllecLive as ol iLs publicaLion daLe {converLed inLo Law No. 11.9^1/09),
Provisional Measure {MP) no. ^^9, ol 3 December 2008, is Lhe exisLing
insLrumenL which aims Lo achieve Lhe inLended Lax neuLraliLy upon Lhe
conversion inLo lFRS. lL has creaLed a LransiLional Lax regime {R11),
under which, lor income Laxes and PlS and COFlNS purposes, Lhe accounLing
meLhods and criLeria as ol 31 December 2007 shall be considered lor Lhe
recogniLion ol revenues, cosLs and expenses.
1he R11 is opLional lor Lhe years 2008 and 2009, and iL has creaLed Lhe
necessiLy lor ollbook conLrols lor Lhe dillerenL accounLing meLhods and
criLeria lor Lhe deLerminaLion ol Lhe compuLaLion basis ol such Laxes, Lhus
leading Lo Lhe exisLence ol delerred Laxes. As lrom 2010, Lhe R11 becomes
mandaLory, excepL il newer legislaLion deLermines oLherwise.
Concession owner
Foreign companies may parLicipaLe in Lhe block concession bidding rounds
held by Lhe ANP. However, a loreign company musL commiL Lo incorporaLing a
company in Brazil under Brazilian law, wiLh iLs headquarLers and adminisLraLion
in Brazil, Lo hold Lhe concession righLs il iL wins Lhe bid.
National content
1he naLional conLenL rule was creaLed Lo losLer naLional indusLry. Under Lhis
rule, a cerLain percenLage ol goods, equipmenL and services musL be purchased
lrom Brazilian suppliers.
Up Lo ANP round ^, Lhere were no minimum naLional conLenL requiremenLs.
Since ANP round 5, Lhe agency has esLablished minimum naLional conLenL
requiremenLs lor Lhe exploraLion and developmenL phases. 1he percenLages
indicaLed below are varied depending on Lhe ANP round.
Pound
CommiLmenL ol acquiring local services
and resources {minimum value)
5
7, 8, 9 10
Min Max Min Max
LxploraLion DeepwaLer 307 307 377 557
Shallow waLer 507 507 377 557
Shallow waLer 100m 517 07
Land 707 707 707 807 707 807
DevelopmenL DeepwaLer 307 307 557 57
Shallow waLer 07 07 557 57
Shallow waLer 100m 37 707
Land 707 707 777 857 777 857
1he minimum naLional conLenL is 707 lor Lhe aucLioned blocks classilied as
inacLive marginal lields lor evaluaLion, rehabiliLaLion and producLion ol oil and
naLural gas.
Pepatriation oI capital
RepaLriaLion ol share capiLal is generally noL resLricLed il Lhe loreign invesLor
has regisLered iLs loreign direcL original invesLmenL and subsequenL capiLal
increases or capiLalizaLion ol earnings wiLh BACLN.
Brazil
54
RepaLriaLion ol capiLal may be accomplished by Lhe sale ol Lhe Brazilian shares
Lo a local residenL by a capiLal reducLion, redempLion ol shares or liquidaLion ol
Lhe Brazilian company. Commercial law conLains specilic rules on redempLion ol
shares and on companies repurchasing Lheir own shares.
Provisional Measure 472
Under Lhe Brazilian Federal ConsLiLuLion, Lhe Brazilian presidenL is allowed Lo
issue a Provisional Measure {MP) in case ol relevanL and urgenL maLLers.
Such insLrumenL has Lhe ellecL ol law and musL be submiLLed Lo Lhe Brazilian
Congress lor approval immediaLely alLer iLs issuance.
ll Lhe Brazilian Congress does noL examine an MP issued by Lhe presidenL wiLhin
^5 days lrom iLs publicaLion, all oLher legislaLive deliberaLions lrom Lhe
Congress {House ol RepresenLaLives or SenaLe, depending on where Lhe MP
has noL been examined) musL be posLponed unLil Lhe examinaLion ol such MP.
ll an MP is noL converLed inLo law wiLhin 60 days {exLendable lor 60 more
days) lrom iLs publicaLion, iL loses iLs ellecL. ll iL is converLed inLo law by Lhe
Brazilian Congress, iL is ellecLive lrom Lhe daLe ol lirsL publicaLion.
AL Lhe end ol December 2009, MP ^72 was issued by Lhe Brazilian presidenL.
Among oLher maLLers, such an MP {i) creaLed a new special regime lor Lhe
oil and gas indusLry {RLPLNLC), {ii) included Lhin capiLalizaLion rules in Lhe
Brazilian legislaLion and {iii) esLablished addiLional rules lor Lhe deducLion
ol paymenLs, direcL or indirecLly, Lo an individual or company residenL in
lowLax |urisdicLions or under a benelicial Lax regime. More deLails on Lhis
MP is lound below.
PEPENEC
RLPLNLC relaLes Lo inlrasLrucLure pro|ecLs in Lhe oil and gas indusLry approved
by Lhe Federal CovernmenL by 31 December 2010, which applicanL is
incorporaLed in Lhe norLh, norLheasLern and/or midwesLern regions ol Brazil.
ln summary, in Lhe evenL ol local sales or imporLaLion ol new machinery,
insLrumenLs and equipmenL, and ol consLrucLion maLerials lor use or
inLegraLion inLo inlrasLrucLure pro|ecLs classilied as lixed asseLs, RLPLNLC
provides lor Lhe suspension ol PlS, COFlNS, lPl and ll LhaL would oLherwise
apply. 1here is also suspension ol PlS and COFlNS on imporLaLion or acquisiLion
ol local services lor Lhese pro|ecLs.
Thin capitalization
1hin capiLalizaLion rules were inLroduced inLo Lhe Brazilian corporaLe income
Lax sysLem Lo apply Lo inbound and/or ouLbound LransacLions perlormed eiLher
wiLh relaLed parLies or wiLh unrelaLed parLies residenL in |urisdicLions classilied
as lowLax |urisdicLions or |urisdicLions under a benelicial Lax regime.
Under Lhe new rules, irrespecLive ol wheLher Lhe inLercompany loans are
complianL wiLh Lhe general rules governing Lhe deducLion ol expenses and
Brazilian Lransler pricing rules, inLeresL expenses arising lrom linancing
arrangemenLs execuLed wiLh a relaLed parLy are only deducLible il Lhe relaLed
Brazilian borrower does noL have a debLLoequiLy raLio greaLer Lhan 2:1.
Any excess inLeresL is noL deducLible lor corporaLe income Lax purposes.
AddiLionally, inLeresL expenses deriving lrom linancing arrangemenLs execuLed
wiLh a conLracLing parLy esLablished in a lowLax |urisdicLion or under a
benelicial Lax regime, irrespecLive ol wheLher relaLed or noL Lo Lhe Brazilian
borrower, is only deducLible il Lhe debLLoequiLy raLio ol Lhe Brazilian borrower
does noL exceed 0.3:1.
According Lo Lhe Brazilian Federal ConsLiLuLion, Lhese rules will become
ellecLive: {i) as lrom 1 January 2011, lor corporaLe income Lax purposes; and
{ii) 90 days alLer iLs publicaLion in Lhe Cff|c|a| Cazette, lor social conLribuLion
Lax on corporaLe neL proliL purposes.
Brazil
55
Deduction oI payments to an individual or company resident in a
lowtax iurisdiction or under a beneIicial tax regime
Any paymenL made, direcL or indirecLly, Lo an individual or company residenL
in a lowLax |urisdicLion or under a benelicial Lax regime is noL deducLible lor
income Lax purposes, unless Lhe lollowing requiremenLs are meL:
ldenLilicaLion ol Lhe ellecLive beneliciary ol Lhe income
Lvidence ol Lhe operaLing capaciLy ol Lhe recipienL
SupporLing documenLaLion regarding Lhe price paid lor righLs, goods
and services
FurLher, iL is also esLablished LhaL Lhe ellecLive beneliciaries will be deemed Lo
be Lhose enLiLies, Lo which Lhe income can be aLLribuLable, noL creaLed wiLh Lhe
sole purpose ol avoiding Laxes.
Production sharing contracts 1P5C)
AlLer signilicanL debaLe, Lhe Brazilian Congress is currenLly examining
LegislaLive Bill No. 5938/09, which inLroduces subsLanLial changes in Lhe
oil and gas exploraLion and producLion regimes aL Lhe presalL and oLher
sLraLegic areas.
ln summary, Lhe Brazilian NaLional Oil Company {PeLrleo Brasileiro S.A.
PL1ROBRAS) would have, aL leasL, a 307 parLicipaLion in Lhe exploraLion areas
and iL would necessarily be Lhe leader ol Lhe consorLium esLablished lor such
exploraLion. PL1ROBRAS, under cerLain circumsLances, could also be direcLly
hired Lo explore and produce Lhe remaining 707 or iL could be ollered Lo oLher
oil companies under a bid process, in which PL1ROBRAS could also parLicipaLe
in equal condiLions.
1he consorLium Lo explore and produce oil and gas in Lhese sLraLegic areas
would be seL up among:
A CovernmenLowned company named Lmpresa Brasileira de PeLrleo e Cs
NaLural S.A. "PeLroSal," Lo be incorporaLed wiLh Lhe specilic purpose ol
managing Lhe PSC
PeLrobras
ll applicable, Lhe bid winner
PeLrobras and, when applicable, Lhe bid winner will be responsible lor all
cosLs and invesLmenLs lor Lhe execuLion ol Lhe PSC and, in Lhe case ol success,
PeLrobras and, when applicable, Lhe bid winner would be reimbursed lor Lheir
cosLs and invesLmenLs and share Lhe oil proliLs {Lhe dillerence beLween Lhe
LoLal oil produced and Lhe cosL ol oil) wiLh Lhe Brazilian CovernmenL. Up Lo
Lhe Lime Lhis guide was wriLLen, Lhe LegislaLive Bill No. 5938/09 had noL been
approved by Lhe Brazilian Congress and, Lherelore, amendmenLs/deleLions
are sLill possible.
Brazil
5
Camercun
Country code 237
Yacund CMT +1
Ernst & Ycunc
Tcur Ece
11 Avenue de I'arche
Paris
92037
France
TeI +33 10)1 4 93 0 00
DiI and cas ccntacts
Jcseph Paccp Ncupcue
J]ka\]flafHYjak!
TeI +33 10)1 55 1 1 3
jcseph.paccp.ncupcueey-avccats.ccm
Eric Tasi Ndjcdc
J]ka\]flafHYjak!
TeI +33 10)1 55 1 12 07
eric.tasi.ndjcdcey-avccats.ccm
A. At a glance
Fiscal regime
Cameroun's liscal regime applicable Lo Lhe upsLream peLroleum indusLry
consisLs ol Lhe Cameroun's 1ax Code, Lhe Cameroun's PeLroleum Code and
Lhe producLion sharing conLracLs {PSC) or Concession AgreemenL {CA)
concluded beLween Lhe CovernmenL ol Cameroun and Lhe conLracLor.
1he main Laxes applicable in Lhis secLor are Lhe lollowing:
CorporaLe Lax
Annual surlace renL
RoyalLy on Lhe producLion
AddiLional peLroleum Lax
Poyalties 1only applicable to the holders oI a CA)
1he Laxable basis and Lhe Lax raLe ol Lhe royalLy is provided by Lhe
Concession ConLracL.
RoyalLies should be paid on a monLhly basis.
Bonuses
Lump sum in USS Lo be paid on Lhe ellecLive daLe ol signaLure
Lump sum in USS Lo be paid aL Lhe sLarL ol Lhe producLion ol hydrocarbon
Lump sum in USS Lo be paid when Lhe cumulaLive amounL ol producLion
since Lhe sLarL ol Lhe exploiLaLion phase reaches a cap {as provided
by Lhe PSC)
P5C
1he sLaLe has an opLion Lo parLicipaLe direcLly or indirecLly Lhrough a public
enLiLy Lo Lhe JoinL VenLure AgreemenL wiLh Lhe ConsorLium. Usually, Lhis
parLicipaLion cannoL be lower Lhan 57 or higher Lhan 257.
1he sLaLe share should be equal Lo a percenLage ol Lhe producLion as reduced
by Lhe recovery ol Lhe peLroleum cosLs by Lhe conLracLor; i.e., proliL oil.
1his share will vary in accordance wiLh Lhe daily average ol Lhe LoLal
available producLion.
Income tax rate
lncome Lax raLe is provided by Lhe PSC. lL may vary lrom 38.57 up Lo a
maximum ol 507.
5urIace rent tax 1only applicable to the holders oI a P5C)
An annual surlace renL Lax is levied in Cameroun.
Cameroun
57
1his Lax is paid in cash and per compleLe calendar year belore 31 January, on
Lhe basis ol Lhe surlace area on Lhe 1 January each year and, lor Lhe lirsL year,
on Lhe surlace area on Lhe ellecLive daLe.
1he amounLs ol such Lax are Lhe lollowing:
1he lirsL year 1750 XAF/m
1he second year 2000 XAF/m
1he Lhird year 3500 XAF/m
1he lollowing years 5500 XAF/m
Capital allowances
7

Investment incentives
8

B. Fiscal regime
Corporate tax
CorporaLe Lax is levied on Lhe Laxable proliLs ol Lhe conLracLor.
1axable proliL amounLs Lo neL proliLs arising lrom all upsLream acLiviLies carried
ouL in Cameroun during Lhe Laxable period.
NeL proliLs is made ol Lhe dillerence beLween Lhe value ol Lhe opening and
closing balances ol Lhe neL asseLs in Lhe relevanL year ol assessmenL, less
exLra conLribuLions, plus any amounLs Laken by associaLed companies during
said period.
1he neL proliL is compuLed alLer deducLion ol all expenses which are necessary
Lo perlorm upsLream operaLions and supporLed by relevanL invoices and
depreciaLion, reserves and losses Lo some exLenL.
1he paymenL ol Lhe corporaLe income Lax is made in cash, excepL il Lhe sLaLe
expressly asks lor iLs remiLLance on a quanLiLy ol hydrocarbon corresponding Lo
Lhe amounL ol said Lax.
LxcepL il oLherwise provided by Lhe PSC, Lhe paymenL ol Lhe corporaLe income
Lax is due under Lhe provisions ol Lhe general Lax code, i.e., monLhly advance
paymenL ol 1.17 ol Lhe Lurnover ol Lhe previous monLh. 1he remaining balance
is due belore 15 March.
1he Cameroun Lax code does noL provide LhaL Lhe proliL lrom one pro|ecL can
be ollseL againsL Lhe losses lrom anoLher pro|ecL held by Lhe same Lax enLiLy.
Accordingly, Lhe peLroleum operaLions should be separaLely accounLed.
Comment on characteristics oI P5C or CA
1he PSC and CA are concluded beLween Lhe conLracLor and Lhe CovernmenL ol
Cameroun and are signed by Lhe minisLer in charge ol peLroleum acLiviLies alLer
Lhe approval ol Lhe minisLer ol linance.
1hey are approved by Lhe presidenL ol Brazil, published in Lhe ollicial |ournal,
and regisLered in accordance wiLh Lhe condiLions provided by Lhe law.
Covernment share oI proIit oil
1he remaining producLion alLer deducLion ol oil cosLs is shared beLween
Lhe sLaLe and Lhe conLracLor according Lo Lhe value ol Lhe raLio "R" delined
as lollows:
Value oI "P" Covernment share Contractor share
Less Lhan 1 ..........7 ..........7
From 1 Lo 2 ..........7 ..........7
From 2 Lo 3 ..........7 ..........7
Over 3 ..........7 ..........7
7 See Sect|on C.
8 See Sect|on 0.
Cameroun
58 Cameroun
"R" is Lhe raLio "neL cumulaLed revenue" over "cumulaLed invesLmenLs" which
are deLermined in accordance wiLh Lhe cumulaLed amounLs lrom Lhe ellecLive
daLe unLil Lhe end ol Lhe civil year.
"NeL cumulaLed revenue " is Lhe LoLal amounL ol Lhe beneliL alLer Lhe
assessmenL ol Lhe corporaLion Lax
"CumulaLed invesLmenLs" is Lhe LoLal amounL ol Lhe expendiLure ol
research, evaluaLion and developmenL
Nonrecoverable expenditures
Nonrecoverable expendiLures are noL recoverable, Lhe paymenLs made lor
Lhe seLLlemenL ol lees, charges or expenses noL direcLly chargeable Lo Lhe
peLroleum operaLions or noL necessary lor Lhe needs ol said operaLions.
1hese are, lor insLance, paymenLs made lor:
SignaLure bonus
CosLs perLaining Lo Lhe period prior Lo Lhe ellecLive daLe
LxLernal audiLing cosLs paid by Lhe conLracLor wiLhin Lhe lramework ol Lhe
parLicular relaLionship beLween Lhe companies consLiLuLing Lhe conLracLor
PenalLies
Determination oI costs oil
CosLs oil are all expenses borne by Lhe conLracLor in Lhe lramework ol Lhe PSC
and deLermined in accordance wiLh Lhe accounLing proceedings.
Annual surIace rent
1he paymenL ol an annual surlace renL is due as ol Lhe signaLure ol Lhe PSC
or service conLracL. Based on an example ol a PSC, Lhe annual surlace renL is
deLermined as lollows:
1he lirsL year 1750 XAF/m
1he second year 2000 XAF/m
1he Lhird year 3500 XAF/m
1he lollowing years 5500 XAF/m
1his Lax is paid in cash and per compleLe calendar year belore 31 January,
on Lhe basis ol Lhe surlace area on 1 January each year and, lor Lhe lirsL year,
on Lhe surlace area on Lhe ellecLive daLe.
Poyalty regimes and additional petroleum tax
ConLracLors under a CA are sub|ecL Lo Lhe paymenL ol a monLhly royalLy on Lhe
FOB value ol Lhe hydrocarbons produced, Lo be paid in cash or in kind, aL Lhe
sLaLe's opLion. 1he raLe, condiLions ol calculaLion, declaraLion, liquidaLion and
recovery ol Lhis royalLy are specilied in Lhe CA.
ConLracLors can be sub|ecL Lo an addiLional peLroleum Lax LhaL is calculaLed
according Lo a criLerion ol proliLabiliLy ol Lhe peLroleum operaLions. 1he raLe,
condiLions ol calculaLion, declaraLion, liquidaLion and recovery ol Lhis addiLional
Lax are specilied in Lhe CA.
C. Capital allowances
Land and inLangible asseLs are noL depreciable lor Lax purposes. OLher lixed
asseLs may be depreciaLed using Lhe sLraighLline meLhod aL raLes provided by Lhe
PSC and Lhe Lax code. 1he lollowing are some ol Lhe applicable sLraighLline raLes.
Asset Pate 17)
Buildings 5 Lo 20
PlanL and machinery and LransporL equipmenL 7.5 Lo 33
Ollice equipmenL 10 Lo 20
59 Cameroun
D. Incentives
Ability to carry losses
Losses may be carried lorward lour years. Losses may noL be carried back.
VAT incentives
1he supply ol goods and services ol all kind which are direcLly linked Lo
peLroleum operaLions are exempLed lrom VA1.
ConLracLors' suppliers, subconLracLors, services providers and alliliaLes are also
exempLed lrom VA1 oLherwise due on accounL ol sales made, services rendered
and work perlormed in Lhe lrame ol Lhe conLracL.
E. Withholding taxes
Dividends
Dividends paid by a company incorporaLed in Cameroun Lo a nonresidenL are
exempLed lrom LaxaLion on dividend as provided by Lhe PeLroleum Code.
Interests
A 16.57 wiLhholding Lax is imposed on inLeresL paid on debL claims, bank
deposiLs and guaranLees Lo corporaLions LhaL do noL have Lheir head ollice
in Cameroun or Lo nonresidenL individuals.
Poyalties
A wiLhholding Lax will be levied on remuneraLion paid Lo loreign companies or
individuals providing services Lo Lhe local company il Lhe services are used in
Cameroun and il Lhe loreigners have no prolessional insLallaLion in Cameroun.
1he raLe ol Lhe Lax is 157 ol Lhe gross amounL.
Branch remittance tax
LxcepL il oLherwise provided by inLernaLional Lax LreaLies, Lhe proliLs made
by Lhe companies which do noL have Lheir head ollice in Cameroun are deemed
disLribuLed Lo loreigners {individual or company) which are noL residenL or do
noL have Lheir head ollice in Cameroun. However, under Lhe PeLroleum Code,
Lhe conLracLors are exempL lrom any Lax on proliLs or income disLribuLed.
F. Financing considerations
Thin capitalization limits
lnLeresL paid Lo Lhe parLners lor lunds made available Lo Lhe company, in
addiLion Lo Lheir capiLal conLribuLions, no maLLer Lhe lorm ol Lhe company,
will be deducLible wiLhin Lhe limiLs ol Lwo poinLs above Lhe advance raLe ol
Lhe cenLral bank.
C. Transactions
Asset disposals
1he PSC may be LerminaLed il all Lhe asseLs are Lranslerred.
lncome realized Lhrough Lhe Lransler ol cerLain classes ol asseL ol Lhe holder
are regisLered Lo Lhe crediL ol Lhe accounL ol oil cosLs Lo be recovered.
CapiLal gains are Laxed aL Lhe regular corporaLe raLe which may vary lrom
38.57 up Lo a maximum ol 507. 1he Lax, however, can be delerred in Lhe
evenL ol a merger.
ll Lhe business is LoLally or parLially Lranslerred or disconLinued, only onehall
ol Lhe neL capiLal gains is Laxed il Lhe evenL occurs less Lhan live years alLer Lhe
sLarLup or purchase ol Lhe business, and only oneLhird ol Lhe gains is Laxed il
Lhe evenL occurs live years or more alLer Lhe business is begun or purchased.
1he regisLraLion lees Lo be paid are as lollow:
1ransler ol exploraLion permiL: XAF6 million
1ransler ol exploiLaLion permiL: XAF250 million
0
H. Indirect taxes
Import duties
Provisions on cusLoms duLies are idenLical lor mosL conLracLs {PSC or CA).
1hey usually provide LhaL Lhe person designaLed as a conLracLor, as well as
Lheir subconLracLors, are allowed Lo imporL inLo Cameroun any goods,
maLerials, machinery, equipmenL and consumer goods, which are necessary
Lo carry ouL qualilying operaLions, in iLs own name or in Lhe name ol iLs
subconLracLors, as lollows:
1he conLracLor or Lhird parLies acLing on Lheir behall or Lheir subconLracLors
may imporL wiLhouL resLricLion all maLerials, producLs, machinery,
equipmenL and Lools under regulaLions ol 1emporary Admission {A1) or
1emporary lmporLs {l1), eiLher normal or special, on condiLion LhaL Lhese
goods are Lo be used exclusively lor qualilying operaLions and LhaL Lhey can
be reexporLed aL Lhe end ol Lheir use
1he conLracLor or Lhird parLies acLing on Lheir behall or Lheir subconLracLors
are allowed Lo imporL wiLhouL paymenL ol duLy maLerials, producLs,
machinery, equipmenL and Lools Lo be used exclusively lor oil prospecLing
and exploraLion in Lhe specilied area, which are lisLed in Annex ol AcL
Number 2/92UDLAC556 daLed 30 April 1992
1he conLracLor or Lhird parLies acLing on Lheir behall or Lheir subconLracLors
could be granLed permission by Lhe MinisLry ol Lconomy and Finance Lo
imporL aL a reduced raLe ol duLy ol 57 maLerials, producLs, machinery, Lools
and equipmenL which, alLhough Lhey do noL qualily lor Lhe above criLeria,
are necessary and required lor producLion, sLorage, LreaLmenL, LransporL,
shipmenL and LranslormaLion ol hydrocarbons
Export duties
1here is no exporL duLy applicable.
VAT
1he supply ol goods and services ol all kind which are direcLly linked Lo
peLroleum operaLions are exempL lrom VA1.
Ancillary acLiviLies which are noL linked Lo peLroleum operaLions will be sub|ecL
Lo VA1 aL a raLe ol 19.257.
5tamp duties
SLamp duLies can be applicable in respecL ol Lhe regisLraLion ol Lhe dillerenL
conLracLs concluded by an oil company.
Pegistration Iees
RegisLraLion lees depend on Lhe Lype ol Lhe agreemenL concluded.
I. Cther
Exchange controls
1he Lconomic and MoneLary CommuniLy ol CenLral Alrica CounLries {CLMAC)
AcL, daLed 29 April 2000, provides exchangeconLrol regulaLions, which
apply Lo linancial Lranslers ouLside Lhe lranc zone, which is a moneLary zone
including France and mosLly Frenchspeaking Alrican counLries. However, lor
Lhe duraLion ol Lhe PSC, Cameroun auLhoriLies provide cerLain guaranLees Lo
Lhe conLracLor lor Lhe operaLions carried ouL wiLhin Lhe lramework ol Lhe PSC
or CA, especially:
1he righL Lo open a local or loreign bank accounL in local or loreign currencies
1he righL Lo collecL and mainLain ollshore all Lhe lunds acquired or borrowed
abroad, including Lhe receipLs lrom sales, and Lo lreely dispose Lhereol,
limiLed Lo Lhe amounLs LhaL exceed Lhe requiremenLs ol Lheir operaLions
in Cameroun
1he righL Lo repaLriaLe Lhe capiLals invesLed under Lhe PSC and Lo Lransler
Lheir proceeds; in parLicular, inLeresLs and dividends
1he righL Lo ollshore paymenL ol nonresidenL suppliers
Cameroun
1
Canada
Country code 1
CaIcary CMT -7
Ernst & Ycunc
1000, 440 Seccnd Avenue S.W.
CaIcary
AIberta
T2P 5E9
Canada
TeI 403 290 4100
Fax 403 290 425
DiI and cas ccntacts
Dave Van Dyke
TeI 403 20 5177
dave.vandykeca.ey.ccm
Jchn Chan
TeI 403 20 5343
jchn.a.chanca.ey.ccm
BiII Brebber
TeI 403 20 5175
biII.a.brebberca.ey.ccm
Jan Pedder
TeI 403 20 5305
jan.s.pedderca.ey.ccm
AIycia CaIvert
TeI 403 20 537
aIycia.I.caIvertca.ey.ccm
A. At a glance
Fiscal regime
1he liscal regime LhaL applies Lo Lhe oil and gas indusLry in Canada consisLs ol a
combinaLion ol royalLies and income LaxaLion.
RoyalLies Crown royalLies 107 Lo ^57, special regime lor oil
sands producLion
Freehold royalLies and gross overriding royalLies vary
lrom lease Lo lease
lncome Lax raLe Federal corporaLe Lax is 187, 16.507 in 2011 and 157 in
2012 lor income sub|ecL Lo Lax in a province
Provincial corporaLe Lax 107 Lo 167
lnvesLmenL lC R&D
9
207
B. Fiscal regime
Corporate tax
For Canadian income Lax purposes, a corporaLion's worldwide Laxable
income is compuLed in accordance wiLh Lhe common principles ol business
{or accounLing) pracLice, modilied by cerLain sLaLuLory provisions in Lhe
Canadian lncome 1ax AcL. ln general, no special Lax regime applies Lo oil
and gas producers.
DepreciaLion, depleLion or amorLizaLion recorded lor linancial sLaLemenL
purposes is noL deducLible; raLher, LaxdeducLible capiLal allowances specilied
in Lhe lncome 1ax AcL are allowed.
Oil and gas corporaLions are Laxed aL Lhe same raLe as oLher corporaLions.
CorporaLions are Laxed by Lhe lederal CovernmenL and by one or more
provinces or LerriLories. 1he basic raLe ol lederal corporaLe Lax is 28.007,
10

buL iL is lurLher reduced Lo 18.007 by an abaLemenL ol 107 on a corporaLion's
Laxable income earned in a province or LerriLory. Provincial and LerriLorial Lax
raLes are added Lo Lhe lederal Lax and Lhey generally vary beLween 107 and
167 ol Laxable income.
9 |C: |nvestment crec|t, P80.
10 1ne 2010 cenera| fecera| cororate tax rate |s 28.00x :oefore aoatement;.
|t |s furtner recucec to 2.50x |n 2011 anc 25x for 2012 anc onwarc.
Canada
2
No Lax consolidaLion, group reliel or proliL Lransler sysLem applies in Canada.
Lach corporaLion compuLes and pays Lax on a separaLe legal enLiLy basis.
Business losses or noncapiLal losses may be carried backward 3 years and
lorward 20 years.
Cains resulLing lrom a disposal ol capiLal properLy are sub|ecL Lo Lax. CapiLal
gains or losses are deLermined by deducLing Lhe ad|usLed cosL base ol an asseL
lrom Lhe proceeds ol disposiLion. For corporaLe Laxpayers, onehall ol Lhe
capiLal gain {Laxable capiLal gain) is Laxed aL normal income Lax raLes.
CapiLal losses are exclusively deducLible againsL capiLal gains and noL againsL
oLher Laxable income. However, noncapiLal losses are deducLible againsL
Laxable capiLal gains, which are included in Laxable income. CapiLal losses can
be carried lorward indeliniLely lor use in luLure years, provided an acquisiLion
ol conLrol has noL occurred.
Oil and gas righLs are noL capiLal properLies.
Poyalties
Oil and gas producers are required Lo make royalLy paymenLs Lo Lhe holder
ol Lhe mineral righLs. ln Canada, Lhe ma|oriLy ol Lhe mineral righLs are owned
by Lhe crown {Lhe CovernmenL). RoyalLy paymenLs Lo Lhe CovernmenL are
relerred Lo as "crown royalLies." 1he compuLaLion ol crown royalLies is very
complex and iL varies lrom province Lo province because each province or
LerriLory has iLs own royalLy regime. ln general, compuLaLions are based on a
luncLion ol producLiviLy and Lhe wellhead price. Crown royalLy raLes Lypically
range lrom 107 Lo ^57. Special Lax and royalLy regimes apply Lo oil sands
pro|ecLs and ArcLic and ALlanLic ollshore producLion.
RoyalLies paid on mineral righLs LhaL are noL held by Lhe CovernmenL are called
"lreehold royalLies." 1hese royalLies are Lypically based on producLion and Lhe
royalLy percenLage varies according Lo Lhe lreehold lease. Because Lhe crown
does noL receive royalLies on lreehold leases, "lreehold mineral Laxes" are
levied by Lhe crown on lreehold leases and Lhe Lax is based on producLion.
RoyalLies LhaL are noL paid Lo a lreehold owner or Lhe crown are considered Lo
be gross overriding royalLies {CORR). 1hese royalLies are Lypically based on
producLion revenue.
RoyalLies are generally deducLible in deLermining Laxable income.
C. Capital allowances
Cil and gas rights
1he cosL ol oil and gas righLs is accumulaLed in a pool called Canadian Oil and
Cas ProperLy Lxpense {COCPL). Lach year, Lhe pool is increased by Lhe cosL
ol Lhe new acquisiLions and reduced by Lhe proceeds ol Lhe disposiLion ol oil
and gas righLs and by deducLions claimed lrom Lhe pool. COCPL does noL
include Lhe cosL ol any Langible or depreciable properLy, such as oil and gas
machinery or equipmenL.
DeducLions in compuLing income lor income Lax purposes lor a LaxaLion year
may be claimed up Lo a maximum amounL ol 107 ol Lhe unclaimed COCPL
balance. 1he deducLion is discreLionary, and unclaimed COCPL may be carried
lorward indeliniLely Lo be claimed in luLure years.
Cil and gas exploration
1he cosLs incurred Lo deLermine Lhe exisLence, exLenL and locaLion ol oil and
gas {such as seismic, geological, geophysical and geochemical expenses)
and Lhe cosL ol drilling a well LhaL resulLs in Lhe discovery ol a new oil and gas
reservoir, are accumulaLed in a pool called Lhe Canadian LxploraLion Lxpense
{CLL). Lach year, Lhe CLL pool is increased by Lhe new expendiLures and
reduced by Lhe proceeds ol Lhe disposiLion and by Lhe deducLions claimed lrom
Lhe pool. CLL does noL include Lhe cosL ol any Langible or depreciable properLy,
such as oil and gas well machinery or equipmenL.
Canada
3
DeducLions in compuLing income lor income Lax purposes lor a LaxaLion year
may be claimed up Lo a maximum amounL ol 1007 ol Lhe unclaimed CLL
balance. 1he deducLion is discreLionary, and unclaimed CLL may be carried
lorward indeliniLely Lo be claimed in luLure years. A corporaLion LhaL carries
on an oil and gas business cannoL claim a CLL deducLion in a LaxaLion year il
Lhe deducLion would creaLe or increase a loss lor Lax purposes lor LhaL year.
Cil and gas development
1he cosLs incurred Lo drill and compleLe an oil and gas well lor Lhe producLion
ol oil and gas are accumulaLed in a pool called Lhe Canadian DevelopmenL
Lxpense {CDL). Lach year, Lhe CDL pool is increased by new drilling and
compleLion expendiLures and reduced by deducLions claimed lrom Lhe pool.
1he CDL does noL include Lhe cosL ol any Langible or depreciable properLy,
such as oil and gas well machinery or equipmenL.
DeducLions in compuLing income lor income Lax purposes lor a LaxaLion year
may be claimed Lo a maximum amounL ol 307 ol Lhe unclaimed CDL balance.
1he deducLion is discreLionary, and Lhe unclaimed CDL may be carried lorward
indeliniLely Lo be claimed in luLure years.
Foreign exploration and development
1he cosLs incurred Lo acquire loreign oil and gas righLs and Lhe expenses
incurred Lo explore or develop a loreign oil and gas properLy are accumulaLed in
a pool called Lhe Foreign Resource Lxpense {FRL). A separaLe FRL pool musL
be mainLained lor all FRL expendiLures lor each individual counLry. FRL does
noL include Lhe cosL ol any Langible or depreciable properLy, such as oil and gas
well machinery or equipmenL.
A corporaLion LhaL carries on an oil and gas business is permiLLed Lo claim a
minimum 107 FRL deducLion in a LaxaLion year, regardless ol wheLher iL has
any income lrom Lhe loreign resource properLy lor Lhe year. 1he deducLion lor
a parLicular LaxaLion year may be increased Lo Lhe lesser ol 307 ol Lhe FRL pool
lor a parLicular counLry or Lhe income lor Lhe year lrom Lhe loreign resource
properLy in LhaL counLry. Unclaimed FRL may be carried lorward indeliniLely Lo
be claimed in luLure years.
Well equipment
1he acquisiLion cosL lor oil and gas well equipmenL used lor exploraLion,
developmenL and producLion ol oil and gas is accumulaLed in a pool
called Class ^1.
Lach year, Lhe Class ^1 pool is increased by Lhe cosL ol Lhe acquisiLion ol oil and
gas well equipmenL. lL is reduced by deducLions claimed lrom Lhe pool {capiLal
cosL allowances) and by Lhe proceeds ol disposiLion {up Lo Lhe original cosL) ol
Lhe oil and gas machinery or equipmenL LhaL was previously added Lo Lhe pool.
DeducLions in compuLing income lor income Lax purposes lor a LaxaLion year
may be claimed up Lo a maximum amounL ol 257 on Lhe unclaimed Class ^1
balance. 1he deducLion is discreLionary and Lhe unclaimed Class ^1 pool may
be carried lorward indeliniLely Lo be claimed in luLure years. Only onehall ol
Lhe normal 257 deducLion is allowed in respecL ol Lhe neL addiLions in Lhe
year. Special availableloruse rules deLermine when Lhe cosL ol oil and gas
equipmenL is lirsL available lor Lhe purposes ol claiming a deducLion.
D. Incentives
Atlantic investment tax credits 1ITC)
Federal income Lax payable may be reduced by an l1C ol 107 ol Lhe qualilying
expendiLures in Lhe Canadian ALlanLic {including Lhe ollshore area Lo Lhe
Canadian ALlanLic).
Oualilying expendiLures include, among oLher Lhings, Lhe acquisiLion
ol machinery, equipmenL and buildings primarily lor use in oil and gas
exploraLion or producLion.
Canada
4
Unused l1C may be carried lorward lor up Lo 20 years or backward lor up Lo
3 years Lo reduce Lhe lederal income Laxes payable lor Lhose years.
1he ellecL ol Lhe l1C is a reducLion in Lhe amounL ol income Lax payable, as
well as a reducLion in Lhe cosL ol machinery, equipmenL or buildings, Lhereby
reducing Lhe amounL ol Lhe cosL available lor Lhe capiLal cosL allowance.
5cientiIic research and experimental development 15P&ED)
SR&LD generally relers Lo sysLemaLic invesLigaLion or research carried ouL in a
lield ol science or Lechnology by means ol experimenL or analysis.
1he LreaLmenL ol SR&LD expendiLures has Lhe lollowing special leaLures:
CurrenL and capiLal expendiLures are accumulaLed in a special pool LhaL can
be deducLed aL a raLe ol 1007 in Lhe currenL year or in any subsequenL year.
No Lime limiL applies lor deducLibiliLy ol Lhese amounLs
SR&LD expendiLures are also eligible lor lederal l1Cs ol 207. For qualilying
Canadian conLrolled privaLe corporaLions {CCPCs), Lhe 207 raLe is
increased Lo 357 on up Lo CS3 million ol annual SR&LD expendiLures
ll Lhese expendiLures are carried ouL in Lhe course ol carrying on an oil and gas
business in Canada, Lhey are deducLible when compuLing Lhe income lrom LhaL
oil and gas business lor income Lax purposes.
Cenerally, SR&LD l1Cs are used Lo ollseL Laxes oLherwise payable.
Unused SR&LD l1Cs may be carried backward lor up Lo 3 years and lorward lor
up Lo 20 years. Some or all ol Lhe l1Cs earned by a qualilying CCPC in a year
LhaL are noL required Lo ollseL Laxes oLherwise payable may be relundable.
ln addiLion Lo Lhe lederal SR&LD l1Cs, mosL provinces oller similar incenLives
on currenL and capiLal expendiLures wiLh l1C raLes varying lrom 107 Lo 207,
and in many cases Lhe l1Cs noL required Lo ollseL Laxes oLherwise payable are
relundable. 1he province ol Ouebec provides lor a 17.57 l1C on SR&LD wages
and a porLion ol Lhe amounL paid Lo subconLracLors lor qualilying work, wiLh an
enhanced 357 l1C raLe lor qualilying CCPCs on up Lo CS3 million ol annual
SR&LD expendiLures.
E. Withholding taxes
Under Lhe lncome 1ax AcL, wiLhholding Lax is imposed aL a raLe ol 257 on
inLeresL, dividends, royalLies and cerLain oLher paymenLs; however, such raLes
may be reduced under a Lax LreaLy.
Interest
lnLeresL paid Lo arm's lengLh, nonresidenL persons is exempL lrom wiLhholding
Lax {oLher Lhan in respecL ol parLicipaLing debL). lnLeresL paid Lo nonarm's
lengLh nonresidenL persons is sub|ecL Lo 257 wiLhholding Lax, unless Lhe raLe is
reduced by an applicable LreaLy. Cenerally, Lhe reduced LreaLy raLe is eiLher 107
or 157. 1he CanadaUS lncome 1ax ConvenLion provides lor a 07 wiLhholding
Lax raLe lor inLeresL paid Lo nonarm's lengLh US residenLs.
Dividends
Dividends paid Lo nonresidenLs are sub|ecL Lo 257 wiLhholding Lax, unless Lhe
raLe is reduced by an applicable LreaLy. Cenerally, Lhe reduced LreaLy raLe is
157. ll Lhe nonresidenL shareholder is a corporaLion LhaL has a subsLanLial
inLeresL in Lhe payer {usually delined as 107 ol Lhe voLes), Lhe dividend
wiLhholding Lax raLe is reduced Lo eiLher 57 or 107, depending on Lhe
applicable LreaLy.
Cil and gas royalties
Oil and gas royalLies paid are generally sub|ecL Lo 257 wiLhholding Lax.
Branch remittance tax
ln general, repaLriaLed branch proliLs {i.e., alLerLax income sub|ecL Lo an
allowance lor invesLmenL in Canadian properLy) are sub|ecL Lo an addiLional
257 Lax. ll a nonresidenL corporaLion LhaL carries on business in Canada is
Canada
5 Canada
residenL in a LreaLy counLry, in mosL cases, Lhe branch proliLs Lax raLe is
reduced by Lhe applicable LreaLy Lo eiLher 57 or 107.
F. Financing considerations
lnLeresL expense is generally deducLible provided LhaL Lhe inLeresL is a
reasonable amounL and iL is incurred pursuanL Lo a legal obligaLion Lo pay
inLeresL on borrowed money or on an amounL payable lor properLy, and iL is
used lor Lhe purpose ol earning income lrom a business or properLy. Canadian
Lransler pricing rules apply Lo Lhe inLeresL raLe on a debL owed Lo a nonarm's
lengLh nonresidenL.
Canada has Lhin capiLalizaLion rules LhaL can disallow a deducLion lor inLeresL
payable by a Canadian corporaLion on debLs owed Lo "specilied nonresidenLs."
1hese rules generally disallow a deducLion lor inLeresL on Lhe porLion ol Lhe
allecLed debL LhaL exceeds Lwo Limes Lhe corporaLion's equiLy. 1he calculaLion
is deLermined using Lhe monLhly average ol Lhe greaLesL amounL ol Lhe debLs
ouLsLanding aL any Lime in each calendar monLh in Lhe relevanL LaxaLion year.
A corporaLion's equiLy lor Lhis purpose is basically Lhe aggregaLe ol iLs reLained
earnings aL Lhe beginning ol Lhe year and Lhe monLhly average ol each ol iLs
conLribuLed surplus and paidup capiLal in respecL ol shares owned by specilied
nonresidenLs aL Lhe beginning ol each calendar monLh.
Cenerally, il Lhe debL is noL denominaLed in Canadian dollars, Lhere may be Lax
consequences lor Lhe borrower lrom any loreign exchange llucLuaLions {e.g.,
a gain or loss on Lhe repaymenL ol Lhe principal amounL ol Lhe debL).
C. Transactions
MosL LransacLions in Canada involve Lhe acquisiLion ol shares ol a corporaLion
or inLeresLs in a parLnership, as opposed Lo a direcL acquisiLion ol operaLing
asseLs. 1his Lrend is generally driven by Lhe dillering Lax consequences ol each
Lype ol LransacLion lor Lhe vendor. On Lhe sale ol a capiLal properLy {such as
shares or parLnership inLeresLs), only onehall ol Lhe capiLal gain is included in
Laxable income in Canada. However, Lhe sale ol operaLing asseLs can give rise
Lo income, 1007 ol which is included in Laxable income in Canada and capiLal
gains {as discussed in lurLher deLail below). Having a mix ol income and capiLal
gains on a sale ol asseLs generally resulLs in a higher ellecLive Lax raLe arising
on an asseL sale Lhan on a sale ol capiLal properLy.
5hare acquisitions
1here are no sLamp duLies or similar Laxes payable in Canada on Lhe acquisiLion
ol shares.
Since Lhere are no Lax consolidaLion rules in Canada, mosL share acquisiLions
are compleLed using a specialpurpose Canadian acquisiLion company, which
is lormed by Lhe purchaser Lo acquire Lhe shares ol Lhe LargeL company.
1he purchaser capiLalizes Lhe acquisiLion company wiLh debL {sub|ecL Lo Lhe
Lhin capiLalizaLion resLricLions noLed above) and equiLy. SubsequenL Lo Lhe
acquisiLion ol Lhe shares ol Lhe LargeL company, Lhe acquisiLion company and
Lhe LargeL company are amalgamaLed. 1he purpose ol Lhe amalgamaLion is Lo
ensure LhaL Lhe inLeresL expense paid on Lhe debL incurred by Lhe acquisiLion
company is deducLible againsL Lhe income ol Lhe LargeL company. Since Lhere
are no Lax consolidaLion rules in Canada, il Lhe amalgamaLion was noL
compleLed, Lhe inLeresL expense incurred by Lhe acquisiLion company would
noL be available Lo ollseL Lhe income ol Lhe LargeL company.
Cenerally, no rules allow lor a sLepup ol Lhe inside Lax basis ol Lhe asseLs ol
Lhe LargeL company upon acquisiLion ol Lhe LargeL company's shares. However,
when Lhe acquisiLion company and Lhe LargeL company amalgamaLe, an
opporLuniLy arises Lo sLep up Lo lair markeL value Lhe Lax cosL ol non
depreciable capiLal properLy owned by Lhe LargeL company aL Lhe daLe ol Lhe
acquisiLion {usually shares ol subsidiaries or parLnership inLeresLs), provided
LhaL cerLain qualilying condiLions are meL.
Shares in a privaLe corporaLion and any oLher shares noL lisLed on a designaLed
sLock exchange are Laxable Canadian properLy. 1he sale ol Lhis Lype ol share
Canada
can give rise Lo a Canadian income Lax liabiliLy lor a nonresidenL vendor.
1o ensure LhaL nonresidenLs pay any Laxes owed in respecL ol a sale ol Laxable
Canadian properLy, Lhe nonresidenL vendor musL provide Lhe purchaser wiLh
a cerLilicaLe issued by Lhe Lax auLhoriLies. 1he cerLilicaLe is granLed when
appropriaLe arrangemenLs are made Lo ensure paymenL ol any Lax liabiliLy.
ll Lhe cerLilicaLe is noL provided, Lhe purchaser musL wiLhhold and remiL Lo
Lhe Lax auLhoriLies 257 ol Lhe purchase price, wheLher or noL any Lax would
be payable by Lhe vendor on Lhe sale. lL is noL necessary Lo obLain a cerLilicaLe
wiLh respecL Lo shares LhaL are lisLed on a recognized sLock exchange.
Cenerally, lor disposiLions alLer 2008, a nonresidenL vendor will noL be
required Lo obLain a cerLilicaLe il iL holds shares lor which Lhe gain on such
shares is exempL lrom Canadian income Lax by virLue ol an income Lax LreaLy
{LreaLyproLecLed properLy).
ll a share purchase resulLs in an acquisiLion ol conLrol, cerLain Lax
consequences apply lor Lhe acquired company, including a deemed Lax year
end and resLricLions on Lhe availabiliLy ol Lax losses and Lhe deducLibiliLy ol
FRL, CLL, CDL and COCPL.
Asset acquisitions
Cenerally, no land Lransler Laxes are imposed on Lhe purchase ol oil and
gas asseLs.
1he allocaLion ol Lhe purchase price among Lhe various asseLs acquired has
Canadian Lax implicaLions lor boLh Lhe vendor and Lhe purchaser. For Lhe
vendor, Lhe manner in which Lhe purchase price is allocaLed may resulL in Lhe
recapLure ol capiLal cosL allowances claimed in prior years, Lhe realizaLion ol
income upon Lhe sale ol inLangible oil and gas righLs {see above) and, in some
cases, capiLal gains on Lhe sale ol capiLal properLy. For Lhe purchaser, Lhe value
aLLribuLed Lo Lhe various asseLs lorms Lhe cosL ol such asseLs. 1herelore, Lo
acceleraLe deducLions lrom Lhe Laxable income LhaL will be generaLed lrom Lhe
business in luLure years, Lhe purchaser may wish Lo allocaLe as much ol Lhe
purchase price as possible Lo depreciable properLy {in mosL cases, eligible lor
Class ^1, which is a 257 declining balance pool) raLher Lhan Lo oil and gas
righLs {in mosL cases, classilied as COCPL, a 107 declining balance pool).
1he allocaLion is a maLLer ol negoLiaLion beLween Lhe parLies, and Lhe values
aLLribuLed Lo Lhe asseLs should generally lorm parL ol Lhe purchase agreemenL.
MosL asseLs used by a nonresidenL vendor in a Canadian oil and gas business
are Laxable Canadian properLy and are usually noL LreaLyproLecLed properLy.
1herelore, in Lhese circumsLances, Lhe purchaser is generally required Lo
wiLhhold and remiL Lo Lhe Lax auLhoriLies 507 ol Lhe purchase price il Lhe non
residenL vendor does noL have a cerLilicaLe lrom Lhe Lax auLhoriLies auLhorizing
a lesser wiLhholding raLe.
H. Indirect taxes
C5T/harmonized sales tax 1H5T)
CS1/HS1 is a VA1 LhaL applies Lo mosL supplies ol goods and services made in
Canada. Supplies made in Lhe provinces ol Newloundland, New Brunswick and
Nova ScoLia are sub|ecL Lo HS1 aL a raLe ol 137; supplies made in all oLher parLs
ol Canada are sub|ecL Lo CS1 aL a raLe ol 57 and Lhe applicable provincial sales
Lax. NoLe LhaL lor supplies made on or alLer 1 July 2010 in OnLario or BriLish
Colombia, HS1 will apply aL a raLe ol 137 or 127 respecLively. 1he CS1/HS1 is
a mulLisLaged Lax, applying aL each poinL ol sale or lease. 1he HS1 raLe in Nova
ScoLia will increase Lo 157, ellecLive July 1, 2010.
CerLain supplies, such as goods sold lor subsequenL exporL and services
provided Lo nonresidenLs ol Canada, are zeroraLed. 1his means LhaL CS1
applies Lo Lhe LransacLion, buL aL a raLe ol 07. DocumenLaLion LhaL evidences
Lhe exporL, and in some siLuaLions a declaraLion leLLer provided by a CS1
regisLered exporLer, is required Lo supporL Lhe zeroraLing.
OLher goods and services are exempL lrom CS1, such as mosL supplies made by
chariLies and linancial services. Oil and gas businesses are noL Lypically involved
in making exempL supplies.
7 Canada
1he imporLaLion ol producLs and equipmenL inLo Canada is sub|ecL Lo
CS1, which is payable by Lhe imporLer ol record Lo Lhe Canada Border
Services Agency.
CS1/HS1 paid on purchases and imporLs is recoverable by a regisLranL LhaL
purchases Lhe goods or services lor use in commercial acLiviLies. Commercial
acLiviLies include business carried on by a regisLranL, oLher Lhan Lo Lhe exLenL Lo
which Lhe business involves making exempL supplies. Oil and gas businesses are
Lypically engaged in commercial acLiviLies.
A nonresidenL is required Lo regisLer lor CS1 il iL carries on business in
Canada. 1he Lerm "carrying on business" is noL delined. Several lacLors are
considered in deLermining wheLher a nonresidenL carries on business in
Canada. Cenerally, a nonresidenL musL have a signilicanL presence in Canada
Lo be considered Lo be carrying on business in Canada. However, even il a
nonresidenL does noL carry on business in Canada, iL may choose Lo
volunLarily regisLer il iL expecLs Lo pay CS1 {and iL meeLs cerLain condiLions).
1his provision allows a nonresidenL person Lo easily recover CS1 paid.
ll a nonresidenL does noL have a permanenL esLablishmenL in Canada,
iL is required Lo posL securiLy wiLh Lhe Canada Revenue Agency in order
Lo regisLer. 1he securiLy amounL ranges lrom CS5,000 Lo CS1 million.
1he securiLy is based on 507 ol Lhe absoluLe value ol Lhe expecLed neL CS1
payable or recoverable over Lhe course ol Lhe lirsL year ol regisLraLion.
LxcepL lor righLs supplied Lo consumers {and Lo nonregisLranLs LhaL supply
Lhem Lo consumers), Lhe supply ol Lhe naLural resources properLy righLs lisLed
below is noL deemed Lo be a supply. 1herelore, any consideraLion paid or due,
or any lee or royalLy charged or reserved in respecL ol Lhese righLs, is noL
deemed Lo be consideraLion lor CS1 purposes. 1herelore, Lhe supply is noL
sub|ecL Lo CS1. 1his provision applies Lo mosL {buL noL all) properLy inLeresLs
LhaL lorm Lhe legal basis ol Canada's ma|or resource indusLries {i.e., oil and
gas, mining, loresLry). For all pracLical purposes, Lhis LreaLmenL has Lhe same
ellecL as zeroraLing. 1he righLs covered by Lhis provision include:
A righL Lo explore lor or exploiL a mineral deposiL {including oil and gas);
a peaL bog or deposiL ol peaL; or a loresLry, waLer or lishery resource
A righL ol enLry or use relaLing Lo a righL relerred Lo above
A righL Lo an amounL compuLed by relerence Lo Lhe producLion
{including proliL) lrom, or Lo Lhe value ol producLion lrom, any such
deposiL, bog or resource
Oil and gas businesses olLen explore lor and operaLe oil and gas resource
properLies as |oinL venLures wiLh oLher oil and gas companies. ll a wriLLen
|oinL venLure agreemenL exisLs beLween Lhe |oinL venLure parLicipanLs and
Lhe parLicipanLs compleLe an elecLion, Lhe operaLor can accounL lor Lhe CS1
collecLed on Lhe sales and paid on Lhe purchases on iLs CS1 reLurn.
FurLhermore, where Lhe elecLion is in place, Lhe operaLor does noL charge CS1
Lo Lhe oLher parLicipanLs on Lhe |oinL inLeresL billings.
Cuebec sales tax 1C5T)
OS1 operaLes like CS1/HS1, excepL LhaL iL is imposed exclusively on supplies
ol goods and services made in Lhe province ol Ouebec. ln addiLion, OS1 is
generally imposed on goods and equipmenL imporLed inLo Ouebec unless Lhe
person imporLing Lhe goods is a regisLranL and will use Lhe goods exclusively in
commercial acLiviLies. OS1 applies aL a raLe ol 7.57 on Lhe CS1inclusive price.
OS1 raLe will increase Lo 8.57 ellecLive January 1, 2011.
Provincial sales taxes 1P5T)
BriLish Columbia, SaskaLchewan, ManiLoba, OnLario and Prince Ldward lsland
impose Laxes on sales ol Langible goods and some services lor consumpLion in
Lhose provinces. AlberLa does noL have a sales Lax. NoLe LhaL PS1 lor OnLario
and BriLish Colombia will no longer apply lor goods delivered and services
provided on or alLer 1 July 2010. 1ax is imposed on Lhe purchaser. 1herelore,
even il PS1 is noL charged by Lhe vendor, PS1 musL be sellassessed by Lhe
purchaser on any Laxable purchases.
8 Canada Chad
Coods acquired lor Lhe purpose ol resale are noL sub|ecL Lo PS1.
Lach province also provides various exempLions in respecL ol cerLain goods and
services. OnLario, BriLish Columbia and SaskaLchewan provide exempLions or
rebaLes lor cerLain oil and gas exploraLion and producLion equipmenL, repair
parLs, cerLain processing maLerials and cerLain services in respecL ol oil and gas
exploraLion and well servicing.
ln general, a person is required Lo regisLer lor PS1 il Lhey make regular supplies
ol Laxable goods or services in a province. Once regisLered, a person musL
collecL PS1 on all Laxable goods and services iL delivers in LhaL province.
PS1 is nonrecoverable unless iL is paid in error. 1he raLes as ol 15 May 2008
are as lollows {raLes applied neL ol CS1, excepL lor Prince Ldward lsland):
BriLish Columbia 77, SaskaLchewan 57, ManiLoba 77, OnLario 87 and Prince
Ldward lsland 107.
Some goods are condiLionally exempL {e.g., where exempLion is based on Lhe
person's use, sLaLus or inLenL Lo resupply Lhe goods raLher Lhan Lhe naLure ol
Lhe goods Lhemselves). ln Lhese circumsLances, Lhe vendor is required Lo
obLain cerLain documenLs lrom Lhe purchaser. 1he documenLs required Lo
saLisly Lhis condiLion vary by province.
Cther indirect taxes
ll a business imporLs, relines or sells relined luel producLs, iL may be required
Lo regisLer lor and remiL lederal excise Lax and provincial luel Laxes. ln many
provinces, businesses LhaL use naLural gas Lhey produce Lo power Lheir own
compressors are required Lo sellassess luel Lax on Lheir consumpLion ol
naLural gas.
LllecLive lrom 1 July 2008, BriLish Columbia imposes a carbon Lax on various
lossil luels consumed in Lhe province, including naLural gas LhaL is llared or
used Lo power compressors. 1he carbon Lax raLe varies based on Lhe Lype ol
lossil luel used and is scheduled Lo increase in each ol Lhe nexL lour years.
I. Cther
Canada has a concessionary Lype liscal regime whereby privaLe ownership ol
resources is permiLLed. Oil and gas in Canada Lypically belong Lo Lhe province
in which Lhe resource is locaLed. RighLs Lo explore, develop or produce oil and
gas in a province are obLained by acquiring a peLroleum or naLural gas lease
or license lrom Lhe province or lrom anoLher parLy LhaL holds such a lease or
license. As is Lypical wiLh mosL concessionary liscal regimes, Lhe iniLial owner
ol Lhe resource {usually a CovernmenL) leases or licenses Lhe righL Lo Lake
peLroleum or naLural gas lrom Lhe lands, buL reLains a royalLy inLeresL in
Lhe producLion.
Chad
Country code 235
CMT +1
Ernst & Ycunc
Tcur Ece
11 Avenue de I'arche
Paris
92037
France
TeI +33 10)1 4 93 0 00
DiI and cas ccntacts
Jcseph Paccp Ncupcue
J]ka\]flafHYjak!
TeI +33 10)1 55 1 1 3
jcseph.paccp.ncupcueey-avccats.ccm
Eric Tasi Ndjcdc
J]ka\]flafHYjak!
TeI +33 10)1 55 1 12 07
eric.tasi.ndjcdcey-avccats.ccm
9 Chad
A. At a glance
Fiscal regime
Chad's liscal regime applicable Lo Lhe upsLream peLroleum indusLry consisLs ol
Lhe Chadian's 1ax Code, Lhe Chadian's PeLroleum Code and Lhe Concession
AgreemenLs {CA) concluded beLween Lhe CovernmenL ol Chad and Lhe
conLracLor {meaning Lhe oil company).
DirecL proliL Lax applicable Lo oil companies 507
RoyalLies on crude hydrocarbon producLion 12.57
RoyalLies on naLural gas producLion 57
Surlace renL Lax As deLailed below
WiLhholding Lax:
Dividends LxempL
lnLeresL 207
RoyalLies 12.57
Branch remiLLance LxempL
CapiLal allowances SLraighLline depreciaLion
lncenLives L
11
, VA1 exempLion
5urIace rent tax rate
During Lhe lirsL live years 1 USS/m
1he lirsL renewal period ol Lhree years 3 USS/m
1he second renewal period ol Lhree years 10 USS/m
UnLil granL ol concession and lor 25 years 100 USS/m
For Lhe second period ol producLion
ol 25 years 200 USS/m
Legal regime
1he Chadian PeLroleum Code only provides lor Lhe concession regime.
1herelore, Lhe convenLions and agreemenLs concluded beLween Lhe sLaLe and
Lhe conLracLors are lollowing such a concession regime. A CA is Lhe oldesL
peLroleum conLracL used in Lhe oil indusLry. 1hey are also known as Lhe lull
risk conLracLs. Under Lhis regime Lhe sLaLe granLs, Lo an oil company or a
consorLium, exclusive mining righLs under Lhe lorm ol a license ol exploraLion.
ln Lhe case ol a discover, Lhe sLaLe granLs an exploiLaLion permiL lor Lhe
producLion phase. ln reLurn, Lhe company pays a royalLy and Laxes Lo Lhe
CovernmenL. 1he owner ol Lhe permiL is also Lhe owner ol Lhe buildings unLil
Lhe end ol Lhe mining righLs where Lhe buildings will be Lranslerred Lo Lhe
sLaLe wiLhouL any compensaLion.
Under Lhis regime, Lhe owner ol Lhe mining righLs becomes Lhe owner ol
all Lhe producLion aL Lhe wellhead wiLh Lhe obligaLion Lo provide Lhe naLional
markeL as a prioriLy.
1he CA are signed by Lhe minisLer in charge ol peLroleum acLiviLies alLer Lhe
approval ol Lhe minisLer ol linance.
1hey are approved by Lhe presidenL ol Lhe republic, published in Lhe ollicial
|ournal and regisLered in accordance wiLh Lhe condiLions provided by Lhe law.
B. Fiscal regime
Direct proIit tax
A 507 direcL proliL Lax is levied on Lhe Laxable proliLs ol Lhe conLracLor.
1axable proliL amounLs Lo neL proliLs arising lrom all upsLream acLiviLies carried
ouL in Chad during Lhe Laxable period.
11 |: /o|||tv to carrv forwarc |osses.
70 Chad
NeL proliL is calculaLed as Lhe dillerence beLween Lhe value ol Lhe opening and
closing balances ol Lhe neL asseLs in Lhe relevanL year ol assessmenL, less exLra
conLribuLions by Lhe company or Lhe shareholders, plus any amounLs Laken by
associaLed companies during Lhe period.
1he neL proliL is esLablished alLer deducLion ol all expenses which are necessary
Lo perlorm upsLream operaLions and supporLed by relevanL invoices and
depreciaLion, reserves and losses Lo some exLenL.
CAs provide lor a derogaLory accounLing procedure. Such, procedure lisLs
Lhe cosLs Lhe conLracLor can deducL lrom iLs proliLs in order Lo obLain Lhe neL
accounLing income belore Lax. However, in order Lo obLain Lhe Laxable basis
ol Lhe direcL proliL Lax, Lhe conLracLor should add back and/or deducL some
iLems in accordance wiLh Lhe Lax regime provided by Lhe PeLroleum Code.
According Lo Lhe PeLroleum Code, Lhe lollowing expenses are deducLible in Lhe
calculaLion ol Lhe Laxable income:
1he cosL ol maLerials, supplies and energy used, personnel expenses
and relaLed cosLs, Lhe cosLs ol services rendered by Lhird parLies
DepreciaLion ellecLively perlormed by Lhe conLracLor wiLhin Lhe limiLs ol Lhe
raLe seL lorLh by Lhe CA
Ceneral cosLs relaLing Lo peLroleum operaLions including cosLs ol sLarLing
business, cosLs ol renLing movable and immovable asseLs, insurance
premium and an amounL relaLing Lo overhead cosLs
lnLeresL on loans conLracLed by Lhe consorLium wiLhin Lhe limiLs provided
by Lhe CA
1he LoLal amounL ol royalLy on producLion paid in cash and Lhe value
ol Lhe share ol Lhe producLion paid in kind lor Lhe purpose ol Lhe royalLy
on producLion
Reasonable reserves seL up Lo meeL losses or necessary maLerial expenses
which evenLs make likely Lo occur, wiLh Lhe excepLion ol reserves seL up lor
Lhe block abandonmenL plan
Any oLher loss or cosL direcLly linked Lo Lhe peLroleum operaLions including
exchange loss raLe, wiLh Lhe excepLion ol Lhe amounL ol direcL proliL Lax
DirecL proliL Lax shall be paid under a sysLem ol quarLerly paymenLs wiLh annual
seLLlemenL alLer declaraLion ol Lhe linancial resulLs lor Lhe calendar year aL
sLake. Lach quarLer should be equal Lo one lourLh ol Lhe direcL proliL Lax
acLually paid during Lhe course ol Lhe preceding calendar year. 1he excess
should consLiLuLe an amounL Lo be ollseL againsL Lhe nexL insLallmenLs.
Accordingly, Lhe conLracLor shall lile an annual Lax reLurn reporLing Lhe resulLs
lrom iLs acLiviLies during Lhe previous Lax year wiLhin Lhree monLhs lollowing
Lhe end ol Lhe Lax year {i.e., belore 1 April).
1he Chadian 1ax Code and Lhe Chadian PeLroleum Code do noL provide LhaL Lhe
proliL lrom one pro|ecL can be ollseL againsL Lhe losses lrom anoLher pro|ecL
held by Lhe same Lax enLiLy. Accordingly, Lhe peLroleum operaLions should be
separaLely accounLed lor.
Nondeductible expenditures
CerLain expendiLure is noL deducLible. Lxamples include:
Lxpenses relaLing Lo Lhe markeLing and LransporLaLion ol Lhe hydrocarbons
beyond Lhe delivery poinL
CilLs, donaLions, subsidies, excepL Lhose approved by Lhe Chadian sLaLe
CilLs and discounLs granLed Lo suppliers, as well as gilLs and
discounLs granLed Lo inLermediaries used in Lhe lrame ol supplies
or services conLracLs
All Lhe lines, conliscaLions and all kinds ol penalLies arising lrom
consorLium LransacLions in conLravenLion ol legal, economic or
liscal provisions ol Lhe convenLion
Any oLher expenses which are noL necessary lor Lhe perlormance ol
peLroleum operaLions, are indirecL, unreasonable or lavish
71 Chad
Any expenses which are expressly excluded by Lhe convenLion, Lhe
Chadian 1ax Code or Lhe Chadian PeLroleum Code are nondeducLible
Investments and exploitation costs
ln accordance wiLh Lhe accounLing proceedings ol Lhe CA, cosLs oil include all
expenses borne by Lhe conLracLor in Lhe perlormance ol Lhe CA, i.e.,
invesLmenL cosLs and exploiLaLion cosLs.
lnvesLmenL cosLs are all Lhe peLroleum cosLs relaLing Lo Lhe acquisiLion ol goods
lor which Lhe period ol use will exceed Lhe year ol Lheir acquisiLion, including
any expenses ol exploraLion and developmenL such as: building, planLs and
consLrucLion, accommodaLion lor Lhe employees, producLion machinery such
as derricks, drillings and all cosLs relaLing Lo such drillings during exploraLion
and developmenL phase, any oLher exploraLion cosLs such as Lemporary or
ancillary building and consLrucLion used lor Lhe exploraLion or collecLion ol
seismic daLa.
LxploiLaLion cosLs includes all Lhe peLroleum cosLs oLher Lhan Lhe
invesLmenL cosLs.
Annual surIace rent
An annual surlace renL Lax is levied in Chad.
1his Lax is paid in cash and per compleLe calendar year belore 1 January, on
Lhe basis ol Lhe surlace area on 1 January each year and, lor Lhe lirsL year, on
Lhe surlace area on Lhe ellecLive daLe.
During Lhe lirsL live years 1 USS/m
1he lirsL renewal period ol Lhree years 3 USS/m
1he second renewal period ol Lhree years 10 USS/m
UnLil Lhe granL ol Lhe concession and lor
a period ol 25 years 100 USS/m
For Lhe second period ol producLion
ol 25 years 200 USS/m
Annual surlace renL is an exploiLaLion cosL and is deducLible lor purposes ol
direcL proliLs Lax.
Poyalty regimes
ConLracLors are sub|ecL Lo a monLhly royalLy on Lhe producLion aL a raLe ol
12.57 lor crude hydrocarbon and 57 lor naLural gas.
1he royalLy on crude hydrocarbon shall be payable aL Lhe sLaLe's opLion eiLher in
cash or in kind, while Lhe royalLy on naLural gas shall always be payable in kind.
ConLracLors shall lile a monLhly Lax reLurn LogeLher wiLh supporLing documenLs
which sums up Lhe LoLal producLion ol Lhe previous monLh including:
1he quanLiLy ol hydrocarbon sold Lhe previous monLh lor Lhe supply ol Lhe
inLernal markeL
1he quanLiLy ol hydrocarbon which was paid in kind Lhe previous monLh
1he remaining quanLiLy ol hydrocarbon which is Lhe quanLiLy Lo be exporLed
1he summary should menLion separaLely Lhe quanLiLy ol crude hydrocarbon
and Lhe quanLiLy ol naLural gas.
1he royalLy is required Lo be paid wiLhin seven days lollowing Lhe liling ol Lhe
Lax reLurn. 1he royalLy amounLs Lo Lhe quanLiLy ol Lhe Lhree iLems described
above, mulLiplied by Lhe markeL price seL lorLh in Lhe CA.
RoyalLies are deducLible lor Lhe purposes ol direcL proliLs Lax.
C. Capital allowances
Land and inLangible asseLs are noL depreciable lor Lax purposes. OLher lixed
asseLs may be depreciaLed using Lhe sLraighLline meLhod aL raLes provided by
Lhe CA. 1he lollowing are examples ol some ol Lhe applicable sLraighLline raLes
under a CA.
72 Chad
Asset Pate 17)
Any operaLion relaLing Lo exploraLion, drilling, eLc. 100
Onshore pipelines 10
Onshore underground pipelines 20
Any lixed building 5
Any oLher lnvesLmenL cosLs 20
D. Incentives
Ability to carry losses
From Lhe lirsL year ol producLion, all Lhe deducLible cosLs incurred in Lhe
lramework ol Lhe peLroleum operaLions which have noL been ollseL againsL
business income will be considered as losses and may be carried lorward lor
live Laxable years.
1he Chadian 1ax Code and Lhe Chadian PeLroleum Code do noL provide LhaL Lhe
proliL lrom one pro|ecL can be ollseL againsL Lhe losses lrom anoLher pro|ecL
held by Lhe same Lax enLiLy. On Lhe conLrary, losses lrom one pro|ecL cannoL be
ollseL againsL proliL lrom anoLher nonpeLroleum pro|ecL. Accordingly, Lhe
peLroleum operaLions should be separaLely accounLed lor.
VAT incentives
1he supply ol goods and services ol all kind which are direcLly linked Lo
peLroleum operaLion are exempL lrom VA1. A lisL ol exempLed goods and
services is enclosed Lo Lhe CA.
E. Withholding taxes
Dividends
Dividends paid by a company incorporaLed in Chad Lo a nonresidenL are
exempL lrom LaxaLion as provided by Lhe peLroleum code.
Interest
A 207 wiLhholding Lax is imposed on inLeresL paid on debL claims, bank deposiLs
and guaranLees Lo corporaLions LhaL do noL have Lheir head ollice in Chad or Lo
nonresidenL individuals.
Poyalties
1he Lax law lor 2000 has inLroduced a wiLhholding Lax on Lhe income ol agenLs,
research/consulLancy ollices, peLroleum conLracLors and oLher corporaLions,
when such persons are noL Lax residenL in Chad.
1his Lax is inLended Lo Lax nonresidenL persons execuLing services conLracLs in
Lhe lramework ol Lhe peLroleum operaLion when such conLracLs are linanced by
loreign sources.
1he wiLhholding Lax raLe is 12.57 on Lhe neL conLracL amounL.
Branch remittance tax
For companies carrying ouL an acLiviLy in Chad, when Lheir head ollice is
locaLed abroad, a branch Lax aL a raLe ol 207 will be levied on Lhe proliLs which
have noL been incorporaLed in Lhe capiLal or reinvesLed in Chad. However, such
LaxaLion will be limiLed Lo a share corresponding Lo Lhe raLio ol Chad proliL
versus worldwide proliL. However, under Lhe provisions ol Lhe Chadian
PeLroleum Code, conLracLors are exempLed lrom such LaxaLion.
73 Chad
F. Financing considerations
Thin capitalization limits
lnLeresL paid Lo Lhe parLners lor lunds made available Lo Lhe company, in
addiLion Lo Lheir capiLal conLribuLions, irrespecLive ol Lhe lorm ol Lhe company,
will be allowed Lo Lhe exLenL LhaL iL is wiLhin Lhe limiLs ol Lwo poinLs above Lhe
discounL raLe ol Lhe cenLral bank.
C. Transactions
Asset disposals
1he CA may be LerminaLed il all Lhe asseLs are Lranslerred.
lncome realized Lhrough Lhe Lransler ol cerLain classes ol asseLs ol Lhe holder is
regisLered Lo Lhe crediL ol Lhe accounL ol oil cosLs Lo be recovered.
CapiLal gains are Laxed aL Lhe regular proliL Lax ol 507. 1he Lax, however, can
be delerred in Lhe evenL ol a merger.
ll Lhe business is LoLally or parLially Lranslerred or disconLinued, only onehall
ol Lhe neL capiLal gains is Laxed il Lhe evenL occurs less Lhan live years alLer Lhe
sLarLup or purchase ol Lhe business and only oneLhird ol Lhe gains is Laxed il
Lhe evenL occurs live years or more alLer Lhe business is begun or purchased.
H. Indirect taxes
Import duties
Provisions on cusLoms duLies are idenLical lor mosL conLracLs. 1hey usually
provide LhaL Lhe person designaLed as a 'conLracLor', as well as Lheir
subconLracLors, are allowed Lo imporL inLo Chad any goods, maLerials,
machinery, equipmenL and consumer goods, which are necessary Lo carry
ouL qualilying operaLions, in Lheir own name or in Lhe name ol Lheir
subconLracLors, as lollows:
1he maLerial inLended exclusively lor peLroleum exploraLion and exploiLaLion
will be exempLed lrom all Laxes and cusLoms duLies
LquipmenL, merchandise and appliance inLended lor Lhe peLroleum
exploraLion and exploiLaLion work siLes will be placed under normal
Lemporary admission regime
Work siLe vehicles, specialized or noL, will be placed under Lhe Lemporary
admission regime; company vehicles and vehicles lor personal use will be
sub|ecL Lo Lhe general legal regime wiLhouL exempLion; airplanes and Lheir
spare parLs, consumable maLerials required lor peLroleum exploraLion and
exploiLaLion, as lisLed in Lhe appendix ol Lhe CA, will be exempLed lrom all
Laxes and cusLoms duLies
Export duties
1he Chadian PeLroleum Code provides LhaL conLracLors will be exempLed lrom
any righLs, Laxes and duLies on exporLaLion.
VAT
1he supply ol goods and services ol all kinds which are direcLly linked Lo
peLroleum operaLion are exempLed lrom VA1. A lisL ol exempLed goods and
services is usually enclosed in Lhe CA.
Ancillary acLiviLies which are noL linked Lo peLroleum operaLion will be sub|ecL
Lo VA1 aL a raLe ol 187. 1here is no separaLe regisLraLion necessary lor VA1
purposes. VA1 regisLraLion will be included in Lhe regisLraLion lor Lax purposes
wiLh Lhe Chadian Lax adminisLraLion. 1here is no Lhreshold minimum value ol
supplies. RegisLraLion lor Lax purposes will be required lor all residenL enLiLies.
74 Chad
5tamp duties
SLamp duLies can be applicable in respecL ol Lhe regisLraLion ol Lhe dillerenL
conLracLs concluded by an oil company.
SLamp duLies are applicable Lo conLracLs, Lransler ol asseLs, eLc. Some ol Lhe
applicable raLes are as lollows:
lncrease ol share capiLal 57
1ransler ol real esLaLe From 10 Lo 157
1ransler ol shares 37
1ransler ol goodwill 07
RegisLraLion duLies applicable Lo conLracLs depends on Lhe amounL ol such
conLracLs under a progressive Lax.
Pegistration Iees
RegisLraLion lees depend on Lhe Lype ol Lhe agreemenL concluded.
I. Cther
Exchange controls
1he Lconomic and MoneLary CommuniLy ol CenLral Alrica CounLries {CLMAC)
AcL, daLed 29 April 2000, provides exchange conLrol regulaLions, which apply
Lo linancial Lranslers ouLside Lhe lranc zone, which is a moneLary zone including
France and mosLly Frenchspeaking Alrican counLries. However, lor Lhe duraLion
ol Lhe CA, Chadian auLhoriLies provide cerLain guaranLees Lo Lhe conLracLor lor
Lhe operaLions carried ouL wiLhin Lhe lramework ol Lhe CA, noLably:
1he righL Lo obLain linancing lrom abroad necessary lor Lhe conducL ol Lhe
peLroleum operaLions; Lo receive and Lo mainLain abroad all lunds acquired
or borrowed abroad including income lrom sales; and Lo dispose Lhereol
lreely insolar as lunds exceed Lhe requiremenLs ol Lheir operaLions in
Chad and ol Lheir liscal and conLracLual obligaLions
Free movemenL ol lunds belonging Lo Lhem lree ol all Laxes and duLies,
beLween Chad and any oLher counLries
1he righL Lo repaLriaLe Lhe capiLal invesLed wiLhin Lhe lramework ol
Lhe CA and Lo Lransler income lrom such capiLal, in parLicular inLeresL
and dividends, alLhough Lhe sLaLe shall have no obligaLion Lo provide
loreign currency
Free Lransler ol amounLs payable, as well as lree righL Lo receive amounLs
ol any naLure which are payable Lo Lhem, sub|ecL Lo making Lhe necessary
declaraLions required by Lhe regulaLion in lorce
1he righL Lo direcL paymenLs abroad Lo loreign suppliers and services
required lor Lhe peLroleum operaLions
75 China
China
Country code 8
Beijinc CMT +
Ernst & Ycunc
LeveI 1, Ernst & Ycunc Tcwer
DrientaI PIaza
Nc. 1 East Chancan Avenue
Dcncchenc District
Beijinc
10073
China
TeI 10 515 3000
Fax 10 51 29
DiI and cas ccntacts
AIan Lan
TeI 10 515 339
aIan.Iancn.ey.ccm
Meccie Yu
TeI 10 515 331
meccie.yucn.ey.ccm
Shenzhen
Ernst & Ycunc
21/F, China Rescurces BuiIdinc
5001 Shennan Dcnc Rcad
Shenzhen
Cuancdcnc
51001
China
TeI 755 2502 2
Fax 755 2502 1
DiI and cas ccntact
Hc Sinc Mak
TeI 755 2502 29
hc-sinc.makcn.ey.ccm
Hcnc Kcnc
Ernst & Ycunc Tax Services Ltd
1/F Twc !nternaticnaI Finance Centre
Finance Street
CentraI
Hcnc Kcnc
China
TeI +52 24 9
Fax +52 2 4432
DiI and cas ccntacts
!van Chan
TeI +52 229 32
ivan.chanhk.ey.ccm
Cecrce Lam
TeI +52 24 9
cecrce.Iamhk.ey.ccm
A. At a glance
Fiscal regime
1he liscal regime LhaL applies Lo Lhe peLroleum indusLry in China mainly
consisLs ol producLion sharing conLracLs {PSC), special oil gain levies, royalLies
and corporaLe income Lax.
Special oil gain levy CalculaLed in accordance wiLh a lormula in
circumsLances where Lhe monLhly average weighLed
price per barrel ol crude oil sold is greaLer Lhan
USS^0 per barrel
RoyalLies 07 Lo 12.57
Bonuses SignaLure bonuses are delined in Lhe PSC and Lake
inLo accounL Lhe volume ol peLroleum resources and
Lhe economic value ol Lhe lield
ProducLion sharing Based on producLion volumes
7 China
lncome Lax raLe 257
Resource Lax Applicable, buL Sinoloreign PSC peLroleum
exploiLaLion is currenLly exempL
lnvesLmenL incenLives Oualilied research and developmenL expendiLure can
be deducLed aL 1507 ol Lhe acLual expenses
B. Fiscal regime
Foreign peLroleum companies are permiLLed Lo parLicipaLe and operaLe Lhe
exploraLion, developmenL and producLion ol peLroleum resources in China
by enLering inLo producLion sharing conLracLs {PSC) wiLh Lhe Chinese
CovernmenL or iLs designaLed Chinese naLional peLroleum companies.
5pecial oil gain levy
WiLh ellecL lrom 26 March 2006, a revenue windlall levy is charged on all
oil producLion enLerprises {boLh domesLic and loreign) LhaL sell crude oil
produced in China. According Lo Lhe MinisLry ol Finance, Lhe revenue windlall
levy applies regardless ol wheLher Lhe crude oil is sold wiLhin or ouLside China.
1he revenue windlall levy is charged whenever Lhe weighLed average price ol
crude oil sold in any monLh exceeds USS^0 per barrel.
1he revenue windlall levy, il applicable, is calculaLed on a monLhly basis and is
paid on a quarLerly basis. LssenLially, Lhe amounL ol revenue windlall levy
payable per barrel is calculaLed as lollows:
MonLhly weighLed average price per barrel ol crude oil sold minus USS^0
mulLiplied by Lhe raLe minus Lhe quick calculaLion deducLion.
1he relevanL "raLe" and quick calculaLion deducLion amounLs are as lollows:
Crude oil price
1U55/per barrel) Pate oI levy
Cuick calculation
deduction
1U55/per barrel)
^0 ^5 {inclusive) 207 0.00
^5 50 {inclusive) 257 0.25
50 55 {inclusive) 307 0.75
55 60 {inclusive) 357 1.50
Above 60 ^07 2.50
Petroleum royalties
PeLroleum royalLies are adminisLered and collecLed by Lhe Laxing auLhoriLies
under Lhe relevanL rules pronounced by Lhe MinisLry ol Finance. PaymenLs are
made in kind wiLh Lhe crude oil and naLural gas so produced.
Sinoloreign
12
PSC onshore peLroleum operaLions in Oinghai, 1ibeL and Xin|iang
provinces and Sinoloreign PSC ollshore peLroleum operaLions are sub|ecL Lo
peLroleum royalLies as shown below:
Annual gross output oI crude oil
1thousand metric tons) Poyalty rate
PorLion noL exceeding 1,000 0.07
PorLion beLween 1,000 and 1,500 ^.07
PorLion beLween 1,500 and 2,000 6.07
PorLion beLween 2,000 and 3,000 8.07
PorLion beLween 3,000 and ^,000 10.07
PorLion exceeding ^,000 12.57
12 |nvo|v|nc co||aoorat|on oetween a Cn|nese, stateownec o|| comanv anc a fore|cn
o|| comanv.
77 China
Annual gross output oI natural gas
1cubic meters) Poyalty rate
PorLion noL exceeding 2 billion 07
PorLion beLween 2 billion and 3.5 billion 17
PorLion beLween 3.5 billion and 5 billion 27
PorLion exceeding 5 billion 37
Sinoloreign PSC onshore peLroleum operaLions, oLher Lhan Lhose locaLed in
Oinghai, 1ibeL and Xin|iang provinces, are sub|ecL Lo a dillerenL seL ol
peLroleum royalLies as shown below:
Annual gross output oI crude oil
1thousand metric tons) Poyalty rate
PorLion noL exceeding 500 0.07
PorLion beLween 500 and 1,000 2.07
PorLion beLween 1,000 and 1,500 ^.07
PorLion beLween 1,500 and 2,000 6.07
PorLion beLween 2,000 and 3,000 8.07
PorLion beLween 3,000 and ^,000 10.07
PorLion exceeding ^,000 12.57
Annual gross output oI natural gas
1cubic meters) Poyalty rate
PorLion noL exceeding 1 billion 07
PorLion beLween 1 billion and 2.5 billion 17
PorLion beLween 2.5 billion and 5 billion 27
PorLion exceeding 5 billion 37
5ignature bonus
A signaLure bonus is a lumpsum paymenL made by a peLroleum enLiLy Lo Lhe
CovernmenL lor Lhe righL Lo exploiL Lhe peLroleum resource. 1he amounL may
be delined by Lhe CovernmenL based on Lhe volume ol peLroleum resources
and economic value ol Lhe lield. lL would be payable on Lhe signing ol a PSC.
Pesource tax
According Lo Lhe HjgnakagfYdJ]_mdYlagfkgfJ]kgmj[]LYp]k issued by Lhe
SLaLe Council in 1993, persons engaged in Lhe exploiLaLion ol naLural resources
in China are liable Lo pay resource Laxes. 1he Lax raLes lor crude oil and naLural
gas are RMB8 Lo 30 Yuan per meLric Lon and RMB2 Lo 15 Yuan per 1,000
cubic meLers respecLively. However, Lhe SLaLe Council has since exempLed
Sinoloreign PSC peLroleum exploiLaLion lrom Lhe paymenL ol resource Laxes
unLil lurLher noLice.
Production sharing
ProducLion sharing is based on producLion volume LhaL is Lermed as "annual
gross producLion." A PSC delines Lhe percenLage ol LoLal producLion Lo be used
lor cosL recovery and Lhe sharing ol Lhe CovernmenL and Lhe PSC parLicipanLs
in Lhe proliL producLion.
Annual gross producLion neL ol all revenue levies and revenue Laxes {such as
special oil gain levy and VA1) is used lor calculaLing "cosL recovery" and "proliL
producLion." ln general, cosL recovery lor ollshore PSCs and onshore PSCs is
lrom 507 Lo 62.57 and 607, respecLively {wiLh deemed inLeresL cosL recovery
on developmenL cosLs).
78 China
1he cosL recovery mainly involves Lhe recovery ol Lhe lollowing expenses and
expendiLure in Lhe sequence below:
1. PeLroleum royalLies
2. ProducLion and operaLing expenses
3. LxploraLion expendiLure
^. DevelopmenL expendiLure
5. Deemed inLeresL cosL recovery on developmenL cosLs; currenLly 97. 1he
remainder is auLomaLically added Lo Lhe pool lor "proliL producLion." ProliL
producLion is shared beLween Lhe CovernmenL and Lhe PSC parLicipanLs
based on Lhe allocaLion lacLor sLipulaLed in Lhe PSC
Corporate income tax
PeLroleum companies are Laxed aL Lhe raLe ol 257 on Lheir Laxable income
according Lo Lhe new LnLerprise lncome 1ax Law, which came inLo ellecL on
1 January 2008. 1axable income equals assessable income less deducLions.
A peLroleum company is permiLLed Lo reporL income Lax on a consolidaLion
basis lor all Lhe PSC parLicipaLions LhaL iL direcLly owns in China. NeL operaLing
Lax losses may be carried lorward lor live years Lo ollseL againsL luLure Laxable
income. Carryback ol losses is noL allowed.
1axable income is delined as LoLal revenues less nonLaxable income,
LaxexempL income, deducLible expenses and Lax losses. No ma|or dillerences
exisL beLween Lax and accounLing meLhods lor income compuLaLion purposes.
Dividends, bonuses, inLeresL, royalLies, renL and oLher income are included in
Laxable income.
All necessary and reasonable expenses incurred in carrying on a business are
deducLible lor Lax purposes, excepL lor adverLisemenL and sales promoLion
expenses, enLerLainmenL expenses, union lees, employee wellare cosLs and
employee educaLion expenses, which are sub|ecL Lo specilied deducLion
Lhresholds. Oualilied research and developmenL expendiLure may be deducLed
aL 1507 ol Lhe acLual expenses. ChariLable donaLions wiLhin 127 ol Lhe LoLal
annual proliL are deducLible.
Reasonable expenses allocaLed lrom Lhe overseas head ollice may be
deducLible lor an esLablishmenL ol a nonLax residenL enLerprise in China,
provided Lhese expenses are incurred by Lhe head ollice lor Lhe producLion or
business operaLion ol Lhe esLablishmenL, and Lhey are supporLed by proper
documenLs issued by Lhe head ollice. 1he compeLenL Lax auLhoriLies may apply
cerLain deducLion Lhresholds Lo be deLermined by relerence Lo Lhe head ollice
overhead percenLage as agreed upon by parLicipanLs in a PSC.
Provisions LhaL have noL been approved by Lhe Lax auLhoriLies are in general
noL deducLible; lor example, various provisions/allowances lor asseL impairmenL
and risk reserves.
For PSC peLroleum operaLions in China, deducLions may Lypically include
paymenLs ol revenue Laxes and levies {including special oil gain levies and
valueadded Laxes levied aL a raLe ol 57), peLroleum royalLies, deducLible
producLion and operaLing expenses, Lax amorLizaLion ol exploraLion
expendiLure and Lax amorLizaLion ol developmenL expendiLure.
Development on the taxation oI oil and gas companies
On 12 April 2009, Lhe Chinese CovernmenL issued Caishui {2009) No.^9
{Circular ^9), governing Lhe Lax LreaLmenL on expendiLures incurred by
peLroleum companies belore commencemenL ol commercial producLion.
Circular ^9 came inLo ellecL as ol Lhe daLe ol promulgaLion.
lL is expecLed LhaL Lhe PRC Lax auLhoriLy will issue more circulars governing
Lhe oil and gas exploraLion and producLion in China or clarily Lhe relevanL
Lax LreaLmenLs.
79 China
Amortization oI expenditure on acquisition oI oil 1gas) Iield
interests and exploration expenditure
Under Circular ^9, qualilied expendiLure on acquisiLion ol oil {gas) lield
inLeresLs and exploraLion expendiLure incurred by a peLroleum company can
eiLher be expensed againsL producLion income generaLed lrom oLher oil {gas)
lields LhaL Lhe company owns in China, or be capiLalized and amorLized on a
sLraighLline basis againsL producLion income generaLed lrom Lhe oil {gas) lield
lor which Lhe expendiLure was incurred. 1he minimum amorLizaLion period ol
Lhe exploraLion expendiLure is Lhree years, sLarLing lrom Lhe monLh during
which commercial producLion commenced.
LxpendiLure on acquisiLion ol oil {gas) lield {oillield acquisiLion expendiLure)
includes all necessary expendiLures incurred in obLaining Lhe exploraLion righL.
LxploraLion expendiLure may include Lhe drilling ol appraisal wells, leasibiliLy
sLudies and Lhe preparaLion ol an overall peLroleum developmenL program
and oLher work Lo idenLily peLroleum reserves and Lo deLermine wheLher Lhe
reserves have commercial value. lL may also include expenses incurred lor
scienLilic research and Lraining lor Lhe developmenL ol peLroleum
resources in China.
Any remaining oillield acquisiLion expendiLure and exploraLion expendiLure
balance LhaL is noL yeL amorLized can be expensed il Lhe operaLions are ceased
due Lo lailure in discovering any commercial oil {gas) sLrucLure. NeL operaLing
Lax losses may be carried lorward lor live years Lo ollseL againsL luLure Laxable
income. Carryback ol losses is noL allowed.
ll Lhe exploraLion drilling expenses incurred resulL in lixed asseLs and Lhe
relevanL oillield enLers inLo commercial producLion, Lhe unamorLized
exploraLion drilling expenses should be reclassilied as developmenL expendiLure
lor depreciaLion purposes.
Under Lhe lormer LnLerprise lncome 1ax Law, il a peLroleum company incurs
exploraLion expendiLure on a peLroleum conLracL block LhaL has been
abandoned, and iL does noL have any oLher producing conLracL block in China,
Lhe peLroleum company is permiLLed Lo preserve iLs amorLizaLion righL lor 10
years and apply Lhe righL againsL new conLracL blocks provided LhaL Lhe new
conLracL blocks are signed up wiLhin Lhe 10year period {hereinalLer 10year
preservaLion ol amorLizaLion righL rule). Circular ^9 does noL, in iLs presenL
lorm, provide Lhe aloresaid Lax LreaLmenL. lL is unclear wheLher or noL PSCs
signed belore 1 January 2008 would be grandlaLhered wiLh Lhe 10year
preservaLion ol amorLizaLion righL rule.
Depreciation oI development expenditure
Under Circular ^9, qualilied developmenL expendiLure may be depreciaLed on a
sLraighLline basis againsL producLion income generaLed lrom Lhe oil {gas) lield
lor which Lhe expendiLure was incurred, sub|ecL Lo a minimum period ol noL less
Lhan eighL years sLarLing lrom Lhe monLh during which commercial producLion
commenced. ll Lhe operaLion ol an oil {gas) lield is LerminaLed, Lhe residual
value ol Lhe developmenL asseLs would be recognized as a loss and deducLible
lor Cl1 purpose in Lhe year ol LerminaLion. NeL operaLing Lax losses may be
carried lorward lor live years Lo ollseL againsL luLure Laxable income. Carryback
ol losses is noL allowed.
DevelopmenL expendiLure is expendiLure incurred lor developmenL operaLions,
including acLiviLies such as design, consLrucLion, insLallaLion, drilling and Lhe
corresponding research work, perlormed during Lhe period sLarLing lrom Lhe
approval daLe lor Lhe overall peLroleum developmenL program up unLil Lhe
commencemenL daLe lor commercial producLion. LxpendiLure includes all
invesLmenLs, eiLher Langible or inLangible {and including lixed asseLs
acquired), made during Lhe period ol developmenL operaLions and amounLs,
should be capiLalized based on each individual oil {gas) lield.
80
Dismantlement costs and environment restoration expenditure
A peLroleum company is permiLLed Lo amorLize neL expendiLure incurred lor
oil {gas) lield dismanLlemenL and environmenL resLoraLion {alLer neLLing oll
proceeds generaLed lrom Lhe disposal ol scrap maLerials) againsL producLion
income generaLed lrom oLher oil {gas) lields LhaL iL owns in China. LxpendiLure
is amorLized on a sLraighLline basis over a period ol 5 Lo 10 years. ll Lhe
producLion period is less Lhan live years, Lhe peLroleum company may apply a
shorLer amorLizaLion period, sub|ecL Lo Lhe conlirmaLion ol Lhe compeLenL Lax
auLhoriLies. ll Lhe company does noL have oLher incomeproducing oil {gas)
lields in China, iL may claim Lhe abandonmenL and environmenL resLoraLion
expendiLure as deducLible expenses againsL producLion income reporLed
lor Lhe oil {gas) lield during Lhe Lhree years preceding Lhe year when Lhe
lield was abandoned.
5ervice contracts
Foreign conLracLors LhaL provide services Lo a peLroleum company in China are
liable Lo pay Chinese Laxes, including business Lax, income Lax and some oLher
local levies.
Business Lax is a Lype ol cumulaLive revenue Lax payable on gross amounLs ol
revenues generaLed lrom Lhe provision ol services, Lhe Lransler ol immovable
properLies and inLangible properLy, so long as Lhe service provider or Lhe
recipienL ol Lhe service is an individual or an enLiLy siLuaLed in China. Supply
ol indusLrial processing services and supply ol repair and replacemenL services
are noL chargeable Lo business Lax, buL Lhey are sub|ecL Lo VA1. 1he Lax raLe
ranges lrom 37 Lo 207, deLermined by Lhe naLure ol acLiviLies perlormed.
lncome Laxes are payable aL Lhe sLandard Lax raLe ol 257 on Lhe acLual proliLs
derived by a loreign conLracLor or on Lhe impuLed proliLs agreed upon beLween
a loreign conLracLor and Lhe Laxing auLhoriLies.
1he peLroleum company LhaL receives Lhe services is deemed Lo be Lhe Lax
wiLhholding agenL.
C. Capital allowances
1he deLailed provisions relaLing Lo capiLal allowances are seL ouL in SecLion B&
D. Investment incentives
PeLroleum companies LhaL are engaged in Lhe exploraLion, developmenL and
producLion ol crude oil and naLural gas may be eligible lor cusLoms duLy and
VA1 exempLions in imporLing cerLain qualilied equipmenL and maLerials inLo
China, sub|ecL Lo Lhe approval ol Lhe compeLenL CovernmenLal auLhoriLies.
As ol 1 January 2009, Lhe revamped Chinese VA1 regime abolishes exempLion
ol VA1 on imporLed machinery and equipmenL, which was applicable Lo
companies in cerLain encouraged indusLries as specilied by relevanL
PRC regulaLions.
As Lo Lhe peLroleum and gas producLion indusLry, iL seems LhaL Lhe above
menLioned VA1 exempLion policy, as well as exempLion ol imporLaLion cusLoms
duLy lor pro|ecLs LhaL have already obLained exempLion approval, can be
reLained unLil end ol 2010 upon lurLher noLice.
Belore 1 January 2009, sub|ecL Lo Lhe approval ol compeLenL CovernmenLal
auLhoriLies, a peLroleum company engaged in ollshore peLroleum operaLions
may also apply lor Lhe relund ol VA1 paid on Lhe acquisiLion ol qualilied
equipmenL LhaL is manulacLured domesLically in China. However, Lhe VA1
relund on Lhe acquisiLion ol qualilied equipmenL {including Lhe oil and gas
indusLry) has been revoked sLarLing lrom 1 January 2009. 1here is LransiLional
policy granLed under Lhe new VA1 regime lor qualilied enLerprises Lo conLinue
en|oying Lhe VA1 relund on Lhe acquisiLion ol qualilied equipmenL purchased on
or belore 30 June 2009.
China
81
E. Withholding taxes and double tax treaties
RemiLLance ol dividends, inLeresL, royalLies and renLal is sub|ecL Lo wiLhholding
Lax aL a raLe ol 107. WiLhholding Lax is due aL Lhe Lime Lhe remiLLance is made
or aL Lhe Lime Lhe relevanL LransacLion and cosLs are recorded in Lhe accounLing
books ol Lhe Chinese payer, whichever is Lhe earlier.
1he LreaLy wiLhholding Lax raLes lor dividends, inLeresL and royalLies varies
depending on Lhe parLicular counLry. Cenerally speaking, dividend, inLeresL and
royalLy wiLhholding Lax raLes vary beLween 57 and 107, 77 and 107, and 57
and 107, respecLively.
F. Financing considerations
According Lo Lhe new income Lax regime, inLeresL expenses paid on bank loans
uLilized Lo linance Laxable operaLions is generally deducLible. lnLeresL expenses
paid on loans borrowed lrom relaLed parLies oLher Lhan a linancial insLiLuLion
are also deducLible. DeducLion is sub|ecL Lo Lhe arm's lengLh principle and
generally should be sub|ecL Lo a debLLoequiLy raLio ol 2:1. Please noLe LhaL
PSCs are noL sub|ecL Lo Lhe Lhincap rule regime.
Deemed inLeresL cosL recovery on developmenL cosLs is noL deducLible lor
income Lax purposes.
C. Transactions
Disposal oI P5C interest
Cains, il any, derived lrom Lhe disposal ol an inLeresL in a PSC are Laxable in
China. 1axable gains are equal Lo disposal proceeds less Lhe remaining balance
ol exploraLion and developmenL expendiLure LhaL has yeL Lo be amorLized lor
Lax purposes. CosLs incurred lor acquiring an inLeresL in a PSC may be claimed
as qualilied exploraLion and developmenL expendiLure and are eligible lor Lax
amorLizaLion according Lo Lhe relevanL Lax rules.
H. Indirect taxes
Customs duties
1he imporLaLion ol Langible goods {including equipmenL and maLerials) inLo
China lor Lhe purpose ol peLroleum exploraLion, developmenL and producLion
is chargeable Lo cusLoms duLies sub|ecL Lo Lhe availabiliLy ol special imporL
incenLives as discussed in SecLion Dabove.
Value added tax 1VAT)
VA1 is payable aL a raLe ol 57 on Lhe crude oil and naLural gas produced lrom
an oil {gas) lield operaLed under a Sinoloreign PSC.
1he purchase ol goods {including equipmenL and maLerials) supplied in China
is sub|ecL Lo VA1, generally aL Lhe sLandard raLe ol 177. VA1 paid on purchases
is noL recoverable, unless iL is sub|ecL Lo Lhe special VA1 relund regime as
discussed in SecLion Dabove.
I. Cther
TransIer pricing
China has inLroduced Lransler pricing rules LhaL require LhaL all lees paid or
charged in business LransacLions beLween relaLed parLies musL be deLermined
based on an arm's lengLh sLandard. ll Lhe parLies lail Lo meeL Lhis requiremenL,
Lhe Lax bureau may make reasonable ad|usLmenLs by using one ol Lhe
lollowing meLhods:
Comparable unconLrolled price {CUP)
Resale price meLhod {RPM)
CosL plus meLhod {CPM)
1ransacLional neL margin meLhod {1NMM)
ProliL spliL meLhod {PSM)
OLher meLhods LhaL are consisLenL wiLh Lhe arm's lengLh principle
China
82
1he new income Lax regime also recognizes Lhe concepL ol cosLsharing
arrangemenLs. 1axpayers may also apply lor Advance Pricing AgreemenLs
{APAs) in China.
Ceneral antiavoidance rules
1he new income Lax regime has inLroduced general anLiavoidance rules LhaL
require any Lax planning Lo have a "business purpose."
1he conLrolled loreign corporaLion {CFC) rules have also been inLroduced Lo
counLer planning based on income delerral. Under Lhe new rules, a CFC's
reLained earnings are sub|ecL Lo currenL Chinese LaxaLion il Lhe earnings are
reLained overseas wiLhouL a reasonable business purpose.
CcIcmbia
Country code 57
Bccct CMT -5
Ernst & Ycunc
CaIIe 113 Nc. 7 ~ 0 Tcrre AR
P!SD 3
Bccct
CcIcmbia
TeI 1 44 7000
Fax 1 44 7474
DiI and cas ccntacts
Luz Mara JaramiIIc
TeI 1 447230
Iuz.jaramiIIccc.ey.ccm
Custavc Pardc
TeI 1 447130
custavc.pardccc.ey.ccm
Diecc Casas
TeI 1 447050
diecc.e.casascc.ey.ccm
Ximena ZuIuaca
TeI 1 44170
ximena.zuIuacacc.ey.ccm
MarieIa Tamayc de Lauschus
TeI 1 447417
marieIa.tamayc cc.ey.ccm
Ricardc Ruiz
TeI 1 447537
ricardc.ruizcc.ey.ccm
AIeksan Dundjian
TeI 1 447297
aIeksan.cundjiancc.ey.ccm
A. At a glance
Fiscal regime
1he liscal regime LhaL applies in Colombia Lo Lhe peLroleum indusLry consisLs ol
a combinaLion ol corporaLe income Lax and royalLybased LaxaLion.
Poyalties
New oil and gas discoveries alLer Law 756 issued in 2002:
13
Field daily production
1monthly average in barrels oI crude
per day) Percentage
Up Lo 5,000 87
5,001 Lo 125,000 8 + {ProducLion 5,000) ` 0.10
125,001 Lo ^00,000 207
^00,001 Lo 600,000 20 + {ProducLion ^00,000) `
0.025
More Lhan 600,000 257
13 1ne |aw enterec |nto force on 25 Ju|v 2002 :Cff|c|a| 0|arv No. 44.878;.
China Colombia
83
RoyalLies lor gas exploiLaLion are obLained applying Lhe lollowing
percenLages on oil royalLies:
Location Percentage
Onshore and ollshore below
1,000looL depLh
807
Ollshore more Lhan a 1,000looL depLh 607
Bonuses
Lconomic righLs Lo be paid Lo Lhe Hydrocarbon NaLional Agency {ANH
14
):
15
RighLs lor Lhe use ol Lhe subsoil
and subsurlace
An amounL in US dollars per hecLare
depending on Lhe locaLion and area ol Lhe
block and Lhe duraLion ol Lhe phase.
RighLs lor Lhe exploiLaLion
{even in Lhe evaluaLion phase)
An amounL in US dollars per barrel.
ParLicipaLion righL
1
A percenLage ol Lhe producLion
{alLer royalLies) Lo Lhe exLenL agreed
in Lhe conLracL.
Production sharing contract 1P5C)
lL is no longer possible Lo execuLe new PSCs in Colombia.
PSC was Lhe Lype ol conLracL used in Colombia unLil Decree 1760 ol 2003
came inLo ellecL. PSCs execuLed belore Decree 1760 ol 2003 may be sLill in
lorce. 1herelore, iL is possible Lo become an associaLe ol a PSC il an associaLe
ol one ol Lhe conLracLs in lorce assigns iLs economic righLs in Lhe conLracL,
LoLally or in parL.
Exploration and Production 1E&P)
1he oil and gas conLracL model was changed, lrom PSC Lo an L&P conLracL
which is a Lype ol conLracL similar Lo a concession conLracL {royalLy/Lax
sysLem), enLered inLo wiLh Lhe ANH. 1he conLracLor explores and produces wiLh
auLonomy aL iLs own risk and cosL. 1he lengLh ol Lime in each phase ol Lhe L&P
conLracL is as lollows:
1
LxploraLion: 6 years
LvaluaLion: 1 2 years
LxploiLaLion: 2^ years {+ exLensions ol 10year periods
unLil linal depleLion)
1he conLracLor has all Lhe producLion righLs, alLer a sliding scale royalLy, and
makes a condiLional paymenL Lo Lhe ANH Lo share Lhe surplus income in case
ol high crude prices. NaLural gas and heavy crude have special incenLives.
lncome Lax raLe CorporaLe income Lax raLe 337 {as ol 2009)
Resource renL Lax NoL applicable
CapiLal allowances D, A, 307
17

lnvesLmenL incenLives L, Don, Lnv,
18
R&D
14 /cenc|a Nac|ona| ce ||crocarouros :/N|;.
15 |nc|ucec |n tne f8P contract vers|ons of 2009 anc 2010.
1 Uncer tne 2009 anc 2010 vers|ons of tne f8P contract a||cao|e for tnose enterec
|nto |n 2009 anc 2010 extens|ons can oe crantec uncer certa|n conc|t|ons.
17 0: cerec|at|on, /: amort|zat|on, 30x: 30x ca|ta| a||owance for |nvestment |n
rocuct|ve rea| f|xec assets, excet for free trace zone tax avers s|nce tn|s oenef|t
coes not a|v to tnem.
18 |: |osses can oe carr|ec forwarc |ncef|n|te|v, 0on: conat|ons, fnv: sec|a| cecuct|on
for |nvestments |n tne env|ronment. P80: sec|a| cecuct|on for |nvestments |n
sc|ent|f|c or tecnno|oc|ca| ceve|oment.
Colombia
84
B. Fiscal regime
1he liscal regime LhaL applies Lo Lhe peLroleum indusLry in Colombia consisLs ol
a combinaLion ol corporaLe income Lax and royalLybased LaxaLion.
Corporate tax
Corporate taxpayers
Companies LhaL are domiciled in Colombia {i.e., incorporaLed under Colombian
law) are Laxed on Lheir worldwide income {sub|ecL Lo review in deLail,
wiLh a corresponding Lax crediL). ColombianregisLered branches ol loreign
corporaLions are Laxed on Lheir Colombian source income {as delined) only.
Permanent establishment 1PE) "permanent activity"
Colombian Lax law does noL provide a deliniLion ol "permanenL esLablishmenL"
{PL). However, Colombia's Code ol Commerce does provide a lisL ol acLiviLies
LhaL qualily as a "permanenL acLiviLy." 1he Code provides LhaL il a loreign
company underLakes a permanenL acLiviLy in Colombian LerriLory, iL musL
incorporaLe a branch in Colombia Lo carry ouL Lhose acLiviLies.
AlLhough Colombia's Lax laws do noL provide a deliniLion ol permanenL
acLiviLies, Lhe Lax laws sLaLe LhaL branches are sub|ecL Lo Laxes in Colombia
as corporaLions, buL limiLed, lor income Lax purposes, Lo Lheir Colombian
source income.
However, iL should be noLed LhaL il a nonresidenL company earns Colombian
source income, Lhe income is Laxable in Colombia, regardless ol wheLher Lhe
nonresidenL company has a branch in Colombia. A nonresidenL company
LhaL is in Lhis posiLion may be required Lo lile an income Lax reLurn in Colombia
depending on Lhe income Lax wiLhholding LhaL applies Lo Lhe income
{see SecLion L below).
Corporate income tax rate
For liscal year 2010, Colombia's corporaLe income Lax raLe is 337. 1ax crediLs
are provided lor loreign Laxes paid by Colombian corporaLions Law 100^ ol
2005 {Free 1rade Zone Regime), esLablished a reduced income Lax raLe ol 157
lor legal enLiLies LhaL perlorm acLiviLies in Lhe indusLrial lree Lrade zones LhaL
are qualilied as "users lor manulacLuring" or "users services providers." 1he
reduced income Lax raLe does noL apply Lo commercial users
19
. However, iL is
imporLanL Lo noLe LhaL SubsecLion 2{1) ol Decree ^051 ol 2007 lorbids Lhe
esLablishmenL ol permanenL lree Lrade zones in areas ol "exploraLion,
exploiLaLion or exLracLion ol nonrenewable naLural resources."
Tax year and due dates Ior corporations
1he Lax year is Lhe calendar year. 1he CovernmenL seLs Lhe due daLes lor liling
income Lax reLurns and making Lax paymenLs annually. lncome Lax is paid in
live insLallmenLs by large Laxpayers and in Lwo insLallmenLs by all oLher
corporaLe Laxpayers. Lach year, Lhe Lax auLhoriLies idenLily and lisL Lhe
companies LhaL Lhey will consider Lo be large Laxpayers LhaL year, as well as Lhe
companies LhaL will be removed lrom Lhe lisL.
Taxable income
1he basis lor Lhe calculaLion ol Lhe annual income Lax paymenL is Lhe higher ol
Lhe lollowing amounLs: ordinary Laxable income and presumpLive income.
Crdinary taxable income
Ordinary Laxable income is calculaLed by subLracLing deducLible cosLs and
expenses lrom neL revenues {Laxed revenues minus rebaLes and discounLs).
ll Lhis calculaLion resulLs in a loss {NOL), Lhe loss may be carried lorward. WiLh
ellecL lrom Lax year 2007, Lax losses may be carried lorward wiLh no limiLaLion.
19 |n acc|t|on, tax avers oerat|nc uncer tne lree 1race Zone Pec|me no |oncer oenef|t
from tne 30x ca|ta| a||owance cue tne tax reform |ssuec |n 0ecemoer 2009.
Colombia
85
AddiLional resLricLions apply Lo Lhe Lransler ol Lax losses in mergers or spinolls
{which are Laxlree evenLs lor Colombian Lax purposes). 1he Lransler ol Lax
losses in mergers and spinolls applies exclusively il Lhe economic acLiviLy ol
Lhe companies involved {which generaLed Lhe losses) remains Lhe same alLer
Lhe merger or spinoll occurs.
Presumptive income
PresumpLive income is calculaLed as 37 ol Lhe prior Lax year's Lax equiLy.
For Lax purposes, Lax equiLy is Lax asseLs minus Lax liabiliLies. However, Lhe
recenL Lax relorm released aL Lhe end ol 2009 provides LhaL liabiliLies held
wiLh relaLed parLies abroad are noL accepLed liabiliLies {which will be deemed
as Lax equiLy).
Some asseLs may be excluded lrom Lhe Laxable basis, lor example, Lhe neL
equiLy value ol asseLs during nonproducLive periods ol an enLerprise.
20
1he excess ol presumpLive income ad|usLed lor inllaLion over ordinary income
may be carried lorward as a deducLion lor live years.
Costs and expenses
CosLs and expenses may generally be deducLed lrom income Lax, provided LhaL
Lhey are necessary, relaLed Lo Lhe generaLion ol Laxable Colombian source
income, and proporLionaLe, and Lhe expendiLure is noL limiLed or lorbidden by law.
Payments abroad
ln general, Laxpayers may deducL expenses incurred abroad il Lhey are relaLed
Lo naLional source income il:
1he applicable Lax wiLhholdings are made on Lhe paymenLs
1he amounLs charged comply wiLh Lransler pricing rules {when applicable)
Lxchange regulaLions are lullilled
21
ll Lax wiLhholdings are noL required, deducLibiliLy is limiLed Lo 157 ol Lhe neL
Laxable income belore such paymenL. Compliance wiLh Lransler pricing rules is
mandaLory, where applicable.
22
Provisions
As a general rule, provisions are noL deducLible, excepL lor provisions relaLed
Lo accounLs receivable and, sub|ecL Lo special rules, provisions lor Lhe paymenL
ol pensions.
Capital gains
Cains on sales ol asseLs considered lixed asseLs
23
and owned lor more Lhan Lwo
years are sub|ecL Lo Lhis Lax. CapiLal losses may be ollseL only againsL capiLal
gains. 1he parL ol Lhe capiLal gains LhaL corresponds Lo previous depreciaLion
deducLions musL be LreaLed as a deducLion recovery, which means LhaL Lhe
amounL is LreaLed as ordinary income.
Functional currency
1here are no provisions in Colombia relaLing Lo luncLional currency.
20 |n 21 Januarv 2009, a cec|s|on |ssuec ov a |ow tax court :1r|ouna| /cm|n|strat|vo ce
Cunc|namarca f||e 0024201; nas rov|cec tnat a we|| m|cnt oe seen as a searate
enterr|se. 1nus, to tne extent |t can oe cemonstratec ov tne taxaver, an ex|orat|on
we|| m|cnt oe seen as a searate enterr|se, notw|tnstanc|nc tne taxaver nas otner
rocuct|ve we||s. 1ne cec|s|on |s not |eca||v o|nc|nc |n Co|omo|a, out rov|ces aux|||arv
cr|ter|a tnat m|cnt oe ooservec ov tne Co|omo|an |ucces.
21 Sect|ons 123 anc 419 of tne Co|omo|an 1ax Coce.
22 Sect|ons 121 anc 122 of tne Co|omo|an 1ax Coce |nc|uce some excet|ons to tn|s 15x
||m|tat|on, as we|| as Sect|ons 124 anc 207 of tne Co|omo|an 1ax Coce.
23 Sect|on 0 of tne Co|omo|an 1ax Coce cef|nes |t as tnose assets wn|cn are not so|c or
excnancec |n tne recu|ar course of ous|ness.
Colombia
8 Colombia
TransIer pricing
1ransler pricing regulaLions are included in SecLions 2601 Lo 26010 ol Lhe
Colombian 1ax Code. 1hese rules were inLroduced by Law 863 ol 2003, and
Lhey basically lollow OLCD principles. 1he Lransler pricing regulaLions esLablish
LhaL Colombian Laxpayers musL apply Lhe arm's lengLh principle Lo crossborder
relaLedparLy LransacLions.
A Laxpayer wiLh gross equiLy LhaL equals or exceeds 100,000 Limes Lhe Colombian
Lax value uniL {UV1)
24
{approximaLely USS1,227,750) or wiLh gross income
LhaL equals or exceeds 61,000 Limes Lhe UV1 {approximaLely USS7^8,927),
musL prepare Lransler pricing documenLaLion lor each Lype ol crossborder
relaLedparLy LransacLion LhaL exceeds 10,000 Limes Lhe UV1 {approximaLely
USS122,775) and iL musL prepare a disclosure lorm relaLed Lo Lhese LransacLions.
A Laxpayer whose gross equiLy or gross income does noL exceed Lhe above
amounLs musL prepare Lransler pricing documenLaLion and a disclosure lorm,
il iL underLakes a LransacLion wiLh a Lax haven counLry wiLh a value exceeding
10,000 Limes Lhe UV1 {approximaLely USS122,775), regardless ol wheLher
Lhe LransacLion is wiLh a relaLed parLy. 1his Lype ol LransacLion is noL considered
Lo be aL arm's lengLh unless proven oLherwise. 1o daLe, Lhere is no lisL ol Lax
havens in Colombia.
Dividends
Colombia applies an impuLaLion sysLem Lo dividends. 1hus, dividends paid by
Colombian companies Lo oLher Colombian or loreign corporaLions are noL
sub|ecL Lo Lax il Lhe company generaLing Lhe proliLs was Laxed on Lhe proliLs
disLribuLed as dividends {Lemporal dillerences may allecL Lhis calculaLion).
OLherwise, dividends are sub|ecL Lo 207 income Lax wiLhholding il Lhe recipienL
is a Colombian company, or 337 il Lhe recipienL is a loreign corporaLion or an
individual who is noL obliged Lo lile an income Lax reLurn lor Lhe corresponding
year {as ol 2009).
Poyalty regimes
Poyalties
ln Colombia, ownership ol minerals lound beneaLh Lhe surlace, including oil and
gas, is vesLed in Lhe naLional CovernmenL. 1herelore, companies engaged in
Lhe exploraLion and exLracLion ol nonrenewable resources {i.e., oil and gas)
musL pay Lhe CovernmenL {Lhe ANH) a royalLy {regalia) aL Lhe producLion
lield, deLermined by Lhe MinisLry ol Mining as lollows:
New oil discoveries lollowing Lhe inLroducLion ol Law 756 issued in 2002
{L&P conLracLs):
Field daily production1monthly
average in barrels oI crude per day) Percentage 17)
Up Lo 5,000 87
5,001 Lo 125,000 8 + {ProducLion 5,000) ` 0.10
125,001 Lo ^00,000 207
^00,001 Lo 600,000 20 + {ProducLion ^00,000) ` 0.025
More Lhan 600,000 257
Prior Lo Lhe inLroducLion ol Law 756 issued in 2002, Lwo oLher royalLy regimes
applied: 207, and sliding scale {57 Lo 257).
24 lor 2010, Uv1 |s CCP$24.555. arox|mate|v ecua| to US$12,2775 :oasec on an
excnance rate of CCP$2,000 to tne US co||ar;.
87 Colombia
RoyalLies lor gas exploiLaLion are obLained by applying Lhe lollowing
percenLages Lo oil royalLies:
Location Percentage
Onshore and ollshore below 1,000looL depLh 807
Ollshore more Lhan 1,000looL depLh 607
Economics rights oI the ANH
25
Since Lhe esLablishmenL ol Lhe ANH,
2
conLracLs lor Lhe exploraLion and
exploiLaLion ol oil and gas have Lhe lollowing economic righLs:
27
Pight Ior the use oI the subsoil and subsurIace
Beginning wiLh Lhe second exploraLion phase, Lhe conLracLing parLy pays a lee
in US dollars as lollows:
28
Monthly amount per phase in U55/hectares on exploration areas
28

Size ol conLracL area

FirsL 100,000 hecLares
Lach hecLare in addiLion Lo
lirsL 100,000
Duration oI the phase = 18
monLhs
>18 monLhs = 18
monLhs
>18
monLhs
Within polygons A and B 2.^^ 3.25 3.25 ^.88
Cutside polygons A and B 1.63 2.^^ 2.^^ 3.25
CIIshore 0.81
Pight Ior the exploitation
1he conLracLing parLy pays ANH Lhe resulLing value ol mulLiplying
USS0.1236
29
by Lhe number ol barrels ol liquid hydrocarbon owned by Lhe
conLracLing parLy. 1his amounL increases annually, based on Lhe Lerms ol
Lhe conLracL.
Pight Ior high prices
From Lhe Lime when Lhe accumulaLed producLion ol Lhe exploiLaLion area,
including Lhe volume ol royalLies, exceeds live million barrels ol liquid
hydrocarbon, and in Lhe evenL LhaL Lhe inLernaLional oil relerence price is
higher Lhan Lhe price deLermined in Lhe conLracL {PO), Lhe conLracLing parLy
shall pay aL an agreed delivery poinL, a parLicipaLion wiLhin Lhe producLion neL
ol royalLies according Lo Lhe lollowing lormula:
25 |atest contract moce| tnat aears on tne /N| weos|te: www.ann.cov.co :|atest
vers|on for contracts enterec |nto |n 2010. 1ne f|cures nave oeen estao||snec ov tne
acm|n|strat|ve act C|rcu|ar 01 of 2010 |ssuec ov tne /N| for 2010;.
2 1ne /N| was estao||snec v|a Nat|ona| 0ecree No 170, 2003.
27 fstao||snec w|tn|n tne f8P contract :|atest moce| contract for f8P contracts to oe
enterec |nto |n 2010;.
28 /nnex 0 of tne |atest vers|on of tne f8P contract, for tnose enterec |nto |n 2010,
o|nts out |n 01 tnat tn|s r|cnt sna|| not oe cnarcec to tne extent f|rst ex|orat|on
nase |s 12 montns or |ower.
29 /mounts a||cao|e for vear 2010.
ANH PaymenL X S
P PO
P
88 Colombia
Notes:
1. For gas, Lhe exempLion applies live years alLer commencemenL ol Lhe
exploiLaLion lield, insLead ol observing accumulaLed producLion.
2. 1he ANH may ask Lo receive Lhis righL in cash insLead ol kind, according Lo
cerLain rules seL up in Lhe L&P conLracL.
3. P: lor liquid hydrocarbon, P is Lhe average benchmark ol W1l in US dollars
per barrel. For naLural gas, P is Lhe average benchmark ol US Cull CoasL
Henry Hub naLural gas in US dollars per million B1U.
^. PO: lor liquid hydrocarbon, PO is Lhe base price ol benchmark crude oil
expressed in US dollars per barrel, and lor naLural gas, iL is Lhe average
naLural gas price in US dollars per million B1U, according Lo a Lable
included in Lhe conLracL. 1he Lable varies depending on {i) APl graviLy ol
crude oil {sLarLing lrom 15 APl). For heavy crude oil, Lhe righLs lor high
prices are Lriggered il APl graviLy is higher Lhan 10, or {ii) discoveries
more Lhan 300 meLers ollshore, or {iii) amounL ol naLural gas produced
and exporLed. However, il Lhe APl graviLy is 107 or less, Lhen Lhe righLs lor
high prices are noL Lriggered.
5. AlmosL all Lhe amounLs are sub|ecL Lo a read|usLmenL lormula already seL
up in Lhe L&P model conLracL.
Pights oI participation in the production to the extent oI extension
oI exploitation phase
ll Lhe exploiLaLion phase ol an exploiLaLion area is exLended lrom Lhe iniLial
exploiLaLion phase subscribed in Lhe L&P conLracL, Lhe conLracLing parLy pays
Lhe ANH a sum equivalenL Lo 107 ol Lhe producLion {lor lighL hydrocarbon),
or 57 in case ol heavy hydrocarbon.
Cther participation rights
1he L&P model conLracL applicable lor Lhose enLered inLo in 2009 and 2010,
allows Lhe ANH Lo agree wiLh Lhe conLracLor a percenLage ol Lhe producLion,
sub|ecL Lo negoLiaLion.
C. Capital allowances
Depreciation
Fixed asseLs {oLher Lhan land) are depreciable and Lhe lollowing uselul
lives
30
apply:
CompuLers and vehicles 5 years
Machinery and equipmenL 10 years
Real esLaLe {e.g., pipeline, buildings) 20 years
However, Laxpayers may apply a dillerenL uselul lile {lower or higher)
alLer requesLing auLhorizaLion lrom Lhe naLional Lax auLhoriLy {DlAN).
1his requesL musL be submiLLed noL less Lhan Lhree monLhs prior Lo Lhe sLarL
ol Lhe relevanL Laxable period. 1his means LhaL, lor example, a requesL lor
auLhorizaLion Lo use a dillerenL uselul lile lor 2010 musL have been liled
belore 30 SepLember 2009.
Cenerally, Lhe depreciaLion deducLion may be calculaLed using any ol Lhe
lollowing meLhods:
1he sLraighLline meLhod
1he decliningbalance meLhod:
Any oLher meLhod ol recognized Lechnical value auLhorized by Lhe DlAN
30 Sect|on 2 of Pecu|atorv 0ecree 3019 of 1989.
89 Colombia
1hese meLhods lollow inLernaLional accounLing principles. For insLance, in Lhe
decliningbalance meLhod, Lhe asseLs are depreciaLed annually aL a lixed raLe.
1his meLhod requires Lhe Laxpayer Lo seL a salvage or residual value; oLherwise, a
balance would remain, making Lhe depreciaLion period inliniLe. Under Lhis meLhod,
Lhe annual lixed depreciaLion raLe is calculaLed using Lhe lollowing lormula:
For asseLs acquired during Lhe Laxable year or period, Lhe depreciaLion amounL
is calculaLed in proporLion Lo Lhe number ol monLhs {or lracLion ol monLhs)
LhaL Lhe asseLs {or improvemenLs) were in service.
1he salvage value is relaLed Lo Lhe realizaLion amounL aL Lhe Lime LhaL Lhe
asseL's uselul lile ends. 1he Lax law has noL esLablished special rules wiLh
mandaLory raLes lor seLLing Lhe salvage value. Accordingly, Laxpayers may
deLermine Lhe value Lhemselves. However, Laxpayers musL be able Lo
demonsLraLe Lo Lhe Lax auLhoriLies, il required, Lhe procedures, Lechniques
and evidence LhaL prove how Lhe salvage value was deLermined.
Likewise, il Lhe asseLs are Lo be used lor a Lerm exceeding eighL hours daily,
Lhe company may depreciaLe lor addiLional shilLs {257 per each eighL
addiLional hours). 1his meLhod could signilicanLly increase Lhe depreciaLion
raLe Lo be used in Lhe year, by allowing Lhe Laxpayer Lo Lake an acceleraLed
depreciaLion lor addiLional shilLs.
Amortization oI investments
lnvesLmenLs or disbursemenLs made lor business purposes
31
and inLangibles
leasible ol impairmenL are amorLized.
For hydrocarbon acLiviLy, Lhe lollowing values may be LreaLed as delerred
amorLizable asseLs:
lniLial preoperaLive insLallaLion, organizaLion and developmenL expenses
AcquisiLion cosLs or well producLion
LxploraLion and producLion cosLs ol naLural, nonrenewable
naLural resources:
ProducLion laciliLies
1he general rule is Lo amorLize all invesLmenLs over a minimum ol live years,
excepL where iL can be demonsLraLed LhaL iL should be done over a shorLer
Lerm, as a resulL ol Lhe naLure or duraLion ol Lhe business. However, lor
hydrocarbon acLiviLy, il iL is deLermined LhaL invesLmenLs made in exploraLion
are unsuccesslul, Lhe acLivaLed values should be amorLized in lull in Lhe same
year LhaL Lhe condiLion is deLermined and, in any case, no laLer Lhan wiLhin Lhe
lollowing Lwo years. 1he amorLizaLion ol invesLmenLs lor Lhe oil and gas
indusLry may be summarized as lollows:
Amortization oI
investments Method Period
LxploraLion and
producLion cosLs
{`)
1echnical uniLs ol operaLion or
sLraighLline meLhod
Five years
sLraighLline
meLhod lor
2002 and on
OLher invesLmenLs
{preoperaLive)
SLraighLline meLhod Five years
or less il Lhe
business
requires iL
31 |n accorcance w|tn tne account|nc metnoc usec, tnev are to oe recorcec for tne|r
amort|zat|on as ceferrec assets.
DepreciaLion raLe = 1
n Salvage
lniLial cosL
90
Amortization oI
investments Method Period
`Unsuccesslul
invesLmenLs
When invesLmenLs in exploraLion are
unsuccesslul, Lheir amounL may be
amorLized in Lhe year such condiLion
is deLermined or in eiLher ol Lhe
lollowing Lwo years. For Lhis purpose,
expenses in exploraLion, prospecLaLion
or insLallaLion ol unsuccesslul lields
may be amorLized againsL Lhe neL
income lrom successlul exploiLaLions
ol Lhe same naLure.
307 capital allowance
32
lndividuals and legal enLiLies may deducL 307 ol Lhe amounL ol Lheir acLual
invesLmenLs made in real, producLive lixed asseLs, in Lhe year LhaL Lhe
invesLmenL is made.
33
1his beneliL is exLended Lo Lhe shareholder aL Lhe Lime
ol disLribuLion ol Lhe corresponding dividends {real savings). FurLhermore,
Lhis special deducLion is losL il Lhe real, producLive lixed asseL is no longer used
in Lhe incomeproducing acLiviLy, or il iL is sold belore Lhe expiraLion ol Lhe
depreciaLion or amorLizaLion Lerm ol Lhe asseL. ln Lhis case, Lhe Laxpayer is
obliged Lo reverse a proporLion ol Lhe Lax beneliL received, corresponding Lo
Lhe porLion ol Lhe asseL's uselul lile remaining aL Lhe Lime when Lhe Lransler,
or change in use, is verilied {LhaL is, Lhe Laxpayer musL recognize Lhe amounL
as Laxable income in Lhe Lax year when Lhe special deducLion is losL).
D. Incentives
Exploration
During a nonproducLive period, an exploraLion company is noL required Lo pay
income Lax under Lhe presumpLive income sysLem {explained in SecLion B).
1he 307 capiLal allowance may be carried lorward il Lhe company generaLes
Lax losses.
Tax holiday
Colombia does noL have any Lax holiday regime.
Tax losses
LllecLive lrom Lax year 2007, Lax losses may be carried lorward wiLh no Lime
limiL or limiLaLion on Lhe amounL. AddiLionally, Lhe Lax regulaLions provide no
limiLaLions Lo Lhe amounL ol Lax losses available Lo ollseL againsL Laxable
income each Lax year. According Lo Lhe Lax auLhoriLies, Lax losses available
belore 31 December 2006, however, are covered by Lhe prior rules. 1hese rules
provide LhaL losses may be carried lorward lor a limiLed Lerm ol eighL years and
LhaL only 257 ol Lax losses is available Lo ollseL each Lax year.
AddiLional resLricLions apply Lo Lhe Lransler ol losses in mergers or spinolls
{which are Laxlree evenLs lor Colombian Lax purposes).
ln mergers, Lhe surviving enLiLy may ollseL losses originaLing in Lhe merged
enLiLies, limiLed Lo Lhe percenLage ol iLs equiLy parLicipaLion in Lhe merged
enLiLy's equiLy.
32 Pr|or to tne tax reform |ssuec on 0ecemoer 2009, tne ca|ta| a||owance a||cao|e
from 2007 to 2009 was 40x.
33 Procuct|ve, rea| f|xec assets are cef|nec as tanc|o|e coocs, suo|ect to cerec|at|on
or amort|zat|on, usec ermanent|v |n tne |ncomerocuc|nc act|v|tv. 1nev mav oe
accu|rec ov f|nanc|a| |eas|nc. |f tne rocuct|ve, rea| f|xec assets are accu|rec from a
re|atec artv, tne 30x ca|ta| a||owance coes not a|v: nowever, tne tax autnor|tv nas
|ssuec a ru||nc a||ow|nc accu|s|t|ons from overseas re|atec art|es. /ssets ou||t ov tne
taxaver are art of tne |nsta||at|on neecec for cr||||nc anc mav c|ve r|se to tne 30x
ca|ta| a||owance.
Colombia
91
ln spinolls, Lhe new company {or companies) or Lhe absorbing company
may ollseL losses originaLing in Lhe spunoll enLiLy, limiLed Lo Lhe parLicipaLion
percenLage ol Lhe new companies in Lhe equiLy ol Lhe spunoll company.
1ax losses generaLed do noL allecL Lhe enLiLy's presumpLive income lor Lhe
relevanL Lax year.
1o have Lhe righL Lo ollseL Lax losses, companies involved in mergers or spin
olls are required Lo carry on Lhe same economic acLiviLy as Lhey did belore Lhe
merger or spinoll process.
34
Pegional incentives
SecLion 16 ol Lhe Decree 1056 ol 1953 {Oil Code) sLaLes LhaL "oil exploraLion
and exploiLaLion, Lhe exLracLed crude oil, iLs derivaLives and iLs LransporLaLion,
machines and elemenLs used on iLs beneliL, and in Lhe consLrucLion and
mainLenance ol relineries and pipelines" are exempL lrom deparLmenLal or
municipal Laxes. ln Lhese circumsLances, Lhe Laxpayer may be required Lo lile an
income Lax reLurn Laxed aL zero raLe.
ln addiLion, anoLher incenLive exisLs lor oil and gas acLiviLies under Lhe indusLry
and commerce Lax {lCA).
35
1he lCA Lax regime does noL assess Lax lor Lhe
exploiLaLion ol oil and gas il Lhe amounL received by Lhe municipaliLy as
royalLies and shared proliLs is equal Lo or greaLer Lhan Lhe amounL iL would
have received oLherwise as a Lax under Lhe lCA.
3
ln Lhese circumsLances, Lhe
Laxpayer is noL required Lo lile an lCA reLurn {Lhe case musL be analyzed when
Lhe Laxpayer obLains linancial revenues).
Donations
DonaLions ellecLively made during Lhe Lax period are deducLible by Lhe
beneliciary il:
1he enLiLy is deemed Lo be a nonLaxpayer under SecLion 22 ol Lhe
Colombian 1ax Code
37

Or
1he enLiLy is an associaLion, corporaLion or loundaLion whose ob|ecL and
acLiviLy correspond Lo Lhe developmenL ol healLh, educaLion, culLure,
religion, sporLs, Lechnological and scienLilic research, ecology and
environmenLal proLecLion, delense, proLecLion and promoLion ol human
righLs and access Lo |usLice or social developmenL programs provided Lhey
are ol general inLeresL
DonaLions are limiLed Lo 307 ol Lhe neL Laxable income calculaLed belore
subLracLing Lhe invesLmenL value. NoneLheless, Lhe 307 limiLaLion does noL
apply in some special cases.
SecLion 125 ol Lhe Colombian 1ax Code sLaLes LhaL a cerLilicaLe issued by Lhe
beneliciary ol Lhe donaLion, signed by Lhe sLaLuLory audiLor or accounLanL, is
required in order Lo LreaL donaLions as an income Lax deducLion. 1he cerLilicaLe
musL include deLails ol Lhe lorm, amounL and desLinaLion ol Lhe donaLion and iL
musL sLaLe LhaL Lhe requiremenLs lisLed above are lullilled.
34 Sect|on 147 of tne Co|omo|an 1ax Coce.
35 1ne tr|ccer|nc event |s tne exerc|se or uncertak|nc, c|rect|v or |nc|rect|v, of
commerc|a|, |ncustr|a| or serv|ce act|v|t|es w|tn|n tne |ur|sc|ct|on of a mun|c|a||tv or
c|str|ct, e|tner ermanent|v or occas|ona||v, |n a certa|n roertv, w|tn or w|tnout a
commerc|a| estao||snment.
3 Sect|on 39 |aw 14, 1983.
37 Sect|on 22 of tne Co|omo|an 1ax Coce ||sts as nontaxavers: 1ne nat|on, tne
ceartments anc |ts assoc|at|ons, tne c|str|cts, tne |nc|cenous terr|tor|es, tne
mun|c|a||t|es anc otner terr|tor|a| ent|t|es, rec|ona| autonomous cororat|ons,
metroo||tan areas, mun|c|a||t|es, assoc|at|ons, suer|ntencenc|es, sec|a|
acm|n|strat|ve un|ts, ceartments assoc|at|ons, mun|c|a||t|es fecerat|ons, |nc|cenous
ent|t|es, uo||c estao||snments, cecentra||zec off|c|a| estao||snments anc wnen tne |aw
coes not state tnat tnev are taxavers.
Colombia
92
5pecial deduction Ior environmental investments
1axpayers LhaL make volunLary invesLmenLs lor Lhe conLrol and improvemenL
ol Lhe environmenL are enLiLled Lo deducL Lhe value ol Lhe invesLmenLs made
during Lhe relevanL Lax year lrom Lheir income. MandaLory invesLmenLs are
excluded lrom Lhis deducLion.
1he law esLablishes several addiLional requiremenLs lor Lhis deducLion Lo apply.
1he LoLal value ol Lhe deducLion may noL exceed 207 ol Lhe Laxpayer's neL
income, calculaLed belore subLracLing Lhe invesLmenL value.
5pecial deduction Ior investments in scientiIic
or technological development
lnvesLmenLs in pro|ecLs qualilied by Colciencias {Lhe Colombian lnsLiLuLe lor
DevelopmenL ol Science and 1echnology, a CovernmenL enLiLy) as "scienLilic,
Lechnological or ol a Lechnological innovaLion naLure," are deducLible Lo Lhe
exLenL ol 1257 ol Lhe invesLmenL value in Lhe relevanL Lax year. 1he law
esLablishes various addiLional requiremenLs lor Lhis deducLion Lo apply.
1he LoLal value ol Lhe deducLion may noL exceed 207 ol Lhe Laxpayer's neL
income, calculaLed belore subLracLing Lhe invesLmenL value.
Income tax discount Ior VAT paid on heavy machinery
Ior basic industries
1he VA1 paid on Lhe imporLaLion ol heavy machinery lor use by basic indusLries
may be used as a Lax crediL {discounL) lor income Lax purposes. 1he
hydrocarbon indusLry is considered Lo be a basic indusLry lor Lhese purposes.
38
E. Withholding taxes
Colombia has a wiLhholding Lax regime LhaL is inLended Lo secure Lhe collecLion
ol Laxes and make Lhe sysLem more ellicienL by providing lor Lhe advance
collecLion ol Lax. 1he mosL imporLanL Laxes sub|ecL Lo Lhis procedure are
income Lax, VA1, sLamp Lax and indusLry and commerce Lax {a municipal Lax
described in more deLail below).
Payments made abroad
Cenerally, services rendered abroad generaLe loreign source income and,
Lherelore, no Colombian wiLhholding Lax applies. 1his provision does noL apply
Lo services rendered abroad LhaL are, by express legal provision, considered Lo
be generaLors ol naLional source income. For example, Lhese services include
paymenLs or crediLs Lo accounLs relaLed Lo consulLing, Lechnical services and
Lechnical assisLance services,
39
which are sub|ecL Lo wiLhholding aL Lhe raLe ol
107, irrespecLive ol wheLher Lhey are rendered in Lhe counLry or abroad.
Unless modilied by a LreaLy,
40
Lhe lollowing Lable conLains a lisL ol Lhe mosL
relevanL iLems sub|ecL Lo wiLhholding Lax, LogeLher wiLh Lhe relevanL
wiLhholding raLes on paymenLs made Lo beneliciaries abroad. 1his lisL
is noL exhausLive:
Items
Income tax
withholding
Deductibility
1income tax) VAT***
PaymenL lor Lechnical
assisLance
42
services and
consulLing {rendered in
Colombia or abroad)`
107 157 limiL does
noL apply
167
PaymenL lor Lechnical
services
43
{rendered in
Colombia)`
107 157 limiL does
noL apply
167
38 Sect|on 2582 of tne Co|omo|an 1ax Coce.
39 Sect|on 408 of tne Co|omo|an 1ax Coce.
40 1reat|es to revent couo|e taxat|on enterec |nto w|tn Sa|n anc Cn||e are
a||cao|e for 2010.
Colombia
93
Items
Income tax
withholding
Deductibility
1income tax) VAT***
PaymenL lor Lechnical
services
44
{rendered
abroad)`
107 157 limiL does noL
apply
07
Overhead expenses lor
general services rendered
abroad and charged Lo
Lhe home ollice
07 NondeducLible`` 07
RoyalLies in acquisiLion
and exploiLaLion ol
inLangibles
337 as ol 2008 1007 167
PaymenLs lor services
rendered in Colombia
{oLher Lhan Lhose
menLioned above)
337 as ol 2008 157 limiL does
noL apply
167
PaymenLs lor services
rendered abroad as a
general rule {oLher Lhan
Lhose menLioned above)
07 LimiLaLion ol 157
ol neL Laxable
income
07
414243
NoLes:
` For Lhese Lypes ol services, Lhe supplier musL be a nonresidenL in
Colombia {paragraph 2, SecLion ^08 ol Lhe 1ax Code).
`` PaymenLs are deducLible il Lhe LransacLion is sLrucLured as a service and
pursuanL Lo Lhe arm's lengLh principle, supporLed by a Lransler pricing
sLudy, regardless ol wheLher iL is sub|ecL Lo wiLhholding. 1he 157 limiLaLion
applies only il no wiLhholding applies.
``` ln order Lo expediLe Lhe Lax collecLion sysLem, Lhe wiLhholding raLe is 1007
lor Lhose who conLracL wiLh people residenL or domiciled abroad buL who
render Lhe services in Lhe naLional LerriLory. ln Lhis case, a special
wiLhholding meLhod is applied, whereby Lhe Colombian residenL who
requesLs Lhe service musL wiLhhold Lhe LoLal VA1 generaLed, using a
reverse charge mechanism. ll Lhe VA1 paid is crediLable, Lhe residenL
compuLes Lhe sellaccounLed VA1 amounL lrom iLs bimonLhly VA1 reLurn
lor Lhe period when Lhe paymenL was made.
ProIits remitted overseas
WiLh ellecL lrom 1 January 2007, proliLs remiLLed abroad by branches ol
loreign corporaLions are noL sub|ecL Lo income Lax wiLhholding, regardless ol
wheLher Lhe branch has paid Laxes on Lhe proliLs. 1his modilicaLion was
inLroduced by Law 1111 ol 2006, which repealed Lhe branch remiLLance Lax
{lormerly 77).
ProliLs generaLed prior Lo 1 January 2007 were Laxed aL 77 unless Lhe proliLs
were reinvesLed lor live years.
As explained, il Lhe company operaLes in a legal lorm LhaL is dillerenL lrom
a branch {Lhe LradiLional enLiLy), Lhe disLribuLion ol dividends or proliLs Lo
shareholders or parLners who are noL domiciled in Colombia is noL sub|ecL Lo
income Lax when Lhe dividends or proliLs have been Laxed aL Lhe corporaLe
level. OLherwise, dividends or proliLs disLribuLed abroad are sub|ecL Lo income
Lax aL Lhe general raLe ol 337.
41 1o cua||fv for tne recucec w|tnno|c|nc tax rate anc for tne cecuct|o|||tv of avments,
tne acreement must oe rec|sterec w|tn tne H|n|strv of Commerce, |ncustrv
anc 1our|sm.
42 |o|c. |owever, tne tax autnor|tv nas |ssuec a ru||nc a||ow|nc accu|s|t|ons from overseas
re|atec art|es.
43 |o|c.
Colombia
94
1he amounLs Laxed are wiLhheld by Lhe legal enLiLy when Lhe dividends are
crediLed Lo Lhe shareholder's accounL.
44
1he lollowing Lable seLs ouL Lhe wiLhholding Lax LreaLmenL ol dividends
and proliLs.
Income tax withholding
ProliLs LhaL paid Laxes in Lhe name ol
Lhe corporaLion
07`
ProliLs LhaL did noL pay Laxes in Lhe
name ol Lhe corporaLion
337 lor nonresidenLs``
207 lor Laxpayer obligaLed by law Lo
presenL income Lax reLurn
Note:
` As a resulL ol Lhe Lax relorm ol 2006, ellecLive lrom liscal year 2007,
Lhe income Lax raLe LhaL applies Lo dividends or parLicipaLions received
by corporaLions or oLher enLiLies domiciled in Lhe counLry changed lrom
77 Lo 07.
45
`` CurrenL LreaLies in lorce {Spain and Chile) do noL provide reliel Lo Lhis raLe.
Some reliel is provided, only when income is exempLed aL Lhe corporaLe
level, sub|ecL Lo cerLain condiLions.
Interest on credit obtained abroad
Cenerally, paymenLs or crediLs Lo accounL made by legal enLiLies relaLing Lo
inLeresL are sub|ecL Lo wiLhholding, aL a raLe ol 337 lor 2008 onwards {unless
modilied by a LreaLy
4
). NeverLheless, Lhe lollowing crediLs obLained abroad
{among oLhers) are noL considered as naLional sourced
47
income and,
Lherelore, Lhey are noL sub|ecL Lo wiLhholding:
ShorLLerm {12 monLhs) crediLs originaLing lrom imporLs ol goods and
bank overs
CrediLs lor loreign Lrade operaLions obLained Lhrough linancial corporaLions
and banks incorporaLed pursuanL Lo Lhe Colombian laws in ellecL
CrediLs lor acLiviLies LhaL are considered ol inLeresL lor Lhe economic and
social developmenL ol Lhe counLry;
48
oil and gas indusLry acLiviLies qualily
in Lhis caLegory
Please noLe: loreign indebLedness is noL allowed lor branches.
F. Financing considerations
Colombia does noL apply any Lhin capiLalizaLion rules. 1herelore, Lhere are no
limiLaLions on Lhe raLio ol debL Lo equiLy.
C. Transactions
Farm in and Iarm outs
Farmin arrangemenLs are commonly used in Colombia in Lhe oil and gas
indusLry. A larm in Lypically involves Lhe Lransler ol parL ol an oil and gas
inLeresL in consideraLion lor an agreemenL by Lhe Lransleree {Lhe larmee)
Lo make cerLain expendiLures LhaL would oLherwise have Lo be underLaken
by Lhe owner {Lhe larmor). For Lax purposes, Lhe local selling price cannoL
be lower Lhan 757 or higher Lhan 1257 ol Lhe lair markeL value ol Lhe righLs.
1ransacLions wiLh loreignrelaLed parLies musL comply wiLh Lransler
pricing provisions.
44 Suosect|on 27:o; of tne Co|omo|an 1ax Coce.
45 Sect|on 13, |aw 1111 of 200.
4 1reat|es to revent couo|e taxat|on enterec |nto w|tn Sa|n anc Cn||e are
a||cao|e for 2010.
47 Sect|on 25 of tne Co|omo|an 1ax Coce.
48 |n accorcance w|tn tne o||c|es acotec ov tne Nat|ona| Counc|| on fconom|c anc
Soc|a| Po||cv :CCNPfS;.
Colombia
95
5elling shares in a company 1consequences Ior resident and
nonresident shareholders)
A share disposal is generally sub|ecL Lo Lhe capiLal gains or income Lax regime.
1he Laxable capiLal gain or Laxable neL income is equal Lo Lhe posiLive dillerence
beLween Lhe sales price ol Lhe asseL and iLs Lax basis {liscal cosL). Sales Lo
loreignrelaLed parLies musL comply wiLh Lransler pricing provisions. UnrelaLed
sales or sales beLween residenLrelaLed parLies cannoL be perlormed lor less
Lhan 757 or higher Lhan 1257 ol Lhe lair markeL value ol Lhe asseLs sold.
NonresidenLs LhaL dispose ol shares held direcLly in a Colombian company
are sub|ecL Lo Lax in Colombia. ll Lhe shares are held indirecLly, Lhe disposal
is noL Laxable.
AsseLs owned in Colombia lor Lwo years or more are liable Lo Lax as capiLal
gains on sales. AsseLs owned lor less Lhan Lwo years are liable Lo income Lax
upon sale. ln boLh cases, Lhe Lax raLe is 337.
H. Indirect taxes
VAT/C5T
Colombian VA1 is Lriggered by Lhe lollowing LransacLions:
49
1he sale ol movable Langible asseLs {sales ol lixed asseLs are noL Laxed
wiLh VA1)
1he imporLaLion ol goods
1he provision ol services in Lhe naLional LerriLory
1he operaLion ol games ol chance or Lhe supply ol LickeLs lor games
ol chance {excluding loLLeries)
ln some cases specilied in Lhe Lax laws, Lhe imporL ol services {LhaL is, services
rendered abroad and used in Colombia) is sub|ecL Lo VA1 il Lhe recipienL ol Lhe
service is locaLed in Colombia. 1he services sub|ecL Lo Lhis provision include Lhe
lollowing {Lhis lisL is noL exhausLive):
Licenses and auLhorizaLions lor Lhe use ol inLangible asseLs
ConsulLing and advisory {including Lechnical assisLance services) and audiL
services; Lechnical services are noL included under Lhis provision
RenLal ol corporaLe movable asseLs
lnsurance and reinsurance services
Crude oil Lo be relined, naLural gas, buLane and naLural gasoline are excluded
lrom VA1 under SecLion ^25 ol Lhe Colombian 1ax Code. OLher excluded
producLs include goods LhaL are basic necessiLies and services, such as healLh,
LransporLaLion, educaLion and public services {among oLhers). Lxcluded
supplies are noL sub|ecL Lo VA1 and, Lherelore, Lhe VA1 paid Lo suppliers ol
goods and services cannoL be crediLed in Lhe VA1 reLurn and should be
accounLed lor as an increase in Lhe cosL or expense ol Lhe goods or service.
ll a company exclusively makes excluded supplies, Lhe VA1 paid on iLs supplies
cannoL be recovered Lhrough Lhe VA1 crediL sysLem; Lhus, VA1 paid becomes an
addiLional cosL or expense lor Lhe company.
ln Colombia, Lhe Lerm "exempL supplies" is used lor supplies ol goods and
services LhaL are liable Lo VA1, buL are zeroraLed {Laxed aL 07). LxporLed
goods and services are included wiLhin Lhis caLegory. ln Lhis case, Lhe VA1 paid
Lo suppliers ol goods and services may be recovered Lhrough Lhe VA1 crediL
sysLem. ll, as a resulL ol making exempL supplies, Lhe Laxpayer has paid more
VA1 Lo iLs suppliers Lhan iL has charged iLs cusLomers, Lhe crediL balance may
be requesLed as a relund lrom Lhe Lax auLhoriLies.
1o improve Lhe Lax collecLion sysLem, Lhe Colombian CovernmenL has
inLroduced a VA1 wiLhholding mechanism and has designaLed cerLain enLiLies as
VA1 wiLhholding agenLs {including CovernmenL deparLmenLs, large Laxpayers,
Colombian payers Lo nonresidenL enLiLies and VA1 Laxpayers LhaL qualily under
Lhe VA1 common regime). 1hese agenLs are responsible lor wiLhholding 507 ol
49 Sect|on 420 of tne Co|omo|an 1ax Coce.
Colombia
9 Colombia
Lhe Lax due on any paymenL or accounLing accrual relaLed Lo Laxable goods or
services. ln case ol LransacLions wiLh nonresidenLs {boLh enLiLies and
individuals), Lhe wiLhholding raLe is 1007.
1he general VA1 raLe is 167. 1his raLe applies Lo all goods and services, unless
a specilic provision allows a reduced Lax raLe.
1he VA1 raLe on imporLed goods lor Lhe oil and gas secLor is generally 167.
1he Lax basis is Lhe cosL, insurance and lreighL {ClF) value ol Lhe goods, plus
Lhe value ol any applicable cusLoms duLies. However, Lhe Colombian 1ax Code
ollers Lhe lollowing VA1 beneliLs lor imporLed goods:
SubsecLion ^28 {e) ol Lhe Colombian 1ax Code esLablishes a VA1 exclusion
lor Lhe Lemporary imporLaLion ol heavy machinery lor use by basic
indusLries {Lhe hydrocarbon secLor is regarded as a basic indusLry) Lo Lhe
exLenL LhaL Lhose goods are noL produced in Lhe counLry {sub|ecL Lo Lhe
opinion given by Lhe MinisLry ol Commerce, lndusLry and 1ourism). Any
requesL lor VA1 exclusion musL be submiLLed aL Lhe Lime ol Lhe imporLaLion
SubsecLion ^28 {g) ol Lhe Colombian 1ax Code esLablishes a VA1 exclusion
lor ordinary imporLs ol indusLrial machinery made by high exporL users
{Usuarios AlLamenLe LxporLadores) Lo Lhe exLenL LhaL Lhe machinery
is used Lo Lranslorm raw maLerials and does noL have local producLion
{according Lo Lhe opinion given by Lhe MinisLry ol Commerce, lndusLry
and 1ourism). Any such requesL lor exclusion should be submiLLed aL Lhe
Lime ol Lhe imporLaLion
SubsecLion ^28 {l) ol Lhe Colombian 1ax Code esLablishes a VA1 exclusion
lor imporLaLion ol machinery or equipmenL lor LreaLmenL ol residues when
said machinery is noL produced in Lhe counLry
Import duties
Coods imporLed by oil and gas secLor companies on a permanenL basis are
generally sub|ecL Lo cusLoms duLies and VA1 charges even il Lhey are imporLed
on a nonreimbursable license basis.
NoneLheless, Decree ^7^3 ol 2005 esLablishes a specilic lisL ol cusLoms
subheadings LhaL are exempLed lrom cusLoms duLy il Lhe goods are imporLed
by companies devoLed Lo Lhe exploraLion, exploiLaLion and LransporLaLion ol
mines and Lhe exploraLion, relinemenL and LransporLaLion ol hydrocarbons.
1his cusLoms duLy beneliL applies unLil 19 OcLober 2010.
Export duties
No duLies apply Lo goods or services exporLed lrom Colombia.
Excise duties
Lxcise duLies do noL apply Lo upsLream oil and gas.
5tamp tax
SLamp Lax is a Lax levied on any public or privaLe documenL delivered or
accepLed in Colombia {including securiLies), or delivered in Colombia buL
perlormed in Colombia, or LhaL generaLes obligaLions in Colombia, which
evidences Lhe esLablishmenL, modilicaLion or exLincLion ol obligaLions, Lheir
exLension or assignmenL, provided iL exceeds Lhe amounL ol 6,000 Lax value
uniLs {USS59,^07 lor 2009, approximaLely).
Since 2007, sLamp Lax raLe is being decreased 0.57 each year in order Lo
achieve 07. For 2010, Lhe sLamp Lax raLe has reached 07; which will remain
Lhe Lax raLe lor luLure Laxable years. However, conLracLs signed belore 2010
shall conLinue bearing Lhe sLamp Lax.
Pegistration tax
RegisLraLion Lax is a Lax levied on documenLs or conLracLs LhaL musL be
regisLered wiLh Lhe Chamber ol Commerce or wiLh Lhe Public lnsLrumenLs Ollice.
As explained below, a branch is Lhe mosL common and convenienL legal
sLrucLure lor oil and gas companies. Companies LhaL operaLe using oLher legal
97 Colombia
sLrucLures musL regisLer wiLh Lhe auLhoriLies {e.g., a noLary) il Lhey decide Lo
increase Lheir paLrimony by lunding, and Lhey musL pay regisLraLion Laxes
whereas branches do noL have Lhese obligaLions. lnsLead, a branch mainLains a
special accounL named Lhe Su|ementarv |nvestment to tne ass|cnec ca|ta|,
in which iL regisLers capiLal dillerences alLer lunding, |usL as il Lhe accounL
was a currenL accounL held wiLh Lhe head ollice.
I. Cther
Equity tax
LquiLy Lax is imposed on legal enLiLies and individuals who, as ol
1 January 2007, owned neL equiLy {i.e., gross equiLy minus debLs,
measured in Lax Lerms) in excess ol COPS3,000 million {approximaLely
USS1.25 million). lL is a Lemporary Lax creaLed by Law 1111 ol 2006
LhaL applies exclusively lor 2007, 2008, 2009 and 2010.
1he Lax raLe is 1.27 per year {lor a ^.87 aggregaLed Lax raLe), and Lhe Lax
applies Lo neL equiLy held on 1 January 2007. 1herelore, enLiLies {wheLher
corporaLions or branches) incorporaLed or esLablished alLer 1 January 2007
are noL sub|ecL Lo equiLy Lax.
1he Laxpayer musL lile Lhe equiLy Lax reLurn {which is dillerenL lrom Lhe income
Lax reLurn) and pay Lhe Lax due in Lwo insLallmenLs. 1his Lax is neiLher
deducLible nor crediLable lor income Lax purposes.
A Lax relorm {Law 1370) was issued in December 2009, creaLing a new equiLy
Lax lor Lax years 2011 Lo 201^, wiLh Lhe lollowing characLerisLics:
lL is a new Lemporary equiLybased Lax, Lo be paid by income Laxpayers
owning a neL equiLy equal or higher Lhan COPS3,000 million
{USS1.5 million approximaLely). 1he new Lax is deLermined under a lixed
Lax basis {neL "Lax equiLy" owned by Lhe Laxpayer on 1 January 2011)
1he Lax raLe is 2.^7 lor Laxpayers owning a neL equiLy equal Lo or higher
Lhan COPS3,000 million {USS1.5 million approximaLely) and ol ^.87
lor Lhose who own neL equiLy equal or higher Lhan COPS5,000 million
{USS2.5 million approximaLely). 1he Lax is accrued in 2011, buL sub|ecL
Lo eighL delerred paymenLs on Lhe nexL lour lollowing years unLil 201^
50
Tax on Iinancial transactions 1TFT)
1he 1F1 applies Lo any linancial debiL LransacLions involving a wiLhdrawal ol
deposiLed resources in checking or savings bank accounLs opened in linancial
enLiLies. LxempLions apply, buL none applies specilically Lo Lhe oil and gas secLor.
1he currenL Lax raLe is 0.^7. 1he 1F1 applies Lo Lhe LoLal amounL ol Lhe
LransacLion. ln general, Lhe wiLhholding agenLs ol 1F1 are linancial enLiLies
and Lhe CenLral Bank.
1his Lax is deducLible lor income Lax purposes, up Lo 257 ol Lhe Lax paid.
Foreign exchange rights
Decree 2080 ol 2000 esLablishes Lhe lollowing righLs lor loreign
invesLors in Colombia:
1o reinvesL proliLs, or Lo reLain Lhe surplus ol Lhose nondisLribuLed earnings
LhaL have Lhe righL Lo be Lranslerred abroad
1o capiLalize amounLs LhaL have Lhe righL Lo be Lranslerred abroad as a
resulL ol obligaLions derived lrom Lhe invesLmenL
1o send abroad, in lreely converLible currency, Lhe LoLal neL proliLs
periodically generaLed by Lheir invesLmenLs
1o send abroad, in lreely converLible currency, Lhe amounL corresponding Lo
Lhe Lransler ol Lhe invesLmenL wiLhin Lhe counLry, or ol Lhe liquidaLion ol Lhe
company or iLs capiLal reducLion
50 1ne tax reform nas not rov|cec cu|cance recarc|nc ceferrec avments wnere
mercers, s|noffs anc ||cu|cat|on nave oeen enterec |nto after 2011. 1nerefore,
caseovcase ana|vs|s |s acv|sao|e.
98
Foreign exchange regimes
As a general rule, all business enLiLies LhaL underLake business operaLions in
Colombia are sub|ecL Lo Colombia's exchange conLrol regime provisions.
Colombian incorporaLed legal enLiLies qualily as "residenLs" lor exchange
conLrol purposes and are sub|ecL Lo whaL is relerred Lo as Lhe "ordinary
exchange conLrol regime." ColombianregisLered branches ol loreign legal
enLiLies also qualily as residenLs and are, Lherelore, sub|ecL Lo Lhis same
regime. However, il Lhe purpose ol Lhe business ol a branch ol a loreign enLiLy
is exclusively Lo enLer inLo mines and hydrocarbon exploraLion and exploiLaLion
acLiviLies or Lhe exclusive provision ol Lechnical services Lo Lhe hydrocarbon
secLor {as a "qualilied branch"), Lhe branch may apply and qualily lor
LreaLmenL under Lhe "special exchange regime."
1he mosL noLable dillerences beLween Lhe Lwo regimes are relaLed Lo Lhe way
LhaL businesses may handle Lheir loreign currency resources and deal wiLh
"exchange operaLions" as lollows:
51
Ceneral regime 5pecial regime
5cope
Applies Lo all ColombianincorporaLed legal
enLiLies {including Lhose underLaking
exploraLion and exploiLaLion ol oil and gas)
and nonqualilying branches ol loreign
legal enLiLies.
Applies Lo branches ol loreign companies
exclusively devoLed Lo Lhe exploraLion and
exploiLaLion ol mines and hydrocarbons, as
well as Lhe exclusive provision ol Lechnical
services Lo Lhe hydrocarbon secLor.
52
Ceneral regime 5pecial regime
Characteristics
lL is mandaLory Lo repaLriaLe Lo Lhe
exchange markeL all loreign currency
received lrom sales abroad {i.e., iL is
mandaLory Lo bring iL inLo Colombia and
converL iL inLo local currency Lhrough a
linancial insLiLuLion).
However, Colombian regulaLions include an
excepLion lor enLiLies under Lhe general
regime LhaL use properly regisLered
compensaLion bank accounLs.
lL is noL mandaLory Lo repaLriaLe Lhe
loreign currency received lrom sales {i.e.,
bring iL inLo Colombia and converL iL inLo
local currency). Branches are only
required Lo repaLriaLe inLo Lhe Colombian
exchange markeL Lhe loreign currency
needed Lo cover Lhe expenses in
Colombian currency.
1he acquisiLion ol loreign currency lrom
Lhe ColombianregulaLed loreign currency
markeL is permiLLed. An enLiLy covered by
Lhis regime should underLake all iLs
exchange conLrol operaLions Lhrough
Colombianqualilied loreign exchange
inLermediaries or Lheir compensaLion
bank accounLs.
ln general, qualilying branches do noL have
access Lo Lhe regulaLed loreign exchange
markeL. As a resulL, qualilying branches
are noL allowed Lo purchase loreign
currency lrom Lhe Colombian loreign
currency markeL and, Lherelore, Lhe
execuLion ol deLermined exchange
operaLions is limiLed, and mosL business
musL be aLLended Lo by Lhe head ollice. By
way ol excepLion, qualilying branches may
remiL abroad Lhrough Lhe exchange markeL
{wiLh Lhe cerLilicaLion ol Lhe enLiLy's
sLaLuLory audiLor or accounLanL) any
proceeds received in Colombian pesos lor
inLernal sales ol oil, naLural gas or services
Lo Lhe hydrocarbon secLor and Lhe loreign
capiLal amounL Lo be reimbursed Lo Lhe
head ollice in Lhe evenL ol Lhe liquidaLion
ol Lhe branch.
51 0ecree 2058 of 1991.
Colombia
99
Ceneral regime 5pecial regime
Characteristics
All expenses incurred by Lhe branch in
Colombia should be paid in Colombian
legal currency, excepL lor paymenLs Lo
companies in Lhe same business secLor,
which may be perlormed in loreign
currency.
Considering LhaL Lhe imporLaLion ol goods
is an exchange operaLion mandaLory Lo
channel Lhrough Lhe loreign exchange
markeL, all imporLs ol goods musL be paid
in lull by Lhe head ollice wiLh iLs own
resources. PaymenL ol services {which is a
lree markeL operaLion noL mandaLorily
channeled Lhrough Lhe loreign exchange
markeL) musL be made abroad by Lhe head
ollice on behall ol Lhe branch. 1hese
paymenLs are considered Lo be capiLal
conLribuLions when paid abroad by Lhe
head ollice. PaymenLs musL be managed
as supplemenLary invesLmenLs Lo Lhe
assigned capiLal.
Colombian incorporaLed legal enLiLies may
receive invesLmenLs in cash and in kind
lrom loreign shareholders {whereas non
qualilying branches may only receive
cash conLribuLions) under Lhe lorm ol
capiLal invesLmenLs.
1he receipL by a branch ol an invesLmenL in
cash or in kind lrom iLs head ollice musL be
auLhorized under Lhe supplemenLary
invesLmenL Lo Lhe assigned capiLal accounL
{SlACA). 1he SlACA is a special accounL
LhaL, even Lhough iL lorms an inLegral parL
ol Lhe equiLy accounLs ol Lhe qualilied
branch, is a separaLe accounL lrom Lhe
assigned capiLal accounL. 1his allows Lhe
llow ol invesLmenL lunds in and ouL ol Lhe
branch's equiLy accounL wiLhouL enLailing a
change Lo Lhe assigned capiLal accounL,
Lhus allowing Lhe branch Lo increase or
reduce Lhe SlACA balance wiLhouL
requiring Lhe lormaliLy ol a corporaLe
resoluLion, or prior auLhorizaLion by
Colombian supervisory enLiLies {e.g.,
SuperinLendence ol CorporaLions).
1herelore, Lhe SlACA can be managed,
in ellecL, as a "currenL accounL" ol Lhe
branch wiLh iLs home ollice.
Colombia
100
Ceneral regime 5pecial regime
Foreign currency movements
1hese enLiLies may carry ouL all operaLions
LhaL are Lypical ol Lhe loreign exchange
markeL. Some ol Lhe exchange conLrol
operaLions are:
Foreign capiLal invesLmenLs in Colombia and
relaLed yields
Colombian capiLal invesLmenLs abroad and
relaLed yields
Financial invesLmenLs in securiLies issued
abroad, invesLmenLs in asseLs locaLed abroad
and relaLed yields, unless Lhe invesLmenL is
made wiLh loreign currency lrom LransacLions
LhaL are noL required Lo be channeled Lhrough
Lhe exchange markeL
LndorsemenLs and warranLy bonds in
loreign currency
DerivaLive LransacLions
1hese enLiLies may:
Receive loreign invesLmenLs inLo Lheir
assigned capiLal or SlACA
Receive Lhe necessary loreign currency lor
Lheir expenses in Lhe counLry
VolunLarily repaLriaLe Lhe proceeds ol Lheir
exporLaLions Lo pay local expenses only
RemiL abroad Lhe proceeds ol Lhe branch's
linal liquidaLion
Considering LhaL Lhe head ollice receives
Lhe proceeds abroad, iL may noL:
Carry ouL operaLions LhaL are Lypical ol Lhe
exchange markeL
RemiL proliLs
Carry ouL loreign indebLedness operaLions
Purchase loreign currency lor Lhe paymenL
ol obligaLions
Pay imporLaLions ol goods
Ceneral regime 5pecial regime
Pequirements
Pegistration oI Ioreign investment
AuLomaLic aL Lhe Lime ol channeling ol Lhe
lunds Lhrough Lhe loreign exchange
markeL, via presenLaLion ol Form No. ^.
1he capiLalizaLion ol sums "wiLh righL ol
remiLLance," such as payable inLeresL or
dividends, are regisLered using Form
No. 11.
Deadline
For regisLraLion ol sums wiLh righL ol
remiLLance, up Lo 31 March ol Lhe year
lollowing Lhe invesLmenL.
Pegistration oI Ioreign investment
CapiLal: auLomaLic aL Lhe Lime ol
channeling ol Lhe lunds Lhrough Lhe
loreign exchange markeL, via presenLaLion
ol Form No. ^.
Deadline
For regisLraLion ol SlACA, up Lo 31 March
ol Lhe year lollowing Lhe invesLmenL.
Annual Ioreign investment update
Form No. 15 "LquiLy reconciliaLion
companies and branches ol Lhe
general regime."
Deadline
On 30 June il LransmiLLed elecLronically,
or 30 April il presenLed in a physical
documenL.
Annual Ioreign investment update
Form No. 13 "RegisLraLion ol SlACA and
updaLe ol equiLy accounLs branches ol
Lhe special regime."
Deadline
Up Lo 30 June ol Lhe year lollowing Lhe
corresponding year il Lhere were no SlACA
movemenLs; oLherwise Lhe above March
deadline would be applicable.
Colombia
101
Ceneral regime 5pecial regime
Foreign trade operations
PaymenL ol imporLs musL be channeled
Lhrough Lhe Colombian loreign
exchange markeL.
1he proceeds ol exporLs musL be
broughL inLo Lhe Colombian loreign
exchange markeL.
lmporLs coming lrom Lheir home ollice or
lrom Lhird parLies may noL be paid in
loreign currency; Lherelore, all goods
enLering Lhe counLry should come in as a
conLribuLion ol Lheir head ollice. lmporLs
made, Lherelore, qualily as non
reimbursable imporLs and, Lhus, Lhere
is no access Lo loreign currency Lo pay
lor Lhem.
1here is no obligaLion Lo reinLegraLe inLo
Lhe Colombian loreign exchange markeL
Lhe proceeds ol Lheir exporLs.
Ceneral regime 5pecial regime
Foreign indebtedness
1hese enLiLies may enLer inLo passive and
acLive loreign debL LransacLions.
Foreign currency originaLed in loreign
indebLedness operaLions and iLs linancial
cosLs musL be channeled Lhrough Lhe
Colombian loreign exchange markeL.
1hese enLiLies may noL enLer inLo passive
or acLive loreign indebLedness operaLions
lor any concepL lor inLernaLional leasing.
Ceneral regime 5pecial regime
Foreign currency accounts
1hese enLiLies may have checking or
savings bank accounLs in loreign currency
wiLh loreign linancial enLiLies and are noL
required Lo reporL or regisLer Lhem wiLh
Lhe CenLral Bank. 1hese accounLs may only
be used lor handling operaLions noL
required Lo be channeled Lhrough Lhe
loreign exchange markeL {SecLion 55
ResoluLion 8 ol 2000).
1hese enLiLies may have currenL or
savings accounLs in loreign currency wiLh
loreign linancial enLiLies and are noL
required Lo reporL or regisLer Lhem wiLh
Lhe CenLral Bank {SecLion 55 ResoluLion
8 ol 2000). No operaLions, oLher Lhan
lree operaLions, may be carried ouL in
Lhe exchange markeL.
1hey may have compensaLion currenL
bank accounLs regisLered belore Lhe
CenLral Bank lor handling operaLions
mandaLorily channeled Lhrough Lhe
loreign exchange markeL. {SecLion 56
ResoluLion 8 ol 2000).
1hey may noL have compensaLion
accounLs because Lhe possibiliLy
ol accessing Lhe exchange markeL
is proscribed.
Cverview
1he special regime lor Lhe invesLmenL ol loreign capiLal relerring Lo Lhe
hydrocarbon secLor prevails over Lhe regulaLions esLablished lor Lhe general
regime lor loreign invesLmenL {SecLion 20 Decree 2080 ol 2000)
Branches ol loreign companies LhaL do noL wish Lo lollow Lhe special
provisions sLipulaLed in Lhe special exchange conLrol regime musL reporL
Lheir decision Lo Lhe CenLral Bank and Lhey shall be exoneraLed lrom
applying such rules lor 10 years, counLed as ol Lhe daLe ol submiLLing Lhe
respecLive communicaLion. Accordingly, all loreign exchange operaLions
carried ouL shall be sub|ecL Lo Lhe common regulaLions provided lor in Lhe
exchange regime {SecLion 50 ol ResoluLion 8 ol 2000)
Colombia
102 Colombia
As an excepLion Lo Lhe general prohibiLion esLablished in Lhe Colombian
exchange regime Lo execuLe paymenLs beLween Colombian residenLs
in loreign currency, Lhe companies {including socieLies and branches)
LhaL perlorm acLiviLies ol exploraLion and exploiLaLion ol hydrocarbon
or Lechnical services lor Lhis secLor are auLhorized Lo perlecL and Lo
pay conLracLs beLween each oLher in loreign currency inLo Lhe counLry
whenever: {i) Lhis is made beLween companies wiLh Lhe same acLiviLy
and {ii) Lhe uLilized currencies come lrom generaLed resources ol
Lheir operaLion
Business presence
Due Lo exchange law regulaLions, branches are a convenienL sLrucLure lor
companies LhaL require regular lunding or LhaL underLake oil and gas acLiviLies.
For oLher indusLries, Lhe mosL used vehicles lor loreign invesLors are Soc|ecac
/non|ma, a Colombian corporaLion {SA), and Soc|ecac ce Pesonsao|||cac
||m|taca {SRL). An SA is a separaLe legal enLiLy in which shareholders' liabiliLy
is limiLed Lo Lheir capiLal subscripLions. An SRL is a limiLed liabiliLy corporaLion
LhaL has Lhe characLerisLics ol boLh a parLnership and a corporaLion. Unlike
shareholders in an SA, members ol an SRL are liable up Lo Lhe amounL ol Lheir
capiLal conLribuLions, excepL lor labor and Lax obligaLions, in respecL ol which
Lhey are |oinLly and severally liable.
ln 2008, Colombia enacLed Law 1258, which is in lorce since January 2009.
1he law creaLes Lhe new simplilied shares company, Soc|ecac or /cc|ones
S|m||f|caca {SAS) as new corporaLe vehicle. 1his new legal vehicle allows lor a
more expediLe incorporaLion process, as iL may be incorporaLed by one single or
more individuals or legal enLiLies {regular corporaLions require a minimum ol
live shareholders). FurLher, pursuanL Lo Lhis new law, Lhe incorporaLion ol an
SAS does no longer require execuLing a public deed belore a public noLary and
may be accomplished solely Lhrough a privaLe documenL. 1his Lype ol enLiLy
allows lor llexibiliLy in several aspecLs such as negoLiaLion ol shares, paymenL
ol capiLal or proliL disLribuLion, which consLiLuLe a good insLrumenL lor Lhe
developmenL ol incorporaLed |oinL venLures.
Colombia does noL have enLiLies LhaL are LreaLed as passLhrough enLiLies
lor income Lax.
Legal stability contracts
1o promoLe new invesLmenL in Colombia, Law 963 ol 2005 allows invesLors Lo
enLer inLo legal sLabiliLy conLracLs. Under Lhis Lype ol conLracL, an invesLor in
Colombia can be guaranLeed LhaL, during Lhe Lerm ol Lhe conLracL {3 Lo 20
years), Lhe invesLmenL will noL be adversely allecLed by modilicaLions made
Lo exisLing laws, regulaLions or rulings. ln consideraLion lor such guaranLee,
Lhe invesLor pays a conLribuLion equal Lo 17 ol Lhe amounL invesLed during
Lhe year. 1he raLe ol Lhe conLribuLion is reduced Lo 0.57 il Lhe pro|ecL is in
Lhe preoperaLional sLage.
ln general, direcL Laxes {income Lax and equiLy Lax) are covered by Lhe
conLracL. However, VA1, Laxes creaLed under a sLaLe ol emergency and
LerriLorial Laxes {sLaLe and municipal Laxes) may noL be covered by Lhe
conLracL. 1he conLracL may also cover oLher measures, such as corporaLe
laws, privaLe laws, uLiliLies' regulaLions and ollicial docLrines issued by
Lhe Lax auLhoriLies.
1o enLer inLo a legal sLabiliLy conLracL, Lhe invesLor needs Lo submiL a proposal
Lo a CovernmenL commiLLee lor iLs approval, including a deLailed lisL ol Lhe laws
and regulaLions covered by Lhe agreemenL, Lhe descripLion ol Lhe invesLmenL
pro|ecL and Lhe Lerm ol Lhe pro|ecL. AddiLional requiremenLs are provided
by Lhe law.
103 Cte d'Ivoire
Cte d'!vcire
Country code 225
Abidjan CMT
Ernst & Ycunc
5, Avenue Marchand,
01 BP 1222
Abidjan 01.
TeI 20 30 0 50
Fax 20 21 12 59
DiI and cas ccntact
Eric N'Cuessan
TeI 20 21 11 15
eric.ncuessanci.ey.ccm
A. At a glance
Fiscal regime
1he liscal regime applicable Lo Lhe peLroleum indusLry in CLe d'lvoire consisLs
ol lvorian Lax law, Lhe lvorian peLroleum code and Lhe producLion sharing
conLracLs {PSC) or Lhe conLracL ol service concluded beLween Lhe lvorian
CovernmenL and Lhe conLracLor {herealLer relerred Lo as Holder).
CorporaLe income Lax 257
Surlace renL Lax No specilic legislaLed raLe and depends
on Lhe Lerms ol Lhe PSC
Bonuses AmounL ol bonus depends on Lhe
Lerms ol Lhe PSC
RoyalLies on producLion RaLe depends on Lhe Lerms ol Lhe
PSC
52
AddiLional peLroleum Lax No specilic legislaLed raLe and depends
on Lhe Lerms ol Lhe PSC
CapiLal allowances D, L
53
lncenLives L, RD
54
B. Fiscal regime
1here are Lwo groups ol peLroleum companies in CLe d'lvoire. 1he lirsL group
is composed ol exploraLion and producLion {L&P) companies LhaL specialize in
Lhe exploraLion and Lhe producLion ol oil and gas {herealLer relerred Lo as L&P
companies or Holder). 1he second group consisLs ol peLroleum services
conLracLors LhaL specialize in Lhe supply ol peLroleum services and are
subconLracLed by Lhe Holder.
1he liscal regime which applies Lo L&P companies dillers lrom LhaL which
applies Lo peLroleum service conLracLors.
Corporate tax
L&P companies in CLe d'lvoire are sub|ecL Lo corporaLe income Lax on Lheir
nonexempL income aL Lhe raLe ol 257 {raLe applicable since 27 January
2008). Some Holders are exempL lrom corporaLe Lax. 1hese exempLions are
specilied in Lheir respecLive conLracLs wiLh Lhe CovernmenL.
OLher companies can be auLhorized Lo pay Lhe income Lax in Lhe lorm ol parL
ol Lheir peLroleum producLion. ln such cases, Lhe naLional peLroleum company
{PL1ROCl) is designaLed Lo verily Lhe quanLiLies provided by L&P companies.
1his musL be sLipulaLed in Lhe conLracL.
52 Pova|t|es are a||cao|e to tne |o|cer of tne PSC.
53 0: acce|eratec cerec|at|on: f: |mmec|ate wr|te off of ex|orat|on costs.
54 |: ao|||tv to carrv forwarc |osses: P0: P80 |ncent|ve.
104
1he corporaLe income Lax is calculaLed on Lhe neL Laxable income ol Lhe Holder.
1he neL proliL is Lhe dillerence beLween Lhe value ol Lhe opening and closing
balances ol Lhe neL asseLs in Lhe relevanL year ol assessmenL, less exLra
conLribuLions, plus any amounLs Laken by associaLed companies during Lhe
said period.
LxploraLion and developmenL cosLs are Laken inLo accounL in deLermining Lhe
company's income.
1he proliL is calculaLed alLer deducLion ol all charges LhaL meeL Lhe
lollowing condiLions:
lncurred in Lhe direcL inLeresL ol Lhe company or relaLed Lo Lhe normal
managemenL ol Lhe company
Correspond Lo acLual charges and are supporLed by sullicienL evidence
Are rellecLed by a decrease in Lhe neL asseLs ol Lhe company
Are included in Lhe charges ol Lhe liscal year during which Lhey were incurred
Characteristics oI the P5C
1he PSC is concluded beLween Lhe Holder and Lhe lvorian CovernmenL and is
signed boLh by Lhe minisLer in charge ol peLroleum acLiviLies and Lhe MinisLer
ol Finance. lL is one ol Lhe mosL common conLracLs used by Lhe CovernmenL.
1his PSC is in principle published in Lhe ollicial |ournal, and regisLered in
accordance wiLh Lhe condiLions provided by Lhe law.
ln Lerms ol Lhe PSC, an L&P company linances all exploraLion and developmenL
cosLs and bears all cosLs and risks ol Lhis operaLion in Lhe evenL LhaL no oil and
gas is lound.
1he producLion is divided as lollows: one parL ol Lhe producLion {Lhe cosL oil)
will be used Lo recover Lhe exploraLion and developmenL cosLs incurred by Lhe
company; Lhe remaining parL {Lhe proliL oil) is shared beLween Lhe
CovernmenL and Lhe Holder.
ProducLion sharing is calculaLed wiLh relerence Lo Lhe producLion volume,
and cash can be payable in lieu ol oil, under cerLain circumsLances.
Covernment share oI proIit oil
1he CovernmenL share ol proliL oil is deLermined in each PSC. 1here is no
quanLiLy required by law. 1he CovernmenL share depends on Lhe Lerms ol
Lhe PSC or Lhe service conLracL, and should be equal Lo a percenLage ol Lhe
producLion alLer Lhe deducLion ol cosL oil. Based on an example ol a PSC,
Lhe CovernmenL share ol proliL oil is deLermined in Lhis example:
Daily global oil
production 1barrels)
Covernment share
oI proIit oil
Holder share
oI proIit oil
From 0 Lo 100,000 ^57 557
From 100,001 Lo
200,000
^77 537
From 200,001 Lo
300,000
557 ^57
Up Lo 607 ^07
Cost oil
Pecoverable expenditures
LxploraLion cosLs are recoverable by Lhe Holder in Lhe lorm ol cosL oil.
Nonrecoverable expenditures
1he lollowings expendiLures are noL recoverable:
LxpendiLures relaLing Lo Lhe period belore Lhe ellecLive daLe ol Lhe conLracL
Lxpenses relaLing Lo Lhe operaLions carried ouL beyond Lhe poinL ol delivery,
such as markeLing and LransporL charges
Cte d'Ivoire
105
Determination oI cost oil
CosL oil is all expense borne by Lhe Holder in Lhe perlormance ol Lhe PSC and
deLermined in accordance wiLh relevanL accounLing processes. CosL oil and
proliL oil are deLermined lor each conLracL. 1here is no sLandard raLe lor all
Holders, and each Holder agrees iLs share ol cosL oil wiLh Lhe CovernmenL.
UpliIt available on recovered costs
1he Holder can also claim a reasonable amounL represenLing general expenses
incurred abroad LhaL are necessary lor Lhe perlormance ol Lhe peLroleum
operaLions and borne by Lhe Holder and iLs alliliaLed companies. 1he amounL
claimable is deLermined wiLh relerence Lo Lhe annual amounL ol peLroleum
cosLs {ouLside ol linancial charges and general expenses).
VAT
1he Holder is exempL lrom VA1 and Lax on linancial operaLions in CLe d'lvoire
lor Lhe supply ol goods and services relaLed Lo iLs peLroleum acLiviLies.
1he availabiliLy ol Lhe exempLion is sub|ecL Lo compliance wiLh VA1 exempLion
procedure esLablished by lvorian Lax auLhoriLies.
1he Holder will be liable lor VA1 aL Lhe raLe ol 187 on Lhe supply ol cerLain
goods and services, noL covered by Lhe exempLion above.
lL is noL necessary Lo regisLer lor VA1 separaLely. As soon as a company is
regisLered in CoLe d'lvoire, iL is given a Laxpayer number which covers all Laxes,
including VA1.
Bonuses
Lach peLroleum or gas agreemenL specilies Lhe bonus payable Lo Lhe
CovernmenL. 1he amounL is negoLiaLed wiLh Lhe CovernmenL when Lhe
agreemenL is signed and Lherelore Lhe amounL ol any bonus payable may
diller in each conLracL. 1here are mainly Lwo kinds ol bonuses:
1he bonus due aL Lhe signing ol Lhe conLracL, payable 30 days alLer Lhe
signing ol a gas or peLroleum agreemenL
1he bonus relaLed Lo quanLiLies produced, payable 30 days alLer Lhe lasL day
ol Lhe LesL producLion
Bonuses vary according Lo Lhe LoLal cumulaLed oil producLion. Based on an
example, Lhe bonus will be due as lollows:
USS3 million when Lhe neL cumulaLed oil producLion reaches
50 million barrels
USS6 million when Lhe neL cumulaLed oil producLion reaches
75 million barrels
USS8 million when Lhe neL cumulaLed oil producLion reaches
100 million barrels
USS12 million when Lhe neL cumulaLed oil producLion reaches
200 million barrels
Annual surIace rent tax
1he paymenL ol an annual surlace renL or oLher surlace renL can be due
according Lo Lhe PSC or service conLracL. ln Lhis case, Lhe paymenL musL be
made in Lhe lirsL 10 days ol Lhe year. ln case ol annual surlace renL Lax, Lhe
amounL due will be paid lor Lhe enLire year, based on Lhe area ol Lhe permiL.
Additional petroleum tax
Holders can be sub|ecL Lo an addiLional peLroleum Lax LhaL is calculaLed by
relerence Lo Lhe proliLabiliLy ol Lhe peLroleum operaLions. 1he raLe, condiLions
ol calculaLion, declaraLion, liquidaLion and recovery ol Lhis addiLional Lax are
specilied in each PSC or service conLracL.
Cte d'Ivoire
10
Poyalties
RoyalLy raLes are deLermined by Lhe PSC or service conLracL.
Holders are sub|ecL Lo Lhe paymenL ol a royalLy on Lhe value ol Lhe
hydrocarbons produced. RoyalLies can be paid in cash or in kind. ln Lhis regard,
royalLies can be based on Lhe esLimaLed producLion value lor Lhe currenL year
and musL be amended on 1 February ol Lhe lollowing year, once Lhe real
quanLiLies ol Lhe producLion have been deLermined.
RoyalLies can also be deLermined wiLh relerence Lo a specilied level ol oil
producLion and musL be paid aL Lhe end ol each quarLer.
1he royalLy is calculaLed wiLh relerence Lo Lhe LoLal quanLiLy ol hydrocarbons
produced in Lhe concession and noL used in Lhe peLroleum operaLions.
1he amounL ol Lhis royalLy, and Lhe rules relaLing Lo Lhe basis and recovery
Lhereol, are specilied in Lhe PSC.
Some conLracLs may provide a Holder wiLh a lull or parLial exempLion lrom Lhe
requiremenL Lo pay a royalLy.
C. Capital allowances
Holders are sub|ecL Lo accounLing rules known as SYSCOHADA, only in relaLion
Lo Lheir general acLiviLies.
ln pracLice, each Holder, wheLher residenL or noL, musL adopL Lwo accounLing
sysLems: one lor general acLiviLies and Lhe oLher lor peLroleum cosLs. ln Lhis
second sysLem, Lhe relevanL company musL have a special accounL per year
where producLion level, resulLs and balance sheeL ol Lhe company are seL ouL.
However, some conLracLs give Lhe righL Lo Lhe Holder noL Lo be sub|ecL Lo
SYSCOHADA.
Accelerated depreciation
According Lo SYSCOHADA, some asseLs may be sub|ecL Lo an acceleraLed
depreciaLion. An L&P company can ask lor an auLhorizaLion lrom Lhe Lax
auLhoriLies il iL wanLs Lo use Lhis meLhod lor Lax purposes. Such depreciaLion
is deducLible lrom Lhe Laxable income ol Lhe Holder.
Immediate writeoII Ior exploration costs
1he exploraLion expenses incurred by Lhe Holder in Lhe LerriLory ol CLe
d'lvoire, including, in parLicular, Lhe cosL ol geological and geophysical surveys,
and Lhe cosL ol exploraLion wells, will be regarded as charges lully deducLible as
ol Lhe year during which Lhey are incurred. AlLernaLively, Lhese cosLs may be
depreciaLed according Lo a meLhod deLermined by Lhe Holder.
D. Incentives
Pesearch and development incentives
Holders ol PSCs are exempL lrom any Laxes, duLies and lees as soon as Lhey
sign Lhe PSC conLracL lor Lhe period in which Lhey are conducLing research and
developmenL during Lhe exploraLion and producLion period up Lo Lhe end ol
Lheir acLiviLies in CoLe d'lvoire or aL Lhe end ol Lhe PSC. 1he main Laxes
exempLed are:
1ax on banking operaLions
1ax on sales or similar Lax {VA1)
1axes and duLies applicable Lo peLroleum producLs supplied Lo permanenL
laciliLies and drilling laciliLies
Any person or company working on behall ol Lhe Holder may be exempL lrom
Lax on sales or a similar Lax in respecL ol Lhe peLroleum operaLions perlormed.
During Lhis period, equipmenL inLended direcLly and exclusively lor Lhe
peLroleum operaLions are exempL lrom any duLies and Laxes aL Lheir
imporLaLion inLo CLe d'lvoire by Lhe Holder or by companies working
on iLs behall.
Cte d'Ivoire
107
Ability to carry Iorward losses
1he unverilied amounL ol Lhe loss is deducLible lrom Lhe Laxable proliLs unLil Lhe
lilLh liscal year lollowing Lhe period in which Lhe loss arose, unless Lhe PSC or
service conLracL auLhorizes Lhe Holder Lo carry Lhese losses lorward beyond Lhe
liveyear period.
However, Lhe amounL ol loss relaLing Lo asseL depreciaLion can be carried
lorward indeliniLely.
E. Withholding taxes
Dividends
Dividends disLribuLed by Lhe Holder are exempL lrom LaxaLion.
Interest
lnLeresL relaLed Lo peLroleum acLiviLies paid by Lhe Holder is noL sub|ecL Lo a
wiLhholding Lax.
Technical services
NonresidenLs {sub)conLracLors are sub|ecL Lo LaxaLion on Lhe amounLs
received lrom a holder based in CLe d'lvoire. Cenerally, Lhe raLe is 207.
However, in case ol Lax LreaLy, Lhese services could be exempLed or sub|ecL
Lo a 107 WH1.
Branch remittance tax
1here is no branch remiLLance Lax lor a Holder.
F. Thin capitalization limits
When a Holder borrows money lrom iLs holding or sisLer companies, Lhe
inLeresL on Lhis borrowing is a deducLible charge lor Lhe Holder, provided
Lhe inLeresL raLe on Lhe lunds placed aL Lhe disposal ol a company by Lhe
associaLed company does noL exceed Lhe prevalenL inLeresL raLe in Lhe
naLional linancial markeL.
C. Transactions
Asset disposals
1he income which resulLs lrom asseL disposals is included in Lhe corporaLe
income ol Lhe company and is sub|ecL Lo LaxaLion. ln Lhe case ol a noncash
paymenL {such as check or bank Lranslers), Lhe asseL cosLs are deducLible
lrom Lhe Laxable income. However, Lhey are noL deducLible in cash LransacLions,
which are noL encouraged in Lhe CoLe d'lvoire.
Capital gains
CapiLal gains are Laxed aL Lhe corporaLe Lax raLe ol 257.
H. Indirect taxes
Import duties
All goods and maLerials enLering inLo CLe d'lvoire lrom overseas are sub|ecL Lo
cusLoms imporL duLies.
However, personal and domesLic goods ol nonresidenL workers ol L&P
companies are exempL lrom any cusLom duLies. Also, all maLerials required
Lo laciliLaLe peLroleum or gas acLiviLies are exempL.
VAT
See above.
Export duties
No duLies are applied Lo goods exporLed lrom CLe d'lvoire. L&P companies,
which exporL peLroleum producL, are noL sub|ecL Lo exporL duLies.
Cte d'Ivoire
108
5tamp duties
SLamp duLies are due on LransacLions made by a Holder. 1hese sLamp duLies are
Lhe same lor all companies.
Pegistration Iees
Upon company regisLraLion, Holders become Laxable enLiLies and musL regisLer
wiLh Lhe Lax auLhoriLies in order Lo obLain a 1ax ldenLilicaLion Number.
1he regisLraLion lees lor Lhe creaLion ol a company are:
Up Lo XOF5 billion share capiLal 0.67
More Lhan XOF5 billion share capiLal 0.27
I. Cther
Excise duties
Lxcise duLies are applied Lo peLroleum producLs which are imporLed or sold in
CLe d'lvoire. 1he lollowing examples are considered Lo consLiLuLe a sale or
imporL which is sub|ecL Lo excise duLy:
1he sale ol peLroleum producL by Lhe Holder Lo iLs subsidiary company is
considered Lo be a duLiable sale
1he usage ol peLroleum producLs lor iLs own use is considered Lo be
a duLiable sale
1he sale ol peLroleum producLs Lo disLribuLion/supplying companies is
considered an imporLaLion
Some peLroleum producLs are exempL lrom excise.
1he amounL ol excise is deLermined as shown in Lhe lollowing Lable:
IdentiIication Amount
Per liLre aL 15C Super and special gasoline XOF157.^0
Car gasoline XOF1^1.20
Diesel oil XOF37.80
CarbureacLor LxempL
Lamp PeLroleum XOF2.80
Diesel oil lor special planes LxempL
Mineral oils XOF15
Per kilogram DisLillaLe diesel oil XOF50.50
LxempL disLillaLe oil XOF1.50
DomesLic luel oil XOF1.50
LighL luel oil XOF1.50
Heavy luel oil XOF1.50
VegeLable laLs XOF15
Cther taxes and compliance issues
OLher Laxes include wiLhholding Laxes on renLal paymenLs. Holders, in Lheir
capaciLy as CLe d'lvoire companies, musL submiL Lheir linancial sLaLemenLs
and income resulLs ol Lhe same period Lo Lhe Lax auLhoriLies each year.
Cte d'Ivoire
109
Denmark
Country code 45
Ccpenhacen CMT +1
Ernst & Ycunc
Cyncemcse Parkvej 50
DK 20
Scbcrc
Denmark
TeI 357 2222
Fax 357 2200
DiI and cas ccntacts
NieIs Jcsephsen
TeI 357 2773
Fax 357 2211
nieIs.jcsephsendk.ey.ccm
Carsten DaII Larsen
TeI 357 277
Fax 357 2211
carsten-daII.Iarsendk.ey.ccm
A. At a glance
55
Fiscal regime
1he Lax regime LhaL applies Lo hydrocarbon exploraLion and producLion
companies in Denmark consisLs ol a combinaLion ol corporaLe income Lax and
hydrocarbon Lax. 1he hydrocarbon Lax raLe and rules applicable depend on
wheLher Lhe license is granLed belore or alLer 1 January 200^.
RoyalLies None
5
Bonuses None
PSC None
57
lncome Lax raLe ChapLer 2 corporaLe Lax raLe 257
ChapLer 3 hydrocarbon Lax raLe 707
ChapLer 3A hydrocarbon Lax raLe 527
Resource renL Lax None
CapiLal allowances D, U, L
58
lnvesLmenL incenLives L
B. Fiscal regime
Danish residenL companies are sub|ecL Lo Lax in accordance wiLh a modilied
LerriLorialiLy principle, which means LhaL income and expenses lrom loreign
permanenL esLablishmenLs and real esLaLe ouLside Denmark are noL included
in Lhe income ol a Danish residenL company. Branches ol loreign companies
locaLed in Denmark, as a general rule, are Laxed exclusively on Lrading income
and on chargeable capiLal gains derived lrom Lhe disposal ol Lrading asseLs
LhaL are locaLed in Denmark and relaLed Lo a permanenL esLablishmenL.
55 / 0an|sn tax reform was acotec |n Hav 2010. No cnances concern|nc nvcrocaroon
taxat|on were mace. |owever, tne reform nas, amonc otner tn|ncs, easec tne taxat|on
of ca|ta| ca|ns on snares anc c|v|cencs :aoo||sn ownersn| er|oc recu|rements;,
|ntrocuce taxat|on on ca|ta| ca|ns anc c|v|cencs wnere tne ownersn| ercentace
|s |ower tnan 10x |rresect|ve of ownersn| er|oc anc |ntrocucec new exc|se cut|es.
1ne new ru|es were effect|ve as of 1 Januarv 2011.
5 Cn|v a sma|| numoer of ||censes are suo|ect to rova|tv oo||cat|ons.
57 / |e||ne cutv |s avao|e. Bes|ces tn|s, 0enmark coes not nave a PSC rec|me,
excet for tne fact tnat tne 0an|sn Covernment no|cs a 20x |nterest |n tne 192
So|e Concess|on.
58 0: acce|eratec cerec|at|on, U: ca|ta| u||ft, f: |mmec|ate wr|teoff for ex|orat|on
costs anc tne cost of erm|ts f|rst usec |n ex|orat|on, |: |osses can oe carr|ec
forwarc |ncef|n|te|v.
Denmark
110
1he Danish hydrocarbon Lax rules, however, conLain a broader deliniLion ol
when a Danish Lax limiLed liabiliLy is creaLed lor a loreign company or person
compared wiLh Lhe ordinary permanenL esLablishmenL LesL.
Foreign persons and companies LhaL engage in hydrocarbon leasibiliLy sLudies,
exploraLion acLiviLies, producLion ol hydrocarbons and relaLed business,
including consLrucLion ol pipelines, supply services and LransporLaLion ol
hydrocarbons by ship or pipeline, are sub|ecL Lo LaxaLion in Denmark on Lhe
income lrom Lhe Lime Lhe acLiviLy is commenced in Denmark. ll Denmark has
enLered inLo a double Lax LreaLy wiLh Lhe counLry where Lhe loreign company
is a Lax residenL, Lhe LreaLy may modily Lhe Danish Lax liabiliLy.
1he Danish LaxaLion regime LhaL applies Lo hydrocarbon exploraLion and
producLion companies consisLs ol a combinaLion ol corporaLe income Lax and
hydrocarbon Lax. 1he hydrocarbon Lax raLe depends on wheLher Lhe license is
granLed belore or alLer 1 January 200^.
1he Danish hydrocarbon Lax sysLem is a LwosLring sysLem combining corporaLe
Lax aL Lhe sLandard raLe ol 257 {ChapLer 2 income) and a special hydrocarbon
Lax aL a raLe ol 707 {ChapLer 3 income) or 527 {ChapLer 3A income).
1he income covered by ChapLers 2, 3 and 3A includes lirsLLime sales ol
hydrocarbons, gains and losses lrom disposal ol licenses, exploraLion righLs and
gains and losses lrom Lhe disposal ol asseLs used in exploraLion and producLion
acLiviLies and linancial income direcLly relaLed Lo Lhe hydrocarbon acLiviLies.
lncome relaLed Lo hydrocarbon leasibiliLy sLudies, providing services Lo
exploraLion and producLion companies, consLrucLion ol pipelines, supply
services and LransporLaLion ol hydrocarbons by ship or pipeline, is noL
covered by ChapLers 2, 3 or 3A, buL is sub|ecL Lo ordinary corporaLe income
Lax {Lhe Lax raLe is 257).
1he income Laxed under ChapLers 2, 3 and 3A is calculaLed according Lo Lhe
ordinary Lax rules LhaL apply Lo Danish companies and branches, wiLh Lhe
ad|usLmenLs provided in Lhe Danish Hydrocarbon 1ax AcL. ln general, due Lo
he hydrocarbon Lax uplilL {see below), hydrocarbon Lax is levied exclusively
on exLraordinarily proliLable oillield producLion. ChapLer 2 Lax is allowed as a
deducLion againsL Lhe Lax basis lor Lhe hydrocarbon Lax {ChapLers 3 and 3A).
SeparaLe Lax reLurns musL be liled each year {ChapLers 2, 3 and 3A Lax
reLurns), and all companies involved in oil and gas exploraLion in Denmark
are required Lo lile a Danish Lax reLurn lrom Lhe year when Lhey commence
Lheir exploraLion acLiviLies. 1he liling deadline is 1 May Lhe lollowing year.
1he linancial period musL lollow Lhe calendar year.
Besides hydrocarbon income, Lhe company may have ordinary corporaLe
income {income noL covered by Lhe hydrocarbon Lax rules). Such income is
Laxed aL a raLe ol 257. 1he liling deadline lor Lhe Lax reLurn is 30 June Lhe
lollowing year.
Licenses granLed alLer 1 January 200^ are covered by a new chapLer in Lhe
Danish hydrocarbon Lax sysLem {ChapLer 3A). ChapLer 3A Laxable income is
Laxed aL 527. Special, less lavorable hydrocarbon Lax reliel rules apply Lo
income covered by Lhis chapLer compared wiLh ChapLer 3 income. 1he income/
expenses are ring lenced {buL Lhere is no lield ring lence il Lhere is more Lhan
one lield/exploraLion siLe).
Companies may have boLh old and new licenses {some covered by ChapLer 3
and some covered by ChapLer 3A). For licenses covered by ChapLer 3, Lhe
overall combined Lax raLe lor ChapLers 2 and 3 is 77.57. 1he overall combined
Lax raLe lor ChapLers 2 and 3A is 6^7.
A pipeline duLy ol approximaLely 57 ol Lhe value ol Lhe hydrocarbons produced
is payable. However, Lhe duLy is deducLible againsL ChapLers 2 and 3 income,
buL noL againsL ChapLer 3A income.
A royalLy is payable on very lew licenses.
Denmark
111
Ping Ience and losses
As a general principle, expenses and Lax losses on LransacLions noL relaLed Lo
Danish oil and gas exploraLion and producLion may noL be ollseL againsL oiland
gasrelaLed Laxable income, neiLher lor company Lax purposes {ChapLer 2) nor
lor hydrocarbon Lax purposes {ChapLers 3 and 3A). For example, linancing
expenses are deducLible againsL Lhe oiland gasrelaLed income only Lo Lhe
exLenL LhaL Lhe loan proceeds have been used in an oil and gas business. When
a lield is commercialized and puL inLo producLion, Lhe lield is LreaLed as a
separaLe Laxable source ol income {lield ring lence) lor ChapLer 3 hydrocarbon
Lax purposes {buL noL lor company Lax purposes in ChapLer 2 or lor ChapLer
3A purposes). 1his means LhaL ChapLer 3 losses on a lossmaking lield cannoL
be ollseL againsL proliLs on a proliLable lield. Lxclusively, Lhe income lrom
proliLable lields is included in Lhe compuLaLion ol Laxable income according
Lo ChapLer 3.
Lxpenses {losses) incurred belore a lield is commercialized are deducLible
{ChapLer 3) ouLside Lhe lield ring lence. 1his means LhaL, Lo Lhe exLenL Lhe
lield neL income is posiLive {alLer deducLion ol expenses and uplilL), Lhese
cosLs can be ollseL againsL Lhe neL posiLive lield income. For ChapLers 2 and 3A
purposes, Lhese cosLs are direcLly deducLible in Lhe ChapLers 2 and 3A income
calculaLion {because no lield ring lence exisLs).
However, excepLions apply Lo Lhe ChapLer 3 lield ring lence rule. LxcepLions
include Lhe lollowing:
When a lossmaking lield is closed down, any Lax loss carrylorward lrom LhaL
lield may be ollseL againsL a proliLable lield
CapiLalized exploraLion cosLs {including hydrocarbon Lax reliel) and Lax loss
carrylorwards lrom Lhe exploraLion phase can also be ollseL againsL proliLs
lrom any lield
lL is noL possible Lo uLilize Lax losses realized under one chapLer againsL income
covered by anoLher chapLer {e.g., Lax losses covered by ChapLer 3 cannoL be
uLilized againsL ChapLer 3A income or vice versa and ChapLer 2 losses cannoL
be uLilized againsL ChapLers 3 or 3A income or vice versa).
ChapLer 2 losses may, however, be ollseL againsL ordinary corporaLe income
{income noL covered by Lhe hydrocarbon Lax law), buL Lhis does noL apply Lhe
oLher way around.
Dismantlement costs
Lxpenses relaLed Lo closing down a lield are Lax deducLible under ChapLers 2, 3
and 3A. Companies and persons LhaL are Laxed according Lo ChapLer 3A receive
a Lax relund equal Lo Lhe Lax value ol Lhe Lax losses remaining aL Lhe Lime ol
closing a Danish hydrocarbon business. 1he relund is limiLed Lo Lhe amounL ol
ChapLer 3A Laxes paid plus ChapLer 3 Laxes paid, belore Lhe 200^ income year.
1he expenses are deducLible when Lhey have been incurred. Provisions lor
dismanLlemenL cosLs are noL deducLible.
Mandatory ioint taxation
Danish companies, branches ol loreign companies and real properLy in
Denmark LhaL belong Lo Lhe same corporaLe group are sub|ecL Lo mandaLory
|oinL LaxaLion. 1he mandaLory |oinL LaxaLion also applies il a group has Lwo
enLiLies in Denmark involved wiLh hydrocarbon acLiviLies, e.g., Lhe ChapLer 3
incomes in Lhese Lwo enLiLies musL be Laxed |oinLly {buL only income and losses
covered by Lhe same chapLer are included).
No carryback can be claimed regarding ChapLers 2 and 3.
Functional currency
Provided LhaL cerLain requiremenLs are meL, Laxpayers may calculaLe Lheir
Laxable income by relerence Lo a luncLional currency {i.e., a parLicular loreign
currency oLher Lhan Lhe Danish krone). 1he elecLion musL be made belore Lhe
beginning ol Lhe income year.
Denmark
112
TransIer pricing
1ransacLions beLween alliliaLed enLiLies musL be deLermined on an arm's lengLh
basis. ln addiLion, Danish companies and Danish permanenL esLablishmenLs
musL reporL summary inlormaLion abouL LransacLions wiLh alliliaLed companies
when liling Lheir Lax reLurns.
Danish Lax law requires enLiLies Lo prepare and mainLain wriLLen Lransler
pricing documenLaLion lor LransacLions LhaL are noL considered insignilicanL.
1he documenLaLion does noL need Lo be liled wiLh Lhe Lax auLhoriLies, buL on
requesL iL musL be liled wiLhin 60 days. For income years beginning on or
alLer 2 April 2006, enLerprises can be lined il Lhey have noL prepared any
Lransler pricing documenLaLion or il Lhe documenLaLion prepared is considered
Lo be insullicienL.
1he documenLaLion requiremenLs lor small and mediumsized enLerprises apply
exclusively Lo LransacLions wiLh alliliaLed enLiLies in nonLreaLy counLries LhaL
are noL members ol Lhe Luropean Union {LU) or Lhe Luropean Lconomic Area
{LLA). 1o qualily as small and mediumsized enLerprises, enLerprises musL
saLisly Lhe lollowing condiLions:
1hey musL have less Lhan 250 employees
1hey musL have an annual balance sheeL LoLal ol less Lhan DKK125 million
or annual revenues ol less Lhan DKK250 million
1he above amounLs are calculaLed on a consolidaLed basis {i.e., all group
companies musL be Laken inLo accounL).
C. Capital allowances
Capital upliIt
1o enable companies engaged in oil and gas exploraLion and producLion
acLiviLies Lo earn an aLLracLive raLe ol reLurn alLer Laxes, Lhe hydrocarbon
Lax reliel {uplilL) was inLroduced Lo ensure LhaL Lhe 707 ChapLer 3 and 527
ChapLer 3A hydrocarbon Laxes are levied exclusively when producLion lrom
a lield is exLraordinarily proliLable. No uplilL is available under ChapLer 2.
1he ChapLer 3 hydrocarbon Lax reliel is an uplilL ol 2507 on qualilying
expendiLures, which includes capiLalized exploraLion cosLs {incurred belore any
lields owned by Lhe company were classilied as commercial) and invesLmenLs
made in drilling rigs, ships, pipelines and oLher producLion planL and equipmenL.
1he reliel is available lor Lhe Lax basis lor hydrocarbon Lax only. 1he uplilL is
allowed as a 257 deducLion over a 10year period and is granLed in addiLion
Lo Lhe normal Lax depreciaLion ol planL and machinery and amorLizaLion ol
capiLalized exploraLion cosLs over a 5year period. 1he uplilL is noL available
lor lease paymenLs, inLeresL, and producLion and adminisLraLion expenses.
1he uplilL on exploraLion expenses is made ouLside Lhe lield ring lence and iL
may be deducLed lrom posiLive hydrocarbon income lrom oLher lields, while
uplilL on invesLmenLs in drilling rigs, ships, pipelines and oLher producLion planL
and equipmenL is made inside Lhe ring lence lor Lhe lield in quesLion.
1he ChapLer 3A uplilL is 307. 1he uplilL is allowed as a 57 deducLion over a
sixyear period.
Depreciation
An acquired oil license righL may be amorLized aL an equal raLe per year over
Lhe Lerm ol Lhe license.
1he main rule is LhaL lixed asseLs {machinery, producLion equipmenL, eLc.)
may be depreciaLed according Lo Lhe reducing balance meLhod by up Lo 257
a year. However, a number ol large asseLs wiLh a long economic lile are
depreciaLed on a separaLe balance by up Lo 157 annually, according Lo Lhe
reducing balance meLhod. 1his group ol asseLs includes, lor example, lixed
planLs such as drilling rigs.
Denmark
113
1he raLe ol 157 is inLroduced gradually during Lhe period unLil 2016 as lollows:
Income year
Depreciation oI Iixed plants, aircraIt, ships,
etc., according to the reducing balance method.
Percentage
2010 2011 217
2012 2013 197
201^ 2015 177
2016 157
Exploration costs
All cosLs relaLed Lo oil and gas exploraLion in Denmark are allowed as a
deducLion {inside Lhe ring lence) lor Lhe purposes ol ChapLers 2, 3 and 3A
when Lhey are incurred. For ChapLer 3, Lhe deducLion is available wiLhin Lhe
hydrocarbon ring lence, buL noL ouLside Lhe lield ring lence.
As an alLernaLive Lo expensing Lhe cosLs when Lhey are incurred, exploraLion
cosLs may be capiLalized and Lhen delerred lor amorLizaLion over live years
when Lhe oil producLion is commenced or lor wriLeoll il Lhe exploraLion is
sLopped alLogeLher. No Lime limiLs apply Lo capiLalized exploraLion cosLs.
A company may choose Lo expense cosLs when Lhey are incurred lor Lhe
purposes ol ChapLer 2 while, aL Lhe same Lime, capiLalizing Lhem lor Lhe
purposes ol hydrocarbon Lax {ChapLers 3 and 3A). CapiLalizaLion ol
exploraLion cosLs is parLicularly advanLageous in relaLion Lo Lhe 707/527
hydrocarbon Lax and, unlike noncapiLalized cosLs, capiLalized exploraLion
cosLs qualily lor an uplilL ol 2507/307 by way ol Lhe hydrocarbon Lax reliel
{see commenLs above). For ChapLer 3, Lhe uplilL is available wiLhin Lhe
hydrocarbon ring lence, buL noL ouLside Lhe lield ring lence.
No capiLalizaLion ol exploraLion expenses can be made by a company lrom Lhe
Lime Lhe company has classilied one lield as "commercial." 1o Lhe exLenL Lhe
company has some cosLs LhaL do noL relaLe Lo Lhe oil and gas business in
Denmark, Lhese cosLs are only deducLible ouLside Lhe ring lence {only againsL
ordinary business income).
D. Incentives
Tax losses
1ax losses {ChapLers 2, 3 and 3A Lax losses) may be carried lorward
indeliniLely. Hydrocarbon Lax losses realized belore Lhe 2002 income year
may be carried lorward lor 15 years. ll a change ol conLrol occurs, cerLain
loss carrylorward resLricLions may apply lor ordinary Lax losses. lL is likely LhaL,
Lhe change ol ownership rules do noL apply Lo ChapLers 2, 3 and 3A Lax losses.
However, Lhis issue has noL specilically been dealL wiLh in Lhe law or in pracLice.
E. Withholding taxes
Dividends paid
ln general, dividends paid are sub|ecL Lo wiLhholding Lax aL a raLe ol 287.
However, no wiLhholding Lax is imposed on dividends paid Lo companies il
Lhe Danish shares qualily as subsidiary shares, provided LhaL Lhe wiLhholding
Lax has Lo be reduced or eliminaLed due Lo Lhe LU parenL/subsidiary DirecLive
or a double Lax LreaLy. For a company owning Danish shares, which are noL
subsidiary shares, buL group shares, iL is a requiremenL LhaL Lhe wiLhholding Lax
should be reduced or eliminaLed due Lo Lhe LU parenL/subsidiary DirecLive or a
double Lax LreaLy in case Lhe shares were subsidiary shares. FurLhermore, iL is
in boLh cases a condiLion LhaL Lhe recipienL ol Lhe dividends is Lhe benelicial
owner ol Lhe dividends and Lhus is enLiLled Lo beneliLs under Lhe LU parenL/
subsidiary DirecLive or a double Lax LreaLy.
Denmark
114
Dividends received
Dividends lrom group shares or subsidiary shares are Lax exempL il Lhe dividend
has Lo be reduced or eliminaLed according Lo Lhe LU parenL/subsidiary DirecLive
or a double Lax LreaLy. Dividends lor which Lhe dividend paying company has
made a Lax deducLion in iLs Laxable income are noL Lax exempL lor Lhe Danish
dividend receiving company, unless LaxaLion in Lhe source counLry is reduced
or eliminaLed according Lo Lhe LU parenL/subsidiary DirecLive.
Dividends received by a Danish permanenL esLablishmenL may also be Lax
exempL il Lhe permanenL esLablishmenL is owned by a loreign company LhaL is
Lax residenL wiLhin Lhe LU, LLA or in a counLry which has concluded a double
Lax LreaLy wiLh Denmark.
Dividends received on a company's own shares are Lax exempL.
Dividends which are noL comprised by Lhe Lax exempLion {see above) such as
dividends lrom porLlolio shares, musL be included in Lhe Laxable income ol Lhe
dividendreceiving company. Such dividends are Lhus Laxed aL a raLe ol 257.
A Lax crediL may be available lor Lhe dividendreceiving company lor loreign
wiLhholding Laxes paid by Lhe dividenddisLribuLing company.
ClassiIication oI shares
Subsidiary shares can generally be delined as shares in a company in
which Lhe shareholder direcLly owns aL leasL 107 ol Lhe share capiLal
{oLher condiLions apply).
Croup shares are shares in a company which is sub|ecL Lo mandaLory |oinL
LaxaLion under Danish rules wiLh Lhe shareholder, or is eligible Lo be comprised
by inLernaLional |oinL LaxaLion under Danish rules wiLh Lhe shareholder
{see SecLion C on "Croup ol companies").
PorLlolio shares are shares which are noL subsidiary shares or group shares.
Interest
ln general, inLeresL paid Lo loreign group companies is sub|ecL Lo wiLhholding
Lax aL a raLe ol 257. 1he wiLhholding Lax is eliminaLed il any ol Lhe lollowing
requiremenLs are saLislied:
1he inLeresL is noL sub|ecL Lo Lax or Laxed aL a reduced raLe under Lhe
provisions ol a double Lax LreaLy. For example, il wiLhholding Lax on
inLeresL is reduced Lo 107 under a double Lax LreaLy, Lhe wiLhholding Lax is
eliminaLed compleLely
1he inLeresL is noL sub|ecL Lo Lax in accordance wiLh Lhe LU inLeresL/royalLy
{l+R) DirecLive. Under Lhe DirecLive, inLeresL is noL sub|ecL Lo Lax il boLh ol
Lhe lollowing condiLions are saLislied:
1he debLor company and Lhe crediLor company lall wiLhin Lhe deliniLion
ol a company under ArLicle 3 in Lhe LU l+R DirecLive {2003/^9/LC)
1he companies have been associaLed as sLaLed in Lhe DirecLive lor a
period ol aL leasL 12monLhs {Danish domesLic law has reduced Lhe
requiremenL lor a 2^monLh period Lo a 12monLh period)
1he inLeresL accrues Lo a loreign company's permanenL
esLablishmenL in Denmark
1he inLeresL accrues Lo a loreign company in which Lhe Danish company,
indirecLly or direcLly, is able Lo exercise conLrol {lor example, by holding
more Lhan 507 ol Lhe voLing righLs)
1he inLeresL is paid Lo a recipienL LhaL is conLrolled by a loreign parenL
company residenL in a counLry LhaL has enLered inLo a double Lax LreaLy
wiLh Denmark and has CFC rules and iL, under Lhese loreign CFC rules, Lhe
recipienL may be sub|ecL Lo CFC LaxaLion
1he recipienL company can prove LhaL Lhe loreign LaxaLion ol Lhe inLeresL
income amounLs Lo aL leasL 3/^ ol Lhe Danish corporaLe income Lax and LhaL
iL will noL in Lurn pay Lhe inLeresL Lo anoLher loreign company LhaL is sub|ecL
Lo corporaLe income Lax amounLing Lo less Lhan 3/^ is Lhe Danish corporaLe
income Lax
Denmark
115
FurLhermore, iL is a condiLion LhaL Lhe recipienL ol Lhe inLeresL is a benelicial
owner ol Lhe inLeresL and Lhus is enLiLled Lo beneliLs under Lhe LU l+R DirecLive
or a double Lax LreaLy. 1he above measures and excepLions also apply Lo
noninLeresL bearing loans LhaL musL be repaid wiLh a premium by Lhe
Danish debLor company.
Poyalties
RoyalLy paymenLs are sub|ecL Lo a 257 wiLhholding Lax. 1he wiLhholding Lax
raLe may be reduced under a double Lax LreaLy or Laxed in accordance wiLh Lhe
LU l+R DirecLive. RoyalLy paymenLs are sub|ecL Lo wiLhholding Lax il Lhe
paymenLs are remuneraLed lor Lhe use ol, or Lhe righL Lo use, any paLenL,
Lrademark, brand, brand name, design, model, paLLern, drawing, secreL lormula
or manulacLuring or producLion meLhod, or lor inlormaLion on indusLrial,
commercial or scienLilic experiences {knowhow). 1he rules apply boLh Lo
lumpsum paymenLs and Lo currenL paymenLs. Under Danish Lax law, Lhe
qualilicaLion ol royalLy income is based on Lhe subsLance ol Lhe agreemenL
beLween Lhe parLies raLher Lhan on how Lhe paymenLs are "named" {lorm).
1echnical services and nonresidenL conLracLors, as a general rule, are noL
sub|ecL Lo wiLhholding Lax, unless Lhe paymenL lalls wiLhin Lhe deliniLion ol
royalLy as delined above. 1hese services may, however, be sub|ecL Lo LaxaLion
under ChapLer 2 {corporaLe LaxaLion ol hydrocarbon income).
Branch remittance tax
Branch remiLLance Lax is noL applicable in Denmark.
Income tax withholding and reporting obligations
A loreign company LhaL is engaged in oil and gas exploraLion or producLion
acLiviLies in Denmark is required Lo wiLhhold a 307 llaLraLe income Lax lrom
salaries paid Lo nonresidenL employees working in Denmark. ll Denmark has
enLered inLo a double Lax LreaLy wiLh Lhe counLry where Lhe loreign company
is a Lax residenL, Lhe LreaLy may modily Lhe Danish Lax liabiliLy.
WiLhholding and paymenL ol Laxes wiLhheld are required on a monLhly basis,
and reporLs musL be liled wiLh Lhe Danish Lax adminisLraLion on an annual basis.
F. Financing considerations
Interest expenses
lnLeresL expenses and capiLal losses {e.g., due Lo loreign exchange) on debLs
incurred lor linancing oil and gas exploraLion and producLion in Denmark are
allowed as a deducLion againsL boLh Lax bases {ChapLers 2, 3 and 3A).
1he inLeresL or loss musL be relaLed Lo Lhe Danish oil and gas acLiviLy.
However, a branch ol a loreign company cannoL deducL inLeresL on loans
lrom iLs principal {Lhe head ollice); Lhere musL be an "ouLside" lender
{e.g., a sisLer company).
CapiLal losses are generally deducLible according Lo Lhe realizaLion principle, buL
iL is possible Lo opL lor Lhe markeLLomarkeL principle on currency llucLuaLions.
Debt to equity and other interest limitation rules
Under Lhe Lhin capiLalizaLion rules, inLeresL paid and capiLal losses realized
by a Danish company or by a branch ol a loreign group company are parLly
deducLible Lo Lhe exLenL LhaL Lhe Danish company's debLLoequiLy raLio exceeds
^:1 aL Lhe end ol Lhe debLor's income year and Lhe amounL ol conLrolled debL
exceeds DKK10 million.
Denied deducLibiliLy applies exclusively Lo inLeresL expenses relaLed Lo Lhe
parL ol Lhe conLrolled debL LhaL needs Lo be converLed Lo equiLy in order Lo
saLisly Lhe debLLoequiLy raLe ol ^:1 {a minimum ol 207 equiLy). 1he Lhin
capiLalizaLion rules also apply Lo LhirdparLy debL il Lhe Lhird parLy has received
guaranLees or similar assisLance lrom a loreign group company.
1he Danish Lhin capiLalizaLion rules have been supplemenLed by an "inLeresL
ceiling" rule and an "earnings belore income Lax" {LBl1) rule. 1hese rules
Denmark
11
cover boLh conLrolled and nonconLrolled debL. Only companies wiLh neL
linancial expenses exceeding DKK21.3 million {2010) are allecLed by Lhese
supplemenLary rules. For |oinLly Laxed companies, Lhe DKK21.3 million
Lhreshold applies Lo all group companies LogeLher.
As a resulL ol Lhe inLeresL ceiling, deducLion lor neL linancial expenses is
resLricLed Lo 57 ol Lhe Laxable value ol cerLain qualilied asseLs. Any neL
linancial expenses LhaL exceed Lhis amounL are losL, excepL lor capiLal and
exchange losses, which may be carried lorward lor Lhree years.
Under Lhe LBl1 rule, a company may only reduce iLs Laxable income {due Lo
linancial expenses) by 807 ol Lhe LBl1. NeL linancial expenses in excess ol
Lhis amounL are nondeducLible, buL, in conLrasL Lo Lhe neL linancial expenses
resLricLed under Lhe inLeresL ceiling rule, Lhese amounLs can be carried lorward
Lo be used in luLure years {il Lhey are noL resLricLed once again by Lhe LBl1 rule
in LhaL year). 1he calculaLion musL be made alLer a possible resLricLion due Lo
Lhe inLeresL ceiling.
ll a company esLablishes LhaL iL could obLain LhirdparLy linancing on similar
Lerms, iL may be permiLLed Lo deducL Lhe inLeresL LhaL would normally be
disallowed under Lhe ordinary Lhin capiLalizaLion rules described above. No
arm's lengLh principle can be applied Lo help Lhe company avoid Lhe inLeresL
ceiling or Lhe LBl1 rule.
Danish Lax law does noL recharacLerize or impose wiLhholding Lax on Lhe
disallowed inLeresL.
C. Transactions
Asset disposals
1he disposal ol asseLs is a Laxable evenL; gains and losses are generally Laxable
or deducLible. As a rule, sales proceeds lrom lixed asseLs are deducLed lrom Lhe
depreciaLion pool.
As an alLernaLive, iL is also possible Lo Lake Lhe loss deducLion direcLly in Lhe
Laxable income compuLaLion. However, Lhis requires LhaL Lhe wriLLendown
Lax value ol Lhe asseL is deducLed lrom Lhe depreciaLion pool and LhaL no
depreciaLion on Lhe asseL is available in Lhe year ol sale. A lurLher requiremenL
is LhaL Lhe depreciaLion pool does noL become a negaLive amounL as a resulL ol
deducLing Lhe wriLLendown Lax value ol Lhe asseL lrom Lhe pool.
Farm in and Iarm out
lL is common in Lhe Danish hydrocarbon producLion indusLry lor enLiLies Lo
enLer inLo larmin arrangemenLs. However, Lhe Lax consequences ol Lhe
larm in/larm ouL musL be considered on a casebycase basis depending on
how Lhe agreemenL is sLrucLured.
1he larmee {Lhe parLy enLering inLo a larmin arrangemenL) is sub|ecL Lo
LaxaLion according Lo Lhe hydrocarbon LaxaLion rules. A larmee is deemed Lo
hold a depreciaLing asseL, Lhe inLeresL in Lhe hydrocarbon license, lrom Lhe Lime
Lhe inLeresL is acquired {Lhis can be uplronL or delerred depending on Lhe
Lerms ol Lhe parLicular arrangemenL). 1he larmee can deducL Lhe cosL ol Lhe
depreciaLing asseL. 1he "cosL" is Lhe amounL LhaL Lhe larmee is considered Lo
have paid lor Lhe inLeresL, and iL can include Lhe value ol noncash beneliLs.
FuLure commiLmenLs incurred by Lhe larmee in respecL ol inLeresL are generally
deducLible lor Lhe larmee {eiLher ouLrighL or over Lhe asseL's ellecLive lile) il
Lhe larmee holds an inLeresL in Lhe permiL.
1he larmor, i.e., Lhe person larming ouL, is deemed Lo have disposed ol an
inLeresL in Lhe license, producLion equipmenL, eLc. 1he Lax LreaLmenL ol Lhe
larmor is described above under "asseL disposals."
5elling shares in a company
From 2010, LaxaLion ol a company's dividends received and realized capiLal
gains on Lhe sale ol shares will depend solely on wheLher Lhe shares qualily
as subsidiary shares, group company shares, own shares or porLlolio shares.
1he ownership period will, lrom Lhe 2010 income year onwards, be irrelevanL.
Denmark
117
H. Indirect taxes
VAT
Since Denmark is parL ol Lhe LU, Lhe LU common sysLem ol VA1 has been
implemenLed. VA1 is a general Lax on consumpLion, which is based on
LransacLions. VA1 applies Lo all supplies ol goods and services aL every sLage
ol Lhe supply chain, up Lo and including Lhe reLail sLage. Cas, waLer, elecLriciLy
and heaL are LreaLed as Lhe supply ol goods.
1he VA1 sysLem was inLroduced in Denmark in July 1967. 1he Danish VA1 raLe
is now applied aL a sLandard raLe ol 257; however, some LransacLions are zero
raLed, and oLher LransacLions and enLiLies are exempL lrom VA1. A deducLion is
granLed lor VA1 on purchases made lor Lhe use in a business sub|ecL Lo VA1.
Danish VA1 applies exclusively wiLhin Lhe Danish LerriLory, which is made up
ol landmasses, inLernal LerriLorial waLers, up Lo 12 nauLical miles inLo Lhe
ouLer LerriLorial waLers lrom Lhe shore or base line and Lhe airspace above.
1he LerriLory does noL include Lhe Faroe lslands or Creenland.
VA1 applies Lo Lhe supply ol goods or services made in Denmark by a
Laxable person; Lhe acquisiLion ol goods lrom anoLher LU Member SLaLe
{inLracommuniLy acquisiLion) by a Laxable person; reversecharge services
received by a Laxable person and Lhe imporLaLion ol goods lrom ouLside Lhe
LU, regardless ol Lhe sLaLus ol Lhe imporLer. A Laxable person is any enLiLy
or individual LhaL underLakes a supply ol goods or services lor consideraLion,
or LhaL makes inLracommuniLy acquisiLions.
Lxamples ol common LransacLions and arrangemenLs {Lhis lisL is
noL exhausLive):
5ubiect to VAT Zerorated Exemption
Selling goods and
services
LxporL Real esLaLe
LransacLions
Leasing goods lnLracommuniLy Lrade Financial LransacLions
lmporLing goods Conveyance ol
passengers
ll producLs are exporLed or sold Lo a VA1regisLered enLiLy in anoLher LU
Member SLaLe {inLracommuniLy supply), Lhe supplies may qualily as lree
ol VA1 il Lhe supplies are supporLed by evidence LhaL Lhe goods have
lelL Denmark.
NonesLablished businesses musL also regisLer lor VA1 in Denmark il Lhey
underLake any ol Lhe lollowing: goods are locaLed in Denmark aL Lhe Lime ol
supply; inLracommuniLy acquisiLions in Denmark; disLance sales are in excess ol
Lhe annual Lhreshold or services LhaL are Laxable in Denmark, and Lo which Lhe
reversecharge mechanism is noL applicable.
1he VA1 regisLraLion Lhreshold is DKK50,000 {approximaLely t6,600);
however, enLiLies Lrading below Lhis Lhreshold can choose Lo regisLer volunLarily
lor VA1. 1here is no regisLraLion Lhreshold lor loreign businesses.
A regisLered enLiLy musL sLaLe Lhe ouLpuL VA1 iL has charged on iLs sales in iLs
periodic VA1 reLurns {monLhly, quarLerly or biannual, depending on Lhe Laxable
person's LoLal annual Lurnover). From Lhe ouLpuL VA1, Lhe regisLered enLiLy may
deducL inpuL VA1 on purchases and cosLs relaLed Lo iLs acLiviLies sub|ecL Lo VA1.
NonesLablished businesses may apply lor reimbursemenL on cosLs incurred
in Denmark.
Import duties
Denmark is parL ol Lhe LU. 1he LU is a cusLoms union wiLh a common markeL;
goods LhaL circulaLe wiLhin Lhe LU are deemed Lo be "in lree circulaLion" and
Lhe Lransler ol goods beLween Member SLaLes is exempL lrom cusLoms duLy.
However, Lhe imporLaLion ol goods lrom ouLside Lhe LU may be sub|ecL Lo
cusLoms duLy {depending on Lhe naLure ol Lhe goods). 1he LU, Lherelore,
Denmark
118
is considered one counLry lrom a cusLoms poinL ol view. 1he duLy raLe
on imporLed goods is regulaLed by Lhe cusLoms Larill, which is based on
inlormaLion lrom Lhe World CusLoms OrganizaLion {WCO). FurLhermore, Lhe
LU has enLered inLo several agreemenLs wiLh developing counLries. According
Lo Lhese agreemenLs, under cerLain circumsLances, goods lrom Lhe developing
counLries may be sub|ecL Lo a reduced or zero cusLoms duLy raLe.
Coods are reporLed Lo Lhe Danish Lax auLhoriLies on imporLaLion inLo Denmark
and, Lhus, Lo Lhe LU cusLoms union. ln general, all duLies {including cusLoms
duLy, excise duLies and VA1) musL be paid Lo Lhe auLhoriLies belore Lhe goods
are in lree circulaLion in Denmark and Lhe LU. However, mosL companies are
granLed a crediL.
Export duties
1he exporL ol goods or services is noL sub|ecL Lo any duLies.
Excise duties
Lxcise duLies are levied on a number ol goods manulacLured in Denmark or
imporLed inLo Denmark. Lxcisable goods include mineral oil producLs, naLural
gas, coal and elecLriciLy. All Lhese energy producLs are covered by an energy
Lax, a carbon dioxide Lax and a sulphur Lax. 1he raLes lor Lhe mosL common
producLs are as lollows {exchange raLe lrom DKK Lo t7^^):

Energy product

Energy tax
Carbon dioxide
tax

5ulphur tax1es)
Casoline t0.53/liLer t0.03/liLer t2.72/kg
conLenL ol s
Diesel oil t0.37/liLer t0.03^/liLer t2.72/kg
conLenL ol s
HeaLing oil t0.26/liLer t0.035/liLer t2.72/kg
conLenL ol s
Heavy luel oil t0.29/kg t0.0^0/kg t2.72/kg
conLenL ol s
NaLural gas t0.^0/m3 t0.028/m3 0
Coal t0.20/kg t0.03/kg t2.72/kg
conLenL ol s
LlecLriciLy t0.08/kWh t0.012/kWh 0
For cerLain purposes, companies LhaL are regisLered lor VA1 can geL a relund on
energy Laxes and carbon dioxide Laxes.
1he energy Lax on elecLriciLy lor oil and gas drilling purposes in Danish LerriLory
is relundable. 1he carbon dioxide Lax on elecLriciLy is also relundable il iL is
used lor relining.
ll cerLain condiLions are meL, energy Lax and carbon dioxide Lax on heaLing oil,
heavy luel oil, naLural gas and coal lor oil and gas drilling and relining purposes
are relundable.
1axes on gasoline and diesel oil {lor engines) are noL relundable.
Ollshore oil and gas drilling Lakes place ouLside Lhe Danish LerriLory and,
Lherelore, is ouLside Lhe scope ol energy LaxaLion.
5tamp duty and registration Iee
1he SLamp DuLy AcL was amended in 1999. As a resulL, only "insurance
againsL loss or damage" is sub|ecL Lo sLamp duLy. However, aL Lhe same Lime,
a regisLraLion lee was implemenLed. 1he RegisLraLion Fee AcL is a revamped
version ol Lhe older SLamp DuLy AcL. 1his lee should noL Lo be conlused wiLh
Lhe regisLraLion lee on cars {car Lax).
Denmark
119
1he main iLems sub|ecL Lo Lhe regisLraLion lee are Lhe regisLraLions ol
ownership ol immovable properLy, boaLs and aircralLs {generally, when
ownership changes). 1he regisLraLion lee is lixed. However, Lhe basis ol Lhe
lee calculaLion is sub|ecL Lo specilic regulaLions. As a general rule, Lhe lee on
immovable properLy is DKK1,^00 plus 0.67 ol Lhe amounL payable lor Lhe
change in ownership. lL should be noLed LhaL iL is possible Lo avoid Lhe 0.67
regisLraLion lee on immovable properLy in connecLion wiLh an ownership
change as a resulL ol cerLain LransacLions {such as mergers, demergers and
Lhe conveyance ol asseLs).
I. Cther
Business presence
Forms ol business presence in Denmark Lypically include companies, loreign
branches and |oinL venLures {incorporaLed and unincorporaLed). ln addiLion
Lo commercial consideraLions, iL is imporLanL Lo consider Lhe Lax consequences
ol each lorm when seLLing up a business in Denmark. UnincorporaLed |oinL
venLures are commonly used by companies in Lhe exploraLion and developmenL
ol oil and gas pro|ecLs.
Tax treaty protection
ln general, oil and gas producLion consLiLuLes a permanenL esLablishmenL{PL)
under mosL Lax LreaLies; Lherelore, LreaLy proLecLion cannoL generally be
expecLed lor a loreign company. For individual income Lax liabiliLy, Lax LreaLy
provisions vary lrom counLry Lo counLry, and proLecLion againsL Danish LaxaLion
may be available in specilic cases.
Cther reporting obligations
LnLiLies involved in exploraLion and producLion LhaL engage loreign
{nonDanish) conLracLors Lo provide services have a reporLing obligaLion Lo
Lhe Danish Lax auLhoriLies. 1he Danish Lax auLhoriLies use Lhis inlormaLion Lo
deLermine wheLher Lhe conLracLor has a Danish limiLed Lax liabiliLy arising
lrom Lhe services provided.
Ecuadcr
Country code 593
0uitc CMT -5
Ernst & Ycunc
Cyede BuiIdinc
AndaIucia & Ccrderc esq.
3rd FIccr
P.D. Bcx 17 1735
Ecuadcr
TeI 2 255 5553
Fax 2 255 4044
DiI and cas ccntacts
MiItcn Vsccnez
TeI 2 255 5553
miItcn.vasccnezec.ey.ccm
Javier SaIazar
TeI 2 255 5553
javier.saIazarec.ey.ccm
Diecc Len
TeI 2 255 5553
diecc.Iecnec.ey.ccm
Denmark Ecuador
120
CuayaquiI
Av. Franciscc de DreIIana
Edificic Centrum ~ 14th FIccr
P.D. Bcx 09-01-7570
CuayaquiI
Ecuadcr
TeI 4 29 3100
Fax 4 29 351
DiI and cas ccntact
Patricic CevaIIcs
TeI 4 29 3100
patricic.cevaIIcsec.ey.ccm
A. At a glance
CorporaLe income Lax raLe 257
59
RoyalLies 12.57 Lo 18.57
0
Bonuses None
PSC 81.57 Lo 87.57
1
Service conLracL A percenLage ol all producLion belongs
Lo Lhe CovernmenL
2
Capital allowances
L: lmmediaLe wriLeoll lor exploraLion cosLs: Lhe immediaLe wriLeoll lor
exploraLion cosLs is noL a common pracLice. However, Lhese cosLs can be
sub|ecL Lo wriLeoll when Lhe operaLion is linished. See amorLizaLion ol
exploraLion cosLs in Lhe lollowing secLions.
Investment incentives
L: Loss carrylorward: neL operaLing losses may be carried lorward and ollseL
againsL proliLs in Lhe lollowing live years, provided LhaL Lhe amounL ollseL
does noL exceed 257 ol Lhe year's proliLs. Loss carrybacks are noL permiLLed.
B. Fiscal regime
Corporate income tax
Oil and gas companies are sub|ecL Lo Lhe general rules LhaL apply Lo all
indusLries. Oil and gas enLiLies LhaL operaLe Lhrough a locally incorporaLed
company, a branch or a consorLium are sub|ecL Lo lile and pay annual income
Lax lor Lhe neL proliL ol Lhe year.
Pate oI corporate tax
1he sLandard raLe lor oil and gas enLiLies is 257. However, companies LhaL
reinvesL Lheir proliLs are enLiLled Lo a 107 reducLion in Lhe income Lax raLe,
provided Lhey use Lhose proliLs lor Lhe acquisiLion ol new machinery or
equipmenL; Lo be used in producLion acLiviLies; or lor Lhe purchase ol goods
relaLed Lo research and Lechnology applied Lo producLion. 1haL is, Lhe
reinvesLed proliLs are Laxed aL a 157 raLe, provided Lhe reinvesLed amounL has
been used lor Lhe acquisiLion ol machinery lor purposes ol Lhe business.
59 / 44x |ncome tax rate a||es for serv|ce contracts.
0 Pova|t|es a|c to tne Covernment for etro|eum ex|o|tat|on m|cnt co from 12.5x to
18.5x over tne cross montn|v |ncome, ceenc|nc on tne tve of tne contract. lor cas
ex|o|tat|on, tnere |s a m|n|mum rate of 1x over tne montn|v |ncome.
1 Cnce rocuct|on oec|ns, tne contractor nas tne r|cnt to a art|c|at|on |n tne area of
tne contract, wn|cn |s ca|cu|atec oasec on tne ercentaces offerec |n tne roosa| anc
acreec |n tne contract.
2 1ne contractor nas a referrec ot|on to urcnase tne rocuct|on of tne area of tne
contract, at a r|ce tnat |s at |east ecua| to tne reference r|ce. |owever, |t |s awarcec
to tne comanv tnat offers tne r|ce at tne oest conc|t|ons.
Ecuador
121
FurLher, Lhe raLe lor companies LhaL have enLered inLo exploraLion and
exploiLaLion conLracLs wiLh Lhe CovernmenL ol Lcuador is ^^7.
3
Dividends
Dividends received by Lcuadorian corporaLions lrom loreign corporaLions
are considered Lo be LaxexempL income, provided LhaL Lhe loreign enLiLy
disLribuLing Lhe dividends has already paid income Lax.
Excess on sale price
WiLh respecL Lo Lhe uniLs sold, Lhe CovernmenL is enLiLled Lo aL leasL 507
{currenLly 707) ol Lhe dillerence beLween Lhe sale price and Lhe base price
esLablished in Lhe conLracL. ll Lhe base price has noL been esLablished in Lhe
conLracL, iL is deLermined by Lhe presidenL ol Lcuador Lhrough a decree. ln no
case will Lhe decreed price be less Lhan Lhe inLernaLional price in lorce aL Lhe
conLracL subscripLion daLe. For newly signed PSCs, Lhe applicable raLe on Lhe
excess sales price shall be 997.
Foreign tax relieI
Lcuador does noL granL reliel lrom loreign Laxes lor companies domiciled in
Lcuador. However, aparL lrom counLries considered Lo be Lax havens, income
sourced lrom oLher counLries received by Lcuadorian corporaLions is
considered Lo be Lax exempL, provided Lhe income was sub|ecL Lo Lax in LhaL
loreign counLry. 1his exempLion does noL apply when Lhe loreign income comes
lrom a Lax haven |urisdicLion.
C. Contracts
P5Cs
1he parLicipaLion ol Lhe conLracLor is based on producLion volume. lL is
calculaLed using Lhe Lerms and parameLers ollered and agreed upon in Lhe
conLracL, basically in accordance wiLh Lhe lollowing lormula:
PC = X * 0
Where:
PC = ParLicipaLion ol Lhe conLracLor
X = Average lacLor, in decimals, corresponding Lo Lhe parLicipaLion
ol Lhe conLracLor
O = AudiLed annual producLion in Lhe area ol Lhe conLracL
Cross proceeds
ln a PSC, income corresponds Lo Lhe parLicipaLion ol Lhe conLracLor based on
Lhe sales price; however, Lhe sales price cannoL be less Lhan Lhe relerence price
seL by Lhe CovernmenL peLroleum enLiLy {PeLroecuador).
According Lo Lhe regulaLions applicable Lo hydrocarbons, Lhe relerence price is
Lhe average price lor Lhe previous monLh's exLernal sales ol hydrocarbons made
by PeLroecuador ol equivalenL qualiLy, based on Lhe conLracLual bases. ll Lhere
are no exLernal sales by PeLroecuador, Lhe relerence price is calculaLed based
on Lhe crude proporLion negoLiaLed by Lhe parLies, obLained lrom specialized
and recognized publicaLions.
For naLural gas, Lhe relerence price is Lhe same as lor renewable energy. ln
PSCs, Lhe relerence price is calculaLed as lollows:
For lree naLural gas: Lhe relerence price lor each uniL is calculaLed by
mulLiplying Lhe calorilic power {in B1U) by Lhe B1U price ol luel oil no. 6
For condensed gas: Lhe relerence price ol a meLric Lon is Lhe same lor Lhe
average volume price ol liquelied peLroleum gas sold by PeLroecuador
under ClF condiLions
1herelore, Lhe relerence prices may be verilied wiLh Lhe producLion companies
Lo analyze new condiLions regarding Lhis issue.
3 1n|s rate was |nc|ucec u to tne |atest tax amencments |n force s|nce 1 Januarv 2008.
Ecuador
122
Preproduction costs
Cenerally, preproducLion cosLs include exploraLion cosLs, developmenL cosLs
and linancial cosLs. ll reserves are lound, Lhese cosLs are amorLized over a
liveyear period sLarLing lrom Lhe daLe producLion begins. ll no reserves are
lound, Lhese cosLs may be deducLed in Lhe year LhaL iL is recognized Lhere is
no success.
PaymenLs Lo relaLed parLies LhaL exceed 57 ol Lhe Laxable basis are noL
deducLible lor income Lax purposes. AmorLizaLion ol preproducLion cosLs
aLLribuLable Lo adminisLraLive expenses may noL exceed 157 ol Lhe LoLal
amounL ol such cosLs.
Funding lrom Lhe home ollice shall be regisLered as a longLerm liabiliLy.
No income sLaLemenLs shall be presenLed.
Exploration costs
For PCS, exploraLion cosLs may be assigned wiLhin Lhe duraLion ol Lhe
exploraLion period, which mighL range lrom lour Lo six years, sLarLing lrom Lhe
daLe LhaL Lhe conLracL is regisLered in Lhe Hydrocarbons DirecLory {0|recc|on
Nac|ona| ce ||crocarouros).
LxploraLion cosLs generally include depreciaLion ol lixed asseLs {supporL
equipmenL). Lxcluded lrom exploraLion cosLs are Lhose LhaL are incurred by Lhe
conLracLor belore Lhe daLe ol regisLraLion ol Lhe conLracL in Lhe Hydrocarbons
DirecLory, and inLeresL lrom linancing.
Development costs
1hese cosLs can be regisLered lrom Lhe daLe on which Lhe developmenL
plan is approved.
Production costs
1hese cosLs should be regisLered lrom Lhe daLe on which Lhe lirsL barrel is
available lor commercializaLion or indusLrializaLion and should be amorLized
based on Lhe uniLs ol producLion. During Lhis period, lunding lrom Lhe home
ollice is regisLered as a shorLLerm liabiliLy. lncome sLaLemenLs are presenLed.
Depreciation, depletion and amortization 1DD&A) calculation
DD&A ol Lhe exploraLion, developmenL and producLion cosLs are calculaLed
as lollows:
PreproducLion cosLs are amorLized on a sLraighLline meLhod over a
liveyear period, sLarLing lrom Lhe producLion phase
ProducLion cosLs are amorLized over Lhe lile ol Lhe conLracL using
Lhe uniLsolproducLion meLhod based on proven crude oil reserves.
See lormula below:
DD&A: UnamorLized cosL aL beginning ol period
x producLion ol Lhe period
Proven reserves aL beginning ol period
ll Lhe proven reserves change during Lhe liscal year, Lhe applicable lormula is
as lollows:
DD&A: UnamorLized cosL aL beginning ol period
x producLion ol Lhe period
Proven reserves aL beginning ol period
producLion ol Lhe period
1ransporLaLion and sLorage cosLs are amorLized on Lhe sLraighLline meLhod
over a 10year period beginning wiLh operaLions
Ecuador
123
SupporL equipmenL is depreciaLed using Lhe sLraighLline meLhod, according
Lo general percenLages ol annual depreciaLion as lollows:
Buildings, aircralL, ships 5.007
FaciliLies, machinery, equipmenL and lurniLure 10.007
Vehicles and oLher LransporLaLion equipmenL 20.007
Hardware and solLware 33.337
Cil production
1o deLermine oil producLion, iL is necessary Lo measure Lhe crude oil kepL in Lhe
warehouse Lanks aL Lhe collecLing cenLers, alLer separaLing waLer and ware
maLerials. 1he resulLing oil is measured in barrels.
Fiscal uncertainty
Oil and gas companies musL adapL Lo Lhe liscal regime in lorce. However, liscal
uncerLainLy clauses are included in oil and gas LransporLaLion conLracLs.
Marginal Iield contracts
WiLh low operaLional and economic prioriLy, marginal lield conLracLs are
inLended lor lowqualiLy crude. 1hey represenL less Lhan 17 ol Lhe
naLional producLion.
Under Lhese conLracLs, all producLion belongs Lo Lhe esLaLe. LxploraLion cosLs
under Lhese conLracLs are capiLalized annually. 1he Lax basis lor Lhese cosLs
{ad|usLed lor amorLizaLion) is considered an asseL ol Lhe conLracLor.
For Lhe developmenL ol Lhe conLracL, Lhe conLracLor receives reimbursemenL
lor operaLion cosLs ol Lhe base curve ol producLion, in dollars, and parLicipaLion
in Lhe volume ol Lhe crude resulLing lrom Lhe increase over Lhe base
producLion. 1he base curve is esLimaLed on luLure producLion lrom developed,
proven reserves using maLhemaLical simulaLion and sLudies ol Lhe wells; iL is
specilically deLailed in Lhe conLracL.
5ervice contracts Ior exploration and exploitation oI hydrocarbons
ln service conLracLs lor exploraLion and exploiLaLion ol hydrocarbons, Lhe
conLracLor commiLs Lo PeLroecuador Lo provide exploraLion and exploiLaLion
services in Lhe areas previously deLermined. 1he conLracLor uses iLs own
economic resources. Accordingly, Lhe conLracLor has Lo invesL Lhe necessary
capiLal and use Lhe equipmenL, machinery and Lechnology required lor
such conLracLs.
1ransporLaLion, commercializaLion and producLion cosLs {including
reimbursemenLs and paymenLs made by PeLroecuador in lavor ol Lhe
conLracLor) are deducLed lrom income. FurLher, Lhe conLracLor secures Lhe
righL Lo a relund ol iLs invesLmenLs, cosLs and expenses, as well as Lhe paymenL
lor services provided, when iL linds hydrocarbons LhaL may be commercialized.
Farm in and Iarm out
Farm in and larm ouL are permissible; however, belore any agreemenL
is enLered inLo, iL is mandaLory LhaL Lhe conLracLor obLain Lhe wriLLen
auLhorizaLion ol PeLroecuador and Lhe MinisLry ol Mines and PeLroleum.
ll Lhe auLhorizaLion is noL duly obLained, Lhe agreemenL is invalid, resulLing
in Lhe LerminaLion ol Lhe conLracL wiLh Lhe CovernmenL. 1he CovernmenL
deLermines Lhe caduciLy ol Lhe conLracL. 1he CovernmenL is noL only in
charge ol auLhorizing Lhis Lype ol agreemenL, buL also in change ol qualilying
Lhe enLiLy enLiLled Lo Lhe righLs, Lhrough Lhe corresponding Lransler.
1ransler lees apply and vary depending on Lhe Lype ol Lhe Lransler.
Cther types oI contracts
JoinL conLracLs
Shared managemenL conLracLs
Specilic services provision or specilic goods acquisiLion conLracLs
Ecuador
124
D. Poyalties
RoyalLies lor Lhe PSCs are generally calculaLed as lollows:
Production 1P)
Monthly maximum
contractor sharing
Monthly minimum
estate sharing
P 30,000 daily barrels 87.57 12.57
30,000 = P 60,000 daily barrels 86.07 1^.07
P > 60,000 81.57 18.57
E. Withholding taxes
4
A 257 wiLhholding Lax is generally imposed on Lhe lollowing paymenLs abroad:
1echnical assisLance Lo nondomiciled companies and
nonresidenL individuals
Services rendered Lo nonresidenL individuals
Prolessional services rendered abroad or occasional services rendered in
Lcuador Lo nondomiciled companies
ReimbursemenL ol expenses
ln addiLion, inLeresL and linancial lees are sub|ecL Lo a 257 wiLhholding Lax
{57 locally) lor paymenLs ol inLeresL by banks and oLher linancial insLiLuLions.
A 27 wiLhholding Lax is applied Lo paymenLs made Lo local beneliciaries lor Lhe
provision ol services, and 17 is applied Lo Lhe acquisiLion ol goods.
Cther
Dividends none.
5

Branch remiLLance Lax none.
F. Financing considerations
LllecLive lrom 1 January 2008, Lhin capiLalizaLion rules are in lorce,
esLablishing a raLio ol 3:1 loreign debL Lo paid common sLock capiLal.
C. Transactions
Capital gains
CapiLal gains derived lrom Lhe sales ol shares are exempL lrom Lax il Lhe sales
qualily as "occasional" sales. Occasional sales are Lhose LhaL are noL made in
Lhe ordinary course ol Lhe company's business. Losses on sales beLween relaLed
parLies are noL deducLible.
Asset disposals
All asseLs are generally Lhe properLy ol Lhe CovernmenL, excepL lor Lhose
acquired under specilic service conLracLs.
WiLh respecL Lo all conLracLs, asseLs lrom loreign invesLmenLs can enLer Lhe
counLry under a special cusLom regime known as Lemporary imporLaLion wiLh
reexporLaLion. Under Lhis regime, Lhere is no income Lax ellecL or VA1 ellecL
{provided Lhe goods are noL "naLionalized").
Currency exportation tax
All Lcuadorian Laxpayers LhaL remiL currency abroad are sub|ecL Lo 27 Lax on
Lhe amounL ol Lhe Lransler, regardless ol wheLher Lhe LransacLion is made
Lhrough a linancial insLiLuLion.
No exempLions apply.
4 1ne fo||ow|nc ercentaces m|cnt varv accorc|nc to tne a||cat|on of couo|e taxat|on
treat|es tnat fcuacor nas |n force. fcuacor nas couo|e taxat|on treat|es w|tn tne
fo||ow|nc commun|t|es anc countr|es: tne /ncean Commun|tv, Braz||, Be|c|um,
Canaca, Cn||e, lrance, Cermanv, |ta|v, Hex|co, Pomancv, Sa|n anc Sw|tzer|anc.
5 No w|tnno|c|nc a||es, rov|cec tnat tne |ncome tax nas a|reacv oeen ||cu|catec anc
a|c ov tne ent|tv tnat avs tne c|v|cencs.
Ecuador
125
H. Indirect taxes
Import taxes
lmporL Laxes are paid based on Lhe cusLom reLurn {generally based on Lhe
descripLion ol goods, including origin, cosL and quanLiLy) and on "auLo
liquidaLion" {generally Lhe sellassessmenL ol Laxes) perlormed by Lhe
Laxpayer. 1he Laxable base lor cusLoms Laxes is Lhe ClF value, including cosL,
insurance and lreighL.
1he direcL imporLaLion ol machinery, Lools and oLher maLerials lor Lhe
exploiLaLion and exploraLion ol hydrocarbons, by companies LhaL have enLered
inLo exploraLion and exploiLaLion conLracLs wiLh Lhe Lcuadorian CovernmenL,
is noL sub|ecL Lo imporL Laxes during Lhe period ol exploraLion or in Lhe lirsL
10 years ol exploiLaLion, provided LhaL Lhe imporLed machines are noL made
in Lcuador.
VAT
VA1 is based on Lhe value ol imporLed goods, Lhe acquisiLion ol goods and
Lhe provision ol services. 1he VA1 raLe is 127; however, cerLain Lranslers ol
goods or services are specilically zeroraLed. lmporLed services are Laxed
wiLh 127 VA1.
Export duties
1he Lax basis lor cusLoms duLies is based on Lhe lreighL onboard value.
LxporL duLies depend on Lhis iLem.
I. Cther considerations
Oil and gas conLracLs have several specilic requiremenLs depending on
Lhe Lype ol conLracL.
For all conLracLs:
CompensaLion lor public consLrucLion Lhe conLracLor is required Lo
compensaLe public consLrucLion aL Lhe beginning ol Lhe producLion period in
accordance wiLh CovernmenL plans, Lhe size ol Lhe conLracLed area and Lhe
proximiLy ol Lhe lindings. 1he amounL ol Lhis compensaLion is deLermined by
Lhe CovernmenL
WaLer and maLerials conLribuLion Lhis is an annual lixed conLribuLion ol aL
leasL USS60,000
Provinces conLribuLion iL is necessary Lo make a monLhly auLoliquidaLion;
Lhe amounL is based on Lhe LransporLed barrels lor Lhe SO1L {ollicial
LransporLaLion lor exporLaLion), excepL lor any LhaL are noL desLined
lor sale
Fund lor Lhe developmenL ol Amazon provinces Lhe Laxable base is Lhe
value ol Lhe PeLroecuador bill lor Lhe services perlormed
Fund lor Lhe developmenL ol Lhe ecosysLem ol Lhe Amazon region
Lhe Laxable base is Lhe commercializaLion value ol Lhe peLroleum
LnvironmenLal warranLies Lhe amounL depends on Lhe basis
lor conLracLing
For specilic services provision or specilic goods acquisiLion conLracLs:
Honor ol oller warranLy a minimum ol 27 ol Lhe amounL ol Lhe oller.
1his warranLy is recoverable once Lhe conLracL is signed
Proper compliance warranLy 57 ol Lhe amounL ol Lhe conLracL.
1his warranLy is recoverable once Lhe documenLaLion ol LerminaLion
or delivery is regisLered
Proper perlormance ol work 57 ol Lhe amounL ol Lhe conLracL. 1his
warranLy is recoverable once Lhere is evidence ol Lhe qualiLy ol Lhe well's
maLerials and wheLher Lhe developmenL work is considered highly ellecLive
Ecuador
12
lnvesLmenL warranLy belore Lhe inscripLion ol Lhe conLracL, Lhe conLracLor
or iLs associaLe shall pay a guaranLee in an equivalenL quanLiLy Lo 207 ol Lhe
compromised invesLmenLs deLailed lor Lhe conLracLor during Lhe exploraLion
period. 1his guaranLy may be paid in cash or CovernmenL bonds. 1his
warranLy is recoverable once Lhe exploiLaLion period concludes and all
exploraLion obligaLions have been accomplished
EquatcriaI Cuinea 1EC)
Country code 240
MaIabc CMT +1
Ernst & Ycunc
CaIIe Niceria 24
Apdc 1P.D. Bcx) 52
MaIabc
EquatcriaI Cuinea
TeI 09 7 19
Fax 09 4 59
DiI and cas ccntacts
AIexis Mcutcme
TeI 25 00 50
aIexis.mcutcmecq.ey.ccm
Jcseph Paccp Ncupcue
J]ka\]flafHYjak!
TeI 33 1 55 1 1 3
jcseph.paccp.ncupcueey.avccats.ccm
A. At a glance
Fiscal regime
1he liscal regime LhaL applies Lo Lhe oil and gas indusLry is provided by Lhe
LC 1ax Code {LC1C) daLed 28 OcLober 200^, Lhe LC Hydrocarbon Law
No. 8/2006 daLed 3 November 2006, Lhe producLion sharing conLracL
{PSC) or oLher similar conLracL concluded beLween Lhe LC CovernmenL
and Lhe conLracLor.
1he main Laxes applicable in Lhis secLor are Lhe lollowing:
CorporaLe income Lax {Cl1) 357
1axes on Lransler and assignmenL ll LransacLion generaLes capiLal gains noL
invesLed in LC, iL is sub|ecL Lo Cl1
LxporL duLies Cenerally exempL sub|ecL Lo condiLions

RoyalLies NoL less Lhan 137


Bonuses DeLermined under Lhe Lerms ol each PSC
Surlace premiums on renLal raLes DeLermined under Lhe Lerms ol each PSC
Discovery, producLion and DeLermined under Lhe Lerms ol
markeLing bonds each PSC
7
Urban properLy Lax 17 ol Lax base
PSC SLaLe is enLiLled Lo a percenLage ol all
hydrocarbons
8
Hater|a|s anc ecu|ment c|rect|v re|atec to etro|eum oerat|ons anc |mortec
uncer tne temorarv |mort rec|me mav oe exortec from fC free of a|| exort cut|es.
7 0|scoverv means tne f|nc|nc ov tne contractor of nvcrocaroons wnose ex|stence
w|tn|n tne contract area was not known r|or to tne effect|ve cate or nvcrocaroons
w|tn|n tne contract area wn|cn nac not oeen cec|arec a commerc|a| c|scoverv
r|or to tne effect|ve cate anc wn|cn are measurao|e ov cenera||v accetec
|nternat|ona| etro|eum |ncustrv ract|ces.
8 1ne state |s ent|t|ec to a ercentace of a|| nvcrocaroons won anc savec from a
contract area, oasec on tne terms acreec |n eacn contract anc after cecuct|on
of rova|t|es anc |nvestment recoverv o||. 1ne art|c|at|on of tne state snou|c
not oe |ess tnan 20x.
Ecuador Equatorial Cuinea
127 Equatorial Cuinea
CapiLal allowances SLraighLline depreciaLion
9
lnvesLmenL incenLives RD
70
, L
71
B. Fiscal regime
Corporate tax
LC companies are sub|ecL Lo Cl1 ol 357 on Lhe LerriLorial principle. LC
companies are Lhose regisLered in LC regardless ol Lhe naLionaliLy ol Lhe
shareholders or where Lhe companies are managed and conLrolled. Foreign
companies engaged in business in LC are sub|ecL Lo Cl1 on LCsourced proliLs.
1he neL proliL will be deLermined by deducLing lrom Lhe gross income or gross
proliL all expenses Lied Lo Lhe perlormance ol Lhe Laxable acLiviLies in LC.
OperaLions carried ouL ollshore {i.e., ouLside Lhe inLernaLional boundaries ol
LC) shall noL lall wiLhin Lhe scope ol LC corporaLe Lax. However, please noLe
LhaL LC Lax auLhoriLies could Lry Lo aLLracL proliLs lrom operaLions carried ouL
ouLside LC when Lhey could be linked Lo Lhe branch/company in LC.
Ping Iencing
LC law does noL provide LhaL Lhe proliL lrom one pro|ecL can be ollseL againsL
Lhe losses lrom anoLher pro|ecL held by Lhe same Lax enLiLy. Accordingly, Lhe
peLroleum operaLions should be accounLed lor separaLely.
P5Cs
1he main Lype ol oil conLracL in LC is a PSC. 1he conLracL is concluded eiLher by
Lhe inLernaLional public inviLaLion Lo Lender in order Lo guaranLee compeLiLion
beLween Lhe poLenLial conLracLors or by Lhe direcL ad|udicaLion.
Lach conLracL shall come inLo lorce only alLer iL has been raLilied by Lhe
presidenL ol Lhe Republic and on Lhe daLe ol Lhe delivery Lo Lhe conLracLor
ol a wriLLen noLice ol said raLilicaLion.
Covernment share oI proIit oil
ln addiLion Lo royalLies, Lhe sLaLe is enLiLled Lo a percenLage ol all hydrocarbons
which have been exLracLed and kepL lrom a conLracL area based on Lhe Lerms
agreed in each conLracL and alLer deducLion ol royalLies and invesLmenL
recovery oil.
Nonrecoverable expenditures
1he lollowing expendiLures are noL recoverable:
a. lnLeresL on loans obLained by Lhe conLracLor lrom any alliliaLed company
or Lhe parenL company or nonalliliaLed Lhird parLies, which exceed Lhe
commercial raLes charged by ollicial banks
b. Lxpenses incurred by Lhe conLracLor prior Lo and during conLracL
negoLiaLions and any expense incurred prior Lo Lhe ellecLive daLe
ol Lhe conLracL
c. Bonus paid by Lhe conLracLor upon execuLion ol Lhe conLracL
d. Discovery bonus paid by Lhe conLracLor
e. Annual surlace renLal raLe paid Lo Lhe sLaLe
l. AmounLs in excess ol 7.57 ol Lhe annual budgeL approved by Lhe
appropriaLe Branch MinisLry during Lhe iniLial exploraLion period; and/
or over 57 ol Lhe annual budgeL approved by said MinisLry during Lhe
developmenL and exploiLaLion phase
9 1ne fC1C rov|ces tne stra|cnt||ne svstem of cerec|at|on: a|| assets are
cerec|atec |n a un|form manner over a er|oc reresent|nc tne rooao|e
usefu| ||fe of tne assets |n cuest|on.
70 1ne fC |nvestment recu|at|ons rov|ce f|nanc|a| anc f|sca| acvantaces for
coman|es wn|cn create |oos anc offer rofess|ona| tra|n|nc for nat|ona|s
anc for researcn anc ceve|oment.
71 Net oerat|nc |osses |ncurrec cur|nc tne rev|ous vear are cecuct|o|e u to a
max|mum of f|ve :5; vears.
128
g. Any paymenL made Lo Lhe CovernmenL as a resulL ol lailure Lo comply wiLh
minimal exploraLion work obligaLions as agreed upon in Lhe conLracL
h. Any sancLion imposed by Lhe CovernmenL on Lhe conLracLor as a resulL ol
environmenLal conLaminaLion {oil spills, eLc.)
i. Fines or sancLions LhaL may be levied as a resulL ol violaLion ol Lhe laws,
regulaLions and oLher legal provisions in LC
|. AudiL and inspecLion expenses incurred by Lhe CovernmenL aL Lhe
conLracLor's headquarLers, as a resulL ol Lhe absence ol original
documenLs in Lhe conLracLor's ollice in Lhe Republic ol LC
k. ConLracLor's experL's expenses according Lo Lhe conLracL
Determination oI cost oil
CosL oil is Lhe sum ol all expenses borne by Lhe holder in Lhe lramework ol Lhe
PSC, deLermined in accordance wiLh accounLing meLhods. All cosLs relaLed Lo
peLroleum operaLions shall be classilied in accordance wiLh Lheir end use.
72

ClassilicaLion criLeria shall be included in Lhe approved annual work program
and annual budgeL lor Lhe calendar year in which Lhe expendiLure is made.
UpliIt available on recovered costs
WiLh Lhe excepLion ol general and adminisLraLion cosLs incurred in LC direcLly
assignable Lo Lhe annual budgeL, an uplilL is available on Lhe general and
adminisLraLion expendiLures incurred by Lhe conLracLor ouLside ol naLional
LerriLory wiLh respecL Lo peLroleum operaLions and should be deLermined
wiLh Lhe sliding scale seL ouL in Lhe PSC, based on LoLal peLroleum operaLions
cosLs incurred during Lhe year and duly |usLilied by Lhe conLracLor and
approved by Lhe MinisLry.
Annual surIace rent
An annual surlace renL is due when Lhe PSC or service conLracL is signed.
1he surlace renLal shall be proraLed lrom Lhe ellecLive daLe Lhrough Lo
31 December ol such year and shall be paid wiLhin 30 days alLer Lhe
ellecLive daLe.
Surlace renLals shall be calculaLed based on Lhe surlace ol Lhe conLracL area
and, where applicable, ol a developmenL and producLion area occupied by Lhe
conLracLor on Lhe daLe ol paymenL ol such surlace renLals.
Poyalty regimes
ConLracLors are sub|ecL Lo Lhe paymenL ol a royalLy on Lhe value ol Lhe
hydrocarbon produced {including Lhe governmenL share ol Lhe producLion)
and Lhis paymenL is due lrom Lhe lirsL day ol producLion based on Lhe LoLal
disposable producLion lrom a developmenL and producLion area.
C. Capital allowances
Tax depreciation rules
DepreciaLion will be esLimaLed lrom Lhe calendar year in which Lhe asseL is
placed inLo service, wiLh a lull year's depreciaLion allowed lor Lhe iniLial
calendar year. DepreciaLion shall be deLermined using Lhe sLraighLline
meLhod. 1he lollowing raLes are some ol Lhose applicable:
Developed land 57
Housing 57
1emporary buildings 207
LighL vehicles 257
Heavy vehicles 33.337
Ollice lurniLure 207
Naval and air maLerial 207
LC law does noL provide lor any acceleraLed depreciaLion lor Lhe asseLs ol a
peLroleum company.
72 fx|orat|on costs, ceve|oment anc rocuct|on costs, oerat|nc or rocuct|on costs,
commerc|a||zat|on costs, a||ocat|on of cenera| anc acm|n|strat|ve costs.
Equatorial Cuinea
129
D. Incentives
CarryIorward losses
NeL operaLing losses incurred during Lhe previous year are deducLible up Lo a
maximum ol live years. As discussed above, ringlencing applies. LC law does
noL provide LhaL Lhe proliL lrom one pro|ecL can be ollseL againsL Lhe losses
lrom anoLher pro|ecL held by Lhe same Lax enLiLy. Accordingly, Lhe peLroleum
operaLions should be accounLed lor separaLely.
P&D incentives
R&D incenLives are deLermined according Lo each PSC.
E. Withholding taxes 1WHT)
Dividends
Dividends paid by an LC company Lo a nonresidenL are sub|ecL Lo a WH1 aL Lhe
raLe ol 257.
Interest
lnLeresL paid by an LC company Lo a nonresidenL is sub|ecL Lo a WH1 aL Lhe
raLe ol 257. However, Lhe bank inLeresL raLe is ^.257.
73
WHT on the resident/nonresident income
Cross income obLained in LC lor any kind ol commercial or indusLrial acLiviLy,
services, manpower supply and analogous services are sub|ecL Lo a WH1 aL Lhe
raLe ol 6.257 when Lhe economic acLiviLies are perlormed and invoiced by Lhe
residenL, while Lhe raLe is lixed aL 107 lor nonresidenLs.
AmounLs paid lor mobilizaLion, demobilizaLion and LransporLaLion services in
LC in Lhe peLroleum secLor shall be sub|ecL Lo a WH1 aL Lhe raLe ol 57 lor non
residenL enLiLies.
Branch remittance tax
1here is no branch remiLLance Lax in LC.
F. Financing considerations
lnLeresL on loans will be deducLible only when Lhey do noL exceed Lhe inLeresL
invoiced by Lhe banks, auLhorized by Lhe Bank Commission.
C. Transactions
1he assignmenL, Lransler or oLher disposiLion ol Lhe righL granLed by any
conLracL shall require prior wriLLen auLhorizaLion lrom Lhe MinisLry. Such
assignmenL, Lransler or oLher disposiLion shall be sub|ecL Lo Lhe paymenL ol
a nonrecoverable, nondeducLible lee and oLher requiremenLs LhaL shall be
esLablished in Lhe auLhorizaLion granLed by Lhe MinisLry.
1he Lransler ol Lhe ownership ol more Lhan 507 ol Lhe shares in capiLal ol any
person making up a conLracLor, LhaL allecLs Lhe ownership ol Lhe righLs under
Lhe relevanL conLracL, shall be deemed Lo be an assignmenL ol conLracLual
righLs under a conLracL. All proliLs resulLing lrom any assignmenL, Lransler
or oLher disposiLion ol righLs under a conLracL, regardless ol Lhe beneliciary,
Lype or locaLion ol Lhe LransacLion, shall be sub|ecL Lo Laxes in accordance wiLh
Lhe laws ol LC.
CapiLal gains will be included in Lhe Laxable proliL calculaLion lor Cl1 purposes,
in accordance wiLh Lhe provisions ol Lhe LC Lax law.
1he regisLraLion lees Lo be paid depend on Lhe kind ol asseL, lor example:
Shares 27
1ranslerable bonds 27
1hese regisLraLion lees are paid by Lhe assignee.
73 1n|s rate mav oe cnancec at anv t|me ov tne Centra| Bank.
Equatorial Cuinea
130
H. Indirect taxes
Import duties
Provisions ol cusLoms duLies are idenLical lor mosL ol LC producLion sharing
agreemenLs {PSAs). 1hey usually provide LhaL Lhe person designaLed as a
conLracLor under a PSA, as well as iLs subconLracLors, are allowed Lo imporL inLo
LC wiLhouL resLricLions and wiLhouL paymenL ol duLies, on goods, maLerials,
machinery, equipmenL and consumer goods, which are necessary Lo carry
ouL qualilying operaLions under a PSA, in iLs own name or in Lhe name ol iLs
subconLracLors under regulaLions ol Lemporary admission {A1) or Lemporary
imporLs {l1), eiLher normal or special, on condiLion LhaL Lhese goods are going
Lo be used exclusively lor qualilying operaLions and will be reexporLed aL Lhe
end ol Lheir use.
Export duties
1he maLerials and equipmenL direcLly relaLed Lo peLroleum operaLions and
imporLed under Lhe l1 regime may be exporLed lrom LC lree ol all exporL
duLies, provided LhaL Lhe ownership ol such maLerials and equipmenL has noL
been Lranslerred Lo Lhe sLaLe.
5tamp duties/registration Iees
RegisLraLion lees are based on a percenLage ol Lhe loreign company's
share capiLal lor a branch regisLraLion and ol Lhe share capiLal lor a
subsidiary regisLraLion. RegisLraLion cosLs perLaining Lo a subsidiary or
Lo a branch are similar.
Provided LhaL Lhe share capiLal lor a subsidiary or lor Lhe loreign company's
share capiLal is noL higher Lhan COL10 million {which is Lhe legal minimum
share capiLal lor a Public {PLC) under Lhe OHADA regulaLions), regisLraLion
cosLs may be esLimaLed aL COL8 million as ol Loday.
RegisLraLions have Lo be renewed every year aL dillerenL adminisLraLions
{mines, Lrade, promoLion ol small and mediumsized businesses
and ciLy council).
I. Cther
Urban property tax
All owners, holders, equiLable owners ol Lhe asseLs will be required Lo pay Lhis
Lax, including, heirs, |oinL owners and oLher enLiLies which, while lacking Lheir
own legal sLaLus, consLiLuLe an economic uniL are Lhe owners ol record ol asseLs
LhaL are urban in naLure.
1he Lax base lor urban properLy Lax, which will coincide wiLh Lhe neL base, will
be consLiLuLed by ^07 ol Lhe sum ol Lhe value ol Lhe land and Lhe consLrucLion.
lL will enLer inLo ellecL lor LaxaLion purposes on Lhe liscal year immediaLely
lollowing iLs noLilicaLion.
1he Lax debL will be Lhe resulL ol applying 17 Lo Lhe Lax base. Said Lax will be
due per compleLe six monLhs and iLs amounL paid in Lhe second quarLer ol Lhe
respecLive liscal year.
Personal income tax
Lmployers are liable Lo personal income Lax {as a payroll deducLion) on behall
ol iLs employees and shall pay iL back Lo Lhe Lax adminisLraLion no laLer Lhan 15
days alLer Lhe beginning ol Lhe lollowing monLh.
1axable basis: previous monLh's gross salary
RaLe: 07 Lo 357 {progressive scale)
Prolessional expenses deducLion amounLs Lo 207 ol gross salary, alLer social
conLribuLions have been deducLed, up Lo one COL1 million a year.
Equatorial Cuinea
131
Lmployers are also liable Lo Lhe lollowing wiLhholding individual conLribuLions,
{as a payroll deducLion) on behall ol Lheir employees and shall pay iL Lo Lhe
Lax adminisLraLion no laLer Lhan 15 days alLer Lhe beginning ol Lhe
lollowing monLh.
a. Social securiLy conLribuLion
1axable basis: previous monLh's gross salary
Lmployers' raLe: 21.57
Lmployees' raLe: ^.57
b. Work ProLecLion Fund {WPF) conLribuLion and Prolessional 1raining Fund
{P1F) conLribuLion:
LxpaLriaLe employees perlorming acLiviLies wiLh Oil and Cas
subconLracLors are sub|ecL Lo specilic raLes
Lmployers' raLe: 0.157 {WPF) + 0.107 {P1F); Laxable basis:
gross salary
Lmployees' raLe: 0.157 {P1F); Laxable basis: neL salary
c. Applicable domesLic producLion requiremenLs
All conLracLors are obliged Lo sell and Lransler Lo Lhe sLaLe, upon wriLLen
requesL ol Lhe MinisLry, any amounLs ol hydrocarbons ol a conLracL area
and any amounLs ol naLural gas processed in LC by a conLracLor or iLs associaLe
LhaL Lhe sLaLe shall deem necessary Lo meeL domesLic
consumpLion requiremenLs.
Tax treaties
LC has enLered inLo Lhe CenLral Alrican Lconomic and CusLoms Union
{UDLAC)
74
Lax LreaLy.
Ecypt
Country code 20
Cairc CMT +2
Ernst & Ycunc
Cairc Rinc Rcad
Rama Tcwer
Katameya
New Maadi
Cairc
PD Bcx 20
Ecypt
TeI 2 333 2000
Fax 2 370 013
DiI and cas ccntacts
Sherif EI-KiIany
TeI 2 333 27
Fax 2 370 013
sherif.eI-kiIanyec.ey.ccm
Ahmed Hecazy
TeI 2 333 2000
Fax 2 370 013
ahmed.hecazyec.ey.ccm
A. At a glance
Fiscal regime
LgypL's liscal regime LhaL applies Lo Lhe peLroleum indusLry consisLs ol a
combinaLion ol corporaLe income Lax and royalLybased LaxaLion.
Bonuses SignaLure and producLion bonuses are
sLipulaLed in Lhe parLicular PeLroleum
Concession AgreemenL {PCA)
74 Now ca||ec CfH/C, wn|cn Hemoers State are: Cameroun, tne Centra| /fr|can
Peuo||c, Conco, Caoon, fcuator|a| Cu|nea anc Cnac.
Equatorial Cuinea Egypt
132
PCS 1he PCS is Lhe basic documenL signed
wiLh Lhe LgypLian Ceneral PeLroleum
CorporaLion {LCPC)
lncome Lax raLe
Ceneral raLe 207
Oil exploraLion and producLion ^0.557
LCPC, Suez Canal AuLhoriLy
and CenLral Bank ol LgypL ^07
CapiLal allowances D
75
lnvesLmenL incenLives L, RD
7
B. Fiscal regime
LgypL's liscal regime lor Lhe peLroleum indusLry consisLs ol a combinaLion ol
corporaLe income Lax and royalLybased LaxaLion as lollows.
Corporate tax
On 9 June 2005, Lhe presidenL ol LgypL approved lncome 1ax Law no. 91,
which was published on 10 June 2005. 1he new law inLroduced new Lax
measures, including Lax consequences lor relaLedparLy LransacLions and
wiLhholding Lax on paymenLs Lo nonresidenL companies.
1he corporaLe Lax applies Lo:
Companies LhaL are residenL in LgypL, on proliLs generaLed inside or
ouLside LgypL
Companies LhaL are noL residenL in LgypL, only on proliLs generaLed
inside LgypL
LgypL does noL apply ring lencing in Lhe deLerminaLion ol corporaLe Lax
liabiliLy. ProliLs arising lrom one pro|ecL may be ollseL againsL Lhe losses lrom
anoLher pro|ecL, provided iL is held by Lhe same Lax enLiLy; similarly, proliLs and
losses lrom upsLream acLiviLies may be ollseL againsL downsLream acLiviLies
underLaken by Lhe same enLiLy. LgypL does noL apply Lax consolidaLion rules.
CorporaLe Lax is levied on Laxable income. 1he general raLe ol corporaLe Lax is
207. However, Laxable income lrom oil exploraLion and producLion is sub|ecL Lo
a corporaLe Lax raLe ol ^0.557 on all proliLs.
1he LCPC, Lhe Suez Canal AuLhoriLy and Lhe CenLral Bank ol LgypL are sub|ecL
Lo a Lax raLe ol ^07.
1axable income equals assessable income less deducLions. Assessable income
includes ordinary income {deLermined under common law) and sLaLuLory
income {amounLs specilically included under Lhe lncome 1ax AcL).
DeducLions include expenses, Lo Lhe exLenL Lhey are incurred in producing
assessable income or are necessary in carrying on a business lor Lhe purpose
ol producing assessable income. However, an expendiLure ol a capiLal naLure
is noL deducLible.
1he LCPC is Lhe linal Lax bearer {under Lhe concession agreemenLs; Lhe
corporaLe Lax due is paid by Lhe LCPC alLer grossing up Lhe Laxable base).
LxploraLion enLiLies calculaLe Lhe corporaLe income Lax due on LCPC's
assessable income, and Lhey have Lhe calculaLion reviewed and conlirmed by
Lhe LCPC. 1he LCPC Lhen pays Lhe Laxes direcLly Lo Lhe Lax auLhoriLy. 1his is
also Lhe case lor all acLive concession agreemenLs. Accordingly, Lhe Lax reLurn
prepared by Lhe exploraLion enLiLy should be reviewed, approved and signed
by Lhe LCPC.
75 0: acce|eratec cerec|at|on oasec on tne rov|s|ons of tne concess|on acreement
anc enc|nc arova| of tne fCPC, ca|ta||zec ex|orat|on exenses are amort|zec
over tne ||fet|me of tne concess|on.
7 |: |osses can oe carr|ec forwarc for f|ve vears, P0: P80 |ncent|ve.
Egypt
133
Crossing up means maximizing Lhe assessable income as lollows:
Assessable base X 100/Lax raLe. 1he Lax due is Lhen calculaLed on Lhe
new grossedup amounL
An exploraLion enLiLy is generally enLiLled Lo sell iLs share ol Lhe oil
Lo whomever iL chooses, sub|ecL Lo approval by Lhe LCPC {in some
circumsLances, Lhe LCPC may elecL Lo purchase Lhe oil iLsell). 1he sales
income lrom iLs share ol Lhe oil and deducLible expenses {which may be
recoverable and nonrecoverable expenses) is included as parL ol Lhe
enLiLy's Lax reLurn and is sub|ecL Lo Lax
Based on Lhe provisions ol Lhe concession agreemenL, deducLions lor
an expendiLure ol a capiLal naLure may be available under Lhe "unilorm
capiLal allowance regime." ln Lhe conLexL ol Lhe oil and gas indusLry, Lhis
would generally be in Lhe lorm ol a capiLal allowance available in respecL
ol depreciaLing asseLs {see discussion below). However, deducLions
may be available lor oLher Lypes ol capiLal expendiLures; lor example, an
expendiLure incurred Lo esLablish an iniLial business sLrucLure is deducLible
over live years
ProliLs lrom oil and gas acLiviLies underLaken by an LgypLian residenL
company in a loreign counLry are generally noL sub|ecL Lo Lax in LgypL,
provided Lhey are underLaken Lhrough a loreign permanenL esLablishmenL/
legal enLiLy, noL a branch
Capital gains
Cains resulLing lrom a CC1 evenL may be sub|ecL Lo Lax. 1he lncome 1ax Law
provides lor CC1 evenLs, including Lhe disposal ol asseLs. CapiLal gains or losses
are deLermined by deducLing Lhe cosL base ol an asseL lrom iLs proceeds
{money received or receivable or Lhe markeL value ol properLy received or
receivable). For corporaLe Laxpayers, Lhe neL capiLal gain is Laxed aL ^07.
CapiLal losses are deducLible exclusively againsL capiLal gains and noL againsL
ordinary income. However, Lrading losses are also deducLible againsL neL
Laxable capiLal gains, which are included in Laxable income.
CapiLal gains derived by an LgypLian residenL company in respecL Lo Lhe
disposal ol shares in a loreign company are sub|ecL Lo Lax in LgypL, wiLh Lhe
enLiLlemenL Lo ollseL Lhe loreign paid Laxes againsL Lhe LgypLian Laxes.
However, losses are noL ollseL againsL LgypLian proliLs.
CapiLal gains resulLing lrom Lhe disposal ol acLive loreign branch operaLions by
an LgypLian company {which generally include oiland gasproducing asseLs)
are sub|ecL Lo Lax in LgypL.
ln summary, CC1 is generally levied on Lhe disposal ol loreign subsidiaries or
branch operaLions.
NonresidenLs are only sub|ecL Lo CC1 on Laxable LgypLian properLy.
Functional currency
Provided cerLain requiremenLs are meL under LgypLian lncome 1ax Law,
Laxpayers may calculaLe Lheir Laxable income by relerence Lo a luncLional
currency {i.e., a parLicular loreign currency) il Lheir accounLs are solely or
predominanLly kepL in LhaL currency. 1he elecLion ol a luncLional currency
is an approach someLimes applied by oil and gas companies il mosL ol Lheir
LransacLions are denominaLed in, lor example, US dollars or BriLish pounds.
LlecLion ol a luncLional currency generally reduces compliance cosLs and,
depending on loreign currency movemenLs, iL may shield Lhe company lrom
unexpecLed Laxable loreign currency gains {alLhough iL could deny a deducLion
lor loreign currency losses).
TransIer pricing
LgypLian 1ax Law includes measures Lo ensure LhaL Lhe LgypLian Laxable
income base associaLed wiLh crossborder LransacLions is based on arm's lengLh
prices. Several meLhods lor deLermining Lhe arm's lengLh price are available,
and sLricL documenLaLion requiremenLs apply Lo supporL Lhe meLhod chosen
Egypt
134
and Lhe prices reached. 1his is parLicularly relevanL Lo Lhe sale ol commodiLies,
inLer company services, inLercompany lunding arrangemenLs, and bareboaL
and Lime charLer leases.
Dividends
Dividends paid by LgypLian residenL companies are lranked wiLh an impuLaLion
crediL Lo Lhe exLenL LhaL LgypLian income Lax has been paid by Lhe company aL
Lhe lull corporaLe raLe on Lhe income being disLribuLed.
No wiLhholding Lax is calculaLed on dividends paid eiLher Lo residenL or
nonresidenL corporaLe shareholders.
Bonuses
SignaLure bonuses and producLion bonuses are generally considered deducLible
according Lo Lhe concession agreemenL. However, recenLly a debaLe arose wiLh
Lhe Lax auLhoriLies as Lo Lhe deducLibiliLy ol Lhese cosLs.
C. Capital allowances
CapiLal allowances are based on Lhe provisions ol Lhe concession agreemenL.
D. Incentives
Exploration
LxpendiLures on exploraLion are capiLalized and are deducLible lor income Lax
purposes. Based on Lhe provisions ol Lhe concession agreemenL and pending
approval ol Lhe LCPC, capiLalized exploraLion expenses are amorLized over Lhe
lileLime ol Lhe concession agreemenL.
Tax losses
lncome Lax losses may be carried lorward lor live years.
P&D
R&D incenLives are based on Lhe provisions ol Lhe concession agreemenL.
E. Withholding taxes
Interest, dividends and royalties
1he new lncome 1ax Law has inLroduced new Lax rules in LgypL, including Lhe
Lax consequences lor relaLedparLy LransacLions and wiLhholding Lax on
paymenLs Lo nonresidenL companies.
According Lo ArLicle 56 ol lncome 1ax Law No. 91 ol 2005, a Lax raLe ol 207 is
applied Lo amounLs paid by individual companies or any legal enLiLies residenL in
LgypL Lo nonresidenLs, wiLhouL any deducLions. 1hese amounLs include
inLeresL, royalLies {excepL Lhose relaLed Lo manulacLuring) and services. 1he
raLe may be reduced according Lo Lhe double Lax LreaLies wiLh oLher counLries.
PaymenLs Lo nonresidenL enLiLies should be lisLed in Lhe Lax reLurn, including
Lhe counLry, Lhe Lype ol deal and Lhe Lax wiLhheld, il any {see below lor
lurLher deLail).
As noLed above, paymenLs Lo nonresidenL enLiLies or individuals are sub|ecL
Lo Lax aL Lhe raLe ol 207, wiLhouL any deducLions. 1his applies as lollows:
RoyalLies:
LxcepL lor lees lor knowhow or designing lees lor serving Lhe LgypLian
indusLry; however, Lhe minisLer ol linance and Lhe minisLer ol indusLries
should issue a decree in Lhis regard
Reduced Lax raLe per Lhe Lax LreaLy {il applicable)
lnLeresL:
LxcepL lor loan agreemenLs ol Lhree years or more
Reduced Lax raLe per Lhe Lax LreaLy {il applicable)
Services lees:
LxcepL lor Lhe lollowing:
1ransporL or lreighL
Egypt
135
Shipping
lnsurance
1raining
ParLicipaLion in exhibiLions and conlerences
LisLing lees ol Lhe LgypL SLock Lxchange
DirecL adverLising and promoLion
FPWT/Ioreign contractors' withholding tax
FRW1 ranges beLween 0.57 and 57. lL musL be wiLhheld lrom paymenLs made
Lo loreign residenLs in respecL ol cerLain works in LgypL and lor relaLed
acLiviLies in connecLion wiLh such works in LgypL.
F. Financing considerations
1he LgypLian income Lax sysLem conLains signilicanL rules regarding Lhe
classilicaLion ol debL and equiLy insLrumenLs and, depending on Lhe level ol
lunding, rules LhaL have an impacL on Lhe deducLibiliLy ol inLeresL. 1hese rules
can have a signilicanL impacL on decisions regarding Lhe linancing ol oil and
gas pro|ecLs.
1he measures provide lor a sale harbor debLLoequiLy raLio ol ^:1. lnLeresL
deducLions are denied lor inLeresL paymenLs on Lhe porLion ol Lhe company's
debL LhaL exceeds Lhe sale harbor raLio.
C. Transactions
Asset disposals
ln general, a gain resulLing lrom disposing ol, or Lhe Lransler ol, an inLeresL in
a peLroleum permiL does noL in iLsell Lrigger any corporaLe Lax consequences
because iL is noL considered Lo be a disposal ol lixed asseLs. ln addiLion, mosL ol
Lhe concession agreemenLs include specilic arLicles exempLing such gains lrom
LgypLian Laxes.
Farm in and Iarm outs
lL is common in Lhe LgypLian oil and gas indusLry lor enLiLies Lo enLer inLo
larmin arrangemenLs.
A larmee is deemed Lo hold a depreciaLing asseL, Lhe inLeresL in Lhe peLroleum
permiL, lrom Lhe Lime Lhe inLeresL is acquired {Lhis can be uplronL or delerred
depending on Lhe Lerms ol Lhe parLicular arrangemenL). 1he larmee can
deducL Lhe cosL ol Lhe depreciaLing asseL over iLs ellecLive lile lrom Lhe Lime iL
is held by Lhe larmee. 1he cosL is Lhe amounL Lhe larmee paid lor Lhe inLeresL
and can include Lhe value ol noncash beneliLs.
FuLure commiLmenLs incurred by Lhe larmee in respecL ol iLs inLeresL will
generally be deducLible lor Lhe larmee {eiLher ouLrighL or over Lhe asseL's
ellecLive lile) il Lhe larmee holds an inLeresL in Lhe permiL.
AcquisiLion cosLs ol a larmee are deducLible lor corporaLe Lax purposes and,
similarly, consideraLion received by a larmor in respecL ol Lhe larm ouL are noL
assessable lor Lax purposes, provided a lormal agreemenL {recommended Lo
be wiLhin a concession agreemenL) is approved by Lhe LCPC. LCPC approval
lor Lhe Lransler ol an inLeresL is mandaLory.
5elling shares in a company 1consequences Ior resident and
nonresident shareholders)
A share disposal is generally sub|ecL Lo Lhe CC1 regime. NonresidenLs LhaL
dispose ol shares in an LgypLian company are noL sub|ecL Lo Lax in LgypL il Lhe
owner ol Lhe shares does noL have a permanenL esLablishmenL in LgypL.
H. Indirect taxes
Coods and services tax 1C5T)
A CS1 regime applies in LgypL Lo ensure LhaL all LransacLions LhaL Lake place
wiLhin LgypL {and some lrom ollshore) are sub|ecL Lo CS1. CS1, inLroduced in
Egypt
13
1991, is a mulLisLaged Lax LhaL applies aL each poinL ol sale or lease. CS1 is
applied aL a sLandard raLe ol 107, wiLh CS1lree raLings lor qualilying exporLed
producLs and services and oLher LransacLions, and inpuL Lax raLings lor linancial
services and residenLial housing.
Only LgypLian residenLs may be sub|ecL Lo CS1 on services and producLs
supplied. All sales wiLhin LgypL are sub|ecL Lo CS1 aL Lhe raLe ol 107 {known as
Laxable supplies). All commercial LransacLions have a CS1 impacL, and Lhis
should be considered prior Lo enLering inLo any negoLiaLion or arrangemenL.
Common LransacLions/arrangemenLs LhaL have CS1 implicaLions include:
lmporLaLion ol equipmenL and vessels
Sale or lease ol equipmenL in LgypL
Sale ol producLs in LgypL
AsseL disposals
ll producLs are exporLed, a CS1lree sLaLus may be obLained. LxporLs musL also
be supporLed by evidence LhaL indicaLes Lhe goods have lelL LgypL.
1he CS1 regisLraLion Lhreshold is LCP150,000 lor residenL enLiLies. However,
enLiLies below Lhis Lhreshold can choose Lo regisLer volunLarily lor CS1.
NonresidenLs are noL required Lo regisLer lor CS1.
lnpuL Lax is generally recovered by being ollseL againsL CS1 payable on
Laxable supplies.
ln general {and according Lo Lhe sLandard concession agreemenLs), oil and
gas exploraLion enLiLies working in LgypL are exempL lrom being sub|ecL
Lo CS1 on supplies made lor Lhem by oLher suppliers {excepL lor passenger
cars). lL is mandaLed LhaL such supplies are used lor exploraLion and
developmenL purposes.
Import and export restrictions
1he CovernmenL is revising LgypL's cusLoms and Lrade sysLems Lo eliminaLe
cerLain bureaucraLic obsLacles conlronLing imporLers. LgypLians musL handle all
imporLs. AlLhough an LgypLian agenL is noL required lor exporLs, such an agenL
is olLen used. CerLain goods, such as coLLon, wheaL, rice, cemenL and oil, may
only be handled by Lhe public secLor.
Import restrictions
1he CovernmenL imposes imporL conLrols Lo improve LgypL's balance ol
paymenLs. lmporLers musL obLain approval Lo open a leLLer ol crediL. A cash
deposiL ranging lrom 157 Lo 1007 is also required, depending on Lhe Lype ol
goods imporLed. 1he origin ol goods musL be cerLilied in order Lo enLer LgypL.
1ravelers enLering LgypL may imporL modesL quanLiLies ol alcohol, cigareLLes
and perlumes lree ol duLy. VisiLors may also purchase cerLain quanLiLies ol
duLylree liquor using loreign currency alLer passing Lhrough cusLoms. Valuable
personal ellecLs may be declared Lo permiL Lhem Lo be Laken ouL ol Lhe counLry
on deparLure.
Export restrictions
MosL goods may be exporLed lree ol duLy. CerLain iLems musL be inspecLed
belore an exporL license is granLed.
5tamp duty
SLamp duLy is a sLaLe and LerriLorybased Lax LhaL is usually imposed on
specilied LransacLions buL, in general, is very minor.
Cther signiIicant taxes
OLher signilicanL Laxes include cash remuneraLion or lringe beneliLs Lax on non
cash employee beneliLs ol 107 Lo 207, and payroll Laxes paid by employees ol
107 Lo 207.
Egypt
137
I. Cther
Foreign direct investment 1FDI)
1he CovernmenL seLs a high prioriLy on aLLracLing FDl inLo Lhe counLry. FDl
helps improve Lechnological innovaLions, creaLes more |obs and expands Lhe
counLry's abiliLy Lo compeLe in inLernaLional markeLs. Lqually imporLanL, FDl
opens Lhe LgypLian economy Lo Lrade in semilinished producLs and oLher
inLermediaLe goods, which are increasingly becoming Lhe mainsLream ol
inLernaLional Lrade.
As parL ol Lhe economic relorm program, and in an ellorL Lo aLLracL loreign
invesLors, changes were made in various areas, such as corporaLe Lax relorm,
lowered cusLoms duLies and sLreamlined invesLmenL procedures. Changes have
also allecLed Lhe sysLem ol naLional accounLing, Lhe modernizaLion ol LgypLian
insurance supervision and inLellecLual properLy righLs. 1hese measures make
LgypL an aLLracLive desLinaLion lor invesLors seeking Lo enLer Lhe Middle LasL
and NorLh Alrica {MLNA) markeLplace.
1he opporLuniLies in LgypL are open in all secLors, including energy, banking
and linance and inlormaLion Lechnology.
FDI statistics
According Lo Lhe CenLral Bank ol LgypL's balance ol paymenLs sLaLisLics, during
liscal year 200^05, neL FDl amounLed Lo USS3.9 billion, compared wiLh
USS1.8^ billion in liscal year 20030^.
NeL FDl in Lhe oil secLor reached USS2.6 billion, approximaLely USS900 million
more Lhan Lhe amounL recorded during Lhe previous liscal year ol 20030^.
ln Lhe nonoil secLor, neL FDl reached USS1.26^ billion. 1his amounL includes
USS^19.5 million in proceeds lrom selling sLakes in publicowned companies
and |oinL venLures, in addiLion Lo unused publicowned asseLs, and
USS8^^ million in greenlield invesLmenLs and expansions ol exisLing
invesLmenLs. 1he increase amounLed Lo USS865.5 million, which is 2117
more Lhan Lhe elapsed liscal year.
Finally, liscal year 200^05 has shown a visible and posiLive improvemenL in
Lerms ol porLlolio invesLmenL, as iL shilLed lrom a negaLive USS226.6 million
in 20030^ Lo a posiLive USS831 million in 200^05, showing a LoLal increase
ol USS1 billion.
ln Lerms ol Lhe number ol newly esLablished companies {local and loreign),
Lhe Ceneral AuLhoriLy lor lnvesLmenL and Free Zones indicaLed a noLiceable
increase in privaLe secLor invesLmenLs, lrom 2,7^5 companies in 20030^
Lo 6,236 in 200^05. Based on Lhe mosL recenL published sLaLisLics, Lhe
lollowing inlormaLion abouL esLablished companies is noLable:
China esLablished Lhe largesL number ol companies {138); however,
Lhe value ol issued capiLal was relaLively low
Saudi Arabia was Lhe biggesL Arab invesLor, opening 99 new companies,
lollowed by KuwaiL {17 companies) and Lhe UniLed Arab LmiraLes
{11 companies)
1he UniLed Kingdom was Lhe second largesL nonArab loreign invesLor in
LgypL wiLh 95 new companies
Exchange control regulations
Because ol Lhe economic relorms and agreemenLs reached wiLh Lhe
lnLernaLional MoneLary Fund {Lhe lMF), exchange conLrols have been
canceled in LgypL. 1he Foreign Lxchange Law ol May 199^ allows individuals
and legal enLiLies Lo reLain and Lransler loreign exchange in LgypL and abroad.
NeverLheless, as a resulL ol Lhe currenL economic downLurn in LgypL, Lranslers
ol loreign exchange {e.g., US dollars) abroad are unlikely Lo conLinue by
companies and individuals. 1his is because linancial insLiLuLions usually
have a severe deliciL in Lhe procuremenL ol loreign exchanges Lo be
repaLriaLed abroad.
Egypt
138
Based on Lhe above, no exchange conLrol regulaLions allecL Lhe Lransler abroad
ol lunds or proliLs generaLed in LgypL. NoLing LhaL, only LgypLian banks
{auLhorized by Lhe CenLral Bank ol LgypL) are used lor such purpose.
Pepatriation oI proIits abroad
1here is no resLricLion on Lhe repaLriaLion ol proliLs abroad.
Dividends paid by an LgypLian company are noL sub|ecL Lo wiLhholding Laxes
on Lhe basis LhaL Lhey have been paid lrom proliLs LhaL have been sub|ecLed Lo
corporaLe Lax, or Lhey are specilically exempL.
Business presence
Forms ol business presence in LgypL Lypically include companies, loreign
branches and |oinL venLures {incorporaLed and unincorporaLed). ln addiLion
Lo commercial consideraLions, Lhe Lax consequences ol each business are
imporLanL Lo consider when seLLing up a business in LgypL.
UnincorporaLed |oinL venLures are commonly used by companies in Lhe
exploraLion and developmenL ol oil and gas pro|ecLs.
Cabcn
Country code 241
LibreviIIe CMT +1
Ernst & Ycunc
!mmeubIe Scnacar
Avenue du CcIcneI Parant
LibreviIIe
Cabcn
TeI 74 21
Fax 72 4 94
DiI and cas ccntacts
NiccIas Chevrinais
TeI 74 32 17
niccIas.chevrinaisca.ey.ccm
Erik Watremez
TeI 74 21
erik.watremezca.ey.ccm
A. At a glance
Fiscal regime
1he liscal regime LhaL applies in Cabon Lo Lhe upsLream peLroleum indusLry
consisLs ol Lhe Cabonese 1ax Code, Lhe Cabonese peLroleum laws, and Lhe
producLion sharing conLracL {PSC) or service conLracL beLween Lhe Cabonese
CovernmenL and Lhe conLracLor.
1he main Laxes applicable in Lhe oil and gas indusLry are Lhe lollowing:
CorporaLe Lax
Annual surlace renL
RoyalLy on producLion
RoyalLies BeLween 67 and 127 ol LoLal producLion
Bonuses On producLion: beLween USS^00,000 and 600,000
On signaLure: USS215/km minimum
PSC
77
BeLween 2/3 Lo ^/5 in lavor ol Lhe sLaLe
CorporaLe Lax Common Lax regime: 357
For holder under CLPP: 357 Lo ^07 aL leasL
For holder under concession: 737
Annual surlace renL On exploraLion: USS6/km
On producLion: USS8/hecLare
77 PSC Covernment Snare |s oasec on rocuct|on. / serv|ce contract rec|me |s |n |ace
ca||ec CfPP :ex|o|tat|on anc rocuct|on snar|nc contract;.
Egypt Cabon
139
Resource renL Lax None
lnvesLmenL incenLives D
78
, L
79
, L
80
B. Fiscal regime
Corporate tax
Tax rate
For oil and gas neL proliLs, Lhe common Lax raLe is 357. WiLh Lhe inLroducLion ol
Lhe CLPP
81
regime, companies are sub|ecL Lo dillerenL Lax raLes. Companies
lollowing Lhis regime are exempL lrom corporaLe Lax or any oLher Lax, excepL lor
Lhose Laxes LhaL are expressly sLaLed in Lhe CLPP. 1he minimum raLe is usually
around 357 Lo ^07. For companies which lollow Lhe concession regime, Lhe Lax
raLe is 737. Under Lhis regime, Lhe Lax can be paid eiLher in kind or in cash.
Ping Iencing
lL is possible Lo ollseL Lhe exploraLion cosLs incurred on one LracL ol land lrom
income arising on anoLher LracL ol land; however, Lhe LracLs ol land musL be
locaLed on Lhe same sedimenLary basin. As such, exploraLion expenses incurred
on a parLicular piece ol land where no discovery has occurred can be deducLed
lrom Lhe producLion exLracL ol anoLher piece ol land, so long as Lhe laLLer LracL
ol land is locaLed on Lhe same sedimenLary basin.
Treatment oI exploration and development costs
1he depreciaLion deducLions applicable in Lhe peLroleum indusLry are calculaLed
by Lhe operaLor in accordance wiLh Lhe raLe delined in Lhe CLPP. 1hese raLes
depend on Lhe Lime period lor depreciaLion, which in Lurn depend on wheLher
expenses are exploraLion expenses or developmenL/exploiLaLion expenses.
1he raLes can be read|usLed il Lhe acLual Lime period lor uLilizaLion is shorLer
{parLicularly in Lhe case ol an accidenLal loss or il Lhe maLerial wears ouL more
quickly Lhan expecLed).
Cenerally, Lhere is a disLincLion beLween exploraLion cosLs and developmenL
{exploiLaLion) cosLs. LxploraLion cosLs can be deducLed in Lhe lirsL year ol
producLion whereas developmenL cosLs, which are also sub|ecL Lo depreciaLion,
can be deducLed eiLher in Lhe year ol realizaLion {which is unusual) or can be
depreciaLed over a period ranging lrom 5 Lo 10 years, or can someLimes be
depreciaLed over a period ol ^0 years. 1he lengLh ol depreciaLion depends on
Lhe naLure ol Lhe expenses. 1here are no rules governing Lhis maLLer. 1he Lime
periods indicaLed above are Lhose LhaL are commonly used in pracLice.
Production sharing contract 1P5C)
1he PSC is an agreemenL beLween Lhe sLaLe and a company. lL is a Lype ol
service conLracL where a company is viewed as a service provider and Lhe sLaLe
is considered a masLer builder. All Lhe operaLions are realized by Lhe company
in lavor ol Lhe sLaLe, which is Lhe owner ol Lhe resources and invesLmenL.
Determination oI the cost oil and proIit oil
Once producLion has sLarLed, iL is divided inLo Lwo parLs; cosL oil and proliL oil.
1hese are divided pursuanL Lo Lhe Lerms ol Lhe service conLracL beLween Lhe
service provider and Lhe sLaLe.
a. CosL oil
CosL oil is Lhe parL ol oil which serves Lo recover Lhe exploraLion expenses,
Lhe operaLing expenses and Lhe developmenL expenses. CosL oil is calculaLed
using an annual base buL can be recovered monLhly. 1he calculaLion is based
on neL producLion {LoLal producLion available ol hydrocarbons less royalLy
paymenLs made).
78 0: /cce|eratec cerec|at|on for ca|ta| coocs.
79 |: |osses can oe carr|ec forwarc unt|| tne tn|rc f|sca| vear fo||ow|nc tne cef|c|t er|oc.
80 f: |mmec|ate wr|teoff for ex|orat|on costs.
81 Caoonese |aw No. 14/82 of 24 Januarv 1983.
Cabon
140
b. ProliL oil
ProliL oil, or Lhe remaining producLion, is Lhe neL producLion less Lhe cosL oil.
1he conLracLor and Lhe sLaLe share Lhe proliL oil according Lo a raLe specilied
in Lhe conLracL. Depending on Lhe conLracL, Lhe raLe in lavor ol Lhe sLaLe can
be LwoLhirds {2/3), LhreequarLers {3/^) or lourlilLhs {^/5). 1he raLe is
progressive and depends on Lhe volume ol producLion. 1he law does noL deline
Lhe minimum share LhaL musL be allocaLed Lo Lhe company or Lo Lhe sLaLe.
Based on production volume or production value
a. CorporaLe Lax
Under Lhe model ol Lhe CLPP LhaL has been in place since 1998, companies
musL pay Lhe corporaLe Lax in kind. 1he corporaLe Lax is noL based on annual
sales, buL is based on Lhe level ol producLion. 1he companies give Lhe sLaLe a
quanLiLy ol peLrol which corresponds Lo Lhe amounL ol Lax owed {i.e., Lhe
quanLiLy ol peLrol given is equivalenL Lo Lhe amounL ol corporaLe Lax LhaL
companies would oLherwise pay in cash).
1he amounL ol corporaLe Lax is calculaLed according Lo a special meLhod
called a "grossup" meLhod. 1he amounL ol corporaLe Lax ol Lhe company
is calculaLed as lollows:
Amcunt cf ccrpcrate tax =
Prcfit ciI x tax rate
1 tax rate
ln addiLion Lo Lheir operaLing accounLs, companies have Lo esLablish special
peLrol cosL accounLs. 1he amounL ol corporaLe Lax calculaLed should normally
correspond Lo Lhe amounL calculaLed in Lhe operaLing accounL. However, as Lhe
expendiLures diller beLween Lhe operaLing accounL and Lhe peLrol cosL accounL,
Lhere could be a discrepancy beLween Lhese numbers. CurrenLly, Lhe minisLer ol
mines, energy and peLroleum in Cabon is considering a reexaminaLion ol Lhe
model ol Lhe CLPP published in 1998.
b. RoyalLies
1he CLPP generaLes a royalLy which is calculaLed aL Lhe producLion sLage.
1he raLe ol royalLy depends on Lhe daily average ol Lhe LoLal producLion
{lor a limiLed zone and lor one monLh). 1his raLe is proporLional Lo Lhe LoLal
producLion and is noL progressive. 1he raLe can be lixed or variable wiLhin a
producLion brackeL {as deLermined in Lhe conLracL) and is generally beLween
67 and 127 ol Lhe LoLal producLion.
1he raLe is deLermined according Lo Lhe lollowing lormula:
Amcunt cf rcyaIty = cfficiaI price cf saIe/transfer x
the ccntract rate x crcss prcducticn
Expenditure recovery
a. Nonrecoverable expenses
1he lollowing expendiLures are nonrecoverable:
Lxpenses which are noL LaxdeducLible
Bonuses
Lxpenses relaLed Lo Lhe period belore Lhe ellecLive daLe ol Lhe conLracL
Lxpenses relaLed Lo operaLions carried ouL lor commercializaLion
b. Caps LhaL apply Lo expendiLure recovery
1he conLracLor reporLs Lo Lhe sLaLe Lhe amounL ol expenses incurred during
Lhe exploraLion according Lo Lhe Lerms ol Lhe conLracL. 1hose expenses are
relunded by Lhe sLaLe aL a laLer Lime, buL are limiLed by a "cosL sLop." 1he
amounL ol a cosL sLop is deLermined in Lhe conLracL and is generally around
607 Lo 707 ol neL producLion {as delined above). ll Lhe cosLs incurred in a
parLicular year are higher Lhan Lhis limiL, Lhey can be deducLed in Lhe nexL year.
Cabon
141
c. UplilL available on recovered cosL
UplilL is available on recovered cosLs buL overhead cosLs are limiLed Lo 37.
d. Fiscal uncerLainLy clauses
Fiscal uncerLainLy clauses are generally included in Lhe conLracL.
e. VA1 LreaLmenL
During Lhe exploraLion phase and unLil Lhe quanLiLy produced is sullicienL
lor commercializaLion, Lhe conLracLor is exempL lrom paying VA1. Suppliers,
subconLracLors, service providers and alliliaLed companies are exempL lrom
paying VA1 as well.
However, during Lhe producLion phase, conLracLors, suppliers, subconLracLors,
service providers and alliliaLed companies are required Lo pay VA1 aL Lhe raLe in
lorce {normally 187, or 107 Lo 257 lor cerLain producLs
82
), buL can recover
Lhese paymenLs laLer. For operaLions beLween companies on Lhe UPLCA lisL,
83

Lhe raLe is 07.
Pesource rent tax
Cenerally, a resource renL Lax is imposed only il Lhe accumulaLed cash llow
lrom Lhe pro|ecL is posiLive {i.e., based on Lhe proliLabiliLy ol Lhe peLroleum
operaLions). Cabon does noL have a resource renL Lax.
Annual surIace rent
An annual surlace renL is due in Lhe calendar year lollowing Lhe granL ol LiLle Lo
a parcel ol land. 1his lee is based on Lhe surlace ol Lhe siLe:
On exploraLion, Lhe annual surlace renL is USS6/km
On producLion, Lhe annual surlace renL is USS8/hecLare
Poyalty regimes
RoyalLy regimes are noL allecLed by Lhe characLerizaLion ol producLion as
onshore or ollshore.
C. Incentives
Accelerated depreciation
1he Lax depreciaLion rules are provided lor in Lhe applicable CLPP conLracL.
DepreciaLion can be calculaLed using eiLher Lhe sLraighLline meLhod or Lhe
decliningbalance meLhod. 1he Financial Law ol 1998 allows Lhe use ol Lhe
decliningbalance meLhod ol depreciaLion lor capiLal goods. Belore 1998, Lhe
calculaLion ol depreciaLion lor capiLal goods was only possible Lhrough Lhe
sLraighLline meLhod ol depreciaLion or, alLer auLhorizaLion lrom Lhe general
direcLor ol Lhe indirecL and direcL conLribuLions, Lhrough an acceleraLed meLhod
ol depreciaLion. 1he decliningbalance meLhod is only possible lor goods which
are parL ol a lisL ol enumeraLed goods made by a |oined order ol Lhe minisLer ol
linance and Lhe minisLer ol Lhe concerned acLiviLy secLor.
According Lo Lhis law, only goods which are necessary Lo Lhe producLion,
LranslormaLion or developmenL ol peLroleum, and Lhose companies which
parLicipaLe in Lhe indusLrial developmenL ol Lhe counLry can beneliL lrom Lhe
use ol Lhe decliningbalance meLhod.
1he Cabonese 1ax Code
84
allows acceleraLed depreciaLion lor cerLain lixed
asseLs. 1he lisL ol lixed asseLs eligible lor acceleraLed depreciaLion is made
available by Lhe minisLer ol linance and Lhe minisLer ol mines buL Lhis lisL has
noL yeL been released. All Lhe lixed asseLs ol Lhe company LhaL are eligible lor
acceleraLed depreciaLion are specilied in Lhe applicable CLPP conLracL.
82 |.e., custom rate.
83 Caoonese Petro|eum Un|on.
84 /rt.11vo of tne Caoonese 1ax Coce.
Cabon
142 Cabon
ln order Lo use Lhe acceleraLeddepreciaLion meLhod, a leLLer musL be senL Lo
Lhe direcLor ol Lhe Lax ollice wiLhin Lhree monLhs ol Lhe acquisiLion ol Lhe lixed
asseL. 1he direcLor musL Lhen respond wiLh his consenL wiLhin Lhree monLhs
alLer Lhe daLe ol Lhe reLurn receipL. ll no answer is received wiLhin Lhose Lhree
monLhs, Lhe requesL is presumed as accepLed by Lhe Lax ollice.
CarryIorward losses
Losses can be carried lorward unLil Lhe Lhird liscal year lollowing Lhe deliciL period.
Immediate writeoII Ior exploration costs
LxploraLion cosLs can be deducLed in Lhe lirsL year ol producLion sub|ecL Lo Lhe
limiLaLions discussed above.
D. Withholding taxes
A 207 wiLhholding Lax is levied on capiLal gains {e.g., dividends, aLLendance
lees and bondholder lees) paid by a residenL company Lo a physical person.
A 157 wiLhholding Lax is levied on capiLal gains {e.g., dividends, aLLendance lees
and bondholder lees) paid by a residenL company Lo anoLher residenL company.
A 107 wiLhholding Lax is levied on mosL oLher paymenLs made Lo a nonresidenL
and/or a loreign company. 1his wiLhholding Lax applies Lo services, indusLrial
properLy, royalLies or inLeresL. 1his raLe also applies Lo Lhe branch remiLLance Lax.
E. Indirect taxes
Import duties
LxploraLion and producLion {L&P) companies are sub|ecL Lo Lhe cusLom code
ol Lhe UDLAC
85
and iLs regulaLions.
ProducLs, maLerials and equipmenL exclusively relaLed Lo Lhe prospecLing and
researching ol peLroleum are exempL lrom cusLoms duLies. ConLracLors,
subconLracLors or oLhers relaLed Lo Lhe conLracLors have Lo produce a linal
cerLilicaLe ol uLilizaLion. For Lhe cusLom adminisLraLion, Lhe exploraLion period
ends when Lhe producLion reaches 10,000 barrels per day and nighL.
1he same exempLion exisLs lor Lhe personal belongings ol Lhe company's
loreign employees who are engaged in Lhe prospecLing, researching or
exploiLaLion ol peLroleum.
8
ProducLs, maLerials and equipmenL relaLed Lo Lhe producLion, sLorage,
LreaLmenL, LransporL, expediLion and LranslormaLion ol hydrocarbons are
sub|ecL Lo a reduced raLe ol 57. A conLracLor musL requesL Lhe general
direcLor ol cusLoms Lo granL permission lor Lhis reduced raLe Lo be
applicable. 1he reduced raLe is noL applicable alLer live years lollowing
Lhe beginning ol exploiLaLion.
ProducLs, maLerials and equipmenL exclusively relaLed Lo Lhe acLiviLy ol a
peLroleum company, which are desLined Lo be "reexporLed" aL Lhe end ol
Lheir uLilizaLion, can be imporLed under Lhe normal Lemporary regime.
Under Lhe normal Lemporary regime, cusLoms duLies on imporLs lor cerLain
goods LhaL are desLined Lo be reexporLed are suspended. Such maLerials
musL be necessary Lo Lhe peLroleum company's acLiviLies and should noL
belong Lo Lhe sLaLe.
For all oLhers goods, normal cusLom rules are applicable.
Export duties
MaLerials and equipmenL which are desLined Lo be reexporLed aL Lhe end ol
Lheir uLilizaLion will be exempL lrom cusLoms duLies.
85 Custom anc fconom|ca| Un|on of Centra| /fr|ca.
8 :/rt. 241c; of tne custom coce of tne U0f/C.
143 Chana
Chana
Country code 233
Accra CMT
Ernst & Ycunc
15 White Avenue
Airpcrt ResidentiaI Area
P.D. Bcx 1009, Airpcrt
Accra
Chana
TeI 21 779 /779 223
Fax 21 77 94
DiI and cas ccntacts
Yaw Asante-Bcadi
TeI 21 772 001
yaw.asante-bcadich.ey.ccm
WiIfred Dkine
TeI 21 779 742
wiIfred.ckinech.ey.ccm
A. At a glance
Fiscal regime
1he liscal regime LhaL applies Lo Lhe peLroleum indusLry consisLs ol Lhe
combined use ol Lhree basic Lax laws: Lhe lnLernal Revenue AcL
87
{Lhe lRA),
Lhe PeLroleum lncome 1ax Law
88
{Pl1L) and Lhe PeLroleum AgreemenL {PA).
PAs are usually signed beLween Lhe Chana CovernmenL {COC), Lhe Chana
NaLional PeLroleum CorporaLion {CNPC) and Lhe relevanL peLroleum company.
RoyalLies RoyalLies payable in respecL ol gas are 37 ol Lhe
gross producLion and lor crude oil 57 Lo 107 ol Lhe
gross producLion.
PSC 1he PA deals wiLh specilic PSC issues LhaL exisL
beLween Lhe peLroleum company, Lhe CNPC and Lhe
COC. Cenerally, Lhe PA indicaLes LhaL Lhe COC's share
may be Laken in cash or in peLroleum lilL.
1he currenL PSC percenLage share beLween Lhe COC/
CNPC and Lhe peLroleum companies may change.
1his is because, in conLrasL Lo Lhe prediscovery era
when COC/CNPC soughL Lo encourage peLroleum
companies Lo invesL in Chana, Chana now has proven
oil reserves in commercial quanLiLies. Accordingly,
enLry requiremenLs inLo Lhe peLroleumexLracLing
indusLry could be reviewed and increased.
lncome Lax raLe 1he income Lax raLe lor upsLream peLroleum acLiviLies
per Lhe Pl1L is 507; however, iL has been reduced Lo
357 lor some companies LhaL signed a PA wiLh Lhe
CNPC and COC. For downsLream peLroleum acLiviLies,
Lhe income Lax raLe is 257.
CapiLal allowances D
89
lnvesLmenL incenLives L, R&D
90
87 :2000; /ct 592 as amencec.
88 :1987; PN0C| 188, vet to oe amencec.
89 0: acce|eratec cerec|at|on.
90 |: |osses can oe carr|ec forwarc |ncef|n|te|v. P0: P80 |ncent|ve.
144 Chana
B. Fiscal regime
Corporate tax
Chana's peLroleum liscal regime is governed by Lhree basic Lax laws: Lhe lRA,
91

Lhe Pl1L
92
and Lhe PA. 1hese laws work LogeLher Lo ensure LhaL Lhe peLroleum
indusLry has been properly adminisLered in Lerms ol Lhe requiremenL
Lo pay Lax.
1he commissioner ol Lhe lnLernal Revenue Service {Lhe Commissioner)
adminisLers Lhe lRA, Lhe Pl1L and Lhe Lax porLions ol Lhe PA.
1he lRA is Lhe main Lax law covering downsLream peLroleum acLiviLies, whereas
Lhe PA and Lhe Pl1L are Lhe main laws covering upsLream peLroleum acLiviLies.
1he corporaLe Lax raLe is 507 in Lhe Pl1L, buL PAs, which override Lhe Pl1L,
generally include a Lax raLe ol 357. 1herelore, iL is likely LhaL all peLroleum
companies LhaL sign a PA wiLh Lhe COC/CNPC will have a 357 Lax raLe.
Annual and quarLerly Lax reLurns musL be liled by Lhe conLracLor or Lhe
peLroleum operaLor. Annual corporaLe Lax reLurns are liled lour monLhs alLer
Lhe linancial yearend ol Lhe conLracLor. ln addiLion, wiLhin 30 days alLer Lhe
end ol every quarLerly period, Lhe conLracLor musL submiL a quarLerly Lax
reLurn Lo Lhe Commissioner. 1he quarLerly reLurn musL disclose an esLimaLe
ol Laxable income lor Lhe quarLer resulLing lrom Lhe operaLions during LhaL
period, an esLimaLe ol Lhe Lax due on LhaL Laxable income and a remiLLance in
seLLlemenL ol Lhe Lax due on LhaL income. 1he Commissioner has Lhe power Lo
granL a lurLher 1^day exLension lor Lhe conLracLor Lo meeL Lhe quarLerly
reLurn requiremenL.
1he Pl1L granLs Lhe Commissioner Lhe power Lo provisionally assess Lhe
conLracLor lor Lax in respecL ol any quarLerly period alLer receipL ol Lhe
quarLerly reLurn, or alLer Lhe expiry ol Lhe periods allowed lor Lhe submission
ol Lhe reLurns.
1he corporaLe Lax raLe is levied on chargeable income. Chargeable income is
arrived aL alLer deducLing specilied expendiLures, including prioryear losses
and permiLLed capiLal allowances lor Lhe year. All expendiLures "wholly,
exclusively and necessarily" expended in Lhe producLion ol peLroleum income
are allowed as deducLions in deLermining chargeable income. LxpendiLures ol a
capiLal naLure and cosLs paid in respecL ol Laxes, however, are noL permiLLed as
deducLible expendiLures in deLermining chargeable income.
Discussions have recenLly Laken place abouL Lhe need Lo revise Lhe Pl1L, given
LhaL iL was dralLed belore Chana had proven oil reserves. RecenL oil linds make
iL likely LhaL some amendmenLs will be implemenLed. 1he Pl1L has no
legislaLive insLrumenL mechanism Lo lurLher expand or explain Lhe Pl1L. lL is
Lherelore possible LhaL a new peLroleum legislaLive insLrumenL {Ll) will be
passed by parliamenL Lo sLrengLhen peLroleum LaxaLion in Chana or
amendmenLs will be made Lo Lhe exisLing Pl1L.
Chana applies ring lencing. ProliLs lrom one pro|ecL cannoL be used Lo ollseL
Lhe losses ol anoLher pro|ecL unless boLh pro|ecLs are ol Lhe same Lype {i.e.,
downsLream proliLs or losses can be ollseL againsL downsLream pro|ecLs and
upsLream proliLs or losses can be ollseL againsL upsLream pro|ecLs). DownsLream
peLroleum acLiviLies are governed by Lhe lRA, while upsLream oil acLiviLies are
governed by Lhe Pl1L and Lhe PA. 1he dillerenL Lax laws apply dillerenL Lax raLes
ol 257 Lo downsLream peLroleum acLiviLies and 507 or 357 Lo Laxable income lor
upsLream peLroleum acLiviLies. 1herelore, ring lencing applies.
CCT
No CC1 is payable on gains made lrom Lhe disposal ol depreciable asseLs, such
as planL or machinery. CC1, however, is payable on Lhe gains made on Lhe sale
ol chargeable asseLs {e.g., goodwill or Lechnical knowhow). 1he gain or loss
made on Lhe disposal ol depreciable asseLs is included in Lhe normal income
Lax calculaLion.
91 :2000; /ct 592 as amencec.
92 :1987; PN0C| 188, vet to oe amencec.
145 Chana
lL is imporLanL Lo noLe LhaL Lhe raLe ol capiLal gains Lax is 57, whereas Lhe
raLe lor income Lax can be 257, 357 or 507 depending on Lhe parLicular
circumsLances {see discussion above).
CapiLal losses are noL carried lorward and are noL allowed as a deducLion
againsL any oLher gains made on oLher chargeable asseLs. ln addiLion, capiLal
losses cannoL be recouped/ollseL againsL Laxable income.
Functional currency
1he primary and luncLional currency in Chana is Lhe Chana cedi. All moneLary
LransacLions in Chana, Lherelore, are expecLed Lo be conducLed in Lhe Chana
cedi. However, under specilied condiLions, Lhe Chana liscal auLhoriLies permiL
companies LhaL have sLrong reasons Lo reporL Lheir business acLiviLies in a
currency oLher Lhan Lhe Chana cedi Lo reporL in Lhe currency ol Lheir choice.
1he PA permiLs oil and gas companies Lo LransacL business in a currency ol
Lheir choice. However, lor Lax purposes, Lhe Commissioner needs Lo give
approval lor an oil and gas company Lo reporL in any oLher currency aparL
lrom Lhe Chana cedi. One ol Lhe primary reasons a company may choose Lo
reporL in anoLher currency is Lo conlorm wiLh Lhe reporLing currency ol iLs
parenL company.
TransIer pricing
Chana's Lax laws include measures Lo ensure LhaL crossborder Lrading does noL
unnecessarily erode local Laxable proliLs ol companies in Lheir dealings wiLh
Lheir parenL or relaLed enLiLies. 1he Commissioner has wide powers Lo disallow
expenses or make ad|usLmenLs il iL is believed LhaL an aLLempL is being made by
Lhe Laxpayer, in dealing wiLh Lhe parenL or any oLher relaLed enLiLy, Lo reduce
Lhe Lax payable in Chana. 1he Commissioner has Lhe power Lo deLermine Lhe
accepLabiliLy and LaxabiliLy or oLherwise ol any pricing module LhaL exisLs
beLween relaLed parLies. A Lechnology Lransler agreemenL Ll also aLLempLs Lo
ensure LhaL Lhe Lransler ol Lechnology beLween an enLiLy and iLs parenL or
oLher relaLed persons is unilormly regulaLed in Chana.
Technical services
1he Chana lnvesLmenL PromoLion CenLre {ClPC) is Lhe manager ol all Lechnical
service Lransler agreemenLs LhaL an enLiLy incorporaLed or regisLered in Chana
can have wiLh iLs parenL, alliliaLe or oLher unrelaLed persons.
1he 1echnology 1ransler RegulaLion {Ll 15^7) is currenLly under review.
1his Ll regulaLes Lhe Lypes ol Lechnology LhaL can be Lranslerred lor a lee in
Chana. 1he lee ranges beLween 07 and 87 ol Lhe neL sales or 07 Lo 2.57 ol PB1.
Dividends
Ordinarily, dividend income is Laxable under Lhe lRA. However, dividend income
is noL a Laxable income under Lhe Pl1L or Lhe PA. 1his means LhaL dividend
income earned by invesLors in a company carrying on upsLream peLroleum
operaLions in Chana is noL sub|ecL Lo any Lax.
Poyalties
PeLroleum royalLies are adminisLered and collecLed by Lhe Commissioner ol Lhe
lRS and, like all Laxes, are paid inLo Lhe sLaLe's consolidaLed lund. 1he royalLy
raLe is 57 Lo 107 ol Lhe gross producLion ol crude oil and 37 lor Lhe gross
producLion ol naLural gas.
RoyalLy paymenLs are based on Lhe gross value ol oil or gas lilLing. Onshore and
ollshore oil and gas lilLing have Lhe same royalLy raLe.
1he COC and CNPC have Lhe righL Lo elecL Lo choose oil and gas lilL as paymenL
lor Lhe royalLy, or Lo receive a cash paymenL in lieu ol Lhe royalLy share ol
such peLroleum.
14
Additional oil entitlement
1he COC and CNPC have Lhe righL Lo receive an addiLional oil enLiLlemenL
{AOL), which is Laken ouL ol Lhe conLracLor's share ol Lhe peLroleum. 1he COC
and CNPC also have Lhe righL Lo elecL LhaL Lhe AOL receivable be seLLled in cash
or peLroleum lilL.
1he AOL calculaLion is very complex. Broadly, Lhe AOL is calculaLed on Lhe
basis ol Lhe alLerLax, inllaLionad|usLed raLe ol reLurn LhaL Lhe conLracLor has
achieved wiLh respecL Lo Lhe developmenL and producLion area aL LhaL Lime.
1he conLracLor's raLe ol reLurn is calculaLed on Lhe conLracLor's neL cash llow
and is deLermined separaLely lor each developmenL and producLion area aL Lhe
end ol each quarLer, in accordance wiLh an agreed lormula.
C. Capital allowances Ior petroleum capital expenditure
A peLroleum capiLal expendiLure is depreciaLed lor Lax purposes over a period
ol live years in equal insLallmenLs.
A preoperaLional peLroleum capiLal expendiLure incurred by a person carrying
on peLroleum operaLions is divided inLo live equal parLs and claimed as a capiLal
allowance in each ol Lhe lirsL live years {commencing in Lhe year commercial
operaLions sLarL).
CapiLal expendiLure incurred alLer Lhe year ol commencemenL ol operaLions is
also claimed equally over a liveyear period.
Accordingly, Lhe capiLal allowance lor any year ol assessmenL alLer Lhe year ol
commencemenL is, Lherelore, Lhe sum ol:
1he annual capiLal allowance lor LhaL year
1he sum ol:
1he capiLal allowance lor Lhe year ol commencemenL {see below)
as long as LhaL allowance subsisLs {i.e., Lhere is a carried lorward,
undeducLed balance)
1he capiLal allowance in respecL ol Lhe subsisLing annual capiLal
allowances lor previous years {i.e., Lhese are carried lorward,
undeducLed balances)
1o calculaLe Lhe capiLal allowance lor Lhe year ol commencemenL, Lhe sum ol
peLroleum capiLal expendiLure incurred in Lhe year ol commencemenL and in
previous years is Laken and Lhe lollowing deducLions are made:
ConsideraLion received in respecL ol any inLeresL acquisiLion
Sales ol any asseL in respecL ol which a peLroleum capiLal expendiLure has
been incurred
lnsurance monies received in respecL ol Lhe loss ol an asseL
Monies received in respecL ol Lhe sole risk ol operaLions {SRO)
Any oLher amounL received in respecL ol peLroleum operaLions in or belore
Lhe year ol commencemenL
D. Incentives
Exploration
LxploraLion cosLs incurred prior Lo commencemenL ol drilling operaLions are
capiLalized and a capiLal allowance claimed equally in Lhe lirsL live years ol
commercial operaLions. Similarly, exploraLion cosLs incurred alLer
commencemenL ol drilling operaLions may be capiLalized and a capiLal
allowance claimed equally over a liveyear period.
Tax losses
1ax losses incurred in any year ol assessmenL can be deducLed lrom Lhe
subsequenL year's proliL. ll Lhe subsequenL year's income is noL enough Lo
recoup Lhe loss, Lhe loss can be carried lorward unLil iL is evenLually recouped.
Under no circumsLances may Lhe aggregaLe deducLion in respecL ol any such
loss exceed Lhe amounL ol Lhe loss.
Chana
147
As noLed previously, ring lencing applies and, accordingly, losses lrom
upsLream peLroleum acLiviLies cannoL be used Lo ollseL againsL proliLs lrom
downsLream or oLher unrelaLed business acLiviLies.
P&D
No special incenLives lor R&D cosLs are available in Lhe Pl1L or Lhe PA.
However, Lhe lRA ordinarily permiLs Lhe deducLion ol R&D expendiLure. 1he lRA
indicaLes LhaL, lor Lhe purposes ol ascerLaining Lhe income ol a person lor a
period lrom any business, Lhe R&D expendiLure incurred by LhaL person during
Lhe period in Lhe producLion ol income is deducLed. 1he lRA lurLher delines
R&D as "any ouLgoing or expense incurred by a person lor Lhe purposes ol
developing LhaL person's business and improving business producLs or
processes buL does noL include any ouLgoing or expense incurred lor Lhe
acquisiLion ol an asseL in relaLion Lo which LhaL person is enLiLled Lo a
capiLal allowance."
E. Withholding taxes
Branch remittance tax
1he Pl1L and Lhe PA do noL Lax branch proliL remiLLances. 1he lRA, however,
imposes Lax on branch proliL remiLLances aL 107. However, since Lhe PA
indicaLes LhaL no Lax, duLy or oLher imposL shall be imposed by Lhe sLaLe
{Chana) or any poliLical subdivision on Lhe conLracLor, iLs subconLracLors or
iLs alliliaLes in respecL Lo Lhe acLiviLies relaLing Lo peLroleum operaLions and Lo
Lhe sale and exporL ol peLroleum oLher Lhan as provided lor in Lhe PA, branch
remiLLances are noL capLured as Laxable LransacLions.
1herelore, unless Lhe Pl1L is amended, branch remiLLances relaLing Lo
upsLream acLiviLies are noL sub|ecL Lo branch remiLLance Lax, buL remiLLances
relaLing Lo downsLream acLiviLies are sub|ecL Lo branch remiLLance Lax ol 107.
FPWT/Ioreign contractors withholding tax
SubconLracLors Lo a PA suller a linal wiLhholding Lax ol 57 on gross paymenLs
received lrom Lhe conLracLor Lo Lhe PA.
A conLracLor, as delined by Lhe Pl1L, means any person who is a parLy Lo a PA
wiLh Lhe COC and Lhe CNPC. A subconLracLor is also delined as meaning any
person who enLers inLo a conLracL wiLh a conLracLor lor Lhe provision ol work
or services {including renLal ol planL and equipmenL) in Chana lor or in
connecLion wiLh Lhe PA.
Cenerally, no variaLion ol, or exempLion lrom, Lhe 57 wiLhholding Lax payable is
available in respecL ol paymenLs Lo subconLracLors. However, wiLhholding Lax in
respecL ol services provided Lo Lhe conLracLor by an alliliaLe is waived, provided
such services are charged aL cosL.
AlLhough Lhe Commissioner cannoL granL any exempLions lrom Lhe paymenL ol
Lhe 57 wiLhholding Lax, Chana's parliamenL may granL an exempLion.
1he Pl1L and Lhe PA do noL seem Lo cover Lhe posiLion ol Laxpayers who are
in lacL subconLracLing wiLh Lhe subconLracLor. By exLension, il subconLracLors
Lo a peLroleum subconLracLor do noL lall under Lhe PA or Lhe Pl1L, such "sub
subconLracLors" would pay Lax under Lhe lRA. Where Lhis is Lhe case, a sub
subconLracLor could pay wiLhholding Laxes ol 57 Lo 157, depending on wheLher
iL is a ChanaianregisLered or incorporaLed company or a nonresidenL company
deriving income lrom Chana.
ln Lhe case ol ChanaianregisLered or incorporaLed companies, annual reLurns
musL be liled wiLh Lhe lRS. However, lor a nonresidenL company, iL is a linal Lax.
ln summary, nonresidenL subconLracLors LhaL derive income in Chana lrom
peLroleum conLracLs enLered inLo wiLh Lhe peLroleum conLracLor pay
wiLhholding Lax ol 57 on Lhe gross income derived lrom Lhe conLracL. However,
il Lhe nonresidenL subconLracLor enLers inLo a conLracL wiLh a subconLracLor
Lo a main conLracLor, Lhe wiLhholding Lax raLe could be 157.
Chana
148
F. Financing considerations
Chana's Lax sysLem has signilicanL rules governing Lhe Lax impacL LhaL Lhe
degree ol debL and equiLy mix could have on a company. 1hese rules should be
Laken inLo accounL by peLroleum companies in evaluaLing any planning opLions.
1hin capiLalizaLion rules resLricL Lhe LoLal debL/equiLy mix in a loreignconLrolled
enLiLy lor Lax purposes. 1he permiLLed debL/equiLy raLio lor Lax purposes is 2:1.
Any excess inLeresL paymenL or loreign exchange loss incurred in respecL ol Lhe
lall in Lhe value ol Lhe debL obligaLion over and above Lhis raLio is noL Lax
deducLible. 1he rule applies Lo Lhe lollowing enLiLies:
Chanaian enLiLies LhaL are loreignconLrolled or loreign enLiLies
LhaL operaLe locally regisLered enLiLies in Chana
Chanaian enLiLies LhaL are locally conLrolled by oLher Chanaian parenL enLiLies
1he Lhin capiLalizaLion rule governs Lhe exLenL ol debL LhaL an exempL
conLrolled enLiLy can obLain lrom Lhe parenL. An exempLconLrolled enLiLy is a
company wiLh 507 or more ol iLs shares owned or conLrolled by Lhe parenL
enLiLy and/or a relaLed enLiLy. 1he deducLibiliLy ol inLeresL paymenLs and loreign
exchange losses lor Lax purposes in any parLicular year is resLricLed Lo a debL/
equiLy raLio ol 2:1.
Financial insLiLuLions are excluded lrom Lhe debL/equiLy rules.
MosL invesLmenLs are inbound and, Lherelore, iL is noL common lor Chanaian
enLiLies Lo have conLrolling inLeresLs in oLher Chanaian enLiLies such LhaL Lhey
could be caughL by Lhe Lhin capiLalizaLion rules. ln Lhe ma|oriLy ol insLances,
Lhin capiLalizaLion rules have been applied Lo Chanaian residenL companies wiLh
parenLs domiciled elsewhere. Such parenL companies generally preler noL Lo
Lie down lunds in equiLy. lnsLead, Lhey preler Lo have a mechanism Lo allow lor
quicker repaLriaLion ol lunds invesLed in Chana and, Lhus, Lend Lo invesL in debL
raLher Lhan equiLy.
C. Transactions
Asset disposal
1he disposal ol an asseL can have Lwo ellecLs depending on wheLher iL was sold
belore or alLer Lhe year in which peLroleum operaLions commenced.
ll an asseL is sold belore Lhe year in which peLroleum operaLions commence,
iLs sale has an impacL on Lhe quanLiLy ol capiLal allowances LhaL may be claimed
when operaLions commence. For Lhe purposes ol calculaLing Lhe capiLal
allowance lor Lhe year ol commencemenL ol commercial operaLions, Lhe lull
proceeds ol Lhe sale are deducLed lrom Lhe accumulaLed peLroleum capiLal
expendiLure incurred up Lo Lhe year ol commencemenL. 1he neL expendiLure,
alLer deducLing Lhe proceeds ol Lhe sale, is LreaLed as Lhe peLroleum capiLal
expendiLure aL commencemenL and iL is sub|ecL Lo a capiLal allowance in equal
insLallmenLs over a period ol live years.
ln Lhe case ol Lhe disposal or Lhe loss or desLrucLion ol a peLroleum capiLal
asseL in any year alLer Lhe year ol commencemenL ol operaLions by a person
carrying on peLroleum operaLions, Lhe lull proceeds ol Lhe sale or insurance
monies, compensaLion or damages received by Lhe person musL be divided
inLo live equal amounLs. 1he resulLing amounL is added Lo Lhe gross income ol
Lhe person arising lrom peLroleum operaLions, lor Lhe purpose ol calculaLing
Lhe Laxable income in LhaL year and in each ol Lhe immediaLely succeeding
lour years.
Farm in and Iarm out
Farmin arrangemenLs are a common pracLice wiLhin Lhe peLroleum exLracLing
secLor. A larmee enLering inLo a larmin arrangemenL is expecLed Lo be
allocaLed Lhe proporLionaLe cosL purchased in respecL ol Lhe larmin
arrangemenL {LhaL is, Lhe cosL ol Lhe inLeresL purchased). 1he larmee is
enLiLled Lo a deducLion lor Lhe cosL iL incurs over a period ol live years lrom Lhe
daLe ol commencemenL ol commercial operaLions {see Lhe previous secLion on
capiLal allowances lor more deLail).
Chana
149
For Lhe larmor, il Lhe larm in occurs in or belore Lhe year ol commencemenL
ol commercial operaLions, Lhe peLroleum capiLal expendiLure incurred up Lo
Lhe daLe ol commencemenL or in previous years is a neL expendiLure, alLer
deducLing Lhe consideraLion received in respecL ol Lhe acquisiLion by Lhe
larmee ol an inLeresL or proporLionaLe parL ol Lhe peLroleum inLeresL or in
Lhe relaLed asseLs.
Any sums received alLer Lhe year ol commencemenL as a reimbursemenL ol
cosL are LreaLed as proceeds lrom Lhe sale ol an asseL and Lhey are divided by
live. 1he resulLing amounL is added Lo Lhe gross income lrom Lhe operaLions lor
Lhe purpose ol calculaLing Lhe income LhaL would be sub|ecL Lo Lax in LhaL year,
and in each ol Lhe immediaLely succeeding lour years.
5elling shares in a company 1consequences Ior resident and
nonresident shareholders)
Cains made on Lhe sale ol shares ordinarily aLLracL CC1. However, Lo encourage
lisLing and Lrading ol shares on Lhe Chana SLock Lxchange, gains made lrom
Lhe sale ol shares lisLed and Lraded on Lhe Chana SLock Lxchange are Lax
exempL. Cains made on shares noL lisLed on Lhe Chana SLock Lxchange,
however, aLLracL a 57 Lax. 1he Lax LreaLmenL is Lhe same lor residenL and non
residenL shareholders. No CC1 is payable on gains derived lrom Lhe sale ol
upsLream peLroleum shares.
H. Indirect taxes
Import duties
Coods imporLed lor upsLream peLroleum operaLions are exempL lrom imporL
duLies. 1he sale ol an exempL iLem by a conLracLor Lo anoLher peLroleum
conLracLor remains exempL. However, Lhe sale ol an exempL iLem by a
conLracLor Lo a nonpeLroleum conLracLor aLLracLs duLy il Lhe iLem is ordinarily
duLiable. 1he duLy is assessed aL Lhe duLy raLe prevailing on Lhe daLe Lhe
asseL is Lranslerred.
VAT
1he VA1 regime came inLo ellecL in 1998. VA1 applies in Chana Lo all
LransacLions conducLed in Chana, excepL lor LransacLions LhaL are exempL.
1he VA1 raLe is 12.57. 1here is a NaLional HealLh lnsurance Levy {NHlL) ol
2.57. 1he NHlL is collecLed by Lhe VA1 service. When combined wiLh Lhe VA1,
iL ellecLively makes Lhe VA1 raLe 157.
1he PA basically exempLs upsLream peLroleum acLiviLies lrom Lhe VA1 {boLh
Lhe 12.57 VA1 and Lhe 2.57 NHlL). However, VA1 applies Lo goods and
services supplied Lo companies LhaL underLake peLroleum acLiviLies. 1o ellecL
Lhe exempLion, Lhe VA1 ollice issues a VA1 Reliel Purchase Order {VRPO) Lo
Lhe peLroleum company whose acLiviLies are VA1 exempL so LhaL iL may "pay"
any VA1 assessed on goods and services wiLh Lhe VRPO. 1his means LhaL Lhe
peLroleum enLiLy is sLill charged VA1 on supplies Lo iL, buL iL uses Lhe VRPO
insLead ol cash Lo pay Lhe VA1 elemenL. Also, iL does noL charge VA1 on iLs
sales and LransacLions.
ln general, exporLs ol goods and services are zeroraLed. 1haL means LhaL
peLroleum exporLs by a conLracLor aLLracL VA1 on exporLs aL a zero raLe.
However, imporLs ol equipmenL {machinery) and vessels are exempL lrom VA1.
ln addiLion, Lhe sale ol equipmenL {machinery, including iLems LhaL consLiLuLe
apparaLus appliances and parLs Lhereol) designed lor use in Lhe indusLry is exempL.
1he sale ol crude oil and hydrocarbon producLs is exempL lrom VA1.
An asseL disposal is exempL lrom VA1 il Lhe asseL is noL sub|ecL Lo VA1 under
Schedule 1 ol Chana's VA1 AcL. However, il Lhe asseL is ordinarily sub|ecL Lo
VA1, a disposal ol Lhe asseL Lo an enLiLy LhaL is noL a peLroleum company is
sub|ecL Lo VA1.
Chana
150
1he VA1 regisLraLion Lhreshold is Chana cedi 10,000. Lvery person who
expecLs Lo earn revenue in excess ol Lhe Lhreshold in a year is required Lo
regisLer lor VA1. Service providers, however, do noL have a Lhreshold margin lor
regisLraLion purposes and all service providers are required Lo regisLer lor VA1
purposes. 1hus, all service providers Lo Lhe conLracLors are expecLed Lo be VA1
regisLered and Lo charge VA1.
Export duties
No exporL duLies apply Lo Lhe exporL ol upsLream peLroleum producLs. Chana
does noL usually charge duLy on Lhe exporL ol goods. 1his is probably because
Lhe CovernmenL wanLs Lo encourage exporLs.
5tamp duties
1he PA exempLs upsLream peLroleum companies lrom Lhe paymenL ol
sLamp duLies.
Pegistration Iees
A varieLy ol regisLraLion lees are payable aL Lhe local CovernmenL level.
I. Cther
1he CovernmenL's approach is Loward Laking equiLy ownership ol pro|ecLs
and Lhe maximum equiLy limiLs LhaL apply, wiLh inLeresL ol Lhe parLies.
ln order Lo encourage prospecLing and Lhe developmenL ol oil and gas in
Chana, pioneer oil and gas corporaLe enLiLies receive very generous impeLus
and liscal incenLives.
1he PA signed by Lhe COC/CNPC and Lhe peLroleum conLracLor requires Lhe
esLablishmenL ol a |oinL managemenL commiLLee {JMC) Lo conducL and
manage Lhe peLroleum operaLions.
However, in relaLion Lo all exploraLion and developmenL, Lhe CNPC is expecLed
Lo Lake {aL no cosL) a 107 Lo 12.57 iniLial inLeresL in respecL ol crude oil and a
107 iniLial inLeresL in respecL ol naLural gas. 1he CNPC has an inLeresL in all
exploraLion and developmenL operaLions.
1he CNPC also has Lhe opLion Lo acquire an addiLional inLeresL ol 107 in every
commercial peLroleum discovery. However, Lo acquire Lhe addiLional inLeresL,
Lhe CNPC musL noLily Lhe conLracLor wiLhin 90 days alLer Lhe conLracLor's
noLice Lo Lhe minisLer ol Lhe discovery. ll Lhe CNPC does noL give Lhe required
noLice, Lhe CNPC's inLeresL remains as described above. ll Lhe CNPC decides
Lo acquire Lhe addiLional inLeresL, Lhe CNPC is responsible lor paying 107 ol all
luLure peLroleum cosLs, including developmenL and producLion cosLs approved
by Lhe JMC.
Domestic production requirements
1he COC has a 57 Lo 107 royalLy Lake in Lhe peLroleum producLion and a 37
royalLy in gas producLion. 1he COC can elecL Lo Lake a cash seLLlemenL lor iLs
37 and 57 Lo 107 royalLy, or iL may have iL seLLled wiLh Lhe supply ol gas and
crude peLroleum, respecLively. ln addiLion Lo Lhe 57 Lo 107 royalLy Lake in oil
and Lhe 37 in gas, Lhe COC {Lhrough iLs equiLy inLeresL) has a 12.57 iniLial
inLeresL Lake in oil and a 107 inLeresL in gas, or Lheir cash equivalenLs.
Any addiLional inLeresL LhaL Lhe CovernmenL has in peLroleum producLion is
deLermined beLween an oil or gas Lake or Lhe cash equivalenL ol Lhis proporLion.
Crude oil lor domesLic consumpLion, Lherelore, is expecLed Lo be meL by
Lhe royalLy and CovernmenL share in Lhe peLroleum producLion. However,
il domesLic consumpLion exceeds Lhis Lake, Lhe COC is expecLed Lo inlorm Lhe
oLher parLners abouL Lhe addiLional local need Lhree monLhs in advance and
Lhe conLracLor is expecLed Lo oblige and meeL local producLion requiremenLs.
1he sLaLe, however, musL pay lor Lhe addiLional supply required aL Lhe ruling
markeL price.
Chana
151
!ndia
Country code 91
Curcacn CMT +5
Ernst & Ycunc
CcIf View Ccrpcrate Tcwer B
Sectcr ~ 42, Sectcr Rcad
Curcacn
Haryana
122002
!ndia
TeI 124 44 4000
Fax 124 44 4050
DiI and cas ccntacts
Vijay !yer
TeI 124 44 470
vijay.iyerin.ey.ccm
AkhiI Sambhar
TeI 124 44 4223
akhiI.sambharin.ey.ccm
Harishanker Subramaniam
TeI 124 44 4103
harishanker1.subramaniamin.ey.ccm
SaIcni Rcy
TeI 124 44 4955
saIcni.rcyin.ey.ccm
Mumbai
Ernst & Ycunc
JaIan MiII Ccmpcund
95 Canpatrac Kadam Marc
Lcwer PareI 1West)
Mumbai
Maharashtra
400013
!ndia
TeI 22 4035 300
Fax 22 4035 400
DiI and cas ccntacts
Sanjay Crcver
TeI 22 4035 30
sanjay.crcverin.ey.ccm
A. At a glance
Fiscal regime
lndia has a hybrid sysLem ol PSCs conLaining elemenLs ol royalLy, as well as
sharing ol producLion wiLh Lhe CovernmenL.
Poyalties 1under New Exploration Licensing Policy)
Onshore areas:
Crude oil 12.57
NaLural gas 107
Shallow waLer ollshore areas:
Crude oil and naLural gas 107
DeepwaLer ollshore areas:
Crude oil and naLural gas For Lhe lirsL seven years ol commercial
producLion 57 and LherealLer 107
Bonuses None as per Lhe New LxploraLion
Licensing Policy
lncome Lax raLe:
DomesLic companies 307
93
93 |n acc|t|on, a surcnarce :10x on tax for a comest|c comanv anc 2.5x on tax for a
fore|cn comanv; must oe a|c |f |ncome of tne comanv |s |n excess of |NP10 m||||on.
/n ecucat|on |evv of 3x on tne tax anc surcnarce |s a|so a||cao|e.
India
152
Foreign companies ^07
94
Resource renL Lax None
CapiLal allowances D, L
94
lnvesLmenL incenLives 1H, RD
95
B. Fiscal regime
lndia has a hybrid sysLem ol PSCs conLaining elemenLs ol royalLy, as well as
sharing ol producLion wiLh Lhe CovernmenL.
Companies enLer inLo a PSC wiLh Lhe CovernmenL ol lndia Lo underLake
exploraLion and producLion {L&P) acLiviLies.
lncome lrom L&P operaLions is Laxable on a neL income basis {i.e., gross
revenue less allowable expenses). Special allowances are permiLLed Lo
L&P companies {in addiLion Lo allowances permiLLed under Lhe domesLic
Lax laws) lor:
UnlruiLlul or aborLive exploraLion expenses in respecL ol any area
surrendered prior Lo Lhe beginning ol commercial producLion; alLer Lhe
beginning ol commercial producLion; Lo expendiLure incurred, wheLher
belore or alLer such commercial producLion, in respecL ol drilling or
exploraLion acLiviLies or services or in respecL ol physical asseLs used
in LhaL connecLion
DepleLion ol mineral oil in Lhe mining area posL commercial producLion
DomesLic companies are sub|ecL Lo Lax aL a raLe ol 307 and loreign companies
aL a raLe ol ^07. ln addiLion, a surcharge {107 on Lax lor a domesLic company
and 2.57 on Lax lor a loreign company) musL be paid il income is in excess ol
lNR10 million. An educaLion levy ol 37 also applies. 1he ellecLive corporaLe Lax
raLes are as lollows:
Domestic company Foreign company
For net income
up to and including
INP10 million
For net income
exceeding
INP10 million
For net income
up to and including
INP10 million
For net income
exceeding
INP10 million
30.97 33.997 ^1.27 ^2.237
Minimum alternate tax
Minimum alLernaLe Lax {MA1) applies Lo a company il Lhe Lax payable on iLs
LoLal income as compuLed under Lhe Lax laws is less Lhan 157 ol iLs book proliL
{accounLing proliLs sub|ecL Lo cerLain ad|usLmenLs). ll MA1 applies, Lhe Lax on
LoLal income is deemed Lo equal 157 ol Lhe company's book proliL.
CrediL lor MA1 paid by a company can be carried lorward lor 10 years and
iL may be ollseL againsL income Lax payable under domesLic Lax provisions.
Due Lo Lhe MA1 regime, a company may be required Lo pay some Lax, even
during Lhe Lax holiday period.
Ping Iencing
No ring lencing applies lrom a Lax perspecLive; Lherelore, iL is possible Lo
ollseL Lhe exploraLion cosLs ol one block againsL Lhe income arising lrom
anoLher block.
Treatment oI exploration and development costs
All exploraLion and drilling cosLs are 1007 Lax deducLible. Such cosLs are
aggregaLed Lill Lhe year ol commencemenL ol commercial producLion.
1hey can be eiLher lully claimed in Lhe year ol commercial producLion or
Lhey can be amorLized equaliLy over a period ol 10 years lrom Lhe daLe ol
lirsL commercial producLion.
94 0: acce|eratec cerec|at|on, f: |mmec|ate wr|teoff for ex|orat|on costs anc tne cost
of erm|ts f|rst usec |n ex|orat|on.
95 1|: tax no||cav, P0: researcn anc ceve|oment |ncent|ve.
India
153
DevelopmenL cosLs {oLher Lhan drilling expendiLure) are allowable under Lhe
normal provisions under Lhe domesLic Lax law.
P5C regime
lndia has a hybrid sysLem ol PSCs conLaining elemenLs ol royalLy as well as
sharing ol producLion wiLh Lhe CovernmenL. L&P companies {conLracLors)
LhaL are awarded Lhe exploraLion blocks enLer inLo a PSC wiLh Lhe CovernmenL
lor underLaking Lhe L&P ol mineral oil. 1he PSC seLs lorLh Lhe righLs and duLies
ol Lhe conLracLor.
1he PSC regime is based on producLion value.
Cost petroleum/cost oil
CosL peLroleum is Lhe porLion ol Lhe LoLal value ol crude oil and naLural gas
produced {and saved) LhaL is allocaLed Loward recovery ol cosLs. 1he cosLs
LhaL are eligible lor cosL recovery are:
LxploraLion cosLs incurred belore and alLer Lhe commencemenL ol
commercial producLion
DevelopmenL cosLs incurred belore and alLer Lhe commencemenL ol
commercial producLion
ProducLion cosLs
RoyalLies
1he unrecovered porLion ol Lhe cosLs can be carried lorward Lo subsequenL
years unLil lull cosL recovery is achieved.
ProIit petroleum/proIit oil
ProliL peLroleum means Lhe LoLal value ol crude oil and naLural gas produced
and saved, as reduced by cosL peLroleum. 1he proliL peLroleum share ol Lhe
CovernmenL is biddable by Lhe conLracLor. 1he blocks are aucLioned by Lhe
CovernmenL. 1he bids lrom companies are evaluaLed based on various
parameLers including Lhe share ol proliL percenLage ollered by Lhe companies.
1he law has no caps on expendiLure recovery. 1he percenLage ol recovery ol
expense incurred in any year is as per Lhe bids submiLLed by Lhe companies.
FurLher, no uplilL is available on recovered cosLs.
1he cosLs LhaL are noL eligible lor cosL recovery
9
are as lollows:
CosLs incurred belore Lhe ellecLive daLe
97
including cosLs ol preparaLion,
signaLure or raLilicaLion ol Lhe PSC
Lxpenses in relaLion Lo any linancial LransacLion Lo negoLiaLe, obLain or
secure lunds lor peLroleum operaLion. For example, inLeresL, commission,
brokerage, lees and exchange losses
MarkeLing or LransporLaLion cosLs
LxpendiLure incurred in obLaining, lurnishing and mainLaining guaranLees
under Lhe conLracL
ALLorney's lees and oLher cosLs ol arbiLraLion proceedings
Fines, inLeresLs and penalLies imposed by courLs
DonaLions and conLribuLions
LxpendiLure on creaLing parLnership or |oinL venLure arrangemenL
AmounLs paid lor nonlullillmenL ol conLracLual obligaLions
CosLs incurred as a resulL ol misconducL or negligence ol Lhe conLracLor
CosLs lor linancing and disposal ol invenLory
1he PSC provides proLecLion in case changes in lndian law resulL in a maLerial
change Lo Lhe economic beneliLs accruing Lo Lhe parLies alLer Lhe daLe ol
execuLion ol Lhe conLracL.
9 w|tnout re|uc|ce to tne|r a||owao|||tv uncer comest|c tax |aws.
97 fffect|ve cate means tne cate wnen tne contract |s executec ov tne art|es or tne cate
from wn|cn tne ||cense |s mace effect|ve, wn|cnever |s |ater.
India
154
Poyalties
A royalLy is payable Lo Lhe CovernmenL ol lndia on Lhe wellhead value ol crude
oil and naLural gas as lollows:
Land areas payable aL Lhe raLe ol 12.57 lor crude oil and 107 lor
naLural gas
Shallow waLer ollshore areas payable aL Lhe raLe ol 107 lor crude oil and
naLural gas
DeepwaLer ollshore areas {beyond ^00m isobaLh) payable aL Lhe raLe ol
57 lor Lhe lirsL seven years ol commercial producLion and LherealLer aL a
raLe ol 107 lor crude oil and naLural gas
1he wellhead value is calculaLed by reducing Lhe markeLing and LransporLaLion
cosLs lrom Lhe sale price ol crude oil and naLural gas.
C. Capital allowances
Accelerated depreciation
DepreciaLion is calculaLed using Lhe decliningbalance meLhod and is allowed
on a class ol asseLs. For lield operaLions carried ouL by mineral oil concerns,
Lhe depreciaLion raLe is 607 lor specilied asseLs
98
while Lhe generic raLe ol
depreciaLion on Lhe wriLLendown basis is 157 {Lhe ma|oriLy ol Lhe asseLs lall
wiLhin Lhe generic raLe). FurLher, addiLional depreciaLion ol 207 is available on
Lhe acLual cosL ol new machinery or planL
99
in Lhe lirsL year.
D. Incentives
Tax holiday
A sevenyear Lax holiday equal Lo 1007 ol Laxable proliLs is available lor an
underLaking engaged in Lhe business ol commercial producLion ol or relining
ol mineral oil.
CarryIorward losses
Business losses can be carried lorward and seL oll againsL income lor eighL
consecuLive years, provided Lhe income Lax reLurn lor Lhe year ol loss is liled
on Lime. For closely held corporaLions, a 517 conLinuiLy ol ownership LesL musL
also be saLislied.
Unabsorbed depreciaLion can be carried lorward indeliniLely.
P&D
LxpendiLures on scienLilic research incurred lor Lhe purposes ol Lhe business
are Lax deducLible.
Deduction Ior site restoration expenses
A special deducLion is available lor provisions made lor siLe resLoraLion
expenses il Lhe amounL is deposiLed in a designaLed bank accounL.
1he deducLion is Lhe lower ol Lhe lollowing amounLs:
1he amounL deposiLed in a separaLe bank accounL or "siLe
resLoraLion accounL"
1wenLy percenL ol Lhe proliLs ol Lhe business ol Lhe relevanL linancial year
98 H|nera| o|| concerns:
:a; P|ant usec |n f|e|c oerat|ons :aoove crounc; c|str|out|on returnao|e ackaces
:o; P|ant usec |n f|e|c oerat|ons :oe|ow crounc;, not |nc|uc|nc curos|ce ums out
|nc|uc|nc uncercrounc tanks anc f|tt|ncs usec |n f|e|c oerat|ons :c|str|out|on; ov
m|nera| o|| concerns
99 /cc|t|ona| cerec|at|on |s erm|ttec for a|| ersons encacec |n tne ous|ness of
manufactur|nc or rocuc|nc anv art|c|e or tn|nc for new |ant anc macn|nerv accu|rec
after 31 Harcn 2005.
India
155
E. Withholding taxes
1he lollowing wiLhholding Lax raLes apply Lo paymenLs made Lo domesLic and
loreign companies in lndia:
Nature oI income
Pate 17)
Domestic
company
Foreign*
company
Dividends`` 07 07
lnLeresL 207 207```
Fees lor prolessional/Lechnical lees 107 107
RoyalLy 107 107
NonresidenL conLracLor
Maximum
^07````
Branch remiLLance Lax 07
For counLries wiLh which lndia has enLered inLo a Lax LreaLy, Lhe wiLhholding Lax
raLe is Lhe lower ol Lhe LreaLy raLe and Lhe raLe under Lhe domesLic Lax laws on
ouLbound paymenLs.
` 1he raLes are Lo be lurLher enhanced by Lhe surcharge and educaLion.
`` Dividends paid by domesLic companies are exempL lrom Lax in Lhe hands
ol Lhe recipienL. DomesLic companies are required Lo pay DD1 aL
16.9957 on dividends paid by Lhem.
``` 1his raLe applies Lo inLeresL lrom loreign currency. OLher inLeresL is
sub|ecL Lo Lax aL Lhe raLe ol ^07 {plus applicable surcharge and
educaLion cess).
```` Sub|ecL Lo LreaLy beneliLs. ll a permanenL esLablishmenL is consLiLuLed in
lndia, Lhe lower wiLhholding Lax raLe depends on proliLabiliLy.
F. Financing considerations
Thin capitalization limits
1here are no Lhin capiLalizaLion rules under Lhe lndian Lax regulaLions.
Under Lhe exchange conLrol regulaLions, commercial loans obLained by an
lndian company lrom ouLside lndia are relerred Lo as exLernal commercial
borrowings {LCBs). LCBs are permiLLed lor capiLal expansion purposes.
LCBs can be raised lrom inLernaLionally recognized sources such as
inLernaLional banks, inLernaLional capiLal markeLs and mulLilaLeral linance
insLiLuLions, exporL crediL agencies, suppliers ol equipmenL, loreign
collaboraLors and loreign equiLy holders {sub|ecL Lo cerLain prescribed
condiLions including debLLoequiLy raLio).
Interest quarantining
lnLeresL quaranLining is possible, sub|ecL Lo Lhe exacL lacL paLLern.
India
15
C. Transactions
Asset disposals
A capiLal gain arising on Lransler ol capiLal asseLs siLuaLed in lndia is Laxable in
lndia {sale proceeds less cosL ol acquisiLion). CapiLal gains can eiLher be long
Lerm {capiLal asseLs held lor more Lhan Lhree years excepL lor securiLies where
iL is required Lo be held lor more Lhan one year) or shorL Lerm. 1he raLe ol CC1
is as lollows: 100 101
Particulars
Pate 17)*
100
5hortterm
capital gains
Longterm
capital gains
101
ResidenL companies 307 207
NonresidenLs ^07 207
` 1he raLes are Lo be lurLher enhanced by Lhe surcharge and educaLion levy.
A shorLLerm capiLal gain on Lransler ol depreciable asseLs is compuLed by
deducLing Lhe decliningbalance value ol Lhe classes ol asseLs {including
addiLions) lrom Lhe sale proceeds.
Farm in and Iarm out
No specilic provision applies lor Lhe Lax LreaLmenL ol larmin consideraLion,
and iLs LreaLmenL is deLermined on Lhe basis ol general LaxaLion principles and
provisions ol Lhe PSC. However, special provisions do deLermine Lhe LaxabiliLy
ol larmouL LransacLions in Lhe cerLain siLuaLions.
5elling shares in a company 1consequences Ior resident and
nonresident shareholders)
Listed securities on a stock exchange
1he Lransler ol lisLed securiLies is exempL lrom longLerm CC1 provided LhaL
securiLies LransacLion Lax is paid. ShorLLerm capiLal gains are Laxable aL a
reduced raLe ol 157.
TransIer oI listed securities outside a stock exchange
LongLerm capiLal gains derived lrom Lhe Lransler ol lisLed securiLies are
Laxed aL Lhe raLe ol 107 {wiLhouL allowing lor indexaLion ad|usLmenLs) or
aL Lhe raLe ol 207 wiLh indexaLion beneliLs. ShorLLerm capiLal gains are
Laxable aL Lhe raLe ol 307 and ^07 lor residenL companies and nonresidenL
companies, respecLively.
Unlisted securities
1he CC1 raLe applicable Lo Lranslers ol unlisLed securiLies is as lollows:
Particulars
Pate 17)*
5hortterm
capital gains
Longterm
capital gains
ResidenL companies 307 207
NonresidenLs ^07 207
` 1he raLes are Lo be lurLher enhanced by Lhe surcharge and educaLion levy.
100 1ne rates are furtner ennancec ov tne a||cao|e surcnarce anc |evv.
101 1ne cost of ca|ta| assets |s ac|ustec for |nf|at|on :|ncexat|on; to arr|ve at tne |ncexec
cost :tne oenef|t of |ncexat|on |s not ava||ao|e to nonres|cents;, wn|cn |s a||owec as a
cecuct|on wn||e comut|nc tne |oncterm ca|ta| ca|ns.
India
157
H. TransIer pricing
1he lncome 1ax AcL includes deLailed Lransler pricing regulaLions. Under
Lhese regulaLions, income and expenses, including inLeresL paymenLs,
wiLh respecL Lo inLernaLional LransacLions beLween Lwo or more associaLed
enLerprises {including permanenL esLablishmenLs) musL be deLermined
using arm's lengLh prices. 1he Lransler pricing regulaLions also apply Lo
cosLsharing arrangemenLs.
1he AcL specilies meLhods lor deLermining Lhe arm's lengLh price:
Comparable unconLrolled price meLhod
Resale price meLhod
CosL plus meLhod
ProliL spliL meLhod
1ransacLional neL margin meLhod
Any oLher meLhod prescribed by Lhe CenLral Board ol DirecL 1axes {CBD1)
1he CBD1 has issued Lhe regulaLions lor applying Lhese meLhods Lo deLermine
Lhe arm's lengLh price.
1he Lransler pricing regulaLions require each person enLering inLo an
inLernaLional LransacLion Lo mainLain prescribed documenLs and inlormaLion
regarding a LransacLion. Lach person enLering inLo an inLernaLional LransacLion
musL arrange lor an accounLanL Lo prepare a reporL and lurnish iL Lo Lhe Lax
ollicer by Lhe due daLe lor liling Lhe corporaLe Lax reLurn, which is 30 SepLember.
A Lax ollicer may make an ad|usLmenL wiLh respecL Lo an inLernaLional
LransacLion, il Lhe ollicer deLermines LhaL cerLain condiLions exisL, including
any ol Lhe lollowing:
1he price is noL aL arm's lengLh
1he prescribed documenLs and inlormaLion have noL been mainLained
1he inlormaLion or daLa on Lhe basis ol which Lhe price was
deLermined is noL reliable
lnlormaLion or documenLs requesLed by Lhe Lax ollicer have
noL been lurnished
SLringenL penalLies {up Lo 27 ol LransacLion value) are imposed lor non
compliance wiLh Lhe procedural requiremenLs and lor undersLaLemenL ol proliLs.
I. Cther
1here is a special Lax regime lor loreign companies which are engaged in Lhe
business ol providing services/laciliLies or supplying planL or machinery or hire
used in connecLion wiLh prospecLing, exLracLion or producLion ol mineral oils.
Important note:
Please noLe LhaL Lhe lndian Finance MinisLry has proposed Lo release a new
direcL Lax law. 1hey had recenLly inLroduced a dralL ol Lhis new law lor public
commenLs. D1C is expecLed Lo be enlorced lrom 1 April 2011 and, once
enacLed, iL would replace Lhe exisLing income Lax. lL is likely LhaL Lhe discussions
above may undergo changes subsequenL Lo iLs enlorcemenL.
J. Indirect taxes
lndirecL Laxes are applicable Lo acLiviLies LhaL span lrom manulacLuring Lo linal
consumpLion, and include wiLhin Lheir scope disLribuLion, Lrading and imporLs,
as well as services. 1herelore, indirecL Laxes impacL almosL all LransacLions.
ln lndia, indirecL Laxes are mulLiple, mulLiraLe and mulLiLier {i.e., levied aL Lhe
cenLral, sLaLe and local levels). 1he principal indirecL Laxes are cenLral excise,
cusLoms duLy, service Lax, cenLral sales Lax and value added Lax. AddiLionally,
oLher indirecL Laxes such as enLry Lax and ocLroi are also levied by sLaLe
CovernmenLs and municipaliLies.
India
158
Customs duty
CusLoms duLy is levied on Lhe imporL ol goods inLo lndia and is payable by Lhe
imporLer. 1he cusLoms duLy on imporLs comprises Lhe lollowing:
Basic cusLoms duLy {BCD)
AddiLional duLy ol cusLoms {ADC), levied in lieu ol excise
on goods manulacLured in lndia
Special addiLional duLy ol cusLoms {SAD), levied in lieu ol VA1
on Lhe sale ol similar goods in lndia
LducaLion levy
1he raLe ol cusLoms duLy is based on Lhe classilicaLion ol imporLed goods. 1he
classilicaLion is aligned Lo Lhe Harmonized SysLem ol NomenclaLure {HSN).
1he raLes ol BCD vary across goods and Lhey range lrom 07 Lo 107, excepL lor
cerLain specilied iLems which aLLracL higher raLes.
1he ADC is levied in lieu ol Lhe excise duLy LhaL applies Lo similar goods
manulacLured in lndia. lL is generally 10.37 {including Lhe educaLion cess).
1he SAD is levied in lieu ol cenLral sales Lax or VA1 payable on Lhe sale ol
similar goods aL ^7. ln addiLion, educaLion levies {Laxes) aL 37 are also
charged on Lhe aggregaLe cusLoms duLy.
1hus, Lhe ellecLive cusLoms duLy raLe lor imporLed goods LhaL are sub|ecL Lo
BCD aL 107 LoLals 26.857. FurLher, cerLain exempLions or concessions are
provided on Lhe basis ol classilicaLion, locaLion or usage ol Lhe imporLed
producLs. ln addiLion, Lhe CovernmenL ol lndia has enLered inLo a number ol
lree Lrade agreemenLs wiLh Lrade parLners such as 1hailand, Sri Lanka, Lhe
SouLh Asian AssociaLion lor Regional CooperaLion {SAARC) counLries and
Singapore. 1o promoLe Lradein Lerms, prelerenLial Larill raLes have been
exLended lor cerLain idenLilied goods Lraded wiLh Lhese counLries. Similar Lrade
agreemenLs wiLh Lhe AssociaLion ol SouLh LasL Asian NaLions {ASLAN),
Mercosur and Luropean Union counLries are also pro|ecLed.
Sub|ecL Lo condiLions, an imporLer using imporLed goods in Lhe manulacLure ol
goods may obLain a crediL lor ADC and SAD, whereas a service provider using
imporLed goods may obLain a crediL exclusively lor ADC.
Notable issues Ior the oil and gas sector
Several concessions or exempLions have been provided lor imporL ol goods lor
specilied conLracLs lor exploraLion, developmenL and producLion ol peLroleum
goods. FurLher, concessions or exempLions have been provided lor Lhe imporL
ol crude and oLher peLroleum producLs.
FurLher, imporL ol cerLain peLroleum producLs also aLLracLs oLher cusLoms
duLies, in addiLion Lo Lhe duLies discussed above, such as addiLional duLy on
imporL ol moLor spiriL and highspeed diesel, and naLional calamiLy conLingenL
duLy on imporL ol crude oil.
Excise duty
Lxcise duLy applies Lo Lhe manulacLure ol goods in lndia. MosL producLs aLLracL
a unilorm raLe ol excise duLy ol 107 and educaLion cesses aL a raLe ol 37.
Accordingly, Lhe ellecLive excise duLy raLe on mosL producLs is 10.37.
1he excise duLy is mosLly levied as a percenLage ol Lhe value ol goods sold.
However, lor cerLain goods, Lhe excise duLy is on Lhe basis ol Lhe maximum
reLail price, reduced by Lhe prescribed abaLemenL.
1he CLNVA1 crediL rules ol 200^ allow a manulacLurer Lo obLain and use Lhe
crediL ol excise duLy, addiLional duLy ol cusLoms, special addiLional duLy ol
cusLoms and service Lax paid on Lhe procuremenL ol goods and services Loward
paymenL ol excise duLy on Lhe manulacLured goods.
Notable issues Ior the oil and gas sector
No excise duLy is levied on domesLic producLion ol crude oil buL Lhe same
aLLracLs naLional calamiLy conLingenL duLy as well as oil cess. On cerLain
peLroleum producLs, excise duLy is levied boLh on Lhe basis ol value and
India
159
quanLiLy. CerLain peLroleum producLs also aLLracL oLher excise duLies such
as addiLional duLy {on moLor spiriL and highspeed diesel), special addiLional
excise duLy {on moLor spiriL).
CLNVA1 crediL is noL available in respecL ol excise duLy paid on moLor spiriL,
lighL diesel oil and highspeed diesel oil used in Lhe manulacLure ol goods.
5ervice tax
Service Lax is levied on cerLain idenLilied Laxable services provided in lndia aL
Lhe raLe ol 10.307 {inclusive ol a 37 educaLion levy). 1he liabiliLy Lo pay Lhe
service Lax is on Lhe service provider, excepL in Lhe case ol a goods LransporL
agency service or a sponsorship service, where Lhe liabiliLy Lo pay Lhe service
Lax resLs wiLh Lhe service recipienL.
Service Lax is applied on Lhe basis ol Lhe desLinaLion principle. 1hus, exporL ol
services is noL sub|ecL Lo Lax. On Lhe oLher hand, imporL ol services is Laxable
in lndia and Lhe liabiliLy Lo pay Lhe Lax is on Lhe recipienL ol Lhe service {under
Lhe reversecharge mechanism). Specilic rules have been promulgaLed Lo
deLermine Lhe condiLions under which a specilic service would qualily as an
exporL or an imporL.
Similar Lo Lhe manulacLure ol goods, Lhe CLNVA1 crediL rules allow a service
provider Lo obLain a crediL ol Lhe ADC and excise duLy paid on Lhe procuremenL
ol inpuLs/capiLal goods. FurLher, service Lax paid on Lhe inpuL services used
in rendering ouLpuL services is also available as crediL Loward paymenL ol
Lhe ouLpuL service Lax liabiliLy. However, crediL ol SAD is noL available Lo a
service provider.
Notable issues Ior the oil and gas sector
Service Lax is levied on services provided in relaLion Lo Lhe mining ol minerals,
oil and gas and also on Lhe survey and exploraLion ol minerals, oil and gas.
Previously, Lhe applicaLion ol service Lax exLended Lo Lhe lndian landmass,
LerriLorial waLers {up Lo 12 nauLical miles) and designaLed coordinaLes in
Lhe ConLinenLal Shell {CS) and Lxclusive Lconomic Zone {LLZ). FurLher, Lhere
was an amendmenL in Lhe law {wiLh ellecL lrom 7 July 2009) whereby Lhe
applicaLion ol service Lax has been exLended Lo insLallaLions, sLrucLures and
vessels in Lhe CS and LLZ ol lndia.
SubsequenLly, a new noLilicaLion {wiLh ellecL lrom 27 February 2010) has
been issued, superseding an earlier noLilicaLion, which sLipulaLes LhaL Lhe
service Lax provisions would exLend Lo:
Any service provided in Lhe CS and LLZ ol lndia lor all acLiviLies perLaining
Lo consLrucLion ol insLallaLions, sLrucLures and vessels lor Lhe purposes ol
prospecLing or exLracLion or producLion ol mineral oil and naLural gas and
supply Lhereol
Any service provided, or Lo be provided, by or Lo insLallaLions, sLrucLures
and vessels {and supply ol goods connecLed wiLh Lhe said acLiviLy) wiLhin
Lhe CS and LLZ ol lndia which have been consLrucLed lor Lhe purpose ol
prospecLing or exLracLion or producLion ol mineral oil and naLural gas and
supply Lhereol
VAT/Central sales tax 1C5T)
VA1 or CS1 is levied on Lhe sale ol goods. VA1 is levied on sale ol goods wiLhin
a sLaLe and CS1 is levied on a sale occasioning movemenL ol goods lrom one
sLaLe Lo anoLher.
VA1 is levied aL Lwo prime raLes ol ^7 and 12.57 {many sLaLes have now
increased Lhe VA1 raLes). However, cerLain essenLial iLems are exempL
lrom VA1. CS1 is levied eiLher aL Lhe raLe ol 27 {sub|ecL Lo Lhe provision ol
declaraLion lorms prescribed under Lhe CS1 AcL) or aL a raLe equivalenL Lo
Lhe local VA1 raLe.
India
10
A VA1 or CS1 regisLered dealer is eligible lor crediL lor Lhe VA1 paid on Lhe
procuremenL ol goods lrom wiLhin Lhe sLaLe and Lo uLilize iL Loward paymenL
ol Lhe VA1 and CS1 liabiliLy on sale ol goods made Lhe dealer, CS1 paid on
procuremenL ol goods lrom ouLside Lhe sLaLe is noL available as a crediL.
Notable issues Ior the oil and gas sector
1he peLroleum producLs peLrol, diesel, naphLha, aviaLion Lurbine luel, naLural
gas eLc. are sub|ecL Lo VA1 aL higher raLes, which range lrom ^7 Lo 337,
depending on Lhe naLure ol producL and Lhe sLaLe where Lhey are sold. VA1
crediL on peLroleum producLs is generally noL allowed as a crediL againsL ouLpuL
VA1 or CS1 liabiliLy, excepL in Lhe case ol Lhe resale ol such producLs. Since
crude oil has been declared under Lhe CS1 AcL as being goods ol "special
imporLance" in Lhe inLersLaLe Lrade or commerce, iL cannoL be sold aL a VA1/
CS1 raLe higher Lhan ^7.
Coods and services tax 1C5T)
1he currenL scheme ol indirecL Laxes is soughL Lo be replaced by CS1. CS1 is
expecLed Lo be inLroduced wiLh ellecL lrom April 2011 and shall include cenLral
Laxes such as service Lax, excise, CS1 as well as sLaLe Laxes such as VA1 and
enLry Lax/ocLroi.
CS1 would be a dual CS1, consisLing ol a cenLral CS1 and a sLaLe CS1. 1he Lax
would be levied concurrenLly by Lhe cenLer as well as Lhe sLaLes, i.e., boLh goods
and services would be sub|ecL Lo concurrenL LaxaLion by Lhe cenLer and Lhe
SLaLes. An assessee can claim crediL ol cenLral CS1 on inpuLs and inpuL services
and ollseL iL againsL ouLpuL cenLral CS1. Similarly, crediL ol sLaLe CS1 can be seL
oll againsL ouLpuL sLaLe CS1. However, specilic deLails regarding Lhe
implemenLaLion ol CS1 are sLill awaiLed.
CurrenLly, clariLy is required regarding Lhe inclusion ol Lhe peLroleum secLor
under Lhe CS1 since Lhere are varied views wiLhin Lhe CovernmenL on Lhe same.
!ndcnesia
Country code 2
Jakarta CMT +7
Ernst & Ycunc
!ndcnesia Stcck Exchance BuiIdinc
Tcwer 1, 14th FIccr JI. Jend.
Sudirman Kav. 52-53 Jakarta
12190
!ndcnesia
TeI 21 529 5000
Fax 21 529 5200
DiI and cas ccntacts
Peter Nc
TeI 21 529 522
peter.ncid.ey.ccm
Ben KcesmceIjana
TeI 21 529 5030
ben.kcesmceIjanaid.ey.ccm
A. At a glance
1he liscal regime applicable Lo oil and gas companies consisLs ol PSCs which
are enLered inLo beLween conLracLors and BP Migas, Lhe lndonesian execuLive
body lor oil and gas upsLream acLiviLies {previously PerLamina on behall ol
Lhe CovernmenL).
CorporaLe income Lax 1ax raLe depends on generaLion ol conLracL
enLered inLo; currenL raLe is 257
Branch proliLs Lax CurrenL raLe is 207
RoyalLies on producLion None
Bonuses AmounL varies depending on PSC Lerms
Resource renL Lax None
India Indonesia
11
Surlace renL Lax None
WiLhholding Lax:
Dividends Depends on Lhe generaLion ol conLracL
Branch remiLLance Depends on Lhe generaLion ol conLracL
OLher wiLhholding Lax Follows general Lax law
CapiLal allowances Decliningbalance depreciaLion
lncenLives L
102
Legal regime
1he exisLing conLracLual arrangemenLs beLween Lhe loreign oil and gas
conLracLors and BP Migas are mainly in Lhe lorm ol a PSC. 1he oLher Lypes
ol agreemenL beLween Lhe conLracLors and BP Migas are |oinL operaLing
conLracL {JOC), Lechnical assisLance agreemenL {1AA) and enhanced
oil recovery {LOR).
ArLicle 33 ol Lhe 19^5 lndonesian ConsLiLuLion is Lhe lundamenLal philosophy
underlying Lhe oil and gas indusLry in lndonesia. lL sLipulaLes LhaL "all Lhe
naLural wealLh on land and in Lhe waLer is under Lhe |urisdicLion ol Lhe sLaLe and
should be used lor Lhe greaLesL beneliL and wellare ol Lhe people." 1he
CovernmenLesLablished law ol PerLamina, Law No. 8 ol 1971, is based on Lhis
lundamenLal philosophy. ln accordance wiLh ArLicle 12 ol Law No. 8 ol 1971,
Lhe auLhoriLy Lo adminisLer, conLrol Lhe work and carry ouL Lhe mining operaLion
in Lhe lield ol oil, naLural gas and geoLhermal vesLed wiLh PerLamina. PerLamina
is auLhorized Lo cooperaLe wiLh oLher parLies in Lhe lorm ol a PSC in carrying
ouL iLs regulaLory duLies and luncLions.
WiLh Lhe inLroducLion ol Oil and Cas Law, Law No. 22 ol 2001, Law No. 8 ol
1971 is revoked. Unlike Law No. 8 ol 1971, Law 22 ol 2001 dillerenLiaLes
beLween upsLream {exploraLion and exploiLaLion) and downsLream {relining,
LransporL, sLorage and Lrading) acLiviLies. 1he upsLream and downsLream
acLiviLies have Lo be underLaken by separaLe legal enLiLies. Law No. 22 ol 2001
provides Lhe auLhoriLies lor Lhe CovernmenL Lo esLablish BP Migas, an execuLive
agency lor upsLream acLiviLies and BPH Migas, a regulaLory agency lor
downsLream acLiviLies Lo assume PerLamina's regulaLory luncLions.
OLher changes based on Law No. 22 ol 2001 is Lhe conLracLual parLy LhaL
will represenL Lhe lndonesian CovernmenL, {i.e., BP Migas or BPH Mlgas)
as opposed Lo PerLamina {Persero). PerLamina will no longer have Lhe same
luncLion as in Lhe pasL and iL is Lranslormed lrom a sLaLeowned enLerprise
governed by Law No. 8 ol 1971 inLo a sLaLeowned limiLed liabiliLy company,
P1 PerLamina {Persero). P1 PerLamina is now similar Lo oLher oil and gas
companies in lndonesia. However, P1 PerLamina has Lhe auLhoriLy Lo supply
lor domesLic consumpLion. 1he previous conLracLual agreemenLs enLered wiLh
Lhe lndonesian CovernmenL have also changed and are now sLrucLured as a
cooperaLion conLracL. 1he conLracLor may now enLer inLo cooperaLion or
service agreemenLs which are similar Lo Lhe previous PSC Lerms and condiLions.
B. Fiscal regime
Corporate and general tax rules
By regulaLion, each inLeresL holder, including Lhe operaLor ol Lhe work area, has
Lo regisLer wiLh Lhe lndonesian Lax ollice lrom Lhe momenL iL obLains an inLeresL
in Lhe work area.
1he income Lax raLes, consisLing ol Lhe corporaLe income Lax {Cl1) and Lhe
dividend Lax or branch proliL Lax {BP1) lor branch operaLions, vary depending
on Lhe year Lhe conLracL was enLered inLo.
1he conLracLor's Laxable income is broadly calculaLed as gross income less Lax
deducLions. 1he calculaLion embraces Lhe "unilormiLy concepL" as Lhe basis
lor deLermining which cosLs are recoverable and which are Lax deducLible.
1he general Lax law only applies when no special provisions are provided in

102 |: ao|||tv to carrv forwarc |osses.
Indonesia
12
Lhe agreemenL. Under Lhis concepL, very broadly, cosLs LhaL are recoverable are
Lax deducLible excepL lor bonuses paid Lo BP Migas, which are noL recoverable
buL are Lax deducLible.
Ping Iencing
1he CovernmenL applies Lhe Lax ringlencing rule, meaning LhaL cosLs incurred
by Lhe conLracLor in one working inLeresL are noL allowed Lo be ollseL againsL
income ol anoLher working area. As a resulL, an enLiLy is likely Lo hold working
inLeresL in only one conLracL area.
1here are no Lax consolidaLions or oLher group reliel laciliLies available
in lndonesia.
Ceneral terms oI a P5C
1he general concepL ol Lhe PSC is LhaL conLracLors bear all risks and cosLs ol
exploraLion unLil producLion. ll producLion does noL proceed, Lhese cosLs are
noL recoverable. ll producLion does proceed, Lhe conLracLor can receive
Lhe lollowing:
a. A share ol producLion Lo meeL iL recoverable cosLs
b. lnvesLmenL crediL {please reler below)
c. An equiLy inLeresL ol Lhe remaining producLion {also called "equiLy oil")
Cenerally, Lhe lollowing poinLs are included as parL ol Lhe PSC agreemenL:
a. ManagemenL responsibiliLy resLs wiLh BP Migas
b. 1he conLracLor pays a bonus aL Lhe Lime Lhe conLracL is signed, which is
noL cosL recoverable lrom luLure producLion buL is Lax deducLible
c. 1he conLracLor agrees Lo a work program wiLh minimum exploraLion
expendiLures lor a 3 Lo 10year period
d. LxploraLion expenses are only recoverable lrom commercial producLion
e. 1he conLracLor is reimbursed Lhe recoverable cosL in Lhe lorm ol crude oil
called "cosL oil"
l. 1he conLracLor's proliL share oil is called "equiLy oil" and is Laken in Lhe lorm
ol crude oil
g. 1he conLracLor has Lo separaLely seLLle iLs LaxaLion obligaLions on
a monLhly basis
Pelinquishment
Lach PSC also sLipulaLes Lhe requiremenLs lor parL ol Lhe working area Lo be
relinquished during Lhe exploraLion period. 1he PSCs can vary in Lhe Liming and
percenLage Lo be relinquished. Broadly, 157257 ol Lhe conLracL is Lypically
relinquished alLer Lhree years and 307357 by Lhe end ol live years.
Calculation oI equity oil/sharing oI production
1he lollowing simplilied example may serve Lo illusLraLe Lhe amounL ol equiLy
oil Lo be shared. Broadly, iL is crude oil producLion in excess ol Lhe amounLs
received lor lirsL Lranche producLion {F1P), cosL recovery and invesLmenL
crediL ad|usLed wiLh Lhe conLracLor obligaLion Lo supply domesLic markeL
obligaLion {DMO). 1hese Lerms are lurLher explained below.
FTP
Usually, F1P equal Lo 207 ol Lhe producLion each year {belore any deducLion
ol cosL recovery) is spliL beLween Lhe CovernmenL and Lhe conLracLor according
Lo Lheir equiLy oil share as sLipulaLed in Lhe agreemenL wiLh Lhe lndonesian
CovernmenL.
F1P is considered as equiLy oil and is Laxable.
DMC
Broadly, a conLracLor, alLer commencemenL ol commercial producLion lrom
Lhe conLracL area, is required Lo supply a specilic porLion ol Lhe crude oil Lo
Lhe domesLic markeL in lndonesia lrom iLs equiLy share. DMO can also apply
Lo gas producLion.
Indonesia
13
DMO is negoLiaLed lor each agreemenL and usually ranges lrom 157 Lo 257.
However, Lhe quanLiLy ol DMO LhaL is required Lo be supplied under Lhe PSC
will be limiLed by Lhe quanLiLy ol equiLy oil or gas Lo which Lhey are enLiLled.
Any dillerence beLween Lhe maximum DMO Lo be supplied and Lhe DMO Lo
be supplied based on Lhe equiLy share usually will noL be carried lorward Lo
subsequenL years.
1he compensaLion Lo be received lor DMO by Lhe conLracLor is governed by
Lhe agreemenL signed wiLh Lhe lndonesian CovernmenL. Usually, Lhe conLracLor
is compensaLed by BP Migas lor DMO aL Lhe prevailing markeL price lor Lhe
iniLial live years ol commercial producLion. Following LhaL, aL USS0.20 per
barrel or 107 Lo 257 ol Lhe exporL price, depending on Lhe Lerms and
condiLions ol each agreemenL.
Cost recovery
CosL recovery is usually sLipulaLed in LxhibiL C ol Lhe agreemenL wiLh Lhe
lndonesian CovernmenL and is Lhe reimbursemenL ol PSC cosL {Lhrough
cosL oil) prior Lo Lhe deLerminaLion ol Lhe proliL oil. Recoverable cosLs are
generally delined as:
1. CurrenLyear noncapiLal cosLs, which would include inLangible cosLs ol
drilling exploraLory and developmenL works, mainLenance cosLs, operaLor
overhead cosLs and head ollice overhead
2. CurrenLyear depreciaLion changes
3. Priorperiod unrecovered operaLing cosLs
^. Bonus paymenLs
5. lnvenLory cosLs
PrePSC cosLs which are incurred prior Lo Lhe signing ol Lhe agreemenL wiLh Lhe
lndonesian CovernmenL may noL be claimed lor cosL recovery and lor Lax
purposes. However, seismic or daLa cosLs acquired prior Lo signing Lhe conLracL
may be cosL recoverable.
Capital allowance
1he depreciaLion and amorLizaLion ol asseLs are usually sLipulaLed in LxhibiL C
ol Lhe agreemenL wiLh Lhe lndonesian CovernmenL.
All equipmenL purchases by Lhe conLracLors become properLy ol BP Migas once
Lhe equipmenL is in lndonesia. 1he conLracLors have Lhe righLs Lo use and
depreciaLe such properLy unLil iL is abandoned or lor Lhe lile ol Lhe work area
and is sub|ecL Lo approval by BP Migas.
DepreciaLion will be calculaLed aL Lhe beginning ol Lhe calendar year in which
Lhe asseL is placed inLo service, wiLh a lull year's depreciaLion allowed lor Lhe
iniLial calendar year. 1he meLhod used Lo calculaLe each year's allowable
recovery ol capiLal cosLs is Lhe decliningbalance depreciaLion meLhod.
CalculaLion ol each year's allowance recovery ol capiLal cosLs should be based
on Lhe individual asseL's capiLal cosL aL Lhe beginning ol year mulLiplied by Lhe
depreciaLion lacLor as lollows:
Croup 1 507
Croup 2 257
Croup 3 107
Balance ol unrecovered capiLal cosLs is eligible lor lull depreciaLion aL Lhe end
ol Lhe individual asseL's uselul lile.
C. Incentives
1here are several incenLives available Lo Lhe oil and gas companies, e.g.,
invesLmenL crediL, indeliniLe carrylorward ol prior year unrecovered cosLs,
inLeresL recovery and exempLion lrom imporLaLion Lax and duLies on cerLain
equipmenL and asseLs. 1his will depend on Lhe agreemenL wiLh Lhe
lndonesian CovernmenL.
Indonesia
14
Investment credit
Usually, Lhe conLracLor will be permiLLed an invesLmenL crediL ol 8.87 neL alLer
Lax on Lhe capiLal invesLmenL cosL direcLly required lor developing producLion
laciliLies ouL ol new oil lields.
1his invesLmenL crediL is allowed lor capiLal invesLmenL on producLion laciliLies,
including pipeline and Lerminal laciliLies, and Lhe invesLmenL crediL musL be
claimed in Lhe lirsL or second producLion year alLer Lhe expendiLure has been
incurred. 1he invesLmenL crediL is LreaLed as Laxable income as iL is enLiLlemenL
Lo addiLional conLracLor lilLing.
1he invesLmenL crediL rules LhaL apply can depend on Lhe year Lhe agreemenL
was signed and also Lhe Lypes ol lields.
Oillields enLiLled Lo Lhe incenLive musL meeL Lhe lollowing criLeria:
a. LocaLed in Lhe producLion working area
b. LsLimaLed raLe ol reLurn ol less Lhan 157 based on Lhe Lerms and condiLions
in Lhe conLracL and oLher prevailing inLensive package regulaLions
Interest recovery
1he inLeresL on loans does noL normally lorm parL ol Lhe cosL recovery,
irrespecLive ol wheLher Lhe loans are inLernal or Lhird parLy, unless specilically
approved by BP Migas. 1his is noL olLen approved by BP Migas and Lhere are
cerLain condiLions LhaL musL be saLislied lor Lhe recovery ol inLeresL on loans.
1he claim lor inLeresL recovery musL be included in Lhe linancing plan and
amounL musL be included in each year's budgeL lor Lhe approval ol BP Migas.
1he inLeresL raLe should noL exceed Lhe prevailing commercial raLes. Sub|ecL Lo
Lax LreaLy reliel, Lhe inLeresL is sub|ecL Lo wiLhholding Lax ol 207 ol Lhe gross
amounL il iL is provided by a nonlndonesian lender. 1he conLracLors can gross
up Lhe inLeresL amounL Lo rellecL Lhe wiLhholding Lax amounL.
Loss carryIorward and unrecovered cost
1he conLracLors are allowed Lo carry lorward lor Lax purposes Lhe
preproducLion expenses Lo ollseL againsL producLion revenues. However,
Lhese capiLal and noncapiLal cosLs incurred during Lhe preproducLion sLage
are noL expensed and, accordingly, no Lax loss originaLes lrom Lhese cosLs.
1he preproducLion cosLs may be carried lorward indeliniLely Lo luLure years.
1he Lax loss carrylorward limiLaLion ouLlined in Lhe Lax laws is noL applicable
Lo Lhe preproducLion cosLs.
D. Withholding tax
1he raLe ol dividend wiLhholding Lax and branch proliLs Lax depends on Lhe year
LhaL Lhe PSC was enLered inLo.
WiLhholding Lax on all oLher amounLs lollows Lhe general Lax law. For example:
lnLeresL 15/20
103
RoyalLies lrom paLenLs, knowhow eLc. 15/20
104
Fees lor services paid Lo residenLs:
1echnical, managemenL and consulLanL services 2
105
ConsLrucLion conLracLing services 2/3/^
10
103 / f|na| w|tnno|c|nc tax of 20x |s |mosec on avment to nonres|cents. 1ax treat|es
mav recuce tne tax rate. / 15x w|tnno|c|nc tax |s |mosec on |nterest a|c ov
nonf|nanc|a| |nst|tut|ons to res|cents.
104 / f|na| w|tnno|c|nc tax of 20x |s |mosec on avment to nonres|cents. 1ax treat|es
mav recuce tne tax rate.
105 1n|s tax |s cons|cerec a reavment of |ncome tax. |t |s |mosec on tne cross
amount a|c to res|cents. /n |ncrease of 100x of tne norma| w|tnno|c|nc tax rate
|s |mosec on taxavers suo|ect to tn|s w|tnno|c|nc tax tnat co not ossess a tax
|cent|f|cat|on numoer.
10 / f|na| tax. 1ne a||cao|e tax rate ceencs on tne tve of serv|ces rov|cec anc tne
cua||f|cat|on of tne construct|on comanv.
Indonesia
15
ConsLrucLion planning and supervision ^/6
107
OLher services 2
Fees lor services paid Lo nonresidenLs 20
108
E. Financing considerations
Reler Lo Lhe secLion on inLeresL recovery above.
F. Indirect taxes
Cenerally, PSCs are VA1 collecLors and are required Lo collecL Lhe VA1 and remiL
iL Lo Lhe lndonesian CovernmenL on a monLhly basis.
Cenerally, lor PSCs LhaL are signed under pre Law No.22/2001, Lhe imporL
duLy, VA1 on imporLaLion and imporL wiLhholding Lax on imporLaLion ol capiLal
goods and equipmenL are exempL by Lhe lndonesian CovernmenL Lhrough Lhe
use ol a "masLerlisL" arrangemenL.
For PSCs LhaL are signed under Law No.22/2001, Lhe imporL duLy is exempL,
and VA1 on imporLaLion is borne by Lhe lndonesian CovernmenL relaLing Lo
imporL ol capiLal goods and equipmenL used in exploraLion acLiviLies Lhrough
Lhe use ol a "masLerlisL" arrangemenL. 1he imporL wiLhholding Lax may also be
exempL buL iL will require separaLe approval lrom Lhe lndonesian Lax ollice.
C. Cther
Disposal oI P5C interest
Cenerally, under Lhe Lerms ol mosL agreemenLs, Lhe conLracLor has Lhe righL Lo
Lransler Lhe inLeresL under Lhe conLracL Lo a relaLed parLy or oLher parLies wiLh
eiLher wriLLen noLilicaLion or prior wriLLen consenL ol BP Migas.
1he income Lax laws provide LhaL Lhe Lransler ol asseLs is sub|ecL Lo income
Lax. 1he lndonesian CovernmenL is sLill preparing and linalizing regulaLions
on Lhe Lax LreaLmenL ol such capiLal gains and Lhe regulaLions are expecLed
Lo be issued in 2010. AL Lhe daLe ol publicaLion, Lhe regulaLions have noL
been released.
!raq
Country code 94
Bachdad CMT +3
Mail address:
Ernst & Ycunc
P.D. Bcx 004
Bachdad
!raq
TeI 1 543 0357
Fax 1 543 959
SLreeL address:
Ernst & Ycunc
AI-Mansccr/AI-Ameerat St.
BIcck 09, Street 3, Hcuse 23
Bachdad
!raq
107 1ne a||cao|e tax rate ceencs on tne tve of serv|ces rov|cec anc tne cua||f|cat|on
of tne construct|on comanv.
108 1n|s |s a f|na| tax on cross amounts a|c to nonres|cents. 1ne w|tnno|c|nc tax rate on
certa|n tves of |ncome mav oe recucec uncer couo|e tax treat|es.
Indonesia Iraq
1
DiI and cas ccntacts
Mustafa Abbas
TeI 1 543 0357
mustafa.abbasiq.ey.ccm
AbduIkarim Maraqa
TeI 750 79 4444
abduIkarim.maraqaiq.ey.ccm
Bishr Baker
J]ka\]flafBgj\Yf!
TeI +92 554 1993
bishr.bakerjc.ey.ccm
AIi Samara
J]ka\]flafBgj\Yf!
TeI +92 552111
TeI +92 554 1993
aIi.samarajc.ey.ccm
A. At a glance
CorporaLe income Lax raLe 157
CorporaLe income Lax raLe
ol oil and gas co. 357
CapiLal gains Lax raLe 157
Branch Lax raLe 157
WiLhholding Lax
Dividends 07
lnLeresL 157{a)
RoyalLies 157{a)
Branch remiLLance Lax 07
NeL operaLing losses {years)
Carryback 0
Carrylorward 5{b)
{a) 1his wiLhholding Lax is imposed on paymenLs Lo nonresidenLs.
{b) See SecLion C.
{c) 1he lraqi ParliamenL raLilied a new Lax law lor loreign oil and gas
companies. 1he income Lax raLe applicable on income earned in lraq on
conLracLs underLaken by loreign oil and gas companies and on conLracLors
working on oil and gas pro|ecLs will be 357. Companies, branches or ollices
and subconLracLors working in Lhe oil and gas secLor are all sub|ecL Lo Lhe
new law. 1he new law was enlorced on 15 June
B. Taxes on corporate income and gains
Corporate income tax
ln general, income Lax is imposed on corporaLe enLiLies and loreign branches
wiLh respecL Lo Laxable proliL lrom all sources arising or deemed Lo arise in lraq.
lncome is deemed Lo arise in lraq il eiLher ol Lhe lollowing is locaLed Lhere:
1he place ol perlormance ol work
1he place ol delivery ol work
1he place ol signing Lhe conLracL
1he place ol paymenL
Tax rate
1he corporaLe income Lax raLe is {nonoil and gas co.) 157.
1he corporaLe income Lax raLe is {oil and gas co.) 357.
Capital gain
CapiLal gain derived lrom Lhe sale ol lixed asseLs is Laxable aL Lhe normal
corporaLe income Lax raLe. CapiLal gains derived lrom Lhe sale ol shares and
bonds noL in Lhe course ol a Lrading acLiviLy are exempL lrom Lax. CapiLal gains
derived lrom Lhe sale ol shares and bonds in Lhe course ol a Lrading acLiviLy are
Laxable aL Lhe normal corporaLe income Lax raLe.
Iraq
17
Administration
1ax reLurns lor all corporaLe enLiLies musL be liled in Arabic wiLhin live monLhs
alLer Lhe end ol Lhe liscal year, LogeLher wiLh paymenL ol Lhe LoLal amounL
ol Laxes due according Lo Lhe linal Lax declaraLion. ll Lhe Lax reLurn is noL
submiLLed wiLhin Lhe sLaLuLory Lime limiL {21 days lrom Lhe due daLe specilied
by Lhe Lax auLhoriLies), delay lines ol 57 are imposed lor Lhe lirsL 21day
period. PenalLies are doubled alLer Lhe 21day period. 1he LoLal amounL ol Lhe
penalLy may noL exceed lOD500,000.
ln addiLion Lo Lhe penalLies above, loreign branches are sub|ecL Lo a penalLy
ol lOD10,000 il Lhey do noL submiL linancial sLaLemenLs by Lhe due daLe lor
Lhe Lax reLurn.
A Laxpayer may be sub|ecL Lo imprisonmenL lor a period ranging lrom Lhree
monLhs Lo Lwo years il convicLed ol lraud Lo evade Lhe paymenL ol income Lax.
Dividends
ln general, dividends received are exempL lrom Lax.
Interest
lnLeresL is sub|ecL Lo income Lax aL Lhe normal raLe.
Foreign tax relieI
A loreign Lax crediL is available Lo lraqi companies on income Laxes paid abroad.
ln general, Lhe loreign Lax crediL is limiLed Lo Lhe amounL ol an lraqi company's
income Lax on Lhe loreign income calculaLed on a counLrybycounLry basis.
Any excess loreign Lax crediLs may be carried lorward lor live years.
C. Determination oI trading income
Ceneral
All income earned in lraq lrom Lrading or oLher sources is Laxable in lraq, excepL
lor income exempLed by Lhe income Lax law, Lhe indusLrial invesLmenL law or
Lhe invesLmenL law.
All business expenses incurred Lo generaLe income are allowable, wiLh
limiLaLions on cerLain iLems, such as enLerLainmenL and donaLions. However,
provisions and reserves are noL deducLible lor Lax purposes.
Tax depreciation
1he lraqi DepreciaLion CommiLLee seLs Lhe maximum depreciaLion raLes lor
various Lypes ol lixed asseLs. ll Lhe raLes used lor accounLing purposes are
greaLer Lhan Lhe prescribed raLes, Lhe excess is disallowed. A Lax regulaLion
provides sLraighLline depreciaLion raLes lor Lhe linancial secLor {banks and
insurance companies) and oLher secLors. 1he lollowing are Lhe depreciaLion
raLes seL by Lhe lraqi DepreciaLion CommiLLee.
Asset Financial sector 17) Cther sectors 17)
Buildings 2 Lo 5 2 Lo 5
Ollice equipmenL 20 15 Lo 25
MoLor vehicles 20 15
PlanL and machinery 20 15
OLher asseLs 20 20
Used asseLs are depreciaLed aL sLaLuLory raLes esLablished by Lhe Lax
auLhoriLies, calculaLed on Lhe purchase price.
Depreciation on oil and gas companies
ProducLion uniL pure buLane 6.57
Drying planL and cooling gas 57
LlecLrical sysLem Lechnology 57
Iraq
18 Iraq
High pressure vessels 87
Machinery and equipmenL 207
Air compressors, elecLric 87
Crane and roller 7.57
Liquid gas Lanks ^7
Bulldozers and shovels 207
Machinery, precision equipmenL 107
PelieI Ior losses
1axpayers may carry lorward unabsorbed losses lor live years Lo ollseL proliLs
in such years. However, Lhe amounL ol losses carried lorward LhaL may be
deducLed each year is limiLed Lo 507 ol Laxable income. Losses may noL be
carried back. Losses incurred ouLside lraq cannoL be ollseL againsL Laxable
proliL in lraq.
Croups oI companies
lraqi law does noL conLain any provisions lor liling consolidaLed reLurns or lor
relieving losses wiLhin a group ol companies.
D. Cther signiIicant taxes
1he lollowing Lable summarizes oLher signilicanL Laxes.
Nature oI tax Pate 17)
SLamp lees; imposed on Lhe LoLal conLracL value 0.2
ProperLy Lax; imposed on Lhe annual renL
From buildings 9
From buildings 2
Social securiLy conLribuLions; imposed on salaries and
beneliLs ol local and expaLriaLe employees; a porLion ol
employee allowances up Lo an amounL equaling 307 ol Lhe
base salary is noL sub|ecL Lo social securiLy conLribuLions
Lmployer 12
Lmployee 5
Social securiLy {oil and gas co.)
Lmployer 25
Lmployee 5
E. Miscellaneous matters
Foreign exchange controls
1he currency in lraq is Lhe lraqi dinar {lOD). lraq does noL impose any loreign
exchange conLrols.
Debttoequity rules
1he only resLricLions on debLLoequiLy raLios are Lhose sLaLed in Lhe arLicles
and memoranda ol corporaLions.
F. Tax treaties
lraq has enLered inLo double Lax LreaLies wiLh LgypL, Jordan, Libya, Somalia,
Sudan, Syria, 1unisia and Yemen.
19 Ireland
!reIand
Country code 353
DubIin CMT
Ernst & Ycunc
Ernst & Ycunc BuiIdinc
Harccurt Centre
Harccurt Street
DubIin 2
RepubIic cf !reIand
TeI 1 4750 555
Fax 1 4750 599
DiI and cas ccntacts
Kevin McLcuchIin
TeI 1 2212 47
kevin.mcIcuchIinie.ey.ccm
AIan Carey
TeI 1 2212 9
aIan.careyie.ey.ccm
A. At a glance
Fiscal regime
lreland's liscal regime LhaL applies Lo Lhe peLroleum indusLry consisLs ol a
combinaLion ol corporaLion Lax and a proliL resource renL Lax {PRR1)
based on lield proliLabiliLy.
RoyalLies None
Bonuses None
PSC NoL applicable
lncome Lax raLe CorporaLion Lax raLe 257
Resource renL Lax PRR1 raLe beLween 57 and 157, depending on lield
proliLabiliLy relaLive Lo capiLal invesLmenL
109
CapiLal allowances D, L
110
lnvesLmenL incenLives L, RD
111
B. Fiscal regime
lreland's liscal regime LhaL applies Lo Lhe peLroleum indusLry consisLs ol a
combinaLion ol a corporaLion Lax and a PRR1.
Corporation tax
lrish residenL companies are sub|ecL Lo corporaLion Lax on Lheir worldwide
proliLs {i.e., income and gains). lncome lrom an lrish Lrade is sub|ecL Lo
corporaLion Lax aL a raLe ol 12.57; however, cerLain "excepLed Lrades" are
sub|ecL Lo corporaLion Lax aL a raLe ol 257. 1he deliniLion ol excepLed Lrades
includes dealing in land, working minerals and peLroleum acLiviLies.
NonresidenL companies are also sub|ecL Lo lrish corporaLion Lax il Lhey carry
on a Lrade in lreland Lhrough a branch or agency. ProliLs or gains arising lor
a nonresidenL person lrom exploraLion or exploiLaLion acLiviLies carried on in
lreland or in a "designaLed area," or lrom exploraLion or exploiLaLion righLs,
are regarded lor Lax purposes as proliLs or gains ol a Lrade carried on by LhaL
person in lreland Lhrough a branch or agency. A designaLed area is an area
designaLed by order under Lhe ConLinenLal Shell AcL 1968. Accordingly,
income arising lor a nonresidenL company lrom peLroleum acLiviLies is
regarded as arising lrom an excepLed Lrade and is sub|ecL Lo corporaLion
Lax aL a raLe ol 257.
109 PPP1 |s not cecuct|o|e for cororat|on tax uroses.
110 0: acce|eratec cerec|at|on, f: |mmec|ate wr|teoff for ex|orat|on costs.
111 |: |osses can oe carr|ec forwarc |ncef|n|te|v, P0: P80 |ncent|ve.
170 Ireland
Chargeable gains accruing lrom Lhe disposal ol "peLroleumrelaLed asseLs" are
sub|ecL Lo Lax aL a raLe ol 257. PeLroleumrelaLed asseLs include any peLroleum
righLs, any asseLs represenLing exploraLion expendiLures or developmenL
expendiLures and shares deriving Lheir value or Lhe greaLer parL ol Lheir value,
wheLher direcLly or indirecLly, lrom peLroleum acLiviLies, oLher Lhan shares
quoLed on a sLock exchange.
CorporaLion Lax is charged on Laxable income. 1his is deLermined by sLarLing
wiLh income according Lo accounLing principles and Lhen ad|usLing iL lor cerLain
addbacks and deducLions required under Lax legislaLion. Lxpenses are
generally allowed il Lhey are incurred "wholly and exclusively" lor Lhe purposes
ol Lhe Lrade buL cerLain expenses are noL permiLLed under Lhe legislaLion, such
as capiLal expendiLure.
DeducLions lor expendiLure ol a capiLal naLure may be available under Lhe
capiLal allowances regime. For Lhe peLroleum indusLry, Lhis is in Lhe lorm
ol a 1007 deducLion lor boLh exploraLion expendiLures and developmenL
expendiLures LhaL become available when peLroleum exLracLion acLiviLies
commence {in Lhe case ol peLroleum exploraLion expendiLures) and when
producLion in commercial quanLiLies commences {in Lhe case ol developmenL
expendiLures). ln addiLion Lo allowing lull wriLeolls againsL peLroleum proliLs
lor exploraLion and developmenL expendiLures, a provision allows lor a
deducLion lor expendiLures LhaL companies may incur in wiLhdrawing lrom
or shuLLing down an oil or gas lield {see lurLher discussion on exploraLion,
developmenL and abandonmenL expendiLures below).
Ping Iencing
PeLroleum acLiviLies are ring lenced lor Lax purposes so LhaL losses lrom
peLroleum acLiviLies may noL be seL oll againsL proliLs lrom oLher acLiviLies.
Similarly, Lhere are resLricLions on Lhe group reliel ol peLroleum losses and
charges on income incurred in peLroleum acLiviLies. 1he ring lencing also
prevenLs losses lrom oLher secLors ol Lhe economy being applied againsL
peLroleum proliLs. 1his Lwoway ring lence recognizes Lhe unique poLenLial
ol Lhe peLroleum exploraLion and producLion indusLry lor excepLionally large
cosLs and losses and also lor excepLionally large proliLs.
ProliLs lrom oil and gas acLiviLies underLaken by an lrish residenL company in a
loreign counLry are sub|ecL Lo Lax in lreland.
PPPT
lrish Lax legislaLion conLains provisions lor a PRR1 LhaL applies Lo peLroleum
acLiviLies. Under Lhese provisions, companies carrying on lrish peLroleum
acLiviLies will be sub|ecL Lo an addiLional charge Lo Lax depending on Lhe
proliLabiliLy ol Lhe lields allecLed.
1he PRR1 raLe varies lrom 57 Lo 157, depending on Lhe proliLabiliLy ol Lhe
lield, measured by relerence Lo Lhe capiLal invesLmenL required lor LhaL lield.
PRR1 is noL deducLible lor corporaLe Lax purposes.
PRR1 only applies Lo exploraLion licenses, reserved area licenses and licensing
opLions awarded on or alLer 1 January 2007. PRR1 operaLes on a graded basis
by relerence Lo proliLabiliLy and, in parLicular, by relerence Lo Lhe proliL raLio
achieved on Lhe specilic lield lor which a license has been granLed. 1he proliL
raLio is delined as Lhe cumulaLive alLerLax proliLs on Lhe specilic lield divided
by Lhe cumulaLive level ol capiLal invesLmenLs on Lhe specilic lield.
Lach lield lor which a license is granLed on or alLer 1 January 2007 is LreaLed
as a separaLe Lrade lor Lhe purposes ol Lhe new Lax and is ellecLively ring
lenced, wiLh Lhe resulL LhaL a company would noL be enLiLled Lo ollseL losses
lrom any oLher acLiviLies againsL Lhe proliLs ol a Laxable lield lor Lhe purposes
ol calculaLing Lhe PRR1. lL is possible lor capiLal expendiLures incurred by one
company Lo be deemed Lo have been incurred by anoLher group company lor
Lhe purposes ol calculaLing Lhe level ol capiLal invesLmenLs used in deLermining
Lhe proliL raLio.
171 Ireland
PRR1 is calculaLed as lollows:
ProliL raLio 1.5 >1.5 buL 3.0 >3.0 buL ^.5 >^.5
AddiLional Lax 07 57 107 157
PRR1 applies Lo Laxable lield proliLs, which are delined as Lhe amounL ol Lhe
peLroleum proliLs ol Lhe Laxable lield lor Lhe accounLing period alLer making
all deducLions lor, and giving or allowing all reliels lor, corporaLe Lax purposes.
1he one excepLion is il, in a parLicular accounLing period, Lhe proliL raLio lor a
specilic lield is in excess ol 1.5 and was less Lhan 1.5 in Lhe immediaLely
preceding accounLing period in respecL ol LhaL lield. ln such a siLuaLion,
Lhe proliLs Lo which Lhe PRR1 applies are calculaLed by relerence Lo Lhe
lollowing lormula:
(A 1B x 1.5)) x 100/1100 R)
ln Lhis lormula, A is Lhe cumulaLive lield proliLs on Lhe lield lrom 1 January
2007, B is Lhe cumulaLive lield expendiLure on Lhe lield lrom 1 January 2007
and R is Lhe general raLe ol Lax lor lrish peLroleum acLiviLies {currenLly 257).
1he purpose ol Lhis lormula is Lo reduce Lhe quanLum ol proliLs Lo which Lhe
PRR1 applies in Lhe period immediaLely lollowing a period lor which Lhe PRR1
did noL apply as a resulL ol Lhe proliL raLio being less Lhan 1.5.
PRR1 is collecLed in Lhe same manner as corporaLion Lax, and reLurns lor PRR1
are submiLLed wiLh Lhe annual corporaLe Lax reLurn.
C. Capital allowances
Development expenditure
lrish Lax legislaLion provides lor a 1007 allowance lor capiLal expendiLures
incurred lor producLion and developmenL in connecLion wiLh a relevanL lield
being worked in Lhe course ol carrying on a peLroleum Lrade. 1he allowance is
available lor Lhe period when Lhe asseL represenLed by Lhe expendiLure is
broughL inLo use lor Lhe purposes ol Lhe Lrade. 1he allowance is sub|ecL Lo
producLion in commercial quanLiLies, having sLarLed in Lhe lield lor which Lhe
asseLs were provided.
AsseLs leased Lo a person lor Lhe purposes ol a peLroleum Lrade are LreaLed in a
broadly similar manner.
1he legislaLion excludes lrom developmenL expendiLure amounLs expended
on vehicles, land and buildings, machinery or planL or sLrucLures lor processing
or sLoring peLroleum won {oLher Lhan iniLial LreaLmenL or sLorage) and Lhe
acquisiLion ol, or righLs in or over, deposiLs ol peLroleum. lnLeresL paymenLs
are also excluded.
Exploration expenditure
lrish Lax legislaLion provides lor a 1007 allowance lor exploraLion expendiLures
againsL Lhe proliLs ol a peLroleum Lrade. 1he allowance is due when peLroleum
exLracLion acLiviLies begin. LxploraLion expendiLure is delined as a capiLal
expendiLure on peLroleum exploraLion acLiviLies, buL excludes any inLeresL
paymenLs. ll an expendiLure qualilies as a developmenL expendiLure, iL cannoL
also be an exploraLion expendiLure. 1o Lhe exLenL LhaL a loss is creaLed by Lhe
exploraLion allowance, Lhis can be carried lorward againsL luLure proliLs ol Lhe
same peLroleum Lrade.
An allowance is given lor successlul and aborLive exploraLion expendiLures,
sub|ecL Lo Lhe aborLive expendiLure having been incurred noL more Lhan 25
years belore Lhe commencemenL ol Lhe peLroleum Lrade, againsL which Lhe
proliLs ol such allowance are claimed. However, an aborLive expendiLure
incurred more Lhan 25 years ago on a lield LhaL subsequenLly begins
producLion may sLill be claimed upon commencemenL ol producLion.
No allowance lor exploraLion expendiLure will be made, Lo Lhe exLenL LhaL Lhe
exploraLion expendiLure is reimbursed Lo Lhe claimanL. A clawback provision
applies by way ol a balancing charge on Lhe amounLs previously allowed il a
172 Ireland
disposal or parL disposal Lakes place ol an asseL represenLing Lhe amounL ol
Lhe expendiLure, in respecL ol which Lhe allowance was made. 1he maximum
balancing charge is limiLed Lo Lhe amounL ol Lhe allowances made or Lhe
appropriaLe parL ol LhaL amounL, in Lhe case ol a parLial disposal.
A person who buys asseLs represenLing exploraLion expendiLures connecLed
wiLh a relevanL lield may claim an allowance il LhaL person carries on a Lrade
LhaL consisLs ol or includes working LhaL lield or parL ol Lhe lield. 1he allowance
cannoL exceed Lhe exploraLion expendiLure originally incurred or, il less, Lhe
price paid lor Lhe asseLs represenLing LhaL expendiLure.
ll Lhere is a sale or Lransler ol asseLs represenLing an exploraLion expendiLure
belore a peLroleum Lrade commences, Lhen Lhe allowance due Lo Lhe claimanL is
reduced by Lhe proceeds ol Lhe sale or Lransler.
A provision applies lor granLing an allowance lor an exploraLion expendiLure
againsL Lhe proliLs ol a peLroleum Lrade carried on by one company il Lhe
exploraLion expendiLure was incurred by anoLher company and one company
is a wholly owned subsidiary ol Lhe oLher company, or boLh are wholly owned
subsidiaries ol a Lhird company. A Lranslerred expendiLure is LreaLed as incurred
by Lhe Lransleree company aL Lhe Lime iL was acLually incurred by Lhe
Lransleror, Lhus prevenLing an old aborLive exploraLion expendiLure lrom being
used by Lhe Lransleree any laLer Lhan iL could have been used by Lhe Lransleror.
A provision also applies Lo avoid duplicaLion ol allowances.
Abandonment expenditure
An abandonmenL expendiLure is an expendiLure incurred on abandonmenL
acLiviLies in relaLion Lo a lield or parL ol a lield. AbandonmenL acLiviLies in
relaLion Lo a lield or parL ol a lield mean acLiviLies ol a company LhaL comply
wiLh Lhe requiremenLs ol a peLroleum lease held by Lhe company in respecL
ol closing down, decommissioning or abandoning Lhe lield or parL ol iL.
1his provision includes dismanLling and removing pipelines used Lo bring
peLroleum Lo dry land.
A 1007 allowance applies lor an abandonmenL expendiLure lor Lhe chargeable
period when Lhe expendiLure is incurred. ll a loss arises due Lo an insulliciency
ol income Lo absorb Lhe allowance, Lhe loss may be carried back Lo ollseL Lhe
income lrom Lhe peLroleum acLiviLies ol Lhe Lhree previous years. An ollseL is
made againsL laLer periods in prioriLy Lo Lhe earlier periods.
A provision is made lor a carrylorward ol unused abandonmenL losses il a
company permanenLly disconLinues one peLroleum Lrade and subsequenLly
commences a new peLroleum Lrade. ln Lhese circumsLances, Lhe losses are
deducLible in Lhe lirsL chargeable period ol a new peLroleum Lrade carried
on by Lhe company.
An abandonmenL expendiLure incurred alLer a peLroleum Lrade has ceased is
broughL back inLo Lhe linal period ol Lrading. ll Lhis creaLes a loss, LhaL loss may
be carried back lor Lhe Lhree years preceding Lhe linal year ol Lrading.
D. Incentives
Losses
1ax losses may be carried lorward indeliniLely againsL proliLs ol Lhe same
peLroleum Lrade. However, il, wiLhin a Lhreeyear period, Lhere is boLh a change
in ownership {ellecLively more Lhan 507) and a ma|or change in Lhe naLure
or conducL ol Lhe Lrade, Lhen reliel lor losses carried lorward may be denied.
P&D
1o encourage expendiLure on R&D, a crediL ol 257 ol Lhe incremenLal
expendiLure incurred by a company may be ollseL againsL iLs corporaLe Lax
liabiliLy lor Lhe accounLing period when Lhe expendiLure is incurred. Any excess
R&D crediLs may be carried back againsL corporaLe Lax ol Lhe preceding
accounLing period. Any remaining excess R&D crediLs may be relunded by Lhe
lrish Revenue over a Lhreeyear period.
173 Ireland
A limiL is placed on Lhe amounL ol Lhe relund available Lo a company which is
Lhe greaLer ol:
{i) 1he corporaLion Lax payable by Lhe company in Lhe previous 10 years
{ii) 1he payroll Lax liabiliLies {including employers' social insurance) lor Lhe
period in which Lhe expendiLure giving rise Lo Lhe claim is incurred
ln Lhe case ol a company, expendiLures on R&D means expendiLures LhaL have
been incurred on R&D acLiviLies carried on by LhaL company in Lhe LLA in a
relevanL period. 1he expendiLure musL qualily lor Lax reliel in lreland and,
in Lhe case ol an lrish residenL company, iL musL noL qualily lor Lax reliel in any
|urisdicLion oLher Lhan lreland. 1he R&D crediL is in addiLion Lo any Lax reliel
LhaL may be available by way ol a deducLion in compuLing Lrading income,
or by way ol capiLal allowances.
R&D acLiviLies mean sysLemaLic, invesLigaLive or experimenLal acLiviLies in a
lield ol science or Lechnology and being one or more ol basic research, applied
research or experimenLal developmenL. AcLiviLies do noL qualily as R&D
acLiviLies unless Lhey seek Lo achieve scienLilic or Lechnological advancemenL
and involve resoluLion ol scienLilic or Lechnological uncerLainLy.
E. Withholding taxes
Dividends, interest and royalties
Under lrish domesLic law, dividends, inLeresL and royalLies are, r|ma fac|e,
sub|ecL Lo a wiLhholding Lax ol 207. However, inLeresL paid by a company in Lhe
course ol a Lrade or business Lo a company residenL in an LU Member SLaLe or
in a counLry wiLh which lreland has a double Lax agreemenL is exempL lrom
wiLhholding Lax. FurLhermore, under lrish domesLic law, wiLhholding Lax on
royalLies applies only Lo paLenL royalLies and Lo oLher paymenLs regarded as
"annual paymenLs."
ln relaLion Lo dividends, exempLions lrom dividend wiLhholding Lax {DW1) are
provided lor nonresidenLs. 1he principal exempLions are lor:
NonresidenL companies under Lhe conLrol ol persons residenL in an LU
Member SLaLe or in a counLry wiLh which lreland has a double Lax LreaLy
{provided Lhese persons are noL under Lhe conLrol ol persons noL residenL
in such counLries)
NonresidenL companies, or 757 parenL companies ol nonresidenL
companies, Lhe principal class ol shares ol which is subsLanLially and
regularly Lraded on a recognized sLock exchange
Companies noL conLrolled by lrish residenLs LhaL are residenL in an LU
Member SLaLe or a Lax LreaLy counLry
DW1 does noL apply Lo dividends covered by Lhe LU parenL/subsidiary direcLive
{sub|ecL Lo compliance wiLh a bona lide parenL LesL).
Branch remittance tax
Branch remiLLance Lax does noL apply in lreland.
Pelevant contracts tax 1PCT)
RC1 is a wiLhholding Lax under lrish domesLic law LhaL applies Lo persons
engaged in Lhe consLrucLion, meaL processing and loresLry indusLries.
UnlorLunaLely, Lhe RC1 provisions are very widely drawn and Lhe deliniLion ol
"consLrucLion operaLions" brings "operaLions which lorm an inLegral parL ol, or
are preparaLory Lo, or are lor rendering compleLe, Lhe drilling lor or exLracLion
ol minerals, oil, naLural gas or Lhe exploraLion lor, or exploiLaLion ol, naLural
resources" wiLhin Lhe ambiL ol RC1.
1he pracLical implicaLion ol Lhis provision is LhaL a principal conLracLor
musL use a wiLhholding Lax ol 357 on paymenLs Lo subconLracLors unless
Lhose subconLracLors produce a Lax clearance cerLilicaLe {C2) lrom Lhe
lrish Revenue, and cerLain oLher adminisLraLive requiremenLs are meL.
1he requiremenL Lo produce a C2 Lax clearance cerLilicaLe also exLends Lo
nonresidenL subconLracLors. 1he applicaLion process lor obLaining a C2
174 Ireland
cerLilicaLe requires Lhe subconLracLor Lo demonsLraLe LhaL iLs Lax allairs
{LogeLher wiLh Lhe Lax allairs ol iLs direcLors and shareholders) are up Lo daLe
and LhaL iL is lully complianL wiLh all Lax liling and reporLing requiremenLs.
F. Financing considerations
Thin capitalization and interest quarantining
AL presenL, lreland does noL have legislaLion dealing wiLh Lhin capiLalizaLion and
inLeresL quaranLining.
C. Transactions
Asset disposals
ll a company LhaL carries on a peLroleum Lrade disposes ol an asseL
represenLing an exploraLion expendiLure, iL is sub|ecL Lo a balancing charge
calculaLed by relerence Lo Lhe proceeds received lor Lhe disposal. ll Lhe disposal
Lakes place prior Lo Lhe commencemenL ol a peLroleum Lrade, Lhe exploraLion
allowance Lo be made Lo Lhe company when iL commences iLs peLroleum Lrade
is reduced by Lhe amounL ol any consideraLion in money or money's worLh
received on Lhe disposal.
A disposal ol an asseL represenLing a developmenL expendiLure is similarly
sub|ecL Lo a balancing charge calculaLed by relerence Lo Lhe proceeds received
lor Lhe disposal.
Farm in and Iarm out
1he legislaLion provides LhaL changes in license inLeresLs aL Lhe preproducLion
sLage LhaL are approved by Lhe minisLer lor communicaLions, energy and
naLural resources do noL give rise Lo chargeable gains il Lheir sole purpose is
Lhe lurLherance ol exploraLion, delineaLion or developmenL ol a licensed area
{i.e., an area licensed under Lhe 1975 or 1992 licensing Lerms or subsequenL
licensing Lerms).
1he legislaLion operaLes by delining a "relevanL period" in relaLion Lo a disposal
as being a period beginning 12 monLhs belore and 3 years alLer Lhe disposal.
ll Lhe consideraLion received on a disposal is wholly and exclusively applied
wiLhin Lhe relevanL period lor Lhe purposes ol eiLher or boLh peLroleum
exploraLion acLiviLies, and searching lor and winning access Lo peLroleum in a
relevanL lield, Lhe disposal is noL LreaLed as a disposal lor Lhe purposes ol CC1.
1herelore, no chargeable gain {or allowable loss) can arise. On a subsequenL
disposal ol an asseL acquired, broughL inLo being or enhanced in value by Lhe
applicaLion ol Lhe consideraLion received, Lhe consideraLion is noL deducLible in
calculaLing Lhe gain on Lhe subsequenL disposal {i.e., iL does noL lorm parL ol
Lhe base cosL).
1he legislaLion also LreaLs Lhe exchange ol license inLeresLs as noL involving any
disposal or acquisiLion. lL LreaLs Lhe asseL given and Lhe asseL received as Lhe
same asseL acquired, in Lhe same manner as Lhe asseL given was acquired.
For an exchange ol license inLeresLs where one parLy receives consideraLion in
addiLion Lo Lhe license inLeresL Laken by LhaL parLy, Lhe exchange rule seL ouL
above does noL apply Lo LhaL parLy unless Lhe addiLional consideraLion is applied
in lull in Lhe same manner as seL ouL above. ln Lhis way, Lhe disposal ol Lhe
porLion ol Lhe license inLeresL LhaL is represenLed by Lhe consideraLion received
is LreaLed as a parLial disposal lor which Lhe disposal provisions seL ouL
above apply.
ll a parLy Lo an exchange ol license inLeresLs gives consideraLion in addiLion
Lo Lhe license inLeresL, Lhen Lhe porLion ol Lhe license inLeresL received
represenLed by Lhe addiLional consideraLion is regarded as an asseL LhaL has
a basis equal Lo Lhe consideraLion given.
175 Ireland
5elling shares in a company 1consequences Ior resident and
nonresident shareholders)
lrish Lax legislaLion conLains subsLanLial shareholding exempLion provisions.
However, Lhey do noL apply where Lhe shares being sold derive Lhe greaLer
parL ol Lheir value lrom exploraLion or exploiLaLion righLs in a designaLed area.
ln Lhe absence ol being able Lo avail ol Lhe subsLanLial shareholding exempLion,
a residenL shareholder company is liable lor CC1 on a disposal ol shares in a
company LhaL holds exploraLion or exploiLaLion righLs in a designaLed area.
A nonresidenL shareholder company is also liable lor CC1 on a disposal ol
shares in a company LhaL holds exploraLion or exploiLaLion righLs in a
designaLed area. 1his is because lrish domesLic law deems a gain on a disposal
ol shares LhaL derive Lheir value or Lhe greaLer parL ol Lheir value direcLly or
indirecLly lrom exploraLion or exploiLaLion righLs in lrish designaLed waLers Lo be
a gain accruing on Lhe disposal ol asseLs siLuaLed in lreland. 1his has Lhe ellecL
ol bringing Lhe gain inLo Lhe charge Lo Lax.
H. Indirect taxes
Import duties
DuLies apply Lo Lhe imporLaLion ol goods. ll goods are imporLed direcLly Lo a
rig LhaL is locaLed ouLside lrish LerriLorial waLers, Lhere are no lrish cusLoms
duLy issues.
However, il goods are broughL Lo Lhe rig via lreland, Lhen lrish cusLoms duLies
issues arise {enduse auLhorizaLions). On Lhe assumpLion LhaL correcL
procedures are puL in place, lrish cusLoms duLy should noL be a cosL.
VAT
VA1 applies Lo Lhe supply ol goods and services, Lhe imporLaLion ol goods and
inLracommuniLy acquisiLions made in Lhe LerriLory ol lreland.
ll a company is noL esLablished in lreland and iL underLakes acLiviLies ouLside
Lhe 12nauLicalmile limiL lrom Lhe shore ol lreland {and Lhus ouLside Lhe LU),
Lhe supply ol Lhose acLiviLies is deemed Lo occur ouLside Lhe |urisdicLion.
ln Lhese circumsLances, Lhe company is noL enLiLled Lo regisLer lor lrish VA1.
1he supply ol goods lrom lreland Lo Lhe ollshore locaLion is charged aL a zero
raLe because Lhey are ellecLively exporLs.
ll goods or services supplied Lo an ollshore company are liable Lo lrish VA1,
Lhen VA1 reclaims may be made Lhrough Lhe LU 8Lh DirecLive reclaim process
{il Lhe claimanL company is esLablished in Lhe LU) or Lhe LU 13Lh DirecLive
reclaim process {il Lhe claimanL is esLablished ouLside Lhe LU). AlLernaLively,
il an ollshore company has an adminisLraLive ollice in lreland which would
consLiLuLe an esLablishmenL lor VA1 purposes, iL should be allowed Lo regisLer
lor VA1 in lreland in order Lo recover any lrish VA1 incurred Lhrough iLs lrish
VA1 reLurns.
An ollshore company LhaL operaLes ouLside Lhe lrish |urisdicLion makes supplies
LhaL are ouLside Lhe scope ol lrish VA1 and, accordingly, any invoices raised by
Lhe company are also ouLside Lhe scope ol lrish VA1.
5tamp duty
SLamp duLy applies Lo cerLain legal documenLs LhaL relaLe Lo someLhing done
or Lo be done in lreland. SLamp duLy is chargeable under dillerenL heads
wiLh Lhe mosL signilicanL relaLed Lo Lhe conveyance or Lransler on a sale.
SLamp duLy can represenL a signilicanL cosL. 1he raLe applicable Lo Lranslers
ol nonresidenLial properLy lor consideraLion in excess ol t80,000 is 67 .
1he raLe ol sLamp duLy applicable Lo Lranslers ol lrish regisLered shares is 17.
SLamp duLy is payable by Lhe purchaser.
AsseLs such as planL and machinery LhaL are capable ol passing by delivery are
noL sub|ecL Lo sLamp duLy unless Lhey are included in a conLracL along wiLh
oLher asseLs LhaL are duLiable {e.g., debLors, goodwill).
17
An exempLion lrom sLamp duLy is provided, however, lor Lhe sale, assignmenL
or Lransler ol licenses and leases granLed under Lhe PeLroleum and OLher
Minerals DevelopmenL AcL 1960. 1he exempLion exLends Lo Lhe sale,
assignmenL or Lransler ol any righL or inLeresL in any such license or lease.
I. Cther
Pules Ior valuation oI petroleum in certain circumstances
lrish legislaLion provides rules lor Lhe valuaLion ol peLroleum disposed ol oLher
Lhan by way ol sale aL arm's lengLh or appropriaLed Lo use in acLiviLies LhaL lall
ouLside Lhe ring lence {e.g., il Lhe oil is appropriaLed by a producLion company
lor use in iLs own relinery).
PeLroleum disposed ol oLher Lhan by way ol sale aL arm's lengLh is LreaLed as
disposed ol lor a consideraLion equal Lo Lhe markeL value aL Lhe Lime ol
disposal. PeLroleum LhaL is "relevanLly appropriaLed" lor use in acLiviLies
ouLside Lhe company's ringlence acLiviLies wiLhouL being disposed ol is LreaLed,
lor Lhe purposes ol Lhe ringlence acLiviLies and Lhe acLiviLies Lo which iL is
appropriaLed, as having been sold and boughL, respecLively, lor a price equal Lo
iLs markeL value aL Lhe Lime iL is appropriaLed.
1he markeL value ol peLroleum aL any Lime is Lhe price LhaL Lhe peLroleum could
be expecLed Lo leLch in a sale on Lhe open markeL aL LhaL Lime.
Employee taxation
Income tax
lrish Lax legislaLion brings inLo charge income arising lrom Lhe exercise ol
employmenL in lreland, wheLher or noL an individual is Lax residenL in lreland.
1he legislaLion provides LhaL duLies perlormed in a designaLed area in
connecLion wiLh exploraLion or exploiLaLion acLiviLies are LreaLed as perlormed
in lreland. An income Lax charge, Lherelore, arises on an individual under
domesLic legislaLion LhaL may be miLigaLed or exempLed under a relevanL
double Lax LreaLy.
While noL provided lor in Lhe legislaLion, Lhe Lax auLhoriLies generally ignore a
charge il an individual spends less Lhan 30 working days in lreland {which, lor
Lhis purpose, includes Lhe lrish ConLinenLal Shell) in a liscal {calendar) year.
1here will, Lherelore, noL be any income Lax liabiliLy or wiLhholding requiremenL
il Lhe individual spends less Lhan 30 working days in lreland. See Lhe discussion
below, however, regarding Lhe social insurance liabiliLy.
LllecLive lrom 1 January 2006, an obligaLion arises on a loreign employer
Lo wiLhhold income Lax under Lhe Pay As You Larn {PAYL) sysLem lrom
individuals LhaL exercise duLies in lreland, regardless ol wheLher Lhose
individuals ulLimaLely have an income Lax liabiliLy in lreland. ll Lhe employer
is a nonresidenL and does noL comply wiLh Lhis obligaLion, Lhe enLiLy beneliLing
lrom Lhe services in lreland may be held liable. However, Lwo exempLions lrom
Lhe requiremenL lor Lhe employer Lo operaLe lrish PAYL exisL.
1he lirsL exempLion sLaLes LhaL PAYL wiLhholding will noL be required il:
1. 1he individual is residenL in a counLry wiLh which lreland has a double
LaxaLion agreemenL and is noL residenL in lreland lor Lax purposes lor Lhe
relevanL Lax year
2. 1here is a genuine loreign ollice or employmenL
3. 1he individual is noL paid by, or on behall ol, an employer residenL in lreland
^. 1he cosL ol Lhe ollice or employmenL is noL borne, direcLly or indirecLly, by
Lhe loreign employer lor a permanenL esLablishmenL in lreland
5. 1he duLies ol LhaL ollice or employmenL are perlormed in Lhe sLaLe lor noL
more Lhan 60 LoLal working days in a year ol assessmenL and, in any evenL,
lor a conLinuous period ol noL more Lhan 60 working days
1he second exempLion sLaLes LhaL, ellecLive lrom 1 January 2007, condiLion 5.
above may be exLended Lo 183 working days, buL only il condiLions 1. Lhrough
^. above are saLislied, in addiLion Lo a number ol oLher condiLions imposed on
Lhe employees and loreign employers.
Ireland
177
5ocial insurance
PayrelaLed social insurance {PRSl) is payable in respecL ol every individual
LhaL exercises duLies ol employmenL in lreland, regardless ol Lhe duraLion.
Various classes ol conLribuLion apply, depending on Lhe naLure ol Lhe
employmenL and Lhe level ol Lhe emolumenLs. 1he mosL common class is
A1 and Lhis imposes a charge ol 10.757 on Lhe gross earnings {including
beneliLs) ol Lhe employer and ^7 on Lhe employee. 1he lirsL t127 per week is
exempL lrom Lhe employee conLribuLion, and Lhe employee conLribuLion is only
payable on earnings up Lo a ceiling ol t75,036 in 2009. 1here is no ceiling on
Lhe earnings liable Lo Lhe employer conLribuLion.
A charge Lo PRSl can be avoided only il Lhe employer provides an appropriaLe
auLhorizaLion lrom Lhe employee's home counLry Lo remain wiLhin Lhe home
counLry's social insurance regime. 1he auLhorizaLion may be eiLher an L101
lorm {lor LU counLries, lceland, LiechLensLein and Norway) or a CerLilicaLe
ol Coverage {lor AusLralia, Canada, New Zealand, SwiLzerland and Lhe
UniLed SLaLes).
ln respecL Lo Lhe counLries noL covered by Lhe L101 or CerLilicaLe ol Coverage
provisions, Lhere may be an enLiLlemenL Lo an exempLion lrom PRSl lor Lhe
lirsL 52 weeks ol a posLing in lreland. Advice should be soughL on Lhe specilic
condiLions applicable Lo Lhis exempLion.
Kazakhstan
Country code 7
AImaty CMT +
Essentai Tcwer
77/7 AI-Farabi Ave.
AImaty
05000
Kazakhstan
TeI 727 255 90
Fax 727 255 91
DiI and cas ccntacts
Zhanna Tamencva
TeI 727 259 7201
zhanna.s.tamencva kz.ey.ccm
AIiya Dzhapayeva
TeI 727 259 7204
aIiya.k.dzhapayevakz.ey.ccm
ErIan Dcsymbekcv
TeI 727 259 7200
erIan.dcsymbekcvkz.ey.ccm
Jahancir Juraev
TeI 727 259 720
jahancir.juraevkz.ey.ccm
A. At a glance
Fiscal regime
1his arLicle describes Lhe liscal regime in lorce lor almosL all exisLing and all
new conLracLs lrom 1 January 2009. 1his regime is applicable Lo all conLracLs
excepL producLion sharing agreemenLs LhaL became ellecLive prior Lo
1 January 2009 and conLracLs specilically approved by Lhe presidenL
ol KazakhsLan.
1he generally applicable liscal regime LhaL applies in KazakhsLan Lo exploraLion
and producLion conLracLs in Lhe peLroleum indusLry consisLs ol a combinaLion ol
corporaLe income Lax, renL Lax on exporL, bonuses and royalLyLype LaxaLion.
Oil and gas producLion acLiviLies are ring lenced lrom downsLream acLiviLies
and lrom each oLher {i.e., conLracL by conLracL) lor Lax purposes.
Mineral extraction tax
1he mineral exLracLion Lax {ML1) is a volumebased, royalLyLype Lax
applicable Lo crude oil, gas condensaLe and naLural gas. RaLes escalaLe
depending on volume. DillerenL Lables ol raLes apply depending on whaL
Ireland Kazakhstan
178
is produced and wheLher iL is exporLed or sold domesLically. 1he raLes are
applied Lo producLion valued aL world prices.
Bonuses
Subsurlace users are expecLed Lo pay a signaLure bonus and a commercial
discovery bonus.
Corporate income tax 1CIT)
CorporaLe income Lax {Cl1) is applied Lo all companies aL a raLe ol 207 ol
Laxable income in 2010, reducing in sLeps Lo 157 in 201^.
Pent tax on export
1he Lax base is deLermined as Lhe value ol Lhe exporLed crude oil and gas
condensaLe based on Lhe same Lax valuaLion as lor ML1. 1he Lax raLe ranges
lrom 07 Lo 327.
Excess proIit tax 1EPT)
Lxcess proliL Lax {LP1) is calculaLed annually. 1he Lax is paid aL progressive
raLes on Lranches ol income LhaL remain alLer deducLion ol Cl1. 1he Laxable
Lranches are derived by applying raLios Lo Lhe deducLible expenses.
Capital allowances
Available lor Cl1 and LP1.
Investment Incentives
Losses relaLing Lo subsurlace use conLracLs can be carried lorward lor
up Lo 10 years.
Crude oil export duty
Crude oil exporL duLy is currenLly charged aL a raLe ol zero percenL.
B. Fiscal regime
ln KazakhsLan, oil and gas exploraLion and producLion concessions are relerred
Lo as "subsurlace use conLracL."
1he Laxes applicable Lo subsurlace users are as lollows:
Applicable taxes
Bonuses Variable
Mineral exLracLion Lax 0.57 Lo 207
Lxcess proliLs Lax 07 Lo 607
PaymenL lor compensaLion ol
hisLorical cosLs Variable
RenL Lax on exporL 07 Lo 327
Lxcise on crude oil and gas condensaLe Variable
Land Lax Cenerally immaLerial
AsseL Lax 1.57
LnvironmenLal lees Variable
OLher lees {e.g., lee lor Lhe use ol radio
lrequency specLrum, lee lor Lhe use ol
navigable waLerways) Variable
OLher Laxes and paymenLs Variable
VA1 127
Crude oil exporL duLy 07
Kazakhstan
179
EPT
LP1 is calculaLed annually. 1he Laxable ob|ecL is Lhe porLion ol neL income
{il any) LhaL exceeds 257 ol "deducLions." 1he neL income is calculaLed as
aggregaLe annual income less deducLions less Cl1 and branch proliLs Lax,
il any. For LP1 purposes, deducLions is Lhe expendiLure deducLible lor Cl1
purposes plus cerLain modilicaLions such as Lhe righL Lo Lake acceleraLed
depreciaLion lor lixed asseLs. 1he Lax is calculaLed by applying Lhe lollowing
raLes Lo Lhe Lranches ol excess income, each Lranche being allocaLed Lhe
marginal neL income deLermined as a percenLage ol deducLions unLil Lhe
limiL ol neL income is reached.
Net income allocation schedule
Ior EPT,7 oI deductions
7 Ior calculating
marginal net income
allocation Ior EPT
Excess proIit
tax rate 17)
Less Lhan or equal Lo 257 25 NoL seL
From 267 Lo 307 inclusively 5 10
From 317 Lo ^07 inclusively 10 20
From ^17 Lo 507 inclusively 10 30
From 517 Lo 607 inclusively 10 ^0
From 617 Lo 707 inclusively 10 50
Over 707 Any excess 60
Special rules apply Lo deLermine Lhe Laxable ob|ecL il Lhe hydrocarbon
producLion is processed prior Lo sale, lor example, by relining crude oil inLo
gasoline, diesel eLc. ln such cases, iL is unlikely LhaL an LP1 liabiliLy would
acLually arise.
Payment Ior compensation oI historical costs
From 2009, Lhe paymenL lor compensaLion ol hisLorical cosLs is included
in Lhe lisL ol obligaLory paymenLs ol a subsurlace user and is a lixed paymenL
ol Lhe subsurlace user Lo compensaLe Lhe sLaLe lor geological survey and
developmenL cosLs ol Lhe conLracL LerriLory incurred belore Lhe subsurlace use
conLracL is concluded.
1he obligaLion Lo compensaLe hisLorical cosLs arises lrom Lhe daLe when Lhe
conlidenLialiLy agreemenL is concluded beLween Lhe subsurlace user and
auLhorized sLaLe body on subsurlace sLudy and usage.
MET
ML1 applies Lo crude oil, gas condensaLe and naLural gas. 1he Laxable ob|ecL is
Lhe value ol producLion. 1he value is based on world prices wiLhouL deducLions.
1he world price ol crude oil and gas condensaLe is deLermined as Lhe ariLhmeLic
mean ol daily quoLaLions lor each ol Lhe Urals MediLerranean {Urals Med) or
DaLed BrenL {BrenL DLd) brands in Lhe Lax period on Lhe basis ol inlormaLion
published in Lhe P|atts Cruce C|| Harketw|re issued by 1he McCrawHill
Companies or, il LhaL source does noL provide price inlormaLion lor Lhose
brands, using Lhe PeLroleum Argus source. 1he world price lor naLural gas is
deLermined as Lhe ariLhmeLic mean ol daily quoLaLions in Lhe Lax period on Lhe
basis ol inlormaLion published in Lhe P|atts Cruce C|| Harketw|re issued by 1he
McCrawHill Companies. ll LhaL source does noL provide price inlormaLion lor
naLural gas, Lhe PeLroleum Argus source should be used.
Kazakhstan
180
1he raLes ol Lax are deLermined by Lhe annual volume ol producLion aL Lhe
lollowing raLes. DillerenL raLes apply Lo crude oil and gas condensaLe on Lhe
one hand and naLural gas on Lhe oLher, as lollows:
Volume oI annual oil production,
including gas condensate, Ior each
calendar year 1thousand tons)
MET
200912 2013 2014
Up Lo 250 inclusively 57 67 77
Up Lo 500 inclusively 77 87 97
Up Lo 1,000 inclusively 87 97 107
Up Lo 2,000 inclusively 97 107 117
Up Lo 3,000 inclusively 107 117 127
Up Lo ^,000 inclusively 117 127 137
Up Lo 5,000 inclusively 127 137 1^7
Up Lo 7,000 inclusively 137 1^7 157
Up Lo 10,000 inclusively 157 167 177
Over 10,000 187 197 207
1hese raLes are reduced by 507 il Lhe producLion is processed domesLically in
KazakhsLan eiLher by Lhe producer or by a purchaser.
ln Lhe case ol naLural gas LhaL is exporLed, a llaL raLe ol 107 applies. ll Lhe gas
is sold Lo Lhe domesLic KazakhsLan markeL, raLes are reduced Lo beLween 0.57
and 1.57 depending on Lhe annual producLion.
Bonuses
Subsurlace users are expecLed Lo pay Lwo Lypes ol bonuses:
1. SignaLure bonus
2. Commercial discovery bonus
5ignature bonus
1he signaLure bonus is a lumpsum amounL paid by a subsurlace user lor Lhe
righL Lo use Lhe subsurlace.
For oil exploraLion conLracLs, Lhe bonus is a lixed amounL ol 2,800 MCl,
112

which is equivalenL Lo KZ13,956,^00.
For oil producLion conLracLs, where reserves have noL been approved, Lhe
bonus is a lixed amounL ol 3,000 MCl, which is equivalenL Lo KZ1^,239,000.
Where reserves have been approved, Lhe bonus is calculaLed by a lormula
which applies a raLe ol 0.0^7 Lo Lhe approved reserves and 0.017 Lo Lhe
provisionally approved reserves buL noL less Lhan 3,000 MCl.
For producLion conLracLs, Lhe signaLure bonus should noL be less Lhan Lhe
amounL ol Lhe commercial discovery bonus.
Commercial discovery bonus
1he commercial discovery bonus is a lixed paymenL paid by subsurlace users
when a commercial discovery is made on Lhe conLracL LerriLory.
1he base lor calculaLion ol Lhe commercial discovery bonus is delined as Lhe
value ol Lhe exLracLable minerals duly approved by Lhe compeLenL sLaLe
auLhoriLies. 1he value ol Lhe mineral resources is deLermined using Lhe markeL
price esLablished aL Lhe lnLernaLional {London) PeLroleum Lxchange in PlaLLs.
1he raLe ol Lhe commercial discovery bonus is lixed aL 0.17 ol Lhe value ol
proven exLracLable resources.
112 1ne montn|v ca|cu|at|on |ncex :HC|; |s |Z11,413.
Kazakhstan
181
CIT
Cl1 is applied Lo all companies aL Lhe raLe ol 207 ol Laxable income in
20092012, 17.57 in 2013 and 157 in 201^. 1axable income is calculaLed as
Lhe dillerence beLween aggregaLe annual income {alLer cerLain ad|usLmenLs)
and sLaLuLory deducLions.
Deductions
All expenses incurred by a Laxpayer in carrying ouL acLiviLies which are direcLed
aL Lhe receipL ol income are deducLible lor Lhe purpose ol deLermining Laxable
income. Lxamples ol expenses LhaL are allowed lor deducLion can be lound
below {Lhis lisL is noL exhausLive):
lnLeresL expense {wiLhin limiLs)
ConLribuLions Lo Lhe decommissioning lund, Lhe procedure lor making such
conLribuLions and Lhe amounL are Lo be esLablished in Lhe subsurlace
use conLracL
LxpendiLure on geological sLudies and exploraLion and preparaLory
operaLions lor exLracLion ol mineral resources
LxpendiLures on research and developmenL and scienLilic and
Lechnological works
Ceological sLudies and exploraLion, and preparaLory operaLions lor producLion
ol uselul minerals, include Lhe lollowing: appraisal, preparaLory work, general
and adminisLraLive expenses, and cosLs associaLed wiLh Lhe paymenL ol Lhe
bonuses. 1hese cosLs LogeLher wiLh expendiLure on Lhe purchase ol lixed
asseLs and inLangible asseLs {expendiLure incurred by a Laxpayer while
acquiring Lhe righL Lo geological exploraLion, developmenL or exLracLion ol
mineral resources) lorm a depreciaLion group separaLe lrom lixed asseLs lor
Lax purposes. 1hese cosLs may be deducLed by decliningbalance depreciaLion
aL a raLe noL exceeding 257. Similar expenses incurred alLer Lhe separaLe
depreciaLion group has been lormed {such as expenses incurred alLer
depreciaLion sLarLs) are included inLo Lhe group Lo increase iLs balance value.
DepreciaLion ol Lhe pool ol such expenses begins when producLion commences.
ln Lhe case ol a larm in, Lhe subsurlace user is allowed Lo capiLalize Lhe cosL ol
acquiring a subsurlace use righL. Upon larm ouL, Lhe subsurlace user is liable
lor Lax on capiLal gains.
1he lollowing are examples ol oLher deducLible expenses:
Lxpenses incurred under a |oinL operaLing agreemenL based on inlormaLion
provided by Lhe operaLor
Business Lrip and represenLaLive expenses {per diems are deducLed in lull
based on Laxpayers' inLernal policy whereas represenLaLive expenses are
deducLible in Lhe amounL up Lo 17 ol payroll)
Foreign exchange losses when a loreign exchange loss exceeds a loreign
exchange gain
Lxpenses on social paymenLs Lo employees
lnsurance premiums, excepL lor insurance premiums paid according Lo
accumulaLive insurance conLracLs
AmounLs paid as redempLion ol doubLlul payables previously wriLLen
oll as income
DoubLlul receivables noL redeemed wiLhin Lhree years
1axes paid {excepL lor Lhe Laxes already excluded prior Lo deLermining
aggregaLe annual income, income Lax paid in KazakhsLan and in any oLher
sLaLes, and LP1)
Fines and penalLies, excepL lor Lhose payable Lo Lhe sLaLe budgeL
MainLenance or currenL repair expenses
CapiLal repair {wiLhin Lhe sLaLuLory limiLs)
LxpendiLure acLually incurred by a subsurlace user wiLh respecL Lo Lraining
KazakhsLan personnel and Lhe developmenL ol Lhe social sphere ol rural
areas, wiLhin amounLs sLipulaLed in subsurlace use conLracLs
Kazakhstan
182
1he 1ax Code also provides lor cerLain expenses Lo be deducLed direcLly
lrom Laxable income up Lo 37 ol Lhe Laxable income such as sponsorship
aid and chariLable conLribuLions {sub|ecL Lo cerLain condiLions)
1he depreciaLion regime lor lixed asseLs is discussed aL in SecLion C.
Dividends
Dividends disLribuLed domesLically {i.e., by a local subsidiary Lo a local parenL
company), are Lax exempL. Dividends paid abroad are sub|ecL Lo 157
wiLhholding Lax usually reduced by Lax LreaLies Lo 57. Branches are sub|ecL Lo
an equivalenL branch proliL Lax aL Lhe same raLes buL applied Lo undisLribuLed
proliL alLer deducLion ol Cl1.
Pent tax on export
1he renL Lax on exporL is paid by legal enLiLies and individuals LhaL make sales
lor exporL ol crude oil and gas condensaLe. 1he Lax base is deLermined as Lhe
value ol Lhe exporLed crude oil on Lhe same basis as lor ML1. 1he Lax raLes
applied Lo exporLed crude oil and gas condensaLe vary as lollows:
Market price 1U55/bbl) Pate
USS20/bbl inclusively 0
USS30/bbl inclusively 0
USS^0/bbl inclusively 0
USS50/bbl inclusively 7
USS60/bbl inclusively 11
USS70/bbl inclusively 1^
USS80/bbl inclusively 16
USS90/bbl inclusively 17
USS100/bbl inclusively 19
USS110/bbl inclusively 21
USS120/bbl inclusively 22
USS130/bbl inclusively 23
USS1^0/bbl inclusively 25
USS150/bbl inclusively 26
USS160/bbl inclusively 27
USS170/bbl inclusively 29
USS180/bbl inclusively 30
USS190/bbl inclusively 32
USS200/bbl inclusively 32
1he Lax period lor renL Lax on exporL is a calendar quarLer.
Kazakhstan
183
C. Capital allowances
For Lax depreciaLion purposes, lixed asseLs are spliL inLo lour groups. AsseLs are
depreciaLed aL Lhe maximum depreciaLion raLes seL ouL in Lhe lollowing Lable:
Croup
number Type oI Iixed assets
Maximum
depreciation rate
17)
l Buildings, sLrucLures {excepL lor oil and
gas wells and Lransmission devices)
10
ll Machinery and equipmenL, excepL lor
machinery and equipmenL ol oil and
gas producLion
25
lll Ollice machinery and compuLers ^0
lV Fixed asseLs noL included inLo oLher
groups, including oil and gas wells,
Lransmission devices, machinery and
equipmenL ol oil and gas producLion
15
Fixed asseLs, among oLher Lhings, include:
Fixed asseLs, invesLmenLs in real esLaLe, inLangible asseLs and biological
asseLs recorded in accordance wiLh lFRS and KazakhsLan accounLing
sLandards
AsseLs wiLh a uselul lile exceeding one year, manulacLured and {or)
acquired by concessionaires under concession agreemenLs
AsseLs wiLh a uselul lile exceeding one year LhaL are ob|ecLs ol social
inlrasLrucLure pro|ecLs
AsseLs wiLh a uselul lile exceeding one year LhaL are inLended lor use in
acLiviLies which are direcLed aL Lhe receipL ol income and were received
by a liduciary lor liduciary managemenL under a liduciary managemenL
agreemenL or on Lhe basis ol anoLher documenL which is a basis on which
liduciary managemenL arises
1he lollowing iLems are noL considered as lixed asseLs:
lnLangible asseLs wiLh an indeliniLe uselul lile
AsseLs commissioned under invesLmenL conLracLs concluded belore
1 January 2009
Subsurlace users have Lhe righL Lo use double depreciaLion raLes in Lhe year ol
commissioning "newly creaLed" lixed asseLs, provided Lhey will be used in Lheir
conLracL acLiviLies lor Lhree years.
Lxpenses acLually incurred on use, repair, mainLenance and liquidaLion ol lixed
asseLs are delined as "subsequenL cosLs" and are deducLible in Lhe Lax period
when Lhey are acLually incurred.
D. Investment incentives
Losses
Losses perLaining Lo subsurlace use conLracLs may be carried lorward lor up Lo
10 years. 1ax losses may noL be carried back.
Tax holiday
KazakhsLan does noL have a Lax holiday regime lor subsurlace users.
Investment tax preIerences
CerLain Lax prelerences are available lor subsurlace users sub|ecL Lo Lhe
CovernmenL's approval and limiLed Lo conLracLs concluded beLween
2009 and 2012.
Kazakhstan
184
E. Withholding taxes
ln Lhe absence ol a permanenL esLablishmenL in KazakhsLan ol a nonresidenL
company, KazakhsLan wiLhholding Lax {"WH1") applies Lo a nonresidenL's
income derived lrom KazakhsLan sources. 1he general WH1 raLe is 207 {lrom
2013 17.57 and lrom 201^ 157), excepL lor dividends, capiLal gains and
inLeresL income {157), income lrom inLernaLional LransporLaLion services and
insurance premiums payable in accordance wiLh reinsurance risk agreemenLs
{57) and insurance premiums {107).
FurLher, double Lax LreaLies provide lor eiLher an exempLion lrom KazakhsLan
WH1 or applicaLion ol reduced WH1 raLes. Cenerally, inLeresL and royalLy raLes
in LreaLies are 107 and dividends 57 provided condiLions are meL.
F. Financing considerations
From 2009 Lo 2011, a sixLoone debLLoequiLy limiL applies {lourLoone
LherealLer) on boLh KazakhsLan and nonKazakhsLansourced linancing
obLained lrom or guaranLeed by a relaLed parLy or obLained lrom an enLiLy
regisLered in a Lax haven. lnLeresL on debLLolinance consLrucLion should
be capiLalized.
C. Transactions
Any capiLal gains derived lrom a sale ol an equiLy inLeresL in a subsurlace use
conLracL, or in a KazakhsLanresidenL company or a nonresidenL company il
more Lhan 507 ol Lhe value ol LhaL enLiLy is derived lrom subsurlace use righLs
in KazakhsLan, gives rise Lo KazakhsLan source income. Such ollshore gains
realized by nonresidenLs and noL associaLed wiLh a permanenL esLablishmenL
in KazakhsLan are sub|ecL Lo WH1 in KazakhsLan aL 157, unless specilically
exempL lrom Lax according Lo KazakhsLan domesLic Lax law or by virLue ol an
applicable double LaxaLion LreaLy.
ln Lhe case ol a larm in, Lhe subsurlace user may capiLalize Lhe cosL ol acquiring
a subsurlace use righL. Upon larm ouL, Lhe subsurlace user is liable lor Lax on
capiLal gains.
H. Indirect taxes
Import duties
Some old conLracLs beneliL lrom grandlaLhered cusLoms exempLions; however,
new conLracLs do noL.
1he cusLoms legislaLion provides lor a Lemporary imporL regime lor goods
LhaL will be reexporLed. lL eiLher exempLs goods and equipmenL lrom cusLoms
duLies and imporL VA1 or iL allows lor parLial paymenL provided Lhe goods and
equipmenL are reexporLed.
VAT
A LUsLyle VA1 applies in KazakhsLan. 1he VA1 raLe has reduced progressively
lrom 207 in Lhe laLe 1990s Lo 127 currenLly.
Crude oil, naLural gas and gas condensaLe sold in Lhe LerriLory ol KazakhsLan
are sub|ecL Lo 127 VA1. LxporL sales ol crude oil, naLural gas and gas
condensaLe are sub|ecL Lo zeroraLed VA1.
Under Lhe 1ax Code, inLernaLional LransporLaLion services {including
LransporLaLion ol oil and gas via Lrunk pipelines) are sub|ecL Lo zeroraLed VA1.
lmporLs ol goods and equipmenL are sub|ecL Lo 127 imporL VA1.
Place oI supply rule
1he applicabiliLy ol KazakhsLan VA1 is deLermined based on Lhe deemed place
ol supply ol a given supply. lL is imporLanL Lo noLe LhaL, under Lhe place ol
supply rules, a service may be physically perlormed ouLside KazakhsLan,
buL deemed Lo be supplied inside KazakhsLan lor VA1 purposes. Lxamples ol
services Laxed in Lhis way include a supply ol a service relaLed Lo immovable
properLy locaLed in KazakhsLan, or a consulLing service perlormed ouLside
Kazakhstan
185
KazakhsLan lor a cusLomer inside KazakhsLan. ll Lhe place ol supply is deemed
Lo be ouLside KazakhsLan, Lhe underlying supply is noL sub|ecL Lo KazakhsLan
VA1. 1he rules deLermining Lhe place ol supply are generally as lollows:
For goods:
1he place where LransporLaLion commences il goods are
LransporLed or mailed
OLherwise, Lhe place where goods are Lranslerred Lo Lhe purchaser {iL is noL
clear wheLher Lhis involves a physical Lransler or a Lransler ol righLs)
For works and services:
1he place where immovable properLy is locaLed lor works and services
direcLly relaLed Lo such properLy
1he place where works and services are acLually carried ouL lor works and
services relaLed Lo movable properLy
1he place ol business or any oLher acLiviLy ol Lhe cusLomer lor Lhe lollowing
works and services: Lransler ol righLs Lo use inLellecLual properLy, consulLing
services, audiL services, engineering services, design services, markeLing
services, legal services, accounLing services, aLLorney's services, adverLising
services, daLa provision and processing services, renL ol movable properLy
{excepL lor renL ol moLor vehicles), supply ol personnel, communicaLion
services and oLhers
OLherwise, Lhe place ol business or any oLher acLiviLy ol Lhe
service provider
Sales ol goods or services LhaL are merely auxiliary Lo a principal sale are
deemed Lo Lake place wherever Lhe principal sale Lakes place. No deliniLion
ol auxiliary sales is provided in Lhe Lax legislaLion
Export duties
ln May 2008, KazakhsLan inLroduced a new cusLoms exporL duLy on crude oil aL
Lhe raLe ol USS109.91 per Lonne. lL is inLended LhaL Lhe raLe will be ad|usLed
periodically in line wiLh movemenLs in world markeL prices. AL Lhe presenL Lime,
Lhe raLe is zero.
5tamp duties
No sLamp duLy applies in KazakhsLan.
Pegistration Iees
lnsignilicanL lixed lees apply.
I. Cther
5ocial tax
1he social Lax is paid by employers lor each employee aL Lhe raLe ol 117 on Lhe
LoLal cosL ol employing Lhe individual {including beneliLs in kind).
Individual income tax
Lmployees pay individual income Lax aL 107 on pracLically all income.
Contract transIers
1he KazakhsLan sLaLe has a preempLion righL on Lranslers ol subsurlace use
conLracLs or enLiLies LhaL own Lhem direcLly or indirecLly, which iL lrequenLly
exercises, olLen Laking 507 ol Lhe inLeresL Lranslerred.
TransIer pricing
From 2009, a new Lransler pricing law was inLroduced and is expecLed Lo be
aggressively applied.
Kazakhstan
18
Kuwait
Country code 95
CMT +3
Ernst & Ycunc
1th tc 21st FIccrs
Baitak Tcwer
Ahmed AI Jaber Street
Safat Square
Kuwait
TeI 2295 5000
Fax 2245 419
DiI and cas ccntacts
Farccq Mchammad Ladha
TeI 2295 5100
farccq.Iadhakw.ey.ccm
AIck Chuch
TeI 2295 5104
aIck.chuchkw.ey.ccm
A. At a glance
Fiscal regime
1here are no separaLe Lax laws or regulaLions in KuwaiL governing Lhe oil
and gas secLor. Foreign {nonCCC) companies, Lherelore, are sub|ecL Lo Lhe
corporaLe income Lax law as amended by Law No. 2 ol 2008 {Law No. 2)
and LxecuLive Bylaws {Lhe Bylaws) LhereLo. For liscal periods commencing
alLer 3 February 2008, Lhe corporaLe income Lax raLes are as lollows:
RoyalLies 157 {a)
Bonuses None
PSC None
lncome Lax raLe 157
Resource renL Lax None
lnvesLmenL incenLives 1H
{a) RoyalLies are considered in Lhe same manner as normal business income
and sub|ecL Lo Lax aL 157.
B. Fiscal regime
Corporate income tax
1here are no separaLe Lax laws or regulaLions in KuwaiL governing Lhe oil
and gas secLor.
Foreign "bodies corporaLe" are sub|ecL Lo Lax in KuwaiL il Lhey carry on a Lrade
or business in KuwaiL, direcLly or Lhrough an "agenL" {see below), in Lhe
islands ol Kubr, Oaru, and Umm al Maradim or in Lhe ollshore area ol Lhe
parLiLioned neuLral zone under Lhe conLrol and adminisLraLion ol Saudi Arabia.
KuwaiLiregisLered companies wholly owned by KuwaiLis, and companies
incorporaLed in Cull CooperaLion Council {CCC) counLries LhaL are wholly
owned by CCC ciLizens, are noL sub|ecL Lo income Lax. 1he members ol Lhe CCC
are Bahrain, KuwaiL, Oman, OaLar, Saudi Arabia and UniLed Arab LmiraLes.
1he Lerm "body corporaLe" relers Lo an associaLion LhaL is lormed and
regisLered under Lhe laws ol any counLry or sLaLe and is recognized as having
a legal exisLence enLirely separaLe lrom LhaL ol iLs individual members.
ParLnerships lall wiLhin Lhis deliniLion.
Law No. 2 includes a deliniLion ol an "agenL." Under Lhis deliniLion, an "agenL"
is a person auLhorized by Lhe principal Lo carry ouL business, Lrade or any
acLiviLies sLipulaLed in ArLicle 1 ol Lhe law or Lo enLer inLo binding agreemenLs
wiLh Lhird parLies on behall and lor Lhe accounL ol Lhe person's principal.
A loreign principal carrying on business in KuwaiL Lhrough an agenL {as delined
in Lhe preceding senLence) is sub|ecL Lo Lax in KuwaiL.
Kuwait
187
Foreign companies carrying on a Lrade or business in KuwaiL are sub|ecL Lo
income Lax under Amiri Decree No. 3 ol 1955.
Foreign companies carrying on a Lrade or business in Lhe islands ol Kubr, Oaru
and Umm al Maradim are sub|ecL Lo Lax in KuwaiL under Law No. 23 ol 1961.
Foreign companies carrying on a Lrade or business in Lhe ollshore area ol Lhe
parLiLioned neuLral zone under Lhe conLrol and adminisLraLion ol Saudi Arabia
are sub|ecL Lo Lax in KuwaiL on 507 ol Lhe Laxable proliL under Law No. 23 ol
1961. ln pracLice, Lhe Lax deparLmenL compuLes Lhe Lax on Lhe LoLal income
ol Lhe Laxpayer and expecLs LhaL 507 ol such Lax should be seLLled in KuwaiL.
Many Laxpayers are currenLly conLesLing Lhis pracLice. Amiri Decree No. 3 ol
1955 and Law No. 23 ol 1961 diller primarily wiLh respecL Lo Lax raLes.
Foreign companies can operaLe in KuwaiL eiLher Lhrough an agenL or as a
minoriLy shareholder in a locally regisLered company. ln principle, Lhe meLhod
ol calculaLing Lax is Lhe same lor companies operaLing Lhrough an agenL and
lor minoriLy shareholders. For minoriLy shareholders, Lax is levied on Lhe
loreign company's share ol proliLs {wheLher or noL disLribuLed by Lhe KuwaiLi
company) plus any amounLs receivable lor inLeresL, royalLies, Lechnical services
and managemenL lees.
Tax rates
Under Law No. 2, Lhe Lax raLe is reduced Lo a llaL raLe ol 157, ellecLive lor liscal
years beginning alLer 3 February 2008. ConsequenLly, Lhe new law would noL
apply Lo a company wiLh a liscal year beginning 1 January 2008 and ending on
31 December 2008. For such companies, Lhe new law is ellecLive lor Lhe liscal
year beginning on 1 January 2009 and ending on 31 December 2009.
Belore Lhe approval ol Lhe new law, Lhe lollowing Lax raLes were applicable
under Amiri Decree No. 3 ol 1955.
Taxable proIits
Exceeding 1KD) Not exceeding 1KD) Pate 17)
0 5,250 0
5,250 18,750 5
18,750 37,500 10
37,500 56,250 15
56,250 75,000 20
75,000 112,500 25
112,500 150,000 30
150,000 225,000 35
225,000 300,000 ^0
300,000 375,000 ^5
375,000 0 55
1he lollowing are Lhe Lax raLes under Law No. 23 ol 1961.
Taxable proIits
Exceeding 1KD) Not exceeding 1KD) Pate 17)
0 500,000 20
500,000 18,750 57
KuwaiLi income Lax is noL progressive; consequenLly, LoLal proliL is Laxed aL Lhe
appropriaLe raLe lrom Lhe above Lable. ll Laxable proliL is only marginally higher
Lhan Lhe previous limiL, Lax is calculaLed by adding Lhe acLual excess Lo Lhe
amounL payable on Lhe previous limiL.
Kuwait
188
For example, on KD38,000 ol Laxable income derived in KuwaiL, Lhe Lax is
KD37,500 aL 107 = KD3,750, plus KD500, resulLing in LoLal Lax ol KD^,250.
Capital gains
CapiLal gains on Lhe sale ol asseLs and shares by loreign shareholders
are LreaLed as normal business proliLs and are sub|ecL Lo Lax aL Lhe raLes
sLaLed above.
ArLicle 1 ol Law No. 2 and ArLicle 8 ol Lhe Bylaws provide lor a possible Lax
exempLion lor proliLs generaLed lrom dealing in securiLies on Lhe KuwaiL SLock
Lxchange {KSL), wheLher direcLly or Lhrough invesLmenL porLlolios. However,
no lurLher clarilicaLions have been provided regarding Lhe deliniLions ol
"proliLs" and "dealing."
Administration
1he calendar year is generally used lor KuwaiLi Lax purposes, buL a Laxpayer
may ask in wriLing lor permission Lo prepare linancial sLaLemenLs lor a year
ending on a daLe oLher Lhan 31 December. For Lhe lirsL or lasL period ol Lrading
or carrying on a business, a Laxpayer may be allowed Lo lile a Lax declaraLion
covering up Lo 18 monLhs.
AccounLing records should be kepL in KuwaiL, and iL is normal pracLice lor Lhe
Lax auLhoriLies Lo insisL on inspecLing Lhe books ol accounL {which may be in
Lnglish) and supporLing documenLaLion belore agreeing Lo Lhe Lax liabiliLy.
1he Bylaws provide LhaL a Laxpayer musL regisLer wiLh Lhe DeparLmenL ol
lnspecLions and 1ax Claims {Dl1) wiLhin 30 days alLer signing iLs lirsL conLracL
in KuwaiL. 1he prior Lax law did noL specily a period.
Under Lhe Bylaws, a new sysLem ol Lax cards will be inLroduced. All Laxpayers
will be issued Lax cards LhaL will be renewed annually. All CovernmenL
deparLmenLs and public auLhoriLies will be prohibiLed lrom dealing wiLh
companies LhaL do noL hold an acLive Lax card. AL Lhe Lime ol wriLing, Lhe
requiremenLs and procedures lor Lhe Lax card had noL yeL been announced.
A Lax declaraLion musL be liled on or belore Lhe 15Lh day ol Lhe ^Lh monLh
lollowing Lhe end ol Lhe Lax period {lor example, 15 April in Lhe case ol a
31 December yearend). 1ax is payable in ^ equal insLallmenLs on Lhe 15Lh
day ol Lhe ^Lh, 6Lh, 9Lh and 12Lh monLhs lollowing Lhe end ol Lhe Lax period.
1he Bylaws provide LhaL a requesL lor exLension in Lime lor liling Lhe Lax
declaraLion musL be submiLLed Lo Lhe Dl1 by Lhe 15Lh day ol Lhe 2nd
monLh {Lhe 3rd monLh under Lhe prior law) alLer Lhe liscal yearend.
1he maximum exLension ol Lime LhaL may be granLed is 60 days {75 days
under Lhe prior law).
ln Lhe evenL ol a lailure Lo lile a Lax declaraLion by Lhe due daLe, a penalLy is
imposed, equal Lo 17 ol Lhe Lax lor each 30 days or lracLion Lhereol during
which Lhe lailure conLinues. ln addiLion, in Lhe evenL ol a lailure Lo pay Lax by
Lhe due daLe, a penalLy is imposed, equal Lo 17 ol Lhe Lax paymenL lor each
period ol 30 days or lracLion Lhereol lrom Lhe due daLe Lo Lhe daLe ol Lhe
seLLlemenL ol Lhe Lax due.
MinisLerial Order No. 16 ol 1997, which was issued by Lhe MinisLry ol Finance,
provides lor Lhe liling ol ob|ecLions and appeals againsL Lax assessmenLs.
Under MinisLerial ResoluLion No. 10, daLed 28 March 200^ and issued by Lhe
MinisLry ol Finance, Lhe assisLanL undersecreLary Lo Lhe MinisLry ol Finance may
reconsider Lhe linal assessmenL issued by Lhe Dl1 il errors ol lacL exisL. 1he Dl1
issues iLs decision based on Lhe opinion received lrom Lhe undersecreLary ol
Lhe MinisLry ol Finance wiLhin 60 days alLer Lhe daLe ol submission ol Lhe
requesL by Lhe Laxpayer.
Under Lhe prior Lax law, il an assessmenL ol Lax had noL yeL been issued by Lhe
Dl1, iL was possible Lo revise Lhe Lax declaraLion lor a liscal period by submiLLing
Lo Lhe Dl1 a leLLer providing deLails ol Lhe proposed amendmenLs and Lheir
ellecL on Lhe Laxable resulLs. 1he Bylaws allow companies Lo submiL a revised
Lax declaraLion, buL Lhey are unclear wiLh respecL Lo Lhe procedure lor liling a
revised declaraLion.
Kuwait
189
ll Lhe Dl1 accepLs Lhe amended Lax declaraLion, Lhe daLe ol liling ol Lhe revised
Lax declaraLion is considered lor Lhe purpose ol imposing delay lines.
Law No. 2 inLroduced a sLaLuLe ol limiLaLions period ol live years inLo Lhe
Lax law. 1he prior KuwaiL Lax law did noL provide a sLaLuLe ol limiLaLions lor
Lax. However, under ArLicle No. ^^1 ol Lhe KuwaiL Civil Law, any claims lor
Laxes due Lo KuwaiL or applicaLions lor Lax relunds may noL be made alLer
Lhe lapse ol live years lrom Lhe daLe on which Lhe Laxpayer is noLilied LhaL
Lax or a relund is due.
ArLicle 13 ol Lhe Bylaws provides LhaL companies LhaL may noL be sub|ecL Lo Lax
based on Lhe applicaLion ol any Lax laws, oLher sLaLuLes, or double Lax LreaLies
musL submiL Lax declaraLions in KuwaiL.
Determination oI trading income
Ceneral
1ax liabiliLies are generally compuLed on Lhe basis ol proliLs disclosed in audiLed
linancial sLaLemenLs and ad|usLed lor Lax depreciaLion and any iLems disallowed
by Lhe Lax inspecLor on review.
1he Lax declaraLion and supporLing schedules and linancial sLaLemenLs, all ol
which musL be in Arabic, are Lo be cerLilied by an accounLanL pracLicing in
KuwaiL who is regisLered wiLh Lhe MinisLry ol Commerce and lndusLry.
Design expenses
1he KuwaiL MinisLry ol Finance has issued a new circular, ellecLive as ol
29 May 2007. 1his circular supersedes ArLicle 1 ol Circular No. 37 ol 2002,
which provided Lhe deemed proliL percenLages lor revenue derived lrom
engineering and design services. Under Circular No. 37, 757 Lo 807 ol Lhe
relaLed design revenue was allowed as cosLs.
Under Lhe new circular, cosLs incurred lor engineering and design services
provided by Lhird parLies are now also resLricLed Lo Lhe percenLages provided
in Lhe circular.
1he lollowing are signilicanL aspecLs ol Lhe new circular:
ll design work is carried ouL in Lhe head ollice, 757 Lo 807 ol Lhe design
revenue is allowed as cosLs
ll design work is carried ouL by an associaLed company, 807 Lo 857 ol Lhe
design revenue is allowed as cosLs
ll design work is carried ouL by a Lhird parLy, 857 Lo 907 ol Lhe design
revenue is allowed as cosLs
ll Lhe design revenue is noL specilied in Lhe conLracL, buL design work needs
Lo be execuLed ouLside KuwaiL, Lhe lollowing lormula may be used by Lhe Lax
auLhoriLies Lo deLermine Lhe revenue:
Desicn revenue fcr the year =
Desicn ccsts fcr the year x annuaI
ccntract revenue
TctaI direct ccsts fcr the year
Interest paid to banks
lnLeresL paid Lo local banks relaLing Lo amounLs borrowed lor operaLions
{working capiLal) in KuwaiL may normally be deducLed. lnLeresL paid Lo banks
or linancial insLiLuLions ouLside KuwaiL is disallowed unless iL is proven LhaL Lhe
lunds were specilically borrowed Lo linance Lhe working capiLal needs ol
operaLions in KuwaiL. ln pracLice, iL is dilliculL Lo claim deducLions lor inLeresL
expenses incurred ouLside KuwaiL. lnLeresL paid Lo Lhe head ollice or agenL is
disallowed. lnLeresL LhaL is direcLly aLLribuLable Lo Lhe acquisiLion, consLrucLion
or producLion ol an asseL is capiLalized as parL ol Lhe cosL ol Lhe asseL il iL is
paid Lo a local bank.
Kuwait
190
Leasing expenses
1he KuwaiL Lax auLhoriLies may allow Lhe deducLion ol renLs paid under leases
alLer inspecLion ol Lhe supporLing documenLs. 1he deducLion ol renL lor asseLs
leased lrom relaLed parLies is resLricLed Lo Lhe amounL ol depreciaLion charged
on Lhose asseLs, as specilied in Lhe KuwaiL lncome 1ax Decree. 1he asseL value
lor Lhe purpose ol deLermining depreciaLion is based upon Lhe supplier's
invoices and cusLoms documenLs. ll Lhe asseL value cannoL be deLermined
based on Lhese iLems, Lhe value is deLermined by relerence Lo Lhe amounLs
recorded in Lhe books ol Lhe relaLed parLy.
Agency commissions
1he Lax deducLion lor commissions paid Lo a local agenL is limiLed Lo 37 ol
revenue, neL ol any subconLracLors' cosLs paid Lo Lhe agenL.
Head oIIice overhead
ArLicle 5 ol Lhe Bylaws provides LhaL Lhe lollowing head ollice expenses are
allowed as deducLions:
Companies operaLing Lhrough an agenL: 1.57 {previously 3.57) ol Lhe
direcL revenue
Companies parLicipaLing wiLh KuwaiLi companies: 17 {previously 27) ol
Lhe loreign company's porLion ol Lhe direcL revenue generaLed lrom iLs
parLicipaLion in a KuwaiLi company
lnsurance companies: 1.57 {previously 27) ol Lhe company's
direcL revenue
Banks: 1.57 {previously 27) ol Lhe loreign company's porLion ol Lhe bank's
direcL revenue
ArLicle 5 ol Lhe Bylaws also provides LhaL, lor Lhe purpose ol compuLaLion ol
head ollice overheads, direcL revenue equals Lhe lollowing:
For companies operaLing Lhrough an agenL, companies parLicipaLing wiLh
KuwaiLi companies, and banks: gross revenue less subconLracL cosLs,
reimbursed expenses and design cosL {excepL lor design cosL carried ouL
by Lhe head ollice)
For insurance companies: direcL premium neL ol share ol reinsurance
premium plus insurance commission collecLed
Inventory
lnvenLory is normally valued aL Lhe lower ol cosL or neL realizable value, on a
lirsLin, lirsLouL {FlFO) or average basis.
Provisions
Provisions, as opposed Lo accruals, are noL accepLed lor Lax purposes.
Tax depreciation
1ax depreciaLion is calculaLed using Lhe sLraighLline meLhod. 1he lollowing are
some ol Lhe permissible annual depreciaLion raLes:
Asset Pate 17)
Buildings ^
MosL planL 20
CompuLer equipmenL and solLware 33.3
MoLor vehicles 20
Ollice lurniLure 15
Kuwait
191
PelieI Ior losses
ArLicle 7 ol Lhe Bylaws provides LhaL losses may be carried lorward lor a
maximum ol Lhree years. 1he prior Lax law provided LhaL losses could be carried
lorward and deducLed lrom subsequenL proliLs wiLhouL limiL il no cessaLion ol
acLiviLies occurred.
Aggregation oI income
ll a loreign company has more Lhan one acLiviLy in KuwaiL, one Lax declaraLion
aggregaLing Lhe income lrom all acLiviLies is required.
Miscellaneous matters
Foreign exchange controls
No loreign exchange resLricLions exisL. LquiLy capiLal, loan capiLal, inLeresL,
dividends, branch proliLs, royalLies, managemenL and Lechnical services lees,
and personal savings are lreely remiLLable.
TransIer pricing
1he KuwaiLi Lax auLhoriLies deem Lhe lollowing proliL margins lor imporLed
maLerials and equipmenL:
lmporLs lrom head ollice: 107 Lo 157 ol relaLed revenue
lmporLs lrom relaLed parLies: 6.57 Lo 107 ol relaLed revenue
lmporLs lrom Lhird parLies: 3.57 Lo 6.57 ol relaLed revenue
1he impuLed proliL described above is normally subLracLed lrom Lhe cosL ol
maLerials and equipmenL claimed in Lhe Lax declaraLion. ll Lhe revenue lrom
Lhe maLerials and equipmenL supplied is idenLiliable, Lhe Dl1 normally reduces
Lhe cosL ol such iLems Lo show a proliL on such maLerials and equipmenL in
accordance wiLh Lhe percenLages described above. ll Lhe relaLed revenue
lrom Lhe maLerials and equipmenL supplied is noL idenLiliable or noL sLaLed
in Lhe conLracL, Lhe lollowing lormula may be applied Lo deLermine Lhe
relaLed revenue:
MateriaI and equipment revenue fcr the year =
1ccntract revenue fcr the year/tctaI direct ccst fcr the year)
x
materiaI and equipment ccsts fcr the year
5upply and installation contracts
ln supply and insLallaLion conLracLs, a Laxpayer is required Lo accounL Lo Lhe
Lax auLhoriLies lor Lhe lull amounL received under Lhe conLracL, including Lhe
ollshore supply elemenL, which is Lhe parL ol Lhe conLracL {cosL, insurance
and lreighL Lo Lhe applicable porL) perLaining Lo Lhe supply ol goods.
Contractors' revenue recognition
1ax is assessed on progress billings {excluding advances) lor work perlormed
during an accounLing period, less Lhe cosL ol work incurred. 1he auLhoriLies
generally do noL accepL Lhe compleLed conLracL or percenLageolcompleLion
meLhods ol accounLing.
5ubcontractors' costs
1he KuwaiL Lax auLhoriLies are normally sLringenL in allowing subconLracLors'
cosLs, parLicularly subconLracLors' cosLs incurred ouLside KuwaiL.
SubconLracLors' cosLs are normally allowed il Lhe Laxpayer provides Lhe relaLed
supporLing documenLaLion {conLracL, invoices, seLLlemenL evidence and oLher
documenLs) complies wiLh MinisLerial Order No. ^^ ol 1985 {see WiLhholding
ol linal paymenLs on nexL page), and lullils cerLain oLher condiLions.
Kuwait
192
Withholding oI Iinal payments
Under MinisLerial Order No. ^^ ol 1985, all CovernmenL deparLmenLs, privaLely
owned companies and CovernmenLowned companies are required Lo wiLhhold
linal paymenLs due Lo enLiLies unLil such enLiLies presenL a Lax clearance lrom
Lhe DirecLor ol lncome 1axes. ln addiLion, Lhe lollowing rules musL be lollowed:
Local and loreign esLablishmenLs, auLhoriLies and companies carrying on a
Lrade or business in KuwaiL are required Lo give Lhe DirecLor ol lncome 1axes
deLails ol Lhe companies wiLh which Lhey are doing business as conLracLors,
subconLracLors or in any oLher lorm. lnlormaLion Lo be provided should
include Lhe name and address ol Lhe company LogeLher wiLh a phoLocopy
ol Lhe conLracL
1he linal paymenL due Lo Lhe conLracLor or subconLracLor is Lo be wiLhheld
unLil Lhe conLracLor or subconLracLor presenLs a cerLilicaLe lrom Lhe DirecLor
ol lncome 1axes conlirming LhaL all Lax liabiliLies have been seLLled. 1he linal
paymenL should noL be less Lhan 57 ol Lhe LoLal conLracL value
When inspecLing Lhe Lax declaraLion liled wiLh Lhe DirecLor ol lncome 1axes,
Lhe MinisLry ol Finance will disallow all paymenLs made Lo subconLracLors il
Lhe rules described above are noL observed
MinisLerial ResoluLion No. 8 ol 2003, issued by Lhe minisLer ol linance on
7 June 2003, empowers Lhe MinisLry ol Finance Lo demand paymenL ol Lhe
57 reLained amounL wiLhheld by subconLracLing enLiLies il Lhe concerned
conLracLors or subconLracLors lail Lo seLLle Lheir Laxes due in KuwaiL.
Work in progress
CosLs incurred buL noL billed by an enLiLy aL Lhe end ol Lhe liscal year may
be carried lorward Lo Lhe subsequenL year as work in progress. AlLernaLively,
revenue relaLing Lo Lhe cosLs incurred buL noL billed may be esLimaLed on a
reasonable basis and reporLed lor Lax purposes il Lhe esLimaLed revenue is
noL less Lhan Lhe cosL incurred. ln general, il less Lhan 207 ol Lhe conLracL is
execuLed in a liscal year, boLh income and expenses relaLing Lo Lhe conLracL
may be carried lorward.
5alaries paid to expatriates
ln a press release issued on 23 SepLember 2003, Lhe MinisLry ol Social Allairs
announced LhaL iL would impose sLill penalLies il companies lail Lo pay salaries
Lo employees in Lheir local bank accounLs in KuwaiL. 1hese penalLies apply lrom
1 OcLober 2003. 1he release also sLaLed LhaL Lhe Dl1 may disallow payroll cosLs
il employees do noL receive Lheir salaries in Lheir bank accounLs in KuwaiL.
CIIset program
1he MinisLry ol Finance issued MinisLerial Order 13 ol 2005 Lo reacLivaLe Lhe
ollseL program. 1he lollowing are signilicanL aspecLs ol Lhe program:
All civil conLracLs wiLh a value ol KD10 million or more and delense
conLracLs wiLh a value ol KD3 million or more aLLracL Lhe ollseL
obligaLions lor conLracLors. 1he obligaLions become ellecLive on Lhe
signing daLe ol Lhe conLracL
ConLracLors sub|ecL Lo Lhe ollseL obligaLion musL invesL 357 ol Lhe value ol
Lhe conLracL wiLh KuwaiLi CovernmenL bodies
ConLracLors sub|ecL Lo Lhe ollseL obligaLion may Lake any ol Lhe lollowing
acLions Lo lullill Lheir ollseL obligaLion:
lmplemenL invesLmenL pro|ecLs suggesLed by Lhe OllseL
Program managemenL
Propose Lheir own invesLmenL pro|ecLs and Lhen seek Lhe approval ol
Lhe OllseL Program managemenL lor such pro|ecLs
ParLicipaLe in any ol Lhe lunds esLablished by Lhe OllseL
Program managemenL
Purchase commodiLies and services ol KuwaiLi origin. 1he MinisLry ol Finance
has noL yeL linalized Lhe regulaLions regarding Lhis iLem.
Kuwait
193
ConLracLors covered by Lhe ollseL obligaLion musL provide uncondiLional,
irrevocable bank guaranLees issued by KuwaiLi banks Lo Lhe MinisLry ol
Finance equal Lo 67 ol Lhe conLracL price. 1he value ol Lhe bank guaranLee
is gradually reduced based on Lhe acLual execuLion by Lhe loreign conLracLor
or supplier ol iLs work. 1he MinisLry ol Finance may cash in Lhe bank
guaranLee il Lhe company sub|ecL Lo Lhe ollseL obligaLion lails Lo lullill
such obligaLion
ln pracLice, Lhe OllseL Program is likely Lo be implemenLed Lhrough Lhe
inclusion ol clauses in supply conLracLs LhaL reler Lo an ollseL obligaLion ol Lhe
loreign conLracLor.
Unlike oLher OllseL Programs in Lhe Arabian Cull, Lhe KuwaiLi program allows
loreign conLracLors Lo lullill Lheir ollseL obligaLions by invesLing in pro|ecLs
ouLside KuwaiL il Lhese invesLmenLs add value Lo KuwaiLi producLs. For example,
a |oinL venLure beLween KuwaiLis and loreigners Lo reline KuwaiLi crude oil may
qualily as an ollseL obligaLion. MosL invesLmenLs LhaL beneliL Lhe KuwaiLi
economy may qualily under Lhe program.
Tax treaty withholding tax rates
KuwaiL has enLered inLo Lax LreaLies wiLh several counLries lor Lhe avoidance ol
double LaxaLion. 1reaLies wiLh several oLher counLries are aL various sLages ol
negoLiaLion or raLilicaLion.
However, liLLle experience has been gained in KuwaiL regarding Lhe applicaLion
ol Lax LreaLies. As a resulL, dispuLes abouL Lhe inLerpreLaLion ol various
clauses ol Lax LreaLies beLween Laxpayers and Lhe Dl1 are noL uncommon.
DispuLes wiLh Lhe Dl1 regarding Lax LreaLies normally arise wiLh respecL Lo Lhe
lollowing issues:
LxisLence ol a permanenL esLablishmenL
lncome aLLribuLable Lo a permanenL esLablishmenL
1ax deducLibiliLy ol cosLs incurred ouLside KuwaiL
KuwaiL has also enLered inLo LreaLies wiLh several counLries relaLing solely Lo
inLernaLional air and/or sea LransporL. KuwaiL is also a signaLory Lo Lhe Arab 1ax
1reaLy and Lhe CCC JoinL AgreemenL, boLh ol which provide lor Lhe avoidance
ol double LaxaLion in mosL areas. 1he oLher signaLories Lo Lhe Arab 1ax 1reaLy
are LgypL, lraq, Jordan, Sudan, Syria and Yemen.
1he domesLic Lax law in KuwaiL does noL provide lor wiLhholding Laxes.
As a resulL, iL is noL yeL known how Lhe KuwaiLi CovernmenL will apply Lhe
wiLhholding Lax procedures included in Lhe LreaLies lisLed in Lhe Lable below.
1he wiLhholding raLes lisLed in Lhe Lable are lor illusLraLive purposes only.
Dividends Interest7 Poyalties7 7
AusLria 0 0 10
Belarus 5 {c) 5 {c) 10
Belgium 10 0 10
Bulgaria 5 {|) 5 {l) 10
Canada 5/15 {m) 10 10
China 5 {a) 5 {a) 10
CroaLia 0 0 10
Cyprus 10 10 {b) 5
Czech Republic 5 {|) 0 10
LLhiopia 5 {c) 5 {b) 30
France 0 0 0
Cermany 5/15 {e) 0 10
Creece 5 {c) 5 {c) 15
Kuwait
194
Dividends Interest7 Poyalties7 7
Hungary 0 0 10
lndia 10 {n) 10 {n) 10
lndonesia 10 {c) 5 {b) 20
lLaly 5 0 10
Jordan 5 {c) 5 {b) 30
Korea {SouLh) 10 10 15
Lebanon 0 0 30
Malaysia 0 10 15 {q)
MalLa 10/15 {d) 0 10
MauriLius 0 0 {l) 10
Mongolia 5 {h) 5 {h) 10
NeLherlands 10 {i) 0 5
PakisLan 10 10 {g) 10
Poland 5 {|) 5 {|) 15
Romania 1 1 20
Russian FederaLion 5 {c) 0 10
Singapore 0 7 {b) 10
SouLh Alrica 0 0 0
Sri Lanka 5/10 10 20
Sudan 5 {h) 5 {h) 10
SwiLzerland 15 10 10
Syria 0 10 {k) 20
1hailand 10 10/15 {o) 20
1unisia 10 {c) 2.5 {b) 5
1urkey 10 10 10
Ukraine 5 {l) 0 10
UniLed Kingdom 5/15 0 {e) 10
Venezuela 5/10 {p) 5 20
Yugoslavia 5/10 {l) 10 10
NonLreaLy counLries 0 0 0
{a) 1he raLe is 07 lor amounLs paid Lo a company ol which Lhe CovernmenL
owns aL leasL 207 ol Lhe equiLy.
{b) 1he raLe is 07 lor inLeresL paid Lo Lhe CovernmenL ol Lhe oLher conLracLing
sLaLe. Under Lhe LLhiopia LreaLy, Lhe raLe is also 07 lor inLeresL paid Lo
enLiLies in which Lhe CovernmenL owns a specilied percenLage ol Lhe
equiLy and lor inLeresL paid on loans guaranLeed by Lhe CovernmenL.
{c) 1he raLe is 07 lor dividends and inLeresL paid Lo Lhe CovernmenL ol Lhe
oLher conLracLing sLaLe. Under Lhe LLhiopia LreaLy, Lhe raLe is also 07 lor
dividends paid Lo enLiLies in which Lhe CovernmenL owns a specilied
percenLage ol Lhe equiLy.
{d) 1he raLe is 107 lor dividends paid Lo Lhe CovernmenL ol KuwaiL or any
ol iLs insLiLuLions or any inLergovernmenLal enLiLies. 1he raLe is 157 lor
oLher dividends.
Kuwait
195
{e) 1he 57 raLe applies il Lhe recipienL ol Lhe dividends owns direcLly or
indirecLly aL leasL 107 ol Lhe payer. 1he 157 raLe applies Lo oLher dividends.
{l) 1he raLe is increased Lo 57 il Lhe benelicial owner ol Lhe inLeresL carries
on business in Lhe oLher conLracLing sLaLe Lhrough a permanenL
esLablishmenL and Lhe debL on which Lhe inLeresL is paid is connecLed Lo
such permanenL esLablishmenL.
{g) 1he raLe is 07 lor amounLs paid Lo Lhe CovernmenL ol Lhe oLher
conLracLing sLaLe and Lo enLiLies ol which Lhe CovernmenL owns aL leasL
517 ol Lhe paid in capiLal.
{h) For dividends and inLeresL, Lhe raLe is 07 il Lhe paymenLs are made Lo Lhe
CovernmenL, a CovernmenLal insLiLuLion ol Lhe oLher conLracLing sLaLe,
or Lo a company LhaL is a residenL ol Lhe oLher conLracLing sLaLe and is
conLrolled by, or aL leasL ^97 ol Lhe capiLal is owned direcLly or indirecLly
by, Lhe CovernmenL or a CovernmenLal insLiLuLion. A 07 raLe also applies
Lo inLeresL arising on loans guaranLeed by Lhe CovernmenL ol Lhe oLher
conLracLing sLaLe or by a CovernmenLal insLiLuLion or oLher CovernmenLal
enLiLy ol Lhe oLher conLracLing sLaLe.
{i) A 07 raLe applies il Lhe benelicial owner ol Lhe dividends is a company
LhaL holds direcLly aL leasL 107 ol Lhe capiLal ol Lhe company paying
Lhe dividends.
{|) 1he raLe is 07 il Lhe paymenLs are made Lo Lhe CovernmenL, a
CovernmenLal insLiLuLion ol Lhe oLher conLracLing sLaLe, or Lo a company
LhaL is a residenL ol Lhe oLher conLracLing sLaLe and is conLrolled by, or aL
leasL 257 ol Lhe capiLal is owned direcLly or indirecLly by, Lhe CovernmenL
or a CovernmenLal insLiLuLion ol Lhe oLher conLracLing sLaLe.
{k) 1he raLe is 07 il Lhe benelicial owner ol Lhe inLeresL is a residenL in Lhe
oLher conLracLing sLaLe and Lhe loan is secured or linanced direcLly or
indirecLly by a linancial enLiLy or oLher local body wholly owned by Lhe
CovernmenL ol Lhe oLher conLracLing sLaLe.
{l) 1he 57 raLe applies il Lhe recipienL ol Lhe dividends owns direcLly
or indirecLly aL leasL 257 ol Lhe payer. 1he 107 raLe applies Lo
oLher dividends.
{m) 1he raLe is 57 il Lhe benelicial owner ol Lhe dividends is a company LhaL
owns 107 or more ol Lhe issued and ouLsLanding voLing shares or 257 or
more ol Lhe value ol all ol Lhe issued and ouLsLanding shares. 1he 157
raLe applies Lo oLher dividends.
{n) Dividends or inLeresL paid by a company LhaL is a residenL ol a conLracLing
sLaLe is noL Laxable in LhaL conLracLing sLaLe il Lhe benelicial owner ol Lhe
dividends or inLeresL is one ol Lhe lollowing:
1he CovernmenL
A poliLical subdivision or a local auLhoriLy ol Lhe oLher conLracLing sLaLe
1he CenLral Bank ol Lhe oLher conLracLing sLaLe
OLher CovernmenLal agencies or CovernmenLal linancial insLiLuLions as
may be specilied and agreed Lo in an exchange ol noLes beLween Lhe
compeLenL auLhoriLies ol Lhe conLracLing sLaLes
{o) 1he raLe is 107 in Lhe case ol linancial insLiLuLions {including insurance
companies) and 157 in all oLher cases.
{p) 1he raLe is 57 il Lhe benelicial owner is a company which holds direcLly aL
leasL 107 ol Lhe capiLal ol Lhe company paying dividends. 1he raLe is 107
in all oLher cases.
{q) 1he raLe is 157 lor Lhe use ol, or Lhe righL Lo use, cinemaLograph
lilms, Lapes lor radio or Lelevision broadcasLing and any copyrighL ol
liLerary or arLisLic work. 1he raLe may be reduced Lo 107 lor Lhe righL
Lo use any paLenL, Lrade mark, design, model, plan, secreL lormula
process or any copy.
Kuwait
19
C. Incentives
1he Foreign DirecL lnvesLmenL Law {FDlL) provides LhaL, in Lhe case ol pro|ecLs
ol sLraLegic imporLance Lo KuwaiL {such as pro|ecLs involving Lhe Lransler ol
Lechnology or Lechnical experLise or Lhose which creaLe |ob opporLuniLies lor
KuwaiLi naLionals and conLribuLe Lo Lhe Lraining ol KuwaiLi naLionals), a loreign
company may have up Lo 1007 legal ownership in a business in KuwaiL LogeLher
wiLh cerLain oLher beneliLs such as a Lax holiday ol up Lo 10 years. 1here is a
process lor approval ol pro|ecLs under FDlL in KuwaiL; however, iL is undersLood
LhaL only very lew pro|ecLs have so lar been approved.
D. Withholding taxes
1here are no wiLhholding Laxes currenLly imposed in KuwaiL. However, please
reler Lo Lhe commenLs in SecLion B in respecL ol Lax reLenLion regulaLions.
E. Financing considerations
1here are currenLly no Lhin capiLalizaLion rules currenLly imposed in KuwaiL.
Please, however, reler Lo Lhe commenLs in SecLion B lor our commenLs on Lhe
deducLibiliLy ol inLeresL charges.
F. Indirect taxes
Import duties
1he six Member SLaLes ol Lhe Cull CooperaLion Council have enLered inLo a CCC
CusLoms Union. Under Lhe Lerms ol Lhe CusLoms Union, Member SLaLes have
agreed Lo unily Lhe regional cusLoms Larills aL 57 on all Laxable loreign imporLs,
down lrom individual counLry raLes LhaL ranged beLween ^7 and 157, as ol
1 January 2003.
ln general, alLer landing in KuwaiL, goods may be cleared Lhrough cusLoms
wiLhin Lwo weeks il documenLaLion is compleLely in order. CusLoms examinaLion
is rigorous lor all imporLed goods. 1his also applies Lo conLainerized cargoes
arriving aL Lhe Lwo main porLs, Shuwaikh and Shuaiba. Lorries may be oll
loaded on a random basis aL a special inspecLion poinL in KuwaiL CiLy. CusLoms
accepLs no responsibiliLy lor damage, delays or losses. 1he DeparLmenL ol
SLandards and MeLrology has esLablished a large number ol minimumqualiLy
sLandards, based on a combinaLion ol American, BriLish, Cerman and oLher
naLional sLandards.
VAT
KuwaiL currenLly does noL impose any VA1 or oLher sales Laxes.
Export duties
KuwaiL currenLly does noL impose any exporL duLies.
Libya
Country code 218
TripcIi CMT +2
Ernst & Ycunc
Bashir AI-Ibrahimi Street
Yaser Arafat Square
TripcIi, 9173
Libya
TeI 21 334 4130
Fax 21 334 4372
DiI and cas ccntact
Cerry SIater
TeI 21 334 4130
Fax 21 334 4372
cerry.sIaterIy.ey.ccm
Kuwait Libya
197
A. At a glance
Fiscal regime
ln Libya, Lhe liscal regime LhaL applies Lo Lhe peLroleum indusLry consisLs ol a
combinaLion ol Cl1 and a surLax.
Under Lhe PSC regime, Laxes are deemed Lo be paid by Lhe NOC, and Lhe Lax
compuLaLion is noLional.
RoyalLy 1he royalLy is 16.677 ol producLion
Bonuses SignaLure bonuses are payable under Lhe bid process.
SubsequenL bonuses are payable upon declaraLion ol a
commercial discovery, upon reaching producLion ol
100 million barrels and upon subsequenL milesLone
producLion ol each addiLional 30 million barrels
PSC Libya has a PSC regime and is presenLly conLracLing
under Lhe lourLh generaLion ol exploraLion and PSAs
{LPSA lV)
Income tax rate
Cl1 raLe ol ^07 plus
^7 |ihad Lax
ll Lhese Laxes, plus an ad|usLmenL lor royalLy, are less
Lhan 657 ol proliLs, a surLax is payable so LhaL Lax,
oLher deducLions and a surLax combine Lo produce a
composiLe 657 raLe
Resource renL Lax NoL applicable
CapiLal allowances All capiLal expendiLures are recoverable lrom cosL oil
Lhrough depreciaLion or amorLizaLion
lnvesLmenL
incenLives
NoL applicable Lo oil companies
B. Fiscal regime
Corporate tax
Libyan corporaLions are sub|ecL Lo income Lax on Lheir nonexempL worldwide
income. Foreign corporaLions, including inLernaLional oil companies {lOCs),
are Laxable on income arising in Libya.
Cil companies
PeLroleum exploraLion and producLion in Libya is governed by PeLroleum Law
25 ol 1955, as amended {principally by RegulaLion 9 ol 1973). UnLil Lhe
1970s, oil licenses were granLed via deeds ol concession, and Libya received
remuneraLion Lhrough royalLies and Laxes. 1he royalLy was 16.677 ol
producLion. A combinaLion ol a royalLy ad|usLmenL, renLs, income Laxes and a
surLax combined Lo creaLe a deducLion ol 657 on proliLs. 1he amounL paid by
lOCs, Lherelore, was noL a single peLroleum Lax buL a paymenL comprised ol a
varieLy ol elemenLs. WiLh one excepLion, Lhese concession agreemenLs have
been renegoLiaLed inLo LPSA lV.
ln 197^, Lhe lirsL LPSA conLracL was inLroduced, and succeeding generaLions
ol LPSA conLracLs have inLroduced a varieLy ol changes and relinemenLs.
lOCs and Lhe NOC ol Libya shared proliL in a varieLy ol percenLages and in
accordance wiLh a number ol lormulae.
Under Lhe currenL LPSA lV, inLroduced in 1999 buL amended on an ongoing
basis, Lhere is an open and LransparenL bid process lor new acreage. A share
ol producLion is bid lor, and Lhe lowesL percenLage bid wins Lhe acreage.
PercenLage shares have been awarded lor bids in Lhe range ol 7.57 Lo 257.
1he agreemenL is usually lor a period ol 5 years, exLendable by 25 years il
oil is lound in commercial quanLiLies. 1he agreemenL conLains a minimum
exploraLion commiLmenL, which may comprise, lor example, Lhe drilling ol
1 Lo 3 wildcaL wells and, lor example, 3,000 kilomeLers ol 2D seismic lines.
Libya
198
LPSA lV is a cosL recoverable agreemenL. ll oil is discovered and produced, Lhe
NOC Lakes 1007 less Lhe share ol Lhe producLion bid by Lhe lOC, unLil Lhe lOC
has recovered all exploraLion, appraisal, developmenL and currenL annual
producLion cosLs. 1herealLer, any "excess peLroleum" is allocaLed Lo Lhe lOC
based upon Lhe lollowing lormula:
A factcr x excess petrcIeum 1barreIs)
1he "A" lacLor is Lhe raLio ol Lhe cumulaLive value ol producLion received by Lhe
lOC over Lhe cumulaLive expendiLure. 1he A lacLor is negoLiable, buL an
example ol a reasonable amounL incurred is illusLraLed in Lhe Lable below.
Patio A Iactor
Less Lhan or equal Lo 1:5 0.90
More Lhan 1:5 buL less Lhan or equal Lo 3:0 0.70
More Lhan 3:0 buL less Lhan or equal Lo ^:0 0.50
More Lhan ^:0 0.30
1he crude oil value is used in deLermining Lhe cumulaLive value ol producLion
received and is based on an average monLhly inLernaLional markeL price.
1he 2007 LPSA agreemenL values producLion aL Lhe monLhly average price
achieved by Lhe NOC.
1he Lerms ol Lhe currenL LPSA lV sLaLe LhaL Lhe LaxaLion Lerms ol Lhe PeLroleum
Law apply and LhaL Lhe lOC should submiL royalLy and Lax reLurns. LsLimaLed
reLurns musL be submiLLed, and Laxes and royalLies musL be paid quarLerly.
A linal reLurn {linancial declaraLion) comprising acLual amounLs lor Lhe
calendar Lax year musL be submiLLed no laLer Lhan 31 March ol Lhe lollowing
year. Any addiLional Lax due lor Lhe preceding year musL be paid wiLhin 30 days,
and any overpaymenL is LreaLed as a crediL againsL a luLure liabiliLy.
1he PeLroleum Law idenLilies LhaL Lhe 657 ol proliLs paid by an lOC under
Lhe Lerms ol a concession deed comprises a number ol elemenLs. However,
under LPSA lV, a Lax compuLaLion is prepared using Lhe 657 raLe as il iL was
a single raLe.
1axes are deemed Lo have been paid on behall ol Lhe loreign lOC by Lhe NOC
and Lhe amounL ol Laxes paid on behall ol Lhe lOC are grossed up. 1he grossup
amounL is:
Prcfit x 5X
100X 5X
A Lax receipL is issued lor Lhis amounL.
1he composiLe raLe ol 657 ol proliLs payable by companies LhaL are sub|ecL Lo
PeLroleum Law comprises:
1. lncome Lax due under lncome 1ax Law 11 ol 200^
2. Jihad Lax due under Law ^^ ol 1970
3. Surlace renLs due under ArLicle 1^{1){a) ol Lhe PeLroleum Law
^. A surLax so LhaL Lhe LoLal deducLions are 657 ol Laxable income
1o daLe, 657 ol Lhe proliL delined under Lhe PeLroleum Law has always
exceeded Lhe amounL due in iLems 1. Lo 3. above.
RaLes ol income Lax are compuLed aL scale raLes esLablished in Libyan lncome
1ax Law {Law 11 ol 200^) as lollows:
On proliLs up Lo LD200,000 157
On nexL LD300,000 207
On nexL LD500,000 257
On nexL LD500,000 307
On nexL LD500,000 357
Balance ^07
Libya
199
1he |ihad Lax is imposed by Law ^^ ol 1970 and is payable aL Lhe raLe ol ^7 on
proliLs. lL is charged aL sliding scales on boLh salaries and proliLs. AlLhough iL is
assessed under dillerenL legislaLion, iL is essenLially anoLher income Lax.
1he compuLaLion ol revenue is generally delined in Lhe applicable concession
agreemenL or LPSA conLracL. ln order Lo arrive aL a Laxable proliL, a noLional
royalLy ol 16.677 is deducLed, buL iL is noL payable.
DepreciaLion ol Langible asseLs is allowed aL 107 per year, and inLangibles are
amorLized aL 57 per year. Under Law 3 ol 1983, Lhe secreLary ol peLroleum
was given discreLion Lo change Lhese depreciaLion raLes. 1he raLe applied under
Lhe Lerms ol Lhe old concession agreemenLs is 33.337.
lnLeresL is noL deducLible in deLermining proliLs.
1axpayers lrom some counLries do noL have any ob|ecLion Lo paying one
undillerenLiaLed amounL LhaL is labeled Lhe peLroleum Lax. By comparison, Lax
auLhoriLies ol some home counLries ol loreign invesLors require Lhem Lo prove
Lhe specilic amounLs paid lor Lhe income Lax, |ihad Lax and Lhe peLroleum
surLax in order Lo calculaLe loreign Lax crediLs or Lhe amounL LhaL is eligible lor
a homecounLry exempLion. For Lhose Laxpayers, iL is imporLanL Lo calculaLe Lhe
various Libyan Laxes provided in Lhe income Lax, |ihad Lax and PeLroleum Law.
Ping Iencing
HisLorically, Libya applied Lhe ringlence principle in deLermining a peLroleum
Lax liabiliLy. ProliLs lrom one pro|ecL could noL be ollseL againsL Lhe losses lrom
anoLher pro|ecL held by Lhe same Lax enLiLy. Similarly, a nonassociaLed gas
pro|ecL had Lo be accounLed lor separaLely lrom a crude oil pro|ecL. Under Lhe
currenL LPSA lV, ring lencing does noL apply revenue and cosLs may be
pooled il Lhe resulL is a commercially viable economic uniL.
1he PeLroleum Law covers only upsLream operaLions, alLhough iL includes rules
relaLing Lo pipeline and Lerminal Larills. Oil companies in Libya may acquire and
build asseLs under Lheir agreemenLs buL, in pracLice, downsLream acLiviLies are
usually underLaken by separaLe enLiLies called oil service companies.
Cil service companies
An oil company may esLablish or have an inLeresL in an oil service company,
buL such companies are sub|ecL Lo income Lax law, noL Lhe PeLroleum Law.
SeparaLe legal enLiLies cannoL lorm a Lax consolidaLed group and, Lherelore,
oil companies and oil service companies are Laxed individually.
CorporaLe Lax is levied on Laxable income. 1axable income equals assessable
income less any deducLions. DeducLions include expenses, Lo Lhe exLenL Lhey
are incurred in producing assessable income or are necessary in carrying on a
business lor Lhe purpose ol producing assessable income. Assessable income
generally comprises billings, capiLal gains and exchange raLe gains.
Libyan Lax law is sLraighLlorward, and Lhe basis ol deLermining Laxable income,
assessing and paying Lax and Lhe appeal process, as esLablished in Lhe income
Lax law, resembles Lax laws in many counLries. However, pracLice can diller
lrom Lheory.
AlLhough corporaLe Lax law is based on Lhe usual "addback" basis whereby a
disallowed expendiLure is added back Lo declared neL proliLs or losses, Lhe
currenL pracLice is LhaL Lhe Libyan Lax deparLmenL usually raises assessmenLs
based on a percenLage ol Lurnover Lhe "deemed proliL" basis ol an
assessmenL. 1ax, Lherelore, is payable even when losses are declared.
1he level ol deemed proliL applied Lo Lurnover varies according Lo Lhe Lype ol
business acLiviLy, buL iL is likely Lo be in Lhe range ol 157 Lo 207 lor an oil
service company.
Capital gains
No separaLe schedule exisLs in Lhe Lax law under which capiLal gains are Laxed
in Libya. Cains are Laxed as Lrading income aL Lhe Lax raLes discussed above.
Libya
200
Functional currency
WiLh Lhe excepLion ol oil companies, Lhe general rule is LhaL Lhe luncLional
currency is Lhe Libyan dinar, a currency LhaL lloaLs againsL Lhe special drawing
righLs {SDR).
However, lor oil companies, an LPSA requires LhaL records are mainLained in
boLh Libyan dinars and US dollars and, lor cosL recovery and Lax purposes,
Lhe US dollar records are used. Oil company Lax liabiliLies are deLermined in
US dollars, buL paid in Libyan dinars.
TransIer pricing
Libya has no Lransler pricing regulaLions. 1he PeLroleum Law requires LhaL
charges lrom a parenL company Lo iLs Libyan branch under Lhe Lerms ol a
service agreemenL musL be aL cosL.
1here is no precedenL, buL LransacLions aL arm's lengLh, which include a proliL
Lo comply wiLh OLCD regulaLions, should be idenLilied and are sub|ecL Lo Lax
under Lhe income Lax law.
Dividends
Branches esLablished in Libya by loreign oil companies do noL declare and
pay dividends.
Dividends declared and paid by an oil service company LhaL has lormed a
Libyan |oinL sLock company {which is Lhe legal enLiLy LhaL a loreign company
may esLablish) are payable gross, wiLhouL wiLhholding Lax.
Poyalty regime
A royalLy is payable monLhly under Lhe Lerms ol a concession agreemenL, aL Lhe
same Lime as Laxes, and compuLed aL Lhe raLe ol 16.677 ol producLion and
valued aL Lhe Libyan posLed price applicable Lo lilLings in Lhe monLh LhaL Lhe
royalLy is paid. 1he Libyan posLed price is an anachronism and iL is USS27.75
aL ^00 APl. 1he royalLy payable under an LPSA is now merely noLional.
C. Capital allowances
1here is no capiLal allowances regime in Libya. SLaLuLory raLes ol depreciaLion
are chargeable and deducLible.
D. Incentives
Investment Law 5 oI 1997
lnvesLmenL Law 5 ol 1997, as amended by 1ourism Law 7 ol 2003, LogeLher
wiLh Lhe lmplemenLing RegulaLions ol 200^, was inLroduced as parL ol Lhe
Libyan business sLraLegy Lo regeneraLe Lhe economy alLer sancLions and years
ol under invesLmenL in Lhe inlrasLrucLure. 1he law ollers:
LxempLion lrom company income Lax on boLh reLained and disLribuLed
proliLs lor live years, wiLh Lhe possibiliLy ol an exLension, and Lhe
carrylorward ol losses in exempLion years Lo subsequenL years
LxempL lrom cusLoms duLy are machinery, Lools, equipmenL, spare parLs
and primary maLerials, alLhough Lhis is now superlluous because cusLoms
duLies are aL a 07 raLe {wiLh Lhe excepLion ol Lobacco)
1he pro|ecL exempLs sLamp duLies
1here is llexibiliLy as Lo Lhe corporaLe lorm. 1haL is, an invesLor may esLablish
any legal enLiLy allowed under business law such as a branch or company wiLh
a ma|oriLy or minoriLy shareholding.
1he NOC is in Lhe process ol negoLiaLing wiLh a number ol oil companies and
inLernaLional indusLrial companies Lo relurbish and exLend relineries and oLher
downsLream laciliLies under Lhe Lerms ol Lhe lnvesLmenL Law. 1he LemplaLe is
lor |oinL venLures Lo be esLablished {50/50), which will relurbish or build Lhese
laciliLies and subsequenLly operaLe Lhem. ConLracLs are generally lor 25 years,
perhaps wiLh an exclusive disLribuLion agreemenL ol 10 years.
Libya
201
AlLer Lhe expiraLion ol Lhe company income Lax exempLion period, Lhese
pro|ecLs will be sub|ecL Lo Lax under Lhe income Lax law.
Because NOC is a shareholder or owner in such an agreemenL, and because
revenue will be based upon conLracLs wiLh specilic raLes lor LhroughpuL wiLh
delined cosLs, iL is likely LhaL any proliL lrom Lhese pro|ecLs will subsequenLly
be Laxed on an addback basis.
Exploration
As noLed above, all capiLal expendiLures and operaLing expendiLures lor
exploraLion, appraisal, developmenL and producLion are immediaLely cosL
recoverable il a commercial discovery is declared.
Tax losses
1ax losses can be carried lorward lor 10 years lor an oil company under
Lhe PeLroleum Law and lor 5 years lor an oil service company under Lhe
income Lax law.
Pegional incentives
Regional incenLives are noL applicable in Libya.
P&D
R&D is noL applicable in Libya.
E. Withholding taxes
1here are no lormal wiLhholding Laxes esLablished in Lhe law.
PE
1here is no deliniLion ol PL in Libyan 1ax Law 11 ol 200^, buL Libya has signed
a number ol double Lax agreemenLs in which Lhe concepL ol a PL is recognized
under Lhe general provisions ol Lhe Model UN and OLCD 1ax 1reaLies.
1he esLablishmenL ol PL sLaLus in Libya, Lherelore, oughL Lo be clear and in
accordance wiLh deliniLions conLained in Lhe Model 1ax 1reaLies. However,
in pracLice, iL is a gray area.
Regardless ol Lhe deliniLions in Lhe LreaLy, as a maLLer ol pracLice on a dayLo
day basis, Lhe Libyan Lax auLhoriLies work on Lhe principle LhaL de lacLo PL
sLaLus is esLablished il any work is underLaken, or service perlormed, in Lhe
Libyan |urisdicLion. 1his is Lhe case even il only a small proporLion ol a conLracL
is underLaken in Lhe Libyan |urisdicLion {e.g., siLe visiLs), and regardless ol Lhe
Lime spenL in Libya.
AlLhough iL is a legal requiremenL lor a loreign company Lo esLablish a
corporaLe enLiLy in Libya, in pracLice iL is possible Lo pay Laxes and regisLer
conLracLs wiLhouL regisLering in a siLuaLion where a parLicular experLise is
required, usually lor a single, shorLLerm conLracL. ln such a case, Lhe
associaLed conLracL musL be regisLered wiLh Lhe Lax auLhoriLies, and income
Laxes and sLamp duLies on Lhe lull conLracL value musL be paid in advance.
Interest and royalties
Libyan Lax law Laxes income specilically and only under Lhe lollowing headings:
1. Pure agriculLural income
2. lncome arising lrom commercial, indusLrial and cralL acLiviLies
3. Company income lrom naLional parLners noL wage workers enLiLies
^. lncome lrom Lhe liberal prolessions
5. Wages, salaries eLc.
6. ResidenLs' income lrom abroad
7. lncome lrom bank deposiLs
8. 1ax on companies
Libya
202
1ax law does noL, Lherelore, direcLly deal wiLh maLLers such as inLeresL, royalLy
paymenLs {excepL royalLies under Lhe PeLroleum Law), leasing and paymenLs
lor inLellecLual properLy righLs, and much depends upon precedenL.
All conLracLs lor services Lo be perlormed in Libya should be regisLered aL Lhe
Lax deparLmenL, and sLamp duLy should be paid on Lhese conLracLs.
1hus, a loreign company regisLered in Libya LhaL enLers inLo an agreemenL wiLh
an overseas Lhird parLy lor Lhe use ol an asseL or provision ol a service in Lhe
Libyan |urisdicLion LhaL resulLs in a paymenL, should require LhaL Lhe conLracL is
regisLered by Lhe supplier. ln Lhese circumsLances, Lax is payable on Lhe proliL
deemed Lo resulL lrom Lhe paymenL, and is payable even il Lhe company Lo
which Lhe paymenL was paid is noL regisLered in Libya.
1he same posiLion applies Lo inLeresL payable on a loan Lo a Libyan
regisLered enLiLy.
Branch remittance tax
Branch remiLLance Lax is noL applicable in Libya.
F. Financing considerations
Libya's Lax sysLem conLains no signilicanL rules regarding Lhe classilicaLion ol
debL and equiLy insLrumenLs or Lhe level ol lunding.
1he PeLroleum Law specilically prohibiLs inLeresL paid Lo a parenL Lo lund iLs
Libyan operaLions, buL agreemenLs usually allow lor Lhe lesser ol 27 or
USS1 million ol annual expendiLures Lo be charged as Lhe parenL company's
overhead {PCO).
Under Lhe income Lax law, PCO and inLeresL and commissions are exclusively
allowed, up Lo a maximum ol 57 ol adminisLraLive expenses included in
Lhe accounLs.
1here are no Lhin capiLalizaLion rules.
C. Transactions
Asset disposals
A proliL resulLing lrom Lhe sale ol a business, or lrom any ol iLs Langible or
inLangible asseLs, is Laxable income. 1he proliL is Lhe dillerence beLween Lhe
sale proceeds {or whaL is considered by Lhe Lax deparLmenL Lo be Lhe lair
markeL value) and Lhe cosL or neL book value.
Farm in and Iarm out
lL is noL common in Lhe Libyan oil and gas indusLry lor enLiLies Lo enLer inLo
larmin arrangemenLs.
5elling shares in a company 1consequences Ior resident and
nonresident shareholders)
1here is liLLle precedenL on Lhis issue, buL a share disposal is sub|ecL Lo Lhe
income Lax law, and any gain on disposal is sub|ecL Lo Lax as il iL was Lrading
income, lor a LransacLion ol Lhis naLure being concluded wiLhin Lhe
Libyan |urisdicLion.
H. Indirect taxes
5tamp Duty Law 12 oI 2004
SLamp duLy is applied Lo numerous documenLs, boLh Lo "papers" and "acLions."
1here are ^5 assessable schedules appended Lo Lhe law.
SLamp duLy's mosL relevanL impacL on loreign companies arises lrom Lhe
requiremenL Lo regisLer all conLracLs lor work Lo be perlormed in Libya.
Once a conLracL has been negoLiaLed in Libya, il iL is lor anyLhing oLher Lhan
a direcL supply lrom abroad lrom an unregisLered loreign company, iL musL
be regisLered wiLh Lhe Lax deparLmenL wiLhin 60 days ol Lhe lirsL daLe noLed
in Lhe conLracL.
Libya
203
A 27 duLy on Lhe LoLal conLracL value {plus 5/1,000 ol Lhe duLy) is payable
upon regisLraLion. Any invoice subsequenLly rendered againsL a regisLered
conLracL musL be Laken Lo Lhe Lax deparLmenL and sLamped Lo conlirm LhaL Lhe
conLracL under which iL is issued has been regisLered and Lhe duLy has been
paid. lnvoices should noL be paid unless Lhey are sLamped as regisLered.
VAT/C5T
1here is no VA1 or CS1 in Libya.
Import duties
WiLh Lhe excepLion ol Lobacco, Lhere are no cusLoms imporL duLies in Libya.
A 107257 service charge is assessed on Lhe value ol all imporLed equipmenL
and maLerials Lo cover Lhe adminisLraLive cosLs ol Lhe cusLoms deparLmenL.
Some oLher immaLerial lees apply.
Export duties
1here are no duLies applied Lo goods exporLed lrom Libya.
Excise duties
1here are no duLies applied Lo goods exporLed lrom Libya.
I. Cther
Importation
LquipmenL may be imporLed eiLher on a permanenL or Lemporary basis.
LquipmenL imporLed on a permanenL basis cannoL be reexporLed, whereas
equipmenL imporLed on a Lemporary basis musL be reexporLed.
1he condiLions associaLed wiLh Lemporary imporLaLion are sLricL. LquipmenL
may only be used lor Lhe conLracL lor which iL was imporLed and a deposiL musL
be paid Lo Lhe cusLoms deparLmenL.
Employment taxes
OLher signilicanL Laxes include employer social securiLy conLribuLions ol 11.257
ol Lhe gross salary, employee social securiLy ol 3.757 and Laxes ol 197 on all
salary and beneliLs in kind paid Lo employees.
Foreign exchange controls
1he Libyan dinar is noL a converLible currency and conLracLs usually specily Lhe
proporLion ol Lhe conLracL value LhaL may be remiLLed abroad {Lhe average is
807). 1he balance ol Libyan dinars is noL Lranslerable.
A loreign enLiLy may hold only one Libyan dinar accounL aL one bank. DillerenL
loreign currency accounLs may be opened, buL noL mulLiple accounLs in Lhe
same currency.
Branches ol loreign companies may be paid direcLly ollshore. JoinL sLock
companies {JSCs) may pay inLo loreign currency accounLs held locally, and
Lhey may Lhen remiL Lhe currency in accordance wiLh Lhe Lerms ol Lheir
conLracLs, which should be deposiLed wiLh Lhe local bank.
Forms oI business presence
A loreign oil company may esLablish a branch in Libya.
A loreign service company seeking Lo conducL a conLracL in Lhe Libyan
|urisdicLion is required by law Lo esLablish eiLher a branch {Lo underLake an
"allowed acLiviLy" per a lisL issued by Lhe auLhoriLies) or a Libyan JSC in which
Lhe loreign company may hold a maximum ol 657 ol Lhe share capiLal.
Specilic regulaLions apply Lo Lhe oil secLor. 1he minimum share capiLal lor a JSC
working in Lhe oil indusLry is LD1 million, and Lhe 357 naLional shareholding
is Lo be held eiLher by Lhe Lconomic and Social DevelopmenL Fund {LSDF),
a quasiCovernmenLal body, or by a Libyan company wiLh 100 shareholders
or by 100 naLionals.
Libya
204
MaIaysia
Country code 0
KuaIa Lumpur CMT +
Ernst & Ycunc
LeveI 23A, Menara MiIenium
JaIan DamanIeIa
Pusat Bandar Damansara
50490
MaIaysia
TeI 3 7495 000
Fax 3 2095 5332
DiI and cas ccntacts
Nccr Rida Hamzah
TeI 3 7495 2
Fax 3 2095 7043
nccr-rida.hamzahmy.ey.ccm
Scck Mui Hcw Ycnc
TeI 3 7495 297
Fax 3 2095 7043
scck-mui.hcw-ycncmy.ey.ccm
A. At a glance
Fiscal regime
1he LaxaLion ol income lrom peLroleum operaLions in Malaysia is governed
by Lhe PeLroleum {lncome 1ax) AcL {Pl1A) whereas income derived lrom
nonpeLroleum operaLions is sub|ecL Lo Lax under Lhe lncome 1ax AcL.
RoyalLies 107 ol gross producLion
Bonus ln pracLice, a bonus paymenL, such as a signaLure bonus, is
normally waived
P5C
Under Lhe PeLroleum DevelopmenL AcL 197^, PL1RONAS, Lhe naLional oil
corporaLion ol Malaysia, is vesLed wiLh Lhe exclusive righLs ol exploring and
exploiLaLion ol peLroleum resources in Malaysia.
Oil and gas companies underLaking peLroleum operaLions in Malaysia will enLer
inLo a PSC wiLh PL1RONAS where, generally, under each PSC, Lhe conLracLor
provides Lhe linancing and bears all Lhe risks ol exploraLion, developmenL and
producLion acLiviLies in exchange lor a share ol Lhe LoLal producLion.
Tax rate
1he peLroleum income Lax:
Malaysia 387
JoinL developmenL area:
FirsL 8 years ol producLion is 07
NexL 7 years ol producLion is 107
SubsequenL years ol producLion are 207
lncome Lax 257
113
Resource renL Lax None
Real properLy gains Lax 57
114
113 1ne Protoco| to tne Ha|avs|a1na||anc 0ouo|e 1axat|on /creement rov|ces for tne tax
cnarceao|e to oe recucec ov 50x |n resect of ous|ness |ncome or rof|ts cer|vec from
tne |o|nt ceve|oment area, wn|cn are taxao|e |n ootn countr|es.
114 |t was recent|v announcec tnat roert|es or snares |n rea| roertv coman|es wn|cn
nave oeen ne|c for more tnan f|ve vears w||| oe exemtec. |owever, tne roosa| nas
not oeen cazettec vet.
Malaysia
205
B. Fiscal regime
PeLroleum income Lax is levied aL Lhe raLe ol 387 on Lhe income ol a chargeable
person arising lrom "peLroleum operaLions." 1his Lerm peLroleum operaLions
relers Lo searching lor and winning or obLaining peLroleum in Malaysia and
any sale or disposal ol peLroleum so won or obLained, and includes Lhe
LransporLaLion wiLhin Malaysia ol Lhe peLroleum so won or obLained Lo any
poinL ol sale, delivery or exporL, buL does noL include:
Any LransporLaLion ol peLroleum ouLside Malaysia
Any process ol relining or liquelying peLroleum
Any dealings wiLh producLs so relined or liquelied
Service involving Lhe supply and use ol rigs, derricks,
ocean Lankers and barges
Please noLe LhaL inlormaLion on Lhe liscal regime in Lhis SecLion B relaLes
Lo peLroleum operaLions {upsLream operaLions) only. DownsLream operaLions
are sub|ecL Lo separaLe income Lax legislaLion {lncome 1ax AcL) and Lhe Lax
LreaLmenL may diller lrom LhaL provided under Lhe Pl1A.
Chargeable person
A chargeable person is any person carrying on peLroleum operaLions under
each peLroleum agreemenL {PSC) {i.e., each PSC ellecLively creaLes a
separaLe chargeable person lor Pl1A purposes).
A chargeable person includes a company, a parLnership or oLher body ol
persons and a sole corporaLion.
Cenerally, an operaLor lor Lhe PSC is appoinLed and is responsible lor keeping
Lhe books ol Lhe PSC, as well as liling Lhe peLroleum income Lax reLurn on
behall ol Lhe PSC. 1he individual parLners ol Lhe PSC are noL required Lo lile
a separaLe peLroleum income Lax reLurn in respecL ol Lheir share ol income
lrom Lhe PSC.
Multiple agreements
ll a person carries on peLroleum operaLions under more Lhan one PSC, Lhen
each PSC will be LreaLed as a separaLe chargeable person. LllecLively, expenses
incurred in respecL ol one PSC can only be ollseL againsL income lrom
peLroleum operaLions under Lhe same PSC.
Contiguous agreement areas
ll a parLnership carries on peLroleum operaLions under Lwo or more PSCs in
conLiguous areas, Lhe peLroleum operaLions in Lhose areas are LreaLed as being
carried on under one PSC.
5ucceeding partnerships
ll, aL any Lime during Lhe period ol Lhe PSC, a parLnership is succeeded by
anoLher, and aL leasL one ol Lhe original parLies Lo LhaL PSC who was a member
ol Lhe succeeded parLnership is a member ol Lhe succeeding parLnership, boLh
parLnerships are LreaLed as a conLinuing parLnership.
Unabsorbed losses and capital allowances
Any unabsorbed losses and capiLal allowances can be carried lorward
indeliniLely Lo ollseL luLure business income.
Pecovery oI cost oil and proIit oil
Cenerally, Lhe gross producLion ol crude oil in each quarLer is divided
as lollows:
A maximum ol 107 is lirsL Laken by PL1RONAS as royalLy paymenLs Lo Lhe
lederal and sLaLe CovernmenLs
NexL, cosL oil recovery by conLracLors is deLermined by Lhe "revenue over
cosL" {R/C) raLio
Malaysia
20
1he remaining porLion, which is Lhe proliL oil, is spliL beLween PL1RONAS
and Lhe conLracLors; Lhe proliL oil aLLribuLable Lo Lhe conLracLors is shared,
based on each parLy's parLicipaLing inLeresL
CosL oil recovery excludes nonrecoverable expenses such as:
CosLs incurred as a resulL ol any proven negligenL acL/omission/
willul misconducL
ReplacemenL and/or repair cosLs in respecL ol asseLs or oLher properLy LhaL
is uninsured or underinsured
lndemniLy paymenLs by conLracLors
Lxpenses incurred in connecLion wiLh Lhe negoLiaLion, signaLure or
raLilicaLion ol Lhe PSC
Lxpenses incurred in connecLion wiLh raising money Lo linance peLroleum
operaLions, such as inLeresL, bank charges, commissions
CenLral adminisLraLion/head ollice cosL/charges LhaL are noL subsLanLiaLed
or are excessive
All Laxes and exporL duLies
CosL and expenses associaLed wiLh local ollices and local adminisLraLion,
including sLall beneliLs LhaL are excessive
Functional currency
Upon obLaining approval lrom Lhe MinisLry ol Finance, oil and gas operaLors
may opL Lo submiL Lheir peLroleum income Lax reLurns and calculaLe Lheir
Laxable income by relerence Lo a luncLional currency {i.e., a parLicular loreign
currency) il Lheir accounLs are solely or predominanLly kepL in LhaL currency.
TransIer pricing
1he Malaysian lnland Revenue Board {MlRB) has issued Lransler pricing
guidelines LhaL apply Lo crossborder LransacLions and local LransacLions
beLween associaLed enLerprises. 1he guidelines are based on Lhe arm's lengLh
principle seL lorLh in Lhe OLCD 1ransler Pricing Cuidelines and provide several
meLhods lor deLermining an arm's lengLh price. 1he guidelines also provide a
deLailed lisL ol inlormaLion, documenLaLion and records LhaL need Lo be
mainLained wiLh respecL Lo relaLedparLy LransacLions.
1he anLiavoidance provision under Pl1A allows Lhe MlRB Lo disregard or vary
any LransacLion LhaL is noL made on an arm's lengLh basis.
Capital allowances
CualiIying plant expenditure
Initial
allowance
1a)
Annual
allowance
1b)
Plant
Secondary recovery ^07 107
Any oLher case 207 87
Fixed, ollshore plaLlorm 107
LnvironmenLal proLecLion equipmenL
and laciliLies
^07 207
CompuLer solLware/hardware 207 ^07
Building
Secondary recovery 207 37
Any oLher case 107 37
{a) lniLial allowance is claimable in Lhe year Lhe expendiLure was incurred.
{b) Annual allowance is claimable in each year, commencing lrom Lhe year
Lhe expendiLure was incurred.
Malaysia
207
1he qualilying planL expendiLure incurred during Lhe exploraLion and
developmenL period is accumulaLed and carried lorward Lo Lhe commercial
producLion period and deemed Lo be incurred in Lhe year ol Lhe lirsL sale ol
peLroleum {i.e., when commercial producLion begins).
CualiIying exploration expenditure 1CEE)
OLL incurred during Lhe exploraLion and developmenL period is accumulaLed
and carried lorward unLil Lhe lirsL sale ol peLroleum {i.e., when commercial
producLion begins). OLL is allowed as a deducLion gradually in Lhe lorm ol Lhe
iniLial allowance and annual allowances againsL Lhe gross income lor each year
ol assessmenL.
Disposal oI assets used in petroleum operations
ll an asseL {lor which capiLal allowances have been claimed) is sold, discarded,
desLroyed or ceases Lo be used by Lhe conLracLor lor purposes ol peLroleum
operaLions, a balancing allowance or a balancing charge is compuLed. A
balancing allowance arises when Lhe residual expendiLure ol Lhe asseL exceeds
Lhe disposal value ol Lhe asseL. A balancing charge arises when Lhe disposal
value ol Lhe asseL exceeds Lhe residual expendiLure ol Lhe asseL.
Financing considerations
Upon commencemenL ol commercial producLion, inLeresL expense on
borrowings uLilized in Lhe producLion ol gross income or laid ouL on asseLs used
or held lor Lhe producLion ol gross income is deducLible. 1he amounL ol Lhe
deducLion may noL exceed Lhe lair amounL ol inLeresL in a similar LransacLion
beLween independenL parLies dealing aL arm's lengLh.
C. Incentives
LxcepL lor peLroleum operaLions in Lhe |oinL developmenL area, which are Laxed
aL a lower raLe, Lhere is currenLly no specilic Lax incenLive lor peLroleum
operaLions. However, downsLream pro|ecLs ol naLional and sLraLegic imporLance
may apply lor a prepackaged incenLive {eiLher pioneer sLaLus or invesLmenL Lax
allowance{l1A)), sub|ecL Lo meeLing cerLain condiLions.
D. Withholding taxes
Dividends 07
lnLeresL 157 {a){b)
RoyalLies 107 {b){d)
PaymenLs lor specilied services
perlormed in Malaysia and lor use
ol movable properLy 107 {b){d)
PaymenLs Lo nonresidenL
conLracLors 137 {c){d)
OLher gains or proliLs {nonbusiness)
deemed Lo be derived lrom Malaysia
{e.g., commissions, guaranLee lees) 107 {b)
{a) Bank inLeresL paid Lo nonresidenLs wiLhouL a place ol business in
Malaysia is exempL lrom Lax.
{b) 1his is a linal Lax applicable only Lo paymenLs Lo a nonresidenL.
{c) 1he wiLhholding Lax is LreaLed as a prepaymenL ol Lax ol Lhe linal
Lax liabiliLy.
{d) 1he ProLocol Lo Lhe Malaysia1hailand Double 1axaLion AgreemenL
provides lor Lhe Lax chargeable Lo be reduced by 507 in respecL ol
royalLies, Lechnical lees and conLracL paymenL in connecLion wiLh
service conLracLs LhaL is derived lrom Lhe |oinL developmenL area,
which are Laxable in boLh counLries.
Malaysia
208
E. Indirect taxes
VAT/C5T
1he Coods and Services 1ax {CS1) bill was Labled lor lirsL reading in Lhe
Malaysian ParliamenL on 16 December 2009. 1he second reading ol Lhe CS1
was scheduled lor March 2010 buL was subsequenLly delerred. 1he CS1,
when inLroduced, will replace Lhe exisLing sales Lax and service Lax.
1he Malaysian CovernmenL has announced LhaL Lhe CS1 will be inLroduced aL a
raLe ol ^7 and Lhe CS1 implemenLaLion is expecLed Lo be someLime in 2012.
1he proposed CS1, which is similar in naLure Lo a VA1, would be a mulLisLaged
consumpLion Lax applicable Lo every Laxable supply ol goods and services made
in Malaysia, as well as Lo Lhe imporLaLion ol goods and services inLo Malaysia.
A decision on Lhe sLandard raLe ol and regisLraLion Lhreshold lor CS1 was Lo be
made closer Lo Lhe Lime ol Lhe inLroducLion ol CS1.
Import duty
All duLiable goods, equipmenL and maLerials LhaL enLer Malaysia lrom overseas
are sub|ecL Lo cusLoms imporL duLy. 1he general raLes ol imporL duLy applied Lo
Lhe cusLoms value ol imporLed goods are beLween 27 and 507 depending on
Lhe Lypes ol goods imporLed. Coods under Lrade agreemenLs are accorded Lhe
relevanL prelerenLial imporL duLy raLes. CerLain classes ol peLroleum producLs
are currenLly sub|ecL Lo imporL duLy aL raLes ranging lrom 57 Lo 257 and may
require an imporL license.
1he peLroleum upsLream indusLry {involving Lhe exploraLion, developmenL and
producLion ol crude oil, including condensaLe and gas) currenLly beneliLs lrom
imporL duLy and sales Lax exempLions on all equipmenL and maLerials {lisLed in
Lhe masLer equipmenL lisL) used in such operaLions.
1he peLroleum downsLream indusLry {involving relining ol crude oil inLo
peLroleum producLs, manulacLuring ol peLrochemical producLs, gas processing
and disLribuLion ol processed gas) may apply lor raw maLerials, componenLs,
packaging maLerials, machinery and equipmenL Lo be lree ol imporL duLy il Lhe
goods are used in Lhe manulacLuring acLiviLy.
Export duty
LxporL duLy aL Lhe raLe ol 107 applies Lo peLroleum crude oil exporLed lrom
Malaysia. LxporLaLion ol cerLain classes ol peLroleum producLs may require an
exporL license.
Excise duty
Lxcise duLy applies Lo a selecLed range ol goods manulacLured in Malaysia,
as well as on selecLed goods imporLed inLo Malaysia. No excise duLy is payable
on duLiable goods LhaL are exporLed.
LllecLive lrom 1 January 2000, excise duLy on peLroleum has been abolished.
5ales tax
Sales Lax is a singlesLaged consumpLion Lax imposed on Lhe domesLic sale ol
Laxable goods manulacLured locally and on Lhose goods imporLed inLo Malaysia.
However, sales Lax does noL apply Lo goods manulacLured in, or imporLed
inLo Labuan, Langkawi and 1ioman lsland and in Lhe Malaysia1hailand
JoinL DevelopmenL Area, lree zones, licensed warehouses or licensed
manulacLuring warehouses.
Cenerally, Lhe raLes ol sales Lax lor crude peLroleum, iLs associaLed producLs
and gas are as lollows:
Crude peLroleum and naLural gas {in a gaseous sLaLe) 07 sales Lax
Relined peLroleum sub|ecL Lo sales Lax aL a specilic raLe, e.g., peLrol is
sub|ecL Lo sales Lax aL RM0.5862 per liLer
LubricanL oils sub|ecL Lo 57 sales Lax
Liquelied naLural gas sub|ecL Lo sales Lax aL a specilic raLe {i.e.,
RM0.01 per kilogram)
Malaysia
209
All exporLs ol crude peLroleum, iLs associaLed producLs, and gas are exempL
lrom sales Lax.
Any company LhaL underLakes manulacLuring acLiviLy {ol goods LhaL are
sub|ecL Lo sales Lax) such as relining or compounding, and including Lhe
addiLion ol any loreign subsLance, is required Lo regisLer lor sales Lax,
excepL any:
ManulacLurer whose Laxable Lurnover does noL exceed RM100,000
{Lo apply lor a CerLilicaLe ol LxempLion lrom sales Lax licensing)
ManulacLurer LhaL has been approved wiLh licensed manulacLuring
warehouse {LMW) sLaLus
ManulacLurer LhaL is locaLed in a lree zone
A company LhaL is regisLered lor sales Lax, or is approved wiLh an LMW sLaLus
or is locaLed in a lree zone, is eligible Lo obLain Laxlree raw maLerials,
componenLs, packaging maLerials, machinery and equipmenL lor use in Lhe
manulacLuring acLiviLy.
5ervice tax
Service Lax is a singlesLaged consumpLion Lax applicable on specilied "Laxable
services." Services LhaL are noL included in Lhe prescribed lisL are noL Laxable.
CurrenLly, Lhere are nine ma|or groupings ol Laxable services included in Lhe
prescribed lisL. Lxamples ol Laxable services include LelecommunicaLion
services, employmenL services, consulLancy services, managemenL services,
legal services, accounLing services, adverLising services, engineering services,
surveying services, archiLecLural services, insurance services and hiredcar
services. Cenerally, service Lax is noL applicable Lo Lhe peLroleum indusLry.
Mexicc
Country code 52
Mexicc City CMT -
Ernst & Ycunc Mancera
Ave. Ejrcitc NacicnaI 43 B
CcI. Cranada
Antara PcIancc
Distritc FederaI
DF
11510
Mexicc
TeI 55 523 1300
DiI and cas ccntacts
Kcen Vant Hek
TeI 55 1101 439
kcen.van-t-hekmx.ey.ccm
Terri L. CrcsseIin
J]ka\]flafEaYea!
TeI +1 305 415 1344
terri.crcsseIiney.ccm
AbeIardc Accsta
J]ka\]flaf;`a[Y_g!
TeI +1 312 79 515
abeIardc.accstaey.ccm
A. At a glance
Fiscal regime
1here are no special Lax rules applicable Lo Lhe peLroleum indusLry. lL should
be noLed LhaL oil acLiviLies are reserved lor Lhe Mexican CovernmenL,
and PeLrleos Mexicanos {PLMLX) is Lhe responsible agency.
Malaysia Mexico
210 Mexico
Poyalties 1withholding tax on payments abroad)
For knowhow and Lechnical assisLance, a 257 wiLhholding Lax raLe is
applicable. However, paymenLs lor Lhe use ol paLenLs, cerLilicaLes ol
invenLion or improvemenLs, Lrademarks and Lrade names are Laxed aL 307
ll paid Lo a Lax haven |urisdicLion, Lhe Lax raLe will be ^07
Under mosL Lax LreaLies, Lhe maximum wiLhholding Lax raLe is 107
Bonuses NoL applicable
PSC NoL applicable
lncome Lax raLe CorporaLe income Lax raLe will be Lemporarily increased Lo
307 lor 201012. 1he Lax raLe will be reduced Lo 297 lor
2013 and goes back Lo 287 lor 201^ and subsequenL years
5ingle rate business tax 1alternative minimum tax)
Ceneral Lax raLe 17.57 lor 2010 and LherealLer
Branch Lax raLe Same as corporaLe Lax raLes
Dividends NoL sub|ecL Lo wiLhholding Lax
Interest 1withholding tax on payments abroad)
RegisLered banks residenL in a LreaLy counLry paid ^.97
RegisLered banks noL residenL in a LreaLy counLry paid 107
Oualilied acquisiLions ol machinery and equipmenL paid 217
Ceneral raLe is 307
Ceneral raLes under mosL Lax LreaLies are 107 Lo 157
Capital allowances
Reler Lo SecLion C.
Investment incentives
No invesLmenL incenLives apply in Mexico.
B. Fiscal regime
Mexico's liscal regime does noL provide special rules lor Lhe peLroleum indusLry.
lL should be noLed LhaL oil acLiviLies are reserved lor Lhe Mexican CovernmenL,
and PLMLX is Lhe responsible agency. However, PLMLX subconLracLs an
exLensive varieLy ol services Lo domesLic and inLernaLional providers, among
Lhem: drilling, supply, engineering and consLrucLion.
Corporate income tax
During 2010 Lo 2012, Lhe corporaLe Lax raLe will be increased lrom 287 Lo
307. 1he raLe will be reduced Lo 297 in 2013 and reLurn Lo Lhe currenL 287 as
ol 201^. MexicanresidenL companies are Laxed aL a raLe ol 307 {lor 2010) on
Lheir worldwide earnings. A corporaLion is considered Lo be a Mexican residenL
il iLs "ellecLive place ol managemenL" is locaLed in Mexico. A PL ol a loreign
residenL is generally Laxed in Lhe same manner as a Mexican residenL, buL iL is
Laxed only on income aLLribuLable Lo Lhe PL.
Deductibility requirements
ln general, expenses relaLed Lo Lhe business acLiviLy ol a Laxpayer are
deducLible lor income Lax purposes. ln addiLion, Mexico has lormalisLic
documenLaLion requiremenLs LhaL musL be meL Lo supporL Lhe deducLion,
including requiremenLs relaLed Lo accounLing records as well as invoices.
lnsLead ol lisLing deducLible expenses lor Lax purposes, Lhe Mexican
lncome 1ax Law {Ml1L) provides a lisL ol Lhe expenses LhaL are LreaLed
as nondeducLible iLems.
Consolidated returns
A group ol Mexican companies LhaL meeLs cerLain requiremenLs may lile an
income Lax reLurn on a consolidaLed basis. 1he consolidaLion provisions are
211 Mexico
elecLive and require prior approval lrom Lhe Mexican Lax auLhoriLies
{Hacienda). A group ol companies can sLarL liling consolidaLed Lax reLurns
aL Lhe beginning ol Lhe Lax year lollowing Lhe year when permission Lo lile on
a consolidaLed basis is granLed. Once Lhe opLion Lo reporL Lax resulLs on a
consolidaLed basis is elecLed, Lhe holding company musL consolidaLe iLs resulLs
lor Mexican Lax purposes lor a minimum period ol live years, unless Hacienda
auLhorizes iL Lo cease reporLing on a consolidaLed basis. A group may be
lorced Lo sLop calculaLing iLs income Lax on a consolidaLed basis il Lhe holding
company no longer qualilies as a holding company lor Lhis purpose, or il iL
lails Lo comply wiLh Lhe provisions ol Lhe consolidaLion regime.
1he 2010 Relorms includes signilicanL changes Lo Lhe Lax consolidaLion regime.
1he new rules require Lhe recapLure ol Lhe beneliLs ol Lhe Lax consolidaLion
alLer a liveyear period. Under Lhese new rules, Lhe beneliLs ol consolidaLion
are considered a delerred beneliL, lor which Lhe Lax musL be paid beginning in
Lhe sixLh subsequenL year. 1he acLual paymenL is made as lollows: 257 in years
6 and 7, 207 in year 8, and 157 in years 9 and 10.
Lxample:
F
Y
D
e
I
e
r
r
e
d

t
a
x

1
5
)
2
0
1

2
0
1
7
2
0
1
8
2
0
1
9
2
0
2
0
2
0
2
1
2
0
2
2
2
0
2
3
T
o
t
a
l

1
P
5
)
2010 S1,000
257 257 207 157 157
250 250 200 150 150 1,000
2011 S1,500
257 257 207 157 157
375 375 300 225 225 1,500
2012 S500
257 257 207 157 157
125 125 100 75 75 500
2013 S300
257 257 207 157 157
75 75 60 ^5 ^5 300
Total
15)
53,300 250 25 700 50 550 30 120 45 3,300
1he recapLure ol Lhe beneliLs relaLes Lo: neL operaLing losses used in
consolidaLion; excess dividend disLribuLions beLween members ol Lhe group;
and cumulaLive dillerences beLween Lhe neL accumulaLed alLerLax earnings
accounLs {i.e., CuenLa de ULilidad Fiscal NeLa, or CUFlN) on an individual
versus consolidaLed basis.
As a resulL ol Lhe 2010 Relorm, recapLure ol Lhe consolidaLion beneliLs begins
in 2010 wiLh beneliLs obLained Lhrough 200^. lL is expecLed LhaL Lhis
reLroacLive applicaLion ol Lhe law will likely be challenged by Laxpayers under
consLiLuLional principles.
ln addiLion, beginning in 2010, Lhe CerLilied Public AccounLanL who prepares
Lhe Lax audiL reporL {DicLamen Fiscal) lor Lhe consolidaLed group musL verily
and reporL on Lhe annual delerred income Lax resulLing lrom Lhe consolidaLion.
Capital gains
CapiLal gains and losses are LreaLed as ordinary income and deducLions, excepL
lor mosL losses arising lrom Lhe disposal ol shares. Losses arising lrom Lhe
disposal ol shares are generally noL deducLible againsL ordinary income. An
excepLion exisLs lor members ol a consolidaLed group, whereby cerLain losses
incurred on Lhe sale ol shares ol a member ol Lhe consolidaLed group may be
deducLed againsL ordinary income ol Lhe group. OLherwise, losses lrom Lhe
disposal ol shares may only be used Lo ollseL gains derived lrom Lhe sale ol
sLock or securiLies during Lhe same Lax year or Lhe subsequenL 10 Lax years.
lL is imporLanL Lo noLe LhaL Lhe limiLaLion on Lhe use ol Lhese losses has been
successlully challenged in Mexican courLs.
212
A gain or loss is compuLed as Lhe dillerence beLween Lhe sale proceeds and
Lhe cosL ol Lhe asseL. 1he cosL ol Lhe asseLs is ad|usLed lor inllaLion using
acLualizaLion lacLors based on Lhe NaLional Consumer Price lndex. 1he Lax basis
ol shares ol a Mexican enLiLy is also ad|usLed lor changes in Lhe CUFlN accounL
ol Lhe company, as well as Lhe neL operaLing losses.
5ingle rate business tax
LllecLive lrom 1 January 2008, individuals and legal enLiLies residenL in
Mexico, as well as PLs ol nonresidenL enLiLies, are sub|ecL Lo Lhe single raLe
business Lax {|muesto fmresar|a| a 1asa Un|ca, or Lhe lL1U). 1he lL1U
replaced Lhe asseL Lax in Mexico. 1he Lax is imposed aL a raLe ol 17.57
beginning in 2010 lor Lhe lollowing acLiviLies:
Selling goods
Rendering independenL services
CranLing Lemporary use or en|oymenL ol goods
MexicanresidenL enLiLies are sub|ecL Lo Lax on Lhese acLiviLies on a worldwide
basis. A PL is only sub|ecL Lo Lhe Lax on income aLLribuLable Lo Lhe PL in Mexico.
For purposes ol Lhe lL1U, Lhe deLerminaLion ol a PL and income aLLribuLable Lo
a PL is based on Lhe rules in Lhe Ml1L or Lhe applicable Lax LreaLy.
ln general Lerms, income is recognized on a cash or paymenL basis; however,
an elecLion can be made Lo recognize income based on Lhe rules used lor
income Lax purposes, which require LhaL Lhe income is earned aL Lhe earlier ol
Lhe sale ol Lhe goods or services and Lhe paymenL is received or a documenL is
issued sLaLing Lhe price and ob|ecL ol Lhe LransacLion. 1his elecLion, once made,
cannoL be changed lor luLure years and applies Lo income, noL Lo deducLions.
Lxcluded lrom Lhe deliniLion ol Lhe acLiviLies sub|ecL Lo Lhe Lax are, among
oLhers, dividends, mosL inLeresL and royalLies lrom relaLed parLies, excepL
lrom Lhe lease ol commercial, scienLilic or indusLrial equipmenL.
ln calculaLing Lhe lL1U Lax base, deducLions are allowed lor cerLain expenses
relaLed Lo Laxable acLiviLies. DeducLions are also generally allowed on a cash
basis, including when Lhe paymenLs are made lor capiLal expendiLures. ll a neL
loss is incurred lor lL1U purposes, Lhis loss creaLes a Lax crediL LhaL may be
used during Lhe currenL year againsL luLure lL1U liabiliLies. 1he carrylorward
period is 10 years. AlLhough Lhe lL1U rules provide a series ol crediLs againsL
Lhe Lax, only Lhe loss crediL may be carried lorward. 1his crediL, however, is
required Lo be used lirsL.
1ransiLional rules provide limiLed crediLs lor invenLories and lixed asseLs
acquired prior Lo 1 January 2008. NoLably, expendiLures lor inLeresL and oLher
linancing charges, royalLies Lo relaLed parLies and salaries and beneliLs are noL
deducLible lor lL1U purposes. AlLhough compensaLion and lringe beneliL
paymenLs are noL deducLible, a crediL is allowed lor lL1U purposes lor a
Laxpayer's income Lax liabiliLy lor Lhe year is crediLable againsL lL1U, so LhaL
Lhe greaLer ol Lhe income or lL1U Lax liabiliLy is paid each year. However, unlike
oLher alLernaLive minimum Laxes, il lL1U is paid in a given year, Lhis amounL is
noL recoverable.
ProIit sharing
Lmployers in Mexico musL pay proliL sharing Lo employees each year equal
Lo 107 ol Lhe ad|usLed Laxable income ol Lhe business. 1he proliLsharing
base is similar Lo Laxable income lor income Lax purposes wiLh cerLain
excepLions, including:
No carrylorward ol neL operaLing losses
No inllaLion ad|usLmenLs
1iming ol Lhe recogniLion ol exchange gains and losses
Mexico
213
Cther issues
Functional currency
1he luncLional currency lor Mexican Lax purposes is always Lhe peso.
lL is noL possible Lo elecL any oLher currency as Lhe luncLional currency.
TransIer pricing
Mexican Laxpayers are required Lo conducL LransacLions wiLh relaLed parLies
on an arm's lengLh basis. ln addiLion Lo liling an annual inlormaLional reLurn,
Laxpayers are required Lo produce and mainLain conLemporaneous
documenLaLion {i.e., a Lransler pricing sLudy) demonsLraLing LhaL Lhe income
and deducLions arising lrom inLercompany LransacLions are consisLenL wiLh Lhe
amounLs LhaL would have resulLed had Lhese LransacLions Laken place wiLh
unrelaLed parLies under similar condiLions. Accordingly, Hacienda is enLiLled
Lo make ad|usLmenLs and Lo assess penalLies il iL deLermines LhaL Lhere is an
underpaymenL ol Lax aLLribuLable Lo a missLaLemenL resulLing lrom inLer
company prices charged or paid. ln recenL years, LransacLions beLween relaLed
parLies have been sub|ecL Lo greaLer scruLiny.
AccepLable Lranslerpricing meLhods include Lhe comparable unconLrolled
price {CUP) meLhod, Lhe resale price meLhod, Lhe cosL plus meLhod, Lhe
proliL spliL meLhod, Lhe residual proliL spliL meLhod and Lhe LransacLional
neL margin meLhod.
RecenL modilicaLions Lo Lhe Ml1L require LhaL Laxpayers apply Lhe besL meLhod
rule, giving prioriLy Lo Lhe CUP meLhod, and use Lhe LransacLional meLhods as a
lasL resorL. A deLailed explanaLion musL be included in Lhe conLemporaneous
documenLaLion lor Lhe selecLion ol a meLhod oLher Lhan Lhe CUP meLhod.
lL may be possible Lo reach an APA wiLh Hacienda in order Lo obLain
conlirmaLion ol a meLhod used. 1hese agreemenLs may apply lor a period ol
up Lo live years in Lhe case ol unilaLeral agreemenLs, and lor more years in Lhe
case ol muLual agreemenLs.
Dividends
Mexico has a semiinLegraLed sysLem ol corporaLe LaxaLion under which Lhe
earnings ol a Mexican company are generally Laxed once aL Lhe corporaLe level.
Dividends lrom a Mexican company are noL sub|ecL Lo wiLhholding Lax.
Dividends in excess ol previously Laxed earnings, however, are sub|ecL Lo Lax aL
Lhe disLribuLing company level aL Lhe corporaLe Lax raLe on a grossedup basis.
1he ellecLive raLe alLer gross up is ^2.8587 lor 2010 Lo 2012.
During Lhe period lrom 1 January 1999 Lo 31 December 2001, a porLion ol
corporaLe Lax was allowed Lo be delerred, Lo Lhe exLenL LhaL Lhe earnings
remained invesLed by Lhe Laxpayer in Mexico. 1he porLion ol Lax LhaL was
allowed Lo be delerred was equal Lo Lhe dillerence beLween Lhe neL reinvesLed
earnings ol Lhe company mulLiplied by a 357 Lax raLe wiLh Lhose earnings
mulLiplied by a 307 Lax raLe. 1he laLLer raLe was 327 in 1999.
Dividends LhaL are disLribuLed lrom previously Laxed earnings in Mexico are noL
sub|ecL Lo lurLher LaxaLion upon disLribuLion, excepL lor Lhe amounL ol delerred
Lax, il any, on earnings lrom 1999 Lo 2001. ll Lhe disLribuLions are in excess ol
previously Laxed earnings, corporaLe income Lax is imposed on a grossedup
basis. For Lhis purpose, Mexican businesses musL mainLain a neL accumulaLed
alLerLax earnings accounL {CUFlN). lL should be noLed LhaL, lor companies
LhaL delerred a porLion ol Lheir income Lax on earnings in Lhe period lrom 1999
Lo 2001, Lhese earnings musL be disLribuLed lirsL, and Lhe balance ol Lhese
delerred earnings is moniLored in a reinvesLed CUFlN accounL.
Branch remittance tax
1here is no branch remiLLance Lax in Mexico. However, disLribuLion rules similar
Lo Lhose lor dividends lrom residenL enLiLies apply Lo nonresidenL enLiLies wiLh
a PL or branch in Mexico. For Lhis purpose, Lhe branch is required Lo keep an
accounL lor capiLal remiLLances made Lo Lhe nonMexicanresidenL head ollice
{Cuenta ce Pemesas ce Ca|ta| ce| Pes|cente en e| fxtran|ero, or Lhe
Mexico
214
CURLCARL). ln general Lerms, Lhe CURLCARL balance shows Lhe amounL
ol earnings LhaL have been sub|ecL Lo corporaLe income Lax by Lhe PL.
AddiLionally, Mexican branches are also required Lo record Lheir previously
Laxed earnings Lhrough Lhe CUFlN accounL. ll a remiLLance is made Lo Lhe
head ollice ol Lhe Mexican PL, iL is deemed Lo be a dividend disLribuLion lrom
previously Laxed earnings. ll Lhe paymenL ol Lhe remiLLance exceeds Lhe
CURLCARL and CUFlN balances, Lhe excess dividend musL be grossed up
wiLh a 1.^286 lacLor, wiLh Lhe resulL mulLiplied by Lhe corporaLe Lax raLe.
Tax on cash deposits
1here is a Lax on cash deposiLs {lDL) which is applied on cash deposiLs inLo
Mexican bank accounLs.
1he lDL is imposed aL a raLe ol 37 on monLhly cash deposiLs exceeding
S15,000 pesos {approx. USS1,135). LlecLronic Lranslers, Lranslers beLween
dillerenL bank accounLs, securiLies, and any oLher insLrumenLs or sysLems
agreed wiLh Lhe linancial sysLem, are noL sub|ecL Lo lDL.
C. Capital allowances
Preoperating expenses
PreoperaLing expenses musL be capiLalized and amorLized on a sLraighLline
basis over a 10year period. However, an elecLion may be made Lo adopL a
longer period lor amorLizaLion ol Lhese cosLs. 1he preoperaLing period lasLs
unLil Lhe company sLarLs Lo sell iLs producLs or provides iLs services on a
conLinuous basis.
PreoperaLing expenses are delined as expenses relaLing Lo "Lhe design,
improvemenL, packaging or disLribuLion ol a producL, as well as Lhe rendering
ol services, when Lhese expenses are incurred prior Lo Lhe Lime when Lhe
Laxpayer sells iLs producLs or renders iLs services on a conLinuous basis. ln Lhe
case ol exLracLive indusLries, preoperaLing expenses relaLe Lo Lhe exploraLion
lor locaLion and quanLilicaLion ol new lields suscepLible Lo exploiLaLion." 1his
deliniLion allows signilicanL cosLs incurred during Lhe preoperaLing period Lo be
deducLed raLher Lhan capiLalized, such as inLeresL and general and
adminisLraLive cosLs.
Depreciation oI assets
1axpayers are generally required Lo depreciaLe Lhe cosLs ol lixed asseLs using
Lhe sLraighLline meLhod. 1he amounL ol Lhe depreciaLion deducLion is ad|usLed
lor inllaLion lrom Lhe daLe ol Lhe acquisiLion unLil Lhe Lax year in which Lhe
deducLion is Laken. For Lhis purpose, Lhe Ml1L provides sLaLuLory depreciaLion
raLes; however, Laxpayers may elecL a lower raLe Lhan provided by law.
1he deducLion ol invesLmenLs in lixed asseLs, using Lhe sLraighLline meLhod,
begins in Lhe Lax year when Lhe invesLmenL is placed in service, or Lhe
lollowing year.
Immediate depreciation
For cerLain new asseLs used in Mexico, an immediaLe, oneLime deducLion equal
Lo Lhe presenL value ol Lhe sLraighLline deducLion is allowed {see raLes below).
1he remaining balance ol asseLs deducLed under Lhe immediaLe deducLion
regime is generally noL deducLible. However, il Lhe asseL is sold during Lhe years
immediaLely lollowing Lhe deducLion, an addiLional deducLion may be allowed
as provided by Lhe sLaLuLory Lables in Lhe Ml1L. 1he immediaLe deducLion
opLion is available lor new asseLs used in Mexico buL ouLside ol Lhe meLropoliLan
areas ol Mexico CiLy, Cuadala|ara and MonLerrey. Oualilied invesLmenLs in Lhese
meLropoliLan areas are enLiLled Lo Lhe immediaLe deducLion, il cerLain
adminisLraLive requiremenLs are meL. Please noLe LhaL immediaLe depreciaLion
is noL available lor ollice lurniLure, auLomobiles, buses, Lrucks, LracLors and
Lrailers. lmmediaLe depreciaLion may be Laken in Lhe year Lhe invesLmenL is
made, Lhe year Lhe asseL is placed in service or Lhe subsequenL year.
Mexico
215
For Lhe immediaLe deducLion, Lhe Ml1L provides lor cerLain raLes, which were
modilied by a presidenLial decree issued in 2002. A summary ol some ol Lhe
depreciaLion raLes is as lollows:
Type oI asset Depreciation rate
a) Buildings and consLrucLions 857
b) Vessels 787
c) CompuLers, servers, prinLers, opLic scanners,
digiLizers, exLernal sLorage uniLs, eLc.
9^7
d) 1elephone communicaLion equipmenL 7^7857
e) Dies, molds and Looling 957
l) Maquinary and equipmenL used in Lhe lollowing
acLiviLies:
1. MariLime, river and lake LransporL 7^7
2. ProducLion process ol meLal or naLural carbon
derivaLives
787
3. Crude peLroleum or naLural gas exLracLion
and processing
807
^. Processing ol chemical, peLrochemical and
pharmacobiological producLs, manulacLure ol
plasLic producLs
8^7
5. LlecLrical LransporL and manulacLure ol moLor
vehicles and parLs Lherelor
857
6. ConsLrucLion indusLry 937
7. AsseLs used direcLly Lo new producL research or
Lechnological developmenL in Lhe counLry
957
8. OLhers 857
Since mosL companies in Lhe oil indusLry operaLe under conLracLs Lo perlorm
specilic acLiviLies relaLed Lo Lhe overall ob|ecLives ol PLMLX, Lhe acLual
acLiviLies under Lhe conLracL wiLh PLMLX should be analyzed Lo deLermine Lhe
classilicaLion ol Lhe asseLs. For example, in some insLances, drilling a well may
be classilied as a "consLrucLion" acLiviLy raLher Lhan asseLs used in Lhe
"exLracLion or processing ol crude or naLural gas."
D. Incentives
Exploration
LxploraLion incenLives do noL apply in Mexico.
Tax holiday
Mexico does noL have a Lax holiday regime.
Tax losses
NOLs may be carried lorward lor 10 years; no carryback is allowed. 1he
amounL ol NOLs LhaL may be used in a parLicular Lax year is ad|usLed lor
inllaLion by mulLiplying Lhe amounL by Lhe inllaLion lacLor lor Lhe period lrom
Lhe lirsL monLh ol Lhe second hall ol Lhe Lax year when Lhe loss was incurred
unLil Lhe lasL monLh ol Lhe lirsL hall ol Lhe Lax year when Lhe NOL is used.
ln a merger, only Lhe NOLs ol Lhe surviving company conLinue Lo exisL alLer Lhe
merger. FurLher, Lhe NOLs ol Lhe surviving enLiLy may be used exclusively Lo
ollseL income generaLed by operaLions ol Lhe same caLegory as Lhe operaLions
LhaL produced Lhe losses. 1hus, Lhe merger ol a proliLable company inLo a loss
company designed Lo use Lhe laLLer's losses is ellecLive only il Lhe acLiviLies
conducLed by Lhe proliLable company prior Lo Lhe merger are in Lhe same line
ol business as Lhe loss company.
Mexico
21
1he NOLs ol a company LhaL undergoes a corporaLe division {esc|sc|on)
survive alLer Lhe LransacLion. 1he NOL balance ol Lhe original company is
allocaLed beLween Lhe old and new enLiLies based on Lhe Lype ol businesses
Lhe companies are engaged in. 1he NOL allocaLion is based on invenLory
and accounLs receivable balances il Lhe enLiLies are engaged in commercial
acLiviLies and Lhe allocaLion is based on Lhe lixed asseL balances il Lhe enLiLies
are engaged in indusLrial acLiviLies.
ln Lhe case ol a change, eiLher direcL or indirecL, ol Lhe shareholders ol a
company LhaL has Lax losses, Lhe usage ol Lhe NOLs may be resLricLed. 1his rule
applies when Lhe sum ol Lhe gross income in Lhe Lhree prior Lax years is less
Lhan Lhe amounL ol Lhe available NOLs, ad|usLed lor inllaLion. ll Lhis LesL is meL,
Lhe Lax losses may exclusively be used Lo ollseL income lrom Lhe same business
acLiviLy LhaL generaLed Lhe losses. A change in Lhe conLrolling parLner or
shareholder is deemed Lo occur when Lhere is a change ol shareholders, eiLher
direcLly or indirecLly, ol more Lhan 507 ol Lhe shares or social parLs wiLh voLing
righLs ol Lhe company, in one or more LransacLions over a period ol Lhree years.
Pegional incentives
Local CovernmenLs may granL incenLives relaLed Lo payroll and properLy Laxes
lor new businesses. 1hese incenLives musL be negoLiaLed locally.
P&D
1he research and developmenL {R&D) Lax incenLive, equal Lo a crediL ol 307
on qualilying expenses Lo sLimulaLe invesLmenL in R&D ol Lechnology, was
eliminaLed as ol 2010. However, LransiLional rules are conLemplaLed Lo allow
Lhe use ol any pending crediL againsL Lhe income Lax liabiliLy ol subsequenL
years Lo 2010.
E. Withholding taxes
Oil and gas acLiviLies perlormed in Mexico by privaLe companies musL
generally be perlormed under a conLracL wiLh PLMLX or a PLMLX alliliaLe.
For inLernaLional invesLors, Lhis requires Lhem eiLher Lo enLer inLo a crossborder
conLracL or Lo esLablish a local Lax presence in Mexico. lL is very imporLanL Lo
undersLand in advance how PLMLX will LreaL Lhe paymenLs under Lhe conLracL,
since PLMLX will generally wiLhhold paymenLs Lo a nonresidenL aL Lhe highesL
possible raLe. 1o qualily lor a benelicial LreaLy raLe, a cerLilicaLe ol Lax residence
is required. ll a conLracL requires a loreign enLiLy Lo provide services in Mexico,
PLMLX may asserL LhaL Lhere is a PL in Mexico and require an ollicial invoice.
Planning should be considered Lo separaLe onshore {i.e., perlormed in Mexico)
and ollshore {i.e., perlormed ouLside ol Mexico) services Lhrough a
Mexican presence.
Poyalties and technical assistance Iees
1he general rule is LhaL royalLy and Lechnical assisLance lees are deducLible
wheLher Lhey are paid Lo a Mexican residenL or Lo a nonresidenL. WiLhholding
Lax is generally due on royalLy paymenLs Lo nonresidenLs, aL Lhe earlier ol
Lhe daLe Lhey are paid or Lhe daLe Lhey become payable. Under domesLic
law, Lhe wiLhholding Lax raLe lor knowhow is 257, and lor Lhe use ol paLenLs,
cerLilicaLes ol invenLion or improvemenLs, Lrademarks and Lrade names is 307.
However, il Lhe royalLy is paid Lo a relaLed parLy residenL ol a Laxhaven
|urisdicLion {i.e., prelerenLial Lax regime, as delined in Lhe Ml1L),
Lhe raLe is ^07.
Mexican Lax law delines royalLies as "paymenLs ol any kind lor Lhe Lemporary
use or en|oymenL ol: paLenLs; invenLion or improvemenL cerLilicaLes;
Lrademarks; Lrade names; righLs wiLh respecL Lo liLerary, arLisLic or scienLilic
works including movies, Lelevision or radio recordings; and compuLer solLware
programs; drawings or models; plans; and lormulas, commercial, scienLilic or
indusLrial equipmenL; Lhe Lransler ol Lechnology and inlormaLion relaLed Lo
indusLrial, scienLilic or commercial experience, as well as oLher similar righLs
and properLies and Lhe righL Lo receive lor reLransmission visual images and/or
audio sounds or boLh, or Lhe righL Lo allow Lhe general public Lo access such
Mexico
217
images or sounds, when in boLh cases Lhe Lransmission is made by way ol
saLelliLe, cable, liber opLics or oLher similar means."
As noLed previously, Mexico LreaLs Lhe lease ol commercial, scienLilic or
indusLrial equipmenL as a royalLy. 1his deliniLion is generally deemed Lo include
Lhe lease ol mosL oiland gasrelaLed equipmenL, including rigs and vessels.
ln Lhis respecL, PLMLX imposes Lhe highesL wiLhholding Lax raLe on Lhese
paymenLs il Lhey are paid Lo a nonresidenL. 1he applicaLion ol Lhe lower raLes
lor a LreaLy |urisdicLion requires a cerLilicaLe ol residence.
1he Ml1L specilically excludes Lechnical assisLance lrom Lhe deliniLion ol
royalLies. For Lhis purpose, Lechnical assisLance is delined as Lhe rendering ol
independenL personal services whereby Lhe provider ol Lhe personal services is
obliged Lo provide nonpaLenLable knowledge LhaL does noL involve Lhe Lransler
ol conlidenLial inlormaLion relaLed Lo indusLrial, commercial or scienLilic
experience, and LhaL requires Lhe recipienL ol Lhe services Lo inLervene
in Lhe applicaLion ol Lhis knowledge. Under Lhis deliniLion, mosL service
arrangemenLs, including managemenL and oLher corporaLe service
arrangemenLs, may be LreaLed as Lechnical assisLance. 1echnical assisLance
under Mexican domesLic law is generally sub|ecL Lo a wiLhholding Lax raLe ol
257. However, under many Lax LreaLies, il Lhis service is perlormed ouLside
ol Mexico, Lhe services should qualily as business proliLs noL sub|ecL Lo
wiLhholding Lax. ln Lhis respecL, PLMLX generally assumes LhaL Lhe services
are perlormed in Mexico lor Lhe purposes ol applying wiLhholding Lax.
ln order Lo separaLe onshore and ollshore componenLs ol conLracLs wiLh
PLMLX, many companies esLablish a local presence in Mexico in Lhe lorm ol a
subsidiary or branch Lo enLer inLo Lhe conLracL wiLh PLMLX. 1he local enLiLy
may Lhen subconLracL wiLh a loreign alliliaLe lor Lhe ollshore porLion ol Lhe
conLracL. ll Lhe ollshore services perlormed are proLecLed by a LreaLy, iL may
be possible Lo avoid wiLhholding Lax on Lhe paymenL abroad.
Mexican companies may claim a Lax deducLion lor paymenLs relaLed Lo royalLies
and Lechnology Lranslers, as well as lor Lechnical assisLance lees, paid Lo boLh
residenLs and nonresidenLs provided Lhe lollowing requiremenLs are saLislied:
1he provider possesses Lhe appropriaLe Lechnical experLise
1he Lechnical assisLance is rendered direcLly by Lhe conLracLing corporaLion
and noL Lhrough Lhird parLies, excepL lor Mexican residenLs when Lhe
conLracL conLemplaLes subconLracLing
1he Lechnical assisLance is acLually rendered
ln Lhe conLexL ol royalLies paid abroad, Lhe requiremenL LhaL Lhe service
be rendered direcLly by Lhe loreign recipienL ol Lhe royalLy paymenLs could
resulL in Lhe nondeducLibiliLy ol Lhe royalLies paid. For example, royalLies
paid Lo a nonresidenL LhaL is Lhe primary conLracLor in a Lechnology Lransler
LhaL subconLracLs Lechnical assisLance services Lo a Lhird parLy may be
nondeducLible. Because Lhis rule specilically excludes paymenLs made Lo
Mexican residenLs, residenLs ol cerLain Lax LreaLy parLner counLries LhaL are
negaLively allecLed by Lhis rule may have grounds lor arguing LhaL iL violaLes
Lhe applicable nondiscriminaLion provisions.
Interest
lnLeresL is considered Lo be Mexican sourced il Lhe capiLal is issued or invesLed
in Mexico or il Lhe inLeresL is paid by a Mexican residenL or by Lhe PL ol a
nonresidenL. Mexicansourced inLeresL is sub|ecL Lo wiLhholding Lax when
paid Lo a nonresidenL. 1hree lacLors musL iniLially be considered in deLermining
Lhe wiLhholding Lax raLe applicable Lo inLeresL paymenLs:
1. 1he Lype ol enLiLy LhaL is providing Lhe linancing
2. 1he |urisdicLion where Lhe ellecLive beneliciary ol Lhe inLeresL resides
lor Lax purposes {e.g., a LreaLy parLner counLry, a nonLreaLy counLry
or a Lax haven)
3. 1he naLure ol Lhe underlying insLrumenL lrom which Lhe inLeresL is derived
Mexico
218
Withholding tax rates on interest payments to nonresidents
1he general Mexican wiLhholding Lax raLe on inLeresL paid abroad is 307 lor
2010 Lo 2012 unless an excepLion applies. Among oLhers, Lhe general
excepLions include Lhe lollowing:
107 lor inLeresL paid Lo loreign banks, invesLmenL banks and cerLain
limiLedpurpose linancial companies LhaL are Lhe ellecLive beneliciaries ol
Lhe inLeresL. 1o qualily, Lhe insLiLuLions musL be regisLered wiLh Hacienda
as auLhorized banks. lL should be noLed LhaL Lhe use ol backLoback loan
arrangemenLs as a means ol obLaining reduced wiLhholding Lax raLes is
disallowed under Mexican domesLic law. 1his raLe is reduced Lo ^.97 wiLh
respecL Lo inLeresL paid Lo an enLiLy LhaL resides in a LreaLy parLner counLry
^.97 lor inLeresL paid on publicly Lraded securiLies or securiLies issued
Lhrough a recognized sLock exchange in a counLry wiLh which Mexico has
enLered inLo a Lax LreaLy, provided LhaL Lhe securiLies are regisLered wiLh Lhe
NaLional RegisLry ol SecuriLies and lnLermediaries and, cerLain inlormaLion
requiremenLs are meL. ll Lhe inlormaLion requiremenLs are noL meL or Lhe
securiLies are issued Lhrough an exchange in a counLry wiLh which Mexico
does noL have a Lax LreaLy, Lhe raLe is 107
157 lor inLeresL paid Lo a nonresidenL lessor wiLh respecL Lo a linancial
lease. ln Lhis case, Lhe inLeresL is considered Lo be Mexican sourced il Lhe
asseLs are used in Mexico or il Lhe paymenLs made abroad are deducLed in
lull or in parL by a PL in Mexico, even il Lhe paymenLs are made Lhrough an
esLablishmenL locaLed abroad. 1he law presumes LhaL Lhe asseLs are used
in Mexico when eiLher Lhey are used or en|oyed, or paymenL is made by a
residenL or a loreigner LhaL has a PL in Mexico
MosL Lax LreaLies provide lor a 157 or 107 general raLe. CurrenLly, all regisLered
banks residenL in a LreaLy |urisdicLion are enLiLled Lo a ^.97 raLe under
LransiLory domesLic rules, which have been exLended on an annual basis.
F. Financing considerations
Mexico's income Lax sysLem conLains rules regarding Lhin capiLalizaLion ol
Mexican Laxpayers, which have an impacL on Lhe deducLibiliLy ol inLeresL.
1hese rules can have a signilicanL impacL on decisions made in respecL ol Lhe
linancing ol oil and gas pro|ecLs.
Thin capitalization rules
LllecLive lrom 1 January 2005, Mexico adopLed Lhin capiLalizaLion rules, which,
as amended, deny Lhe deducLion ol inLeresL expense on loans wiLh nonresidenL
relaLed parLies when Lhe company has a debLLoequiLy raLio LhaL exceeds 3:1.
1he amounL ol excess debL lor Lhis purpose is calculaLed by subLracLing Lhe
amounL LhaL resulLs lrom mulLiplying by Lhree Lhe average balance ol
shareholder's equiLy ol Lhe Laxpayer lrom Lhe average annual balance ol all
inLeresLbearing debL. Companies may also elecL Lo deLermine equiLy using
Laxbasis equiLy. ll Lhe debL is higher, a calculaLion is made Lo deLermine Lhe
nondeducLible inLeresL.
ll Lhe average balance ol Lhe Laxpayer's debL wiLh loreignrelaLed parLies is less
Lhan Lhe excess ol Lhe debLLoequiLy raLio, all inLeresL on Lhe relaLedparLy debL
is deemed nondeducLible. ll Lhe average balance ol Lhe Laxpayer's debL wiLh
loreignrelaLed parLies is greaLer Lhan Lhe excess ol Lhe debLLoequiLy raLio,
Lhe inLeresL on relaLedparLy debL is deemed Lo be nondeducLible, based on
Lhe proporLion ol Lhe excess amounL Lo Lhe balance ol Lhe relaLedparLy debL.
1he 2007 Lax relorm also provided LhaL debL conLracLed lor Lhe consLrucLion,
operaLions or mainLenance ol producLive inlrasLrucLure relaLed Lo sLraLegic
areas ol Lhe counLry is exempL lrom Lhe 3:1 raLio requiremenL. 1hese Lerms
may apply Lo invesLmenLs made under conLracLs wiLh PLMLX. FurLhermore,
Laxpayers may avoid being sub|ecL Lo Lhe rules by obLaining a ruling lrom Lhe
Lax auLhoriLies documenLing LhaL Lhe Laxpayer's business requires a higher
debLLoequiLy raLio.
Mexico
219
ln addiLion Lo Lhe Lhin capiLalizaLion rules, inLeresL expense incurred by a
Mexican enLiLy on loans is deducLible, provided Lhe lunds are used Lo linance
Lhe enLiLy's business operaLions. ll debL is used Lo linance an invesLmenL or a
cosL LhaL is eiLher nondeducLible or parLly nondeducLible, Lhe deducLibiliLy
ol Lhe inLeresL expense relaLing Lo LhaL debL is limiLed Lo Lhe exLenL LhaL Lhe
invesLmenL or Lhe cosL is deducLible. 1his rule may have a signilicanL impacL
on Lhe manner in which cerLain invesLmenLs and cosLs are linanced.
lnLeresL is generally deducLible as iL accrues, regardless ol wheLher paymenL
has been made.
Cther restrictions
ln addiLion, inLeresL paid on a loan lrom a relaLed parLy is LreaLed as a
nondeducLible dividend il Lhe loan has any ol Lhe lollowing characLerisLics:
1he loan agreemenL provides LhaL Lhe debLor uncondiLionally promises Lo
repay Lhe loan aL any Lime deLermined by Lhe crediLor
ln Lhe evenL ol delaulL, Lhe crediLor has Lhe righL Lo inLervene in Lhe
adminisLraLion ol Lhe debLor's business
1he paymenL ol inLeresL is condiLional on Lhe availabiliLy ol proliLs, or Lhe
amounL ol Lhe inLeresL is deLermined based on Lhe proliLs
1he inLeresL raLe is noL sLaLed aL a lair markeL raLe
1he inLeresL is derived lrom a backLoback loan, including a backLoback
loan enLered inLo wiLh a linancial insLiLuLion
BackLoback loans lor Lhis purpose are delined as "operaLions in which one
parLy provides direcLly or indirecLly cash, goods or services Lo an inLermediary
which goes on Lo provide cash, goods or services Lo a relaLed parLy or Lhe
original parLy. ln addiLion, backLoback loans include loans which are provided
by a parLy and Lhe loan is guaranLeed by cash or cash deposiLs, shares or
debL insLrumenLs ol any Lype, ol a parLy relaLed Lo Lhe borrower or by Lhe
borrower, Lo Lhe exLenL Lhe loan is guaranLeed in Lhis manner. ln Lhis respecL,
iL is considered LhaL Lhe loan is guaranLeed in Lerms ol Lhis provision when Lhe
granLing ol Lhe loan is condiLioned on Lhe execuLion ol one or more conLracLs
which provide an opLion righL in lavor ol Lhe lender or a relaLed parLy Lo Lhe
lender, Lhe exercise ol which depends on parLial or compleLe compliance wiLh
Lhe paymenL ol Lhe loan or iLs accessories by Lhe borrower. NoL considered
backLoback loans are Lhose LransacLions in which linancing is granLed by a
parLy and Lhe loan is guaranLeed by Lhe shares or debL insLrumenLs, ol any Lype,
or properLy ol Lhe debLor or parLy relaLed Lo Lhe debLor which is residenL in
Mexico, when Lhe lender does noL have legal access Lo Lhe insLrumenLs excepL
in Lhe evenL LhaL Lhe crediLor does noL comply wiLh Lhe Lerms ol Lhe debL."
ll inLeresL paid on a loan made by a Mexican company Lo a nonresidenL
shareholder is deemed Lo be a dividend, Lhe paymenL on Lhe loan should also
be LreaLed as a dividend lor Mexican wiLhholding Lax purposes.
A shareholder loan made Lo a nonresidenL LhaL conLains one ol Lhe provisions
sLaLed above has Lhe lollowing adverse consequences:
1he inLeresL paymenL is nondeducLible
1he principal is noL be LreaLed as equiLy, buL raLher as a liabiliLy sub|ecL Lo
inllaLionary gains LreaLmenL
1he excess ol Lhe inLeresL on Lhe loan over Lhe lending company's CUFlN
could be sub|ecL Lo Lhe excess disLribuLion Lax
WiLh respecL Lo Lhe inLeresL raLe charged beLween relaLed parLies, Mexico's
Lransler pricing rules allow Hacienda Lo make an ad|usLmenL il Lhe inLeresL raLe
charged is deLermined Lo be aL a raLe LhaL varies lrom Lhe markeL raLes. 1hus,
Hacienda may impuLe inLeresL income Lo a Mexican lender using a markeL raLe
LhaL, in Lhe evenL LhaL Lhe inLeresL is charged Lo a relaLed parLy, is deLermined
Lo be aL less Lhan an arm's lengLh raLe. AlLernaLively, il Hacienda deLermines
LhaL Lhe inLeresL charged on a relaLedparLy loan is in excess ol Lhe markeL raLe,
Hacienda may deny a deducLion Lo Lhe borrower lor Lhe amounL ol Lhe inLeresL
in excess ol Lhe markeL raLe.
Mexico
220
InIlationary adiustments
Mexican companies musL recognize lor Lax purposes Lhe inllaLionary gains or
losses aLLribuLable Lo Lheir moneLary liabiliLies and asseLs. 1hus, in deLermining
how Lo linance an invesLmenL in Mexico, consideraLion musL be given Lo Lhe
income Lax LreaLmenL ol inLeresL expense, whereby Lhe inllaLionary gains
arising lrom Lhe debL may, in whole or in parL, ollseL Lhe inLeresL expense and
Lhereby erode Lhe Lax beneliL lrom Lhe inLeresL expense deducLion.
ln broad Lerms, Mexico's sysLem ol Lax accounLing lor inllaLion aLLempLs Lo
rellecL in Laxable income Lhe ellecLs ol inllaLion on a company's moneLary
asseLs and liabiliLies. For Lhis purpose, an inllaLion ad|usLmenL is required, which
is closely linked Lo Lhe LreaLmenL ol inLeresL and exchange gains and losses.
1he inllaLionary ad|usLmenL is made once aL Lhe end ol Lhe year and is applied
Lo Lhe neL moneLary asseL or liabiliLy balance ol Lhe Laxpayer mulLiplied by Lhe
annual ad|usLmenL lacLor. Companies wiLh a neL moneLary asseL have a
deducLible inllaLionary loss, while companies wiLh neL moneLary liabiliLies
reporL a Laxable inllaLionary gain.
Exchange gains and losses
ln Lhe case ol linancial asseLs and liabiliLies denominaLed in a loreign currency
{i.e., any currency oLher Lhan Mexican pesos), Lhe resulLing exchange gains
and losses are LreaLed in Lhe same way as inLeresL, and Lhey are recognized
on an accrual basis. ll, lor example, a Mexican company has US dollar
denominaLed liabiliLies, any exchange loss lor Lhe period resulLing lrom a
devaluaLion ol Lhe peso againsL Lhe US dollar is added Lo Lhe LoLal inLeresL
expense lor Lhe period.
Lxchange gains and losses are recognized as Lhey accrue. 1he paymenL ol a
loreign currency liabiliLy belore iLs maLuriLy daLe, Lherelore, does noL allecL a
resulLing exchange loss deducLion.
C. Transactions
Asset disposals
1he Lransler ol asseLs in Mexico is generally a Laxable LransacLion sub|ecL Lo Lhe
general Cl1, unless Lhe Lransler occurs as a resulL ol a qualilied reorganizaLion.
Mergers and demergers can be done Lax lree beLween MexicanresidenL enLiLies
il cerLain condiLions are meL. lL should be noLed, however, LhaL only PLMLX can
own oil and gas properLies. As such, any sale ol asseL are lixed asseLs used in
Lhe service indusLry.
Farm in and Iarm out
Mexican Lax legislaLion does noL have a special Lax LreaLmenL lor larmin and
larmouL LransacLions.
5elling shares in a company 1consequences Ior resident and
nonresident shareholders)
1he Ml1L provides LhaL a loreign residenL is deemed Lo have Mexicansourced
income il iL sells {Lranslers) shares ol a MexicanresidenL company or il iL
Lranslers shares in a nonMexican enLiLy whose accounLing value {more Lhan
507) is derived lrom real properLy locaLed in Mexico. Under domesLic rules, Lhe
seller has Lhe opLion ol being Laxed aL eiLher 257 on gross proceeds or 307 on
Lhe neL gain {Lhe dillerence beLween Lhe sales price and Lhe Lax basis ol Lhe
shares). lL should be noLed LhaL Lhe neL gain LreaLmenL is allowed exclusively
lor shareholders residenL in counLries LhaL are noL deemed Lo have a
prelerenLial Lax regime or LerriLorial Lax |urisdicLion. 1he Lax basis is deLermined
as Lhe hisLorical acquisiLion price ol Lhe shares, neL ol capiLal redempLions,
ad|usLed lor inllaLion, wiLh Lhe addiLion or subLracLion ol posiLive or negaLive
llucLuaLions in Lhe Mexican company's CUFlN accounL and an ad|usLmenL lor
Lhe increase or decrease in Lhe balance ol NOLs during Lhe period Lhe shares
were held. 1he 307 Lax raLe can only be elecLed il cerLain requiremenLs are
lullilled. NoLe LhaL sellers residenL in Lax havens are sub|ecL Lo Lax on a gross
basis aL Lhe raLe ol ^07.
Mexico
221
Oualilied sales ol publicly Lraded shares on a recognized sLock exchange by
individuals or nonresidenLs are exempL lrom CC1.
ln Lhe case ol a group resLrucLuring, iL is possible Lo Lransler Lhe shares
and deler Lhe income Lax due unLil Lhe shares leave Lhe group {a group is
considered Lo be a group ol companies when aL leasL 517 ol Lhe voLing shares
are direcLly or indirecLly owned by Lhe same corporaLe enLiLy). CerLain Lax
LreaLies enLered inLo by Mexico provide an exempLion lor CC1 or lor Laxlree
corporaLe reorganizaLions.
H. Indirect taxes
VAT
Under Lhe Mexican VA1 law {|ev ce| |muesto a| va|or /crecaco), VA1 is
imposed on legal enLiLies and individuals LhaL carry ouL any ol Lhe lollowing
acLiviLies in Mexico: sell goods and properLy, render independenL services,
granL Lhe Lemporary use or en|oymenL ol goods {e.g., leasing) and imporL
goods or services.
As ol 2010, Lhe general VA1 raLe increases lrom 157 Lo 167 and lor mosL
LransacLions occurring wiLhin Lhe "border zones" ol Lhe counLry, Lhe raLe
increases lrom 107 Lo 117. While Lhe general VA1 raLe is applicable Lo mosL
LransacLions, Lhere is also a 07 raLe applicable Lo cerLain LransacLions, such as
exporLaLion ol goods and cerLain services, sales ol loods, medicines, books, gold.
Cenerally, Laxpayers sub|ecL Lo VA1 shilL Lhe burden ol Lhe Lax Lo Lhe nexL
sLage, unLil iL reaches Lhe ulLimaLe consumer. 1axpayers musL add Lhe VA1 Lo
Lhe sales price ol Lheir producLs or services, collecL iL lrom Lheir cusLomers
and, in Lurn, pay VA1 Lo Lheir own suppliers. 1he VA1 LhaL is paid Lo suppliers
{inpuL Lax) is crediLable againsL Lhe VA1 charged Lo cusLomers {ouLpuL Lax).
ConsequenLly, Lhe amounL LhaL companies musL remiL Lo Hacienda is Lhe excess
ol Lhe LoLal VA1 collecLed during Lhe Lax period lrom Lheir cusLomers over Lhe
VA1 paid Lo suppliers. ll, in a given period, VA1 crediLs exceed VA1 collecLed
lrom cusLomers, Lhe excess may be carried lorward Lo Lhe lollowing Lax period
or, alLernaLively, Lhe Laxpayer may obLain a relund lor such excess; or ollseL Lhe
excess againsL oLher lederal Laxes.
A nonresidenL, in pracLice, is noL able Lo regisLer lor VA1 in Mexico, unless a PL
exisLs. 1herelore, lor LransacLions or conLracLs in Mexico LhaL may require local
componenLs ol goods or services, iL is wise Lo esLablish a Mexican enLiLy in
order Lo recover VA1 on mosL conLracLs.
Import duties
All loreign goods, equipmenL and maLerials LhaL enLer Mexico are sub|ecL Lo
cusLoms and imporL duLies as well as VA1. 1here are exempLions lor imporL
duLies under cerLain lreeLrade agreemenLs.
Special prelerenLial raLes exisL under Lhe NorLh American Free 1rade AgreemenL
{NAF1A) and Lhe lreeLrade agreemenLs wiLh Colombia, Venezuela, CosLa
Rica, Bolivia, Chile, Nicaragua, Lhe LU and Japan. 1o qualily lor Lhese raLes, Lhe
imporLer musL presenL a cerLilicaLe ol origin aL Lhe Lime ol cusLoms clearance.
lL is also possible Lo imporL cerLain equipmenL on a Lemporary basis Lhereby
delerring, and in some cases avoiding, duLies and VA1 on imporLaLion il Lhe
equipmenL is reexporLed wiLhin a cerLain period ol Lime.
Export duties
ln general, Lhe exporL ol goods is noL sub|ecL Lo VA1 or oLher duLies. NoLe LhaL
only PLMLX is allowed Lo exporL oil and gas.
Excise tax
Under Lhe Mexican Lxcise 1ax Law {|ev ce| |muesto fsec|a| soore Procucc|on
v Serv|c|os, or Lhe LlLPS), Lhe sale or imporLaLion ol cerLain producLs, as well
as Lhe rendering ol cerLain services is sub|ecL Lo excise Laxes, based on specilic
characLerisLics {e.g., alcoholic beverages, diesel).
Mexico
222
As ol 2010, cerLain LelecommunicaLions services will be sub|ecL Lo excise Lax aL
a raLe ol 37. 1his Lax will apply Lo cell phone and landline services, cable 1V and
saLelliLe services. LxempLions have been provided lor rural Lelephone services,
public Lelephone services and inLerneL services.
ln general Lerms, Lhe LlLPS provides a Lax incenLive LhaL consisLs ol a crediL lor
excise Laxes paid by Laxpayers LhaL acquire diesel desLined lor marine and oLher
qualilied acLiviLies and asseLs. AdminisLraLive requiremenLs musL be lullilled in
order Lo apply Lhis provision.
5tamp duties
No sLamp duLy applies in Mexico.
Pegistration Iees
No regisLraLion lees apply in Mexico.
I. Cther
Pestrictions on Ioreign investment
Cenerally, loreign parLicipaLion in Mexican legal enLiLies is unresLricLed
{i.e., loreigners may own 1007 ol a Mexican enLiLy's sLock), unless loreign
invesLmenL in a parLicular economic acLiviLy is eiLher prohibiLed or resLricLed by
law. ResLricLions on loreign invesLmenL lall inLo Lhe lollowing lour caLegories:
1. AcLiviLies reserved lor Lhe sLaLe, such as oil, cerLain areas ol elecLriciLy,
nuclear power, Lelegraph, posLal service, and conLrol and supervision
ol porLs, airporLs and heliporLs. NeverLheless, loreign invesLmenL is
allowed lor Lhe lollowing acLiviLies in Lhe oil and elecLriciLy indusLries:
Lhe LransporLaLion, sLorage and disLribuLion ol gas and Lhe generaLion ol
elecLriciLy lor purposes ol cogeneraLion, generaLion lor selluse, imporLs,
exporLs and sales Lo Lhe sLaLeowned elecLrical company
2. AcLiviLies reserved lor Mexicans, such as gas sLaLions, radio and Lelevision
{excepL cable Lelevision and cerLain saLelliLe Lelevision acLiviLies), crediL
unions and land LransporLaLion wiLhin Mexico lor passengers, Lourism
and cargo excluding courier services. NeverLheless, compleLe loreign
invesLmenL in inLernaLional LransporLaLion is allowed in January 200^.
A Mexican legal enLiLy LhaL invesLs in Lhese secLors musL include a "loreign
exclusion clause" in iLs bylaws, esLablishing LhaL Lhe company will noL
accepL, direcLly or indirecLly, loreign shareholders or companies wiLhouL a
similar provision
3. AcLiviLies in which loreign parLicipaLion is limiLed Lo Lhe lollowing minoriLy
equiLy holdings:
Up Lo 257 in airlines
Up Lo 107 in cooperaLive socieLies
Up Lo ^97 in enLiLies engaged in insurance, currency exchange, linancial
leasing and lacLoring, cerLain linancial and invesLmenL insLiLuLions,
newspapers, lishing, cerLain shipping acLiviLies and explosives and
lirearms, among oLhers
^. Prior approval lrom Lhe NaLional Commission ol Foreign lnvesLmenL is
required lor loreign ownership in excess ol ^97 in Mexican enLiLies engaged
in cellular phone sysLems, legal services, crediL inlormaLion, securiLies
raLings, insurance enLiLies, privaLe educaLion services, consLrucLion ol oil
and gas pipelines, oil and gas drilling, managemenL ol airporLs and porL
services and cerLain shipping acLiviLies. Advance approval is necessary lor
any invesLmenL in a Mexican enLiLy il loreign invesLmenL is Lo exceed ^97 ol
Lhe Mexican company's capiLal
Domestic production requirements
Mexico currenLly does noL have domesLic producLion requiremenLs.
Foreign exchange controls
Mexico currenLly does noL have loreign exchange conLrols.
Mexico
223
Forms oI "business presence" in Mexico
Please see SecLion B abouL PLs.
Temporary tax regulations
On 29 April 2009, Lhe Mexican Lax auLhoriLies issued Lheir annual 1emporary
1ax RegulaLions {Peso|uc|on H|sce|anea, "Miscelanea") LhaL came inLo ellecL
on 1 May 2009. One ol Lhe rules provided in Lhe new Miscelanea presenLs a
Lougher compliance requiremenL lor Laxpayers LhaL enLer inLo conLracLs or
provide services Lo Lhe Mexican CovernmenL, and Lo companies owned by Lhe
Mexican CovernmenL {such as Mexico's oil company PLMLX), where Lhey musL
obLain a cerLilicaLe lrom Lhe Mexican Lax auLhoriLies sLaLing LhaL Lhe Laxpayer
is in compliance wiLh iLs LaxrelaLed obligaLions. 1his requiremenL will apply lor
Laxpayers wiLh conLracLs wiLh Lhe Mexican CovernmenL or sLaLeowned companies
LhaL exceed S300,000 pesos {approximaLely USS20,000). ln Lhe pasL, a similar
requiremenL obliged companies Lo lile a sellprepared declaraLion LhaL Lhey had
complied wiLh all Lheir Lax obligaLions. Now, Laxpayers will have Lo requesL Lhe
cerLilicaLe lrom Lhe Mexican Lax auLhoriLies Lhrough an elecLronic requesL.
Energy reIorm
On 28 November 2008, alLer being approved by Lhe Mexican Congress, several
lederal laws and regulaLions relaLed wiLh Lhe energy indusLry {Lnergy Relorm)
were published in Lhe Federal Ollicial CazeLLe. lL is expecLed LhaL Lhe Lnergy
Relorm will losLer privaLe parLicipaLion in Lhe energy secLor and bring business
opporLuniLies lor boLh domesLic and inLernaLional companies dealing wiLh
PLMLX, Lhe Mexican sLaLeowned oil company. 1he Lnergy Relorm also includes
Lhe enacLmenL ol new laws relaLed Lo Lhe developmenL ol renewable sources
and clean energies LhaL will cerLainly losLer developmenL ol privaLe power
generaLion pro|ecLs and energy elliciency in Mexico.
1he Lnergy Relorm includes changes aimed aL creaLing a sLrong regulaLory
lramework and giving PLMLX managemenL an operaLional llexibiliLy and
elliciency. WiLh respecL Lo privaLe invesLors, one ol Lhe mosL relevanL aspecLs ol
Lhe Lnergy Relorm relaLes Lo Lhe availabiliLy ol enLering |oinL invesLmenLs wiLh
PLMLX {i.e., mulLiple services agreemenL), Lo Lhe exLenL LhaL PLMLX remains
in conLrol ol Lhe exploraLion and developmenL acLiviLies.
On 6 January 2010 new adminisLraLive rules were published on conLracLing
acquisiLions, leases, consLrucLions and services relaLed Lo exLracLive acLiviLies
Lo be provided Lo PLMLX. 1hese new rules are exLensive and include, among
oLher provisions, general rules lor various Lypes ol conLracL such as riskbased,
lor exploraLion and exLracLion acLiviLies.
Mczambique
Country code 258
Maputc CMT +2
Ernst & Ycunc
Rua BeImirc Dbadias Muianca, 179
Maputc, 3
Mczambique
TeI 21 353000
Fax 21 32194
DiI and cas ccntacts
!smaeI Faquir
TeI 21 353201
ismaeI.faquirmz.ey.ccm
AIbena Tcdcrcva
TeI 21 353204
aIbena.tcdcrcvamz.ey.ccm
Mexico Mozambique
224
A. At a glance
Fiscal regime
1he liscal regime LhaL applies Lo Lhe peLroleum indusLry in Mozambique consisLs
ol a combinaLion ol Cl1 and royalLybased LaxaLion.
RoyalLies From 27 Lo 107
Bonuses None
PSC None
lncome Lax raLe CorporaLe income Lax raLe 327
Resource renL Lax None
CapiLal allowances NoL applicable
lnvesLmenL incenLives LxempLion lrom VA1 and cusLoms duLies on
imporLaLion ol equipmenL, machinery and Lools
B. Fiscal regime
Corporate tax
Under Lhe CorporaLe lncome 1ax Code, companies and similar corporaLe
enLiLies {including oil and gas companies) are liable lor Cl1 on income
generaLed in Mozambique and abroad {worldwide income).
1he sLandard corporaLe raLe LhaL applies Lo proliLs is 327.
Companies LhaL are Lax residenL in Mozambique or LhaL are noL residenL buL have
a PL in Mozambique and a Lurnover ol more Lhan M12.5 million {approximaLely
USS100,000) are required Lo keep lormal accounLs lor Lax purposes.
1he linancial year is normally a calendar year, buL Laxpayers can apply lor
a dillerenL linancial year il iL is |usLilied {e.g., lor consolidaLion purposes).
TransIer pricing
1ransler pricing was inLroduced recenLly in Mozambique. No specilic
documenLed requiremenLs apply, buL LransacLions musL be underLaken
on an arm's lengLh basis.
Thin capitalization
1he Lhin capiLalizaLion raLio is 2:1.
Dividends
Dividends disLribuLed by Mozambican Laxpayers are sub|ecL Lo a 207
wiLhholding Lax.
Dividends disLribuLed by a residenL company Lo residenL corporaLe shareholders
are noL sub|ecL Lo wiLhholding Lax, provided LhaL Lhe beneliciary holds aL leasL
207 ol Lhe share capiLal and Lhe shares have been held lor a minimum ol Lwo
years. Dividends paid in Lhese circumsLances do noL lorm parL ol Lhe Laxable
income ol Lhe shareholder.
Losses can be carried lorward lor live years.
Ping Iencing
1here is no ring lencing applied wiLhin Lhe same enLiLy, so Lhe proliLs lrom one
pro|ecL can be ollseL againsL Lhe losses lrom anoLher pro|ecL.
However, il Lhe Laxpayer beneliLs lrom a parLial exempLion or a reducLion in Lhe
Lax raLe, Lhe losses ol Lhe acLiviLy LhaL beneliLs lrom Lhe incenLives cannoL be
ollseL againsL Lhe losses ol Lhe remaining acLiviLies.
Mozambique does noL have Lax consolidaLion rules.
CosLs or losses conlirmed as indispensable lor Lhe generaLion ol proliLs or
gains, or cosLs or losses relaLing Lo Lhe mainLenance ol Lhe producLion source,
are Lax deducLible. 1hese include:
CosLs relaLed Lo Lhe producLion or acquisiLion ol goods or services, including
Lhe cosLs relaLing Lo Lhe maLerials used, sLall, elecLriciLy and oLher general
expenses Lo manulacLure, conserve and repair
Mozambique
225
CosLs ol disLribuLion and selling, such as lor LransporLing, adverLising and
placing merchandise
Financial cosLs, such as inLeresLs on loans, discounLs, premiums, Lranslers,
exchange raLe dillerences, expenses ol crediL operaLions, debL collecLion
and issuing bonds and oLher LiLles and reimbursemenL premiums
AdminisLraLive cosLs, such as remuneraLion, allowances, currenL
consumpLion maLerials, LransporLs and communicaLions, renL insurance
CosLs ol analysis, raLionalizaLion, invesLigaLion and consulLaLion
DepreciaLion
Provision
CapiLal losses
Any oLhers LhaL lall in Lhe deliniLion ol cosLs menLioned above
1he Mozambican Lax sysLem allows lor Lhe lollowing deducLions:
Lconomic double LaxaLion ol disLribuLed proliLs
CrediL lor loreign Lax paid {inLernaLional double LaxaLion)
1ax beneliLs
Provisional paymenLs
Concession contracts 1P5Cs)
ln Mozambique, oil operaLions are engaged based on concession conLracLs
resulLing lrom public Lender, which can be lor reconnaissance, research and
producLion or consLrucLion and operaLion ol pipelines. Such conLracLs
deLermine, |nter a||a, Lhe Lerms and condiLions ol sLaLe parLicipaLion in Lhe oil
operaLions. All Lhe Lerms and condiLions ol Lhese concession conLracLs are
agreed wiLh Lhe Mozambican sLaLe on a casebycase basis.
However, such Lerms and condiLions musL be deLermined or agreed wiLhin Lhe
legal limiLs esLablished. lL is imporLanL Lo noLe LhaL Lhe Mozambican law does
noL loresee lurLher deLails wiLh regard Lo parLicipaLion ol Lhe sLaLe in Lhe oil
operaLions wiLhin Lhe Mozambican LerriLory.
Moreover, Lhe Mozambican law sLaLes LhaL no oLher Lax beneliLs apply Lo oil
operaLions oLher Lhan Lhe ones indicaLed in SecLion D. 1his means LhaL Lhe
concession conLracLs ellecLively only lormalize whaL is already loreseen in Lhe
law and deLermine which ol Lhese Lerms and condiLions apply in each case.
Cil production tax 1royalty)
An oil {including naLural gas) producLion Lax {royalLy) is due on Lhe value ol
Lhe oil produced in Mozambique aL Lhe developmenL and producLion siLe.
For onshore producLion, Lhe raLe is 107.
For ollshore producLion, Lhe raLes are as lollows:
Up Lo 100 meLers 77 raw oil and ^7 naLural gas
From 100 Lo 500 meLers 57 raw oil and 37 naLural gas
More Lhan 500 meLers 37 raw oil and 27 naLural gas
1he value ol Lhe Lax is deLermined based on Lhe average sales prices charged
by Lhe oil producLion company in Lhe monLh corresponding Lo LhaL in which Lhe
Lax is assessed.
ln addiLion, Lhe abovemenLioned prices reler Lo Lhe main inLernaLional oil
exporL cenLers' prices.
1he PP1 is considered a cosL lor Cl1 purposes.
C. Taxdeductible costs
Provisions creaLed by companies involved in Lhe peLroleumexLracLing indusLry
relaLed Lo Lhe reconsLrucLion ol wells can be deducLed lor Lax purposes, as well
as Lhose desLined lor Lhe recovery ol Lhe landscape and environmenL ol Lhe
exploraLion siLe alLer Lhe conclusion ol work.
Mozambique
22
WriteoII oI exploration costs
LxploraLion cosLs are considered Lo be a cosL in Lhe linancial year in which Lhe
cosLs are incurred.
D. Incentives
Import duties, VAT and excise duties
LxempLion lrom imporL duLies {e.g., lor equipmenL desLined Lo be
used in Lhe oil operaLions classilied in Class K ol Lhe DuLies Manual,
such as explosives, deLonaLors, igniLing Lubes, machines and explosives
blowing devices)
LxempLion lrom VA1 and Lhe Special ConsumpLion 1ax {excise duLies)
on Lhe imporLs menLioned above
E. Withholding taxes
WiLhholding Lax is due lor boLh corporaLe and individual income Lax.
CIT
1he lollowing income generaLed by nonresidenL enLiLies in Mozambique is
sub|ecL Lo a 207 wiLhholding Lax:
lncome generaLed lrom inLellecLual or indusLrial properLy {e.g., royalLies),
as well as Lhe supply ol inlormaLion relaLing Lo experience acquired in Lhe
indusLrial, commercial or scienLilic secLors
lncome derived lrom Lhe use or concession ol use ol agriculLural, indusLrial,
commercial or scienLilic equipmenL
lncome lrom Lechnical assisLance, managemenL services and direcLors' lees
lncome derived lrom Lhe applicaLion ol capiLal {e.g., dividends, inLeresLs)
and immovable properLy income
1elecommunicaLions and inLernaLional LransporLaLion services are sub|ecL
Lo a 107 WH1.
Branch remittance tax
1here is no branch remiLLance Lax.
F. Financing considerations
Thin capitalization
1he Lhin capiLalizaLion rules apply il a Laxpayer's debL relaLed Lo an enLiLy LhaL
is noL residenL in Mozambique and wiLh which iL mainLains "special relaLions"
is excessive in relaLion Lo Lhe equiLy ol Lhe Laxpayer. 1he inLeresL paid in
respecL Lo Lhe excess is noL deducLible lor purposes ol deLermining ol Lhe
Laxable income.
A special relaLionship is considered Lo exisL beLween a Laxpayer and a
nonresidenL enLiLy il:
1he nonresidenL enLiLy holds, direcLly or indirecLly, a shareholding ol aL
leasL 257 ol Lhe share capiLal ol Lhe Laxpayer
1he nonresidenL enLiLy, noL holding Lhe above level ol shareholding, has in
lacL a signilicanL inlluence on managemenL
1he nonresidenL enLiLy and Lhe Laxpayer are under Lhe conLrol ol Lhe same
enLiLy, wheLher direcLly or indirecLly
An excessive indebLedness is considered Lo exisL il Lhe value ol Lhe debL in
respecL Lo each ol Lhe enLiLies involved, wiLh relerence Lo any daLe in Lhe
LaxaLion period, is more Lhan Lwice Lhe value ol Lhe corresponding percenLage
held in Lhe equiLy ol Lhe Laxpayer.
C. Transactions
Asset disposals
1he Lransler ol immovable properLy is sub|ecL Lo real esLaLe Lax aL
a raLe ol 27.
Mozambique
227
Moreover, any gains or losses arising lrom Lhe disposal ol lixed asseLs ol Lhe
company, as well as Lhe gains and losses derived lrom Lhe disposal ol lixed
asseLs permanenLly used lor a purpose noL relaLed Lo Lhe oil producLion acLiviLy,
are considered Lo be capiLal gains or losses. 1he amounL ol such capiLal gains or
losses is deLermined wiLh relerence Lo Lhe dillerence beLween Lhe realizaLion
value {proceeds) and Lhe base cosL, which is calculaLed in accordance wiLh Lhe
Mozambican Lax laws.
1here is no specilic Lax on capiLal gains in Mozambique. ln Lhe case ol residenL
Laxpayers, Lhe gain is included in Lhe Laxable income ol Lhe respecLive linancial
year and is Laxed aL a general raLe ol 327.
NonresidenLs musL appoinL a Lax represenLaLive in Mozambique Lo comply wiLh
Lheir Lax obligaLions.
Farm in and Iarm out
ln a larmin LransacLion, Lhe inLeresL acquired is considered Lo be a depreciaLing
asseL, which is depreciaLed over Lhe uselul lile ol Lhe asseL.
ln a larmouL LransacLion, a gain resulLing lrom Lhe LransacLion represenLs a
capiLal gain LhaL is included in Lhe Laxable income lor Lhe relevanL linancial year.
For nonresidenL enLiLies, Lhe capiLal gain is Laxed lor Cl1 aL a raLe ol 327.
A nonresidenL enLiLy musL appoinL a Lax represenLaLive Lo comply wiLh iLs
Lax obligaLions.
TransIer oI shares
1he gain resulLing lrom Lhe Lransler ol shares {i.e., Lhe dillerence beLween Lhe
nominal value and Lhe selling price) in a Mozambican company by a
shareholder represenLs a capiLal gain and is Laxed as:
LxLraordinary income il Lhe shareholder is a company; Lhe amounL is
included in Lhe Laxable income in Lhe relevanL linancial year
CapiLal gains income il Lhe shareholder is an individual; Lhe amounL
musL be included in Lhe individual's LoLal Laxable income lor Lhe relevanL
calendar year
CapiLal gains lor nonresidenL shareholders and Lax musL be paid wiLhin
30 days alLer conclusion ol LransacLion
A nonresidenL shareholder musL appoinL a Lax represenLaLive in Mozambique
Lo comply wiLh iLs Lax obligaLions arising lrom Lhe Lransler ol shares.
H. Indirect taxes
VAT
VA1 is levied on Lhe sale ol goods and Lhe rendering ol services, as well as on
imporLs, aL a raLe ol 177.
As a Lax incenLive lor Lhe oil and gas secLor, Lhe imporLaLion ol cerLain
equipmenL desLined Lo be used in oil operaLions {including explosives,
deLonaLors, igniLing Lubes, machines and explosivesblowing devices) is exempL
lrom cusLoms duLies and VA1.
LxporLs are exempL lrom cusLoms duLies and VA1.
5tamp duty
SLamp duLy is levied on all documenLs, books and acLs lisLed in a Lable approved
by Lhe Council ol MinisLers.
Pegistration Iees
Holders ol Lhe righL Lo underLake oil operaLions are sub|ecL Lo Lhe paymenL ol
Lhe lollowing lees:
ApplicaLion lor granLing oil operaLion righLs {approximaLely USS20,000)
Renewal ol a concession conLracL {USS5,000)
Review ol Lhe developmenL plan, excepL in cases ol pipeline consLrucLion
and operaLion conLracLs {USS20,000)
Mozambique
228
AuLhorizaLion Lo commence oil operaLions {USS5,000)
Approval ol Lhe demobilizaLion plan {USS10,000)
I. Cther
5ocial responsibility
A percenLage ol Lhe income generaLed by an oil acLiviLy is allocaLed Lo Lhe
communiLy in Lhe area where Lhe oil pro|ecL is locaLed.
1he percenLage payable is esLablished by Lhe sLaLe budgeL law in accordance
wiLh Lhe esLimaLed oil producLion income.
Exchange control regulations
Mozambique has very sLricL exchange conLrol regulaLions. PaymenLs abroad,
wheLher Lhey are paymenLs lor services, repaymenLs ol loans or oLhers, are
sub|ecL Lo Lhe prior approval ol Lhe CenLral Bank.
Service and loan agreemenLs require Lhe prior approval ol boLh Lhe MinisLry ol
Finance and Lhe CenLral Bank.
1he CenLral Bank requires prool ol paymenL ol Lhe relevanL Laxes prior Lo
granLing approval lor overseas paymenLs.
Oil and gas companies are normally auLhorized Lo open and keep ollshore bank
accounLs lor specilic purposes.
Namibia
Country code 24
Windhcek CMT +2
Ernst & Ycunc Namibia
cnr Dttc Nitzsche and Maritz Streets
KIein Windhcek
Namibia
TeI 1 29 1100
Fax 1 234 991
DiI and cas ccntacts
Camercn Kctze
TeI 1 29 1112
camercn.kctzeza.ey.ccm
FriedeI Janse Van Rensburc
TeI 1 29 1211
friedeI.jansevanrensburcza.ey.ccm
A. At a glance
Fiscal regime
1he liscal regime LhaL applies Lo Lhe peLroleum indusLry in Namibia consisLs ol a
combinaLion ol Pl1 under Lhe PeLroleum {1axaLion) AcL 3 ol 1991 {Lhe P1A),
Lhe adminisLraLive provisions as conLained in Lhe lncome 1ax AcL 2^ ol 1981
{Lhe lncome 1ax AcL) and royalLies levied on sales under Lhe PeLroleum
{LxploraLion and ProducLion) AcL 2 ol 1991 {Lhe PeLroleum AcL).
RoyalLies 57 ol gross revenues. 1he value ol Lhe crude oil lor
royalLy and Lax purposes is Lhe markeL value.
PSC No applicanL is compelled Lo oller Lhe NaLional
PeLroleum CorporaLion ol Namibia {NAMCOR) a share
in a license, and no applicanL is, Lherelore, penalized lor
noL making an oller Lo NAMCOR. However, NAMCOR
can parLicipaLe in licenses il Lhis is ollered during
negoLiaLions and il NAMCOR decides Lo accepL Lhe
inviLaLion Lo parLicipaLe. NAMCOR's inLeresLs are carried
during Lhe exploraLion phase, buL iL conLribuLes lully
lrom Lhe developmenL phase onward.
lncome Lax raLe 357, as well as addiLional proliLs Lax {AP1) levied on
Lhe alLerLax neL cash llows lrom peLroleum operaLions
Mozambique Namibia
229
{deLermined by deducLing Lhe exploraLion and
developmenL expendiLure as well as Lhe peLroleum
income Lax lrom gross income). 1he lirsL Lranche ol
AP1 is only payable il operaLions in a license area earn
an alLerLax raLe ol reLurn ol aL leasL 157. ll operaLions
in Lhe license area earn an alLerLax raLe ol reLurn ol
207 Lo 257, Lhe second and Lhird Lranches ol AP1
become payable.
CapiLal allowances L
115
lnvesLmenL incenLives L
11
, peLroleum companies are exempL lrom non
residenL shareholders' Lax {NRS1). ConLribuLions Lo
decommissioning LrusL lunds are deducLible lor peLroleum
Lax and AP1 purposes. lLems needed lor exploraLion can
be imporLed duLy lree and are exempL lrom VA1.
B. Fiscal regime
1he liscal regime LhaL applies in Namibia Lo Lhe peLroleum indusLry consisLs ol a
combinaLion ol Pl1 under Lhe P1A, Lhe adminisLraLive provisions as conLained in
Lhe lncome 1ax AcL and royalLies levied on sales under Lhe PeLroleum AcL.
Corporate tax
CorporaLe Lax on peLroleum operaLions is levied under Lhe P1A and noL under
Lhe lncome 1ax AcL. Under SecLion 5 ol Lhe P1A, Laxable income received by
a person lrom a license area wiLhin Lhe Namibian LerriLorial sea is Laxed aL a
raLe ol 357, levied in respecL ol each license area. License areas are Laxed
separaLely even il Lhe Laxpayer has been granLed Lhe righL ol exploraLion in
dillerenL license areas.
AP1 is levied on Lhe alLerLax neL cash llows lrom peLroleum operaLions,
deLermined by deducLing Lhe exploraLion and developmenL expendiLure as
well as Lhe Pl1 lrom gross income. 1he lirsL Lranche ol AP1 is only payable il
operaLions in a license area earn an alLerLax raLe ol reLurn ol aL leasL 157.
ll operaLions in Lhe license area earn an alLerLax raLe ol reLurn ol 207 Lo 257,
Lhe second and Lhird Lranches ol AP1 become payable.
Cross income
Under SecLion 7 ol Lhe P1A, "gross income" is Lhe LoLal amounL, in cash or
oLherwise, received by or accrued Lo or in lavor ol a person lrom a license
area in connecLion wiLh exploraLion operaLions, developmenL operaLions or
producLion operaLions, excluding amounLs ol a capiLal naLure, buL specilically
including Lhe lollowing amounLs, wheLher Lhey are capiLal in naLure or noL:
AmounLs received or accrued in or ouLside Namibia, relaLed Lo peLroleum
produced, saved or delivered and sold in an arm's lengLh sale
1he markeL value ol peLroleum produced, saved or delivered and sold in a
nonarm's lengLh sale
1he markeL value ol peLroleum produced and saved in Lhe license area and
appropriaLed lor relining purposes
507 ol Lhe markeL value ol peLroleum produced or saved and which was
noL losL in any manner, noL disposed ol or acquired lor relining purposes or
disposed ol buL noL delivered
lnsurance proceeds in respecL ol any loss ol peLroleum produced or saved
or any income LhaL would have been included in gross income had Lhe loss
noL occurred
Any income received or accrued Lo Lhe person lrom Lhe license area and
deemed Lo lorm parL ol gross income under SecLion 12 ol Lhe P1A
115 f: wr|teoff of accumu|atec ex|orat|on costs |n tne vear of f|rst rocuct|on :un|ess
transferrec to anotner f|e|c uncer c|rcumstances rescr|oec |n tne P1/; as we|| as
onetn|rc of ceve|oment exenc|ture. 1ne rest of tne ceve|oment exenc|ture |s
wr|tten off |n ecua| |nsta||ments |n tne two suosecuent vears.
11 |: assessec |osses can oe carr|ec forwarc |ncef|n|te|v.
Namibia
230
Any income received or accrued Lo a person lrom Lhe sale ol peLroleum
inlormaLion in relaLion Lo such license area
Any income received or accrued Lo a person under a condiLion
ol Lhe license lorms
Any amounLs received or accrued Lo Lhe license holder prior Lo Lhe year ol
producLion in respecL ol Lhese iLems are carried lorward Lo Lhe year ol lirsL
producLion and are included in gross income in LhaL year.
1he share ol peLroleum in crude lorm produced and saved by a person in a
license area is LreaLed as all peLroleum il LhaL person is Lhe sole holder ol Lhe
license area, or as a conLracLually proporLionaLe amounL under any agreemenL
il Lhere are |oinL holders ol a license. ll no agreemenL was enLered inLo, Lhe
peLroleum is divided equally.
Deductible expenditure
Under SecLion 8 ol Lhe P1A, allowable deducLions are expenses acLually
incurred, in respecL ol Lhe parLicular license area, in Lhe producLion ol gross
income. OLher specilic deducLions, aparL lrom Lhe general deducLion, include:
Repairs and mainLenance ol premises occupied lor exploraLion,
developmenL and producLion purposes and machinery used lor
Lhese purposes
Charges lor renL ol land or buildings occupied lor exploraLion,
developmenL and producLion purposes
ConLribuLions Lo a lund or scheme approved by Lhe permanenL secreLary
in respecL ol a person employed in Lhe producLion operaLions
lnLeresL on borrowings relaLing Lo exploraLion, developmenL and producLion
in respecL ol a license area
RoyalLies paid under Lhe PeLroleum AcL
LducaLion and Lraining ol Namibian ciLizens and educaLional or scienLilic
maLerials and equipmenL
Wages and salaries in connecLion wiLh producLion operaLions
in Lhe license area
Consumables in connecLion wiLh producLion operaLions in Lhe license area
1he righL Lo use any planL, machinery or equipmenL in connecLion wiLh
exploraLion, developmenL and producLion operaLions
CusLoms duLies in respecL ol planL, machinery or equipmenL imporLed in
connecLion wiLh producLion operaLions
Ceneral adminisLraLive and managemenL cosLs in connecLion wiLh
producLion operaLions
ResLoraLion cosLs alLer exploraLion operaLions cease
DebLs proven Lo be bad, provided LhaL Lhe amounL is included in Lhe income
in Lhe currenL Lax year or was included in income buL noL deducLed in any
previous Lax year
AmounLs included in Lhe immediaLely preceding Lax year under SecLion
7{1){d) {i.e., amounLs included in respecL ol peLroleum produced or
saved buL noL losL, noL disposed ol or acquired lor relining purposes and
noL delivered)
1he amounL deLermined in accordance wiLh SecLion 68B{1){a) ol
Lhe PeLroleum AcL and deposiLed wiLh relerence Lo Lhe LrusL lund and
decommissioning shorLlalls as relerred Lo in SecLion 68D{3){a)
Under SecLion 13 ol Lhe P1A, deducLions are noL allowed in respecL
ol Lhe lollowing:
LxpendiLures incurred in respecL ol improvemenLs noL specilically allowed
under SecLion 8 ol Lhe P1A
RenLal or cosLs ol acquisiLion ol land and buildings noL occupied lor Lhe
purposes ol producLion in Lhe license area
Namibia
231
ConLribuLions Lo a lund or scheme noL approved by Lhe
permanenL secreLary
LxpendiLures incurred in obLaining a loan or oLher debL noL specilically
allowed under SecLion 8 ol Lhe P1A
CapiLal wiLhdrawn or any sum used as capiLal
Any royalLy noL levied under Lhe PeLroleum AcL
Lxpenses relaLed Lo Lhe purchase ol an inLeresL in peLroleum
Any Lax payable wiLhin or ouLside ol Namibia
SecLion 1^ ol Lhe P1A provides LhaL deducLions lor renL incurred ouLside
Namibia in respecL ol Lhe general adminisLraLion and managemenL ol Lhe
business, as well as capiLal expendiLures direcLly relaLed Lo Lhe general
managemenL and adminisLraLion ol Lhe developmenL operaLions, are only
allowed Lo Lhe exLenL LhaL provision is made in Lhe producLion license, or Lo
Lhe exLenL LhaL Lhe permanenL secreLary considers iL "|usL and reasonable."
SecLion 17 ol Lhe P1A provides LhaL excessive expendiLures incurred under
an arrangemenL beLween associaLed persons may be disallowed by Lhe
permanenL secreLary.
Lach license area is assessed separaLely and losses incurred in one license area
cannoL be ollseL againsL proliLs earned in anoLher. Losses resulLing lrom
allowable deducLions, however, are deducLible as an allowable loss againsL Lhe
gross income lrom Lhe license area in Lhe lollowing year. However, exploraLion
expendiLures lrom a license area wiLhouL gross income may be deducLed lrom
license areas wiLh gross income lrom producLion. 1he license holder is noL
required Lo have Laxable income alLer deducLing iLs expenses. Nor is iL a
requiremenL LhaL Lhe license area where Lhe exploraLion expendiLure arose
has Lo be in producLion belore Lhe license holder is able Lo deducL exploraLion
expendiLures incurred in respecL ol a license area wiLhouL gross income lrom a
license area wiLh gross income.
SecLion 9 ol Lhe P1A provides lor an allowance lor exploraLion expendiLures and
developmenL expendiLures incurred in Lhe years belore producLion commences.
1his allowance is discussed in more deLail in SecLion C.
CCT
Namibia does noL impose CC1. Under Lhe deliniLion ol "gross income" in
SecLion 7 ol Lhe P1A, Lhe gross income is Lhe LoLal amounL, in cash or
oLherwise, received by or accrued Lo or in lavor ol such person lrom a license
area in connecLion wiLh exploraLion operaLions, developmenL operaLions or
producLion operaLions, excluding amounLs ol a capiLal naLure. However, cerLain
amounLs specilically lisLed {as deLailed above) are included in Lhe gross
income, wheLher or noL Lhey are ol a capiLal naLure.
ln addiLion, il Lhe license holder receives an amounL lrom Lhe disposal, loss or
desLrucLion ol any asseL used in exploraLion and developmenL operaLions,
capiLal expendiLure is only allowed Lo Lhe exLenL LhaL iL does noL exceed Lhe
amounL received {see SecLion C lor lurLher inlormaLion).
SecLion 12 ellecLively provides LhaL capiLal gains arising on Lhe disposal
ol asseLs are included in gross income and are Laxable in Lhe hands ol Lhe
license holder.
Functional currency
Books ol accounL musL be kepL in Namibian dollars. Lven Lhough Laxpayers
may invoice or be invoiced in oLher currencies, Lhe invoices musL be converLed
Lo Namibian dollars lor VA1 purposes aL Lhe ruling exchange raLes ol
Lhose LransacLions.
1here are no special provisions in Lhe P1A LhaL deal wiLh Lhe exchange raLes
Lo be used lor Pl1 purposes. However, under generally accepLed accounLing
pracLice, income and expenses are converLed Lo Namibian dollars when Lhe
LransacLions Lake place.
Namibia
232
TransIer pricing
As Lhe P1A specilically provides LhaL no Lax may be levied under Lhe lncome
1ax AcL, Lhe Lransler pricing provisions conLained in LhaL AcL do noL apply.
However, Lhe P1A conLains provisions LhaL are similar in scope Lo Lhe Lransler
pricing provisions in Lhe lncome 1ax AcL in respecL ol Lhe deLerminaLion ol
gross income. Under SecLion 7 ol Lhe P1A, a sale ol peLroleum is considered Lo
be aL arm's lengLh il Lhe price provided lor in Lhe sale agreemenL is Lhe only
consideraLion, Lhe sale is noL allecLed by any relaLionships oLher Lhan Lhe sale
relaLionship creaLed in Lhe sale agreemenL, and Lhe seller or any person
associaLed wiLh Lhe seller has no inLeresL in Lhe subsequenL resale ol Lhe
peLroleum. 1he markeL value ol Lhe peLroleum produced and saved in Lhe
license area is deLermined in accordance wiLh any ol Lhe Lerms or condiLions
ol Lhe license ol LhaL license area or, in Lhe absence ol such an agreemenL, an
amounL deLermined by Lhe permanenL secreLary wiLh regard Lo Lhe amounL
LhaL would be obLained beLween a willing buyer and a willing seller acLing in
good laiLh.
FurLher, SecLion 17 ol Lhe P1A provides LhaL excessive expendiLures incurred
under an arrangemenL beLween associaLed persons may be disallowed.
Dividends
PeLroleum companies are exempL lrom wiLhholding Laxes on dividends
and NRS1.
Poyalties
RoyalLies are payable aL a raLe ol 57 ol gross revenues under Lhe PeLroleum
AcL. 1he value ol Lhe crude oil lor royalLy and Lax purposes is Lhe markeL value.
RoyalLies are generally payable quarLerly. ll Lhe payer lails Lo remiL paymenL,
Lhe minisLer may prohibiL Lhe removal ol peLroleum lrom Lhe producLion area
and any oLher dealings in respecL ol Lhe peLroleum.
Under Lhe P1A, Lhe royalLy paid is deducLible in Lhe deLerminaLion ol Lhe
Laxable income ol Lhe license holder.
C. Capital allowances
CapiLal allowances are divided inLo exploraLion expendiLure and a developmenL
expendiLure, boLh ol which are delined in greaL deLail in SecLion 1 ol Lhe P1A.
However, no separaLe deliniLion lor producLion expendiLure is provided.
An exploraLion expendiLure is an expendiLure acLually incurred, wheLher
direcLly or indirecLly, in or in connecLion wiLh carrying ouL exploraLion
operaLions in or in connecLion wiLh a license area, including, among oLher
Lhings, expendiLures acLually incurred in respecL ol:
1he acquisiLion ol machinery, implemenLs, uLensils and oLher arLicles
employed lor purposes ol such operaLions
Labor, luel, haulage, supplies, maLerials and repairs in connecLion wiLh a
survey or sLudy, excluding drilling lor appraisal purposes
ConLribuLions Lo a lund or scheme, approved by Lhe permanenL secreLary,
in respecL ol any person employed in, or in connecLion wiLh,
expiraLion operaLions
1he advancemenL ol Lraining and educaLion ol Namibian ciLizens aL
insLiLuLions approved by Lhe permanenL secreLary
Charges, lees or renL lor, or in respecL ol, land or buildings occupied lor
purposes ol carrying ouL exploraLion operaLions
1he general adminisLraLion and managemenL direcLly connecLed wiLh
exploraLion operaLions
1he resLoraLion ol a license area, or any parL Lhereol, alLer cessaLion ol
exploraLion operaLions
CusLoms duLy in respecL ol imporLaLion lor use in, or in connecLion wiLh,
exploraLion operaLions in such license areas as planL, equipmenL, spare
parLs, maLerials, supplies or consumable iLems
Namibia
233
Under SecLion 1 ol Lhe P1A, developmenL expendiLures are acLually incurred in,
or in connecLion wiLh, carrying ouL developmenL operaLions in, or in connecLion
wiLh, a license area, including, among oLher Lhings, expendiLures acLually
incurred in respecL ol:
1he acquisiLion ol machinery, implemenLs, uLensils and oLher arLicles used
lor purposes ol such operaLions
1he acquisiLion ol lurniLure, Lools and equipmenL used in ollices and
accommodaLion and in warehouses, exporL Lerminals, harbors, piers,
marine vessels, vehicles, moLorized rolling equipmenL, aircralL, lire and
securiLy sLaLions, waLer and sewage planLs and power planLs
Labor, luel, haulage, supplies, maLerials and repairs in connecLion wiLh
drilling, laying, insLallaLion and consLrucLion
ConLribuLions Lo a lund or scheme, approved by Lhe permanenL
secreLary, in respecL ol any person employed in, or in connecLion wiLh,
developmenL operaLions
1he advancemenL ol Lraining and educaLion ol Namibian ciLizens aL
insLiLuLions approved by Lhe permanenL secreLary
Charges, lees or renL lor, or in respecL ol, land or buildings occupied lor
purposes ol carrying ouL developmenL operaLions
1he general adminisLraLion and managemenL direcLly connecLed wiLh
developmenL operaLions
1he resLoraLion ol such license area, or any parL Lhereol, alLer cessaLion ol
developmenL operaLions
CusLoms duLy in respecL ol Lhe imporLaLion lor use in, or in connecLion
wiLh, developmenL operaLions in such license areas as planL, machinery,
equipmenL, spare parLs, maLerials, supplies or consumable iLems
SecLion 9 ol Lhe P1A provides an allowance lor Lhe exploraLion expendiLure and
developmenL expendiLure incurred in Lhe years belore producLion commences.
1hese allowances can be carried lorward Lo LhaL year in Lhe same way as
income is carried lorward. ln Lhe year when producLion commences, all Lhe
exploraLion expendiLures can be deducLed {unless Lhey have already been
Lranslerred Lo anoLher license area LhaL has gross income lrom producLion),
as well as oneLhird ol Lhe developmenL expendiLure. 1he resL ol Lhe
developmenL expendiLures can be deducLed in Lhe Lwo subsequenL years
in equal insLallmenLs.
SecLion 10 ol Lhe P1A provides LhaL exploraLion expendiLures incurred alLer Lhe
year when producLion commenced are immediaLely deducLible, while all oLher
capiLal expendiLures may be deducLed in Lhree equal insLallmenLs commencing
in Lhe year Lhey were incurred.
D. Incentives
Exploration expenditure
AccumulaLed exploraLion expendiLures are deducLible in lull in Lhe lirsL year ol
producLion {unless Lhey have already been Lranslerred Lo anoLher license area
LhaL has gross income lrom producLion). LxploraLion expendiLures incurred
alLer Lhe year when producLion commences are immediaLely deducLible.
Development expenditure
AccumulaLed developmenL expendiLures are deducLible in Lhree equal
insLallmenLs commencing in Lhe lirsL year ol producLion.
Losses
Losses resulLing lrom allowable deducLions may be deducLed as an allowable
loss againsL Lhe gross income lrom Lhe license area in Lhe nexL year. Losses
may be carried lorward wiLhouL limiLaLion. However, losses incurred in one
license area may noL be ollseL againsL income lrom anoLher license area or
oLher operaLions.
Namibia
234
E. Withholding taxes
Dividends
PeLroleum companies are exempL lrom wiLhholding Laxes on dividends and NRS1.
Cther
No wiLhholding Lax is payable on inLeresL, royalLies, Lechnical services or
nonresidenL conLracLor paymenLs.
Branch remittance tax
1here is currenLly no branch remiLLance Lax in Namibia.
F. Financing considerations
Thin capitalization limits
1here are no Lhin capiLalizaLion provisions in Lhe P1A. However, exchange
conLrol rules may allecL Lhe choice ol lunding. 1he accepLance by a local enLiLy
ol loan lunds lrom abroad is sub|ecL Lo specilic exchange conLrol approval.
1he remiLLance ol inLeresL Lo nonresidenLs may be allowed upon provision
ol evidence ol indebLedness, provided Lhe raLe is reasonable. CurrenLly,
a debLLoequiLy raLio noL exceeding 3:1 is required by Lhe Bank ol Namibia.
C. Transactions
Asset disposals
1he license holder is noL Laxable on Lhe proceeds lrom Lhe sale ol a share in
physical asseLs. SecLion 7 ol Lhe P1A does noL include capiLal receipLs in Laxable
income, and even Lhough SecLion 7{2) provides LhaL an amounL lrom Lhe sale
ol an asseL is deemed Lo have been received during Lhe year ol producLion, an
amounL received lrom Lhe sale ol an asseL prior Lo Lhe lirsL year ol producLion is
noL included in gross income. ll, however, any porLion ol Lhe amounL received
relaLes Lo prospecLing inlormaLion, iL is Laxable in Lhe hands ol Lhe license
holder in Lhe year LhaL producLion commences. FurLhermore, alLhough Lhe
license holder is noL Laxable on Lhe amounL received on Lhe sale ol Lhe asseL,
Lhe asseL's capiLal expendiLure is only allowed {or carried lorward) Lo Lhe
exLenL LhaL iL exceeds Lhe amounL received {i.e., Lhe amounL received is
"deducLed" lrom Lhe capiLal expendiLure carried lorward lrom LhaL year).
CapiLal gains arising on Lhe disposal ol asseLs LhaL are sold alLer Lhe lirsL year
ol producLion are included in gross income, and Lhey are Laxable in Lhe hands ol
Lhe license holder.
1he purchaser is able Lo deducL Lhe consideraLion in Lhe year LhaL producLion
commences, provided LhaL Lhe amounL paid relaLes Lo Lhe Lransler ol parL
ownership in an asseL and noL Lo Lhe righL Lo parLicipaLe in Lhe peLroleum
produced under a producLion license.
Farm in and Iarm out
1he recoupmenL provisions do noL apply il an inLeresL in a peLroleum license is
sold {e.g., where a disposal ol parL ol an inLeresL in a license area Lakes place in
a year prior Lo Lhe lirsL year ol producLion). As such, even il Lhe consideraLion
received, wheLher iL is cash, an asseL or a carrylorward ol an expendiLure,
exceeds Lhe value ol Lhe share ol Lhe inLeresL sold, iL is noL included in Lhe
license holder's gross income because Lhere is no Lax on Lhe proliLs ol Lhe sale
ol capiLal asseLs in Namibia in Lhe years prior Lo Lhe lirsL year ol producLion.
1he recoupmenL provisions do reduce Lhe expendiLure claimable in respecL ol
Lhe asseLs and reduce Lhe capiLal expendiLure claimable in Lhe year LhaL Lhe
consideraLion is received, wheLher Lhe amounL relaLes Lo an asseL or Lo capiLal
expendiLures oLher Lhan in respecL ol an asseL.
1he purchaser is able Lo deducL Lhe consideraLion in Lhe year LhaL producLion
commences, provided LhaL Lhe amounL paid relaLes Lo Lhe Lransler ol parL
ownership in an asseL and noL Lo Lhe righL Lo parLicipaLe in Lhe peLroleum
produced under Lhe auLhoriLy ol a producLion license.
Namibia
235
5elling shares in a company 1resident and nonresident
shareholders)
Namibia does noL impose CC1, and as such, Lhe sale ol Lhe shares in a Namibian
company will noL be sub|ecL Lo Lax in Namibia. 1he sale ol Lhe shares will, however,
be sub|ecL Lo sLamp duLies aL a raLe ol NS2 lor every NS1,000 Lranslerred.
H. Indirect taxes
Import duties
License holders are exempL lrom paying imporL VA1 under Schedule V ol Lhe
Value Added 1ax AcL 10 ol 2000 {Lhe VA1 AcL).
VAT
VA1 is chargeable on Lhe Laxable supply ol goods by every regisLered person
under SecLion 6{1){a) ol Lhe VA1 AcL. 1axable supplies are delined in SecLion 1
ol Lhe VA1 AcL as Lhe supply ol goods or services in Lhe course or in Lhe
lurLherance ol a Laxable acLiviLy. Namibia is delined lor Lhe purpose ol Lhe VA1 AcL
as including Lhe LerriLorial sea, excluding Lhe economic zone and Lhe conLinenLal
shell. As such, lor VA1 purposes, goods or services supplied by a Laxable person
up Lo 200 nauLical miles lrom Lhe low waLermark may be sub|ecL Lo VA1.
ll Laxable supplies exceed NS200,000, regisLraLion lor VA1 is obligaLory.
For VA1 purposes, Laxable acLiviLy means any acLiviLy LhaL is carried on
conLinuously or regularly by any person in Namibia or parLly in Namibia,
wheLher or noL lor a pecuniary proliL, LhaL involves or is inLended Lo involve,
in whole or in parL, Lhe supply ol goods or services Lo any oLher person lor
consideraLion. No guidelines deline Lhe Lerms "conLinuously" or "regularly" buL,
in pracLice, Lhe DirecLoraLe ol lnland Revenue views an uninLerrupLed presence
in Namibia ol ^ weeks or ol 3 Limes in any 12monLh period Lo be a sullicienL
presence Lo oblige Lhe enLerprise Lo regisLer lor VA1.
License holders musL levy VA1 aL 157 on invoices lor goods or services.
As VA1regisLered persons, license holders are enLiLled Lo claim crediL lor VA1
paid on invoices issued by Namibian suppliers againsL VA1 charged on supplies
made in Namibia.
5tamp duties
SLamp duLies are payable aL varying raLes under Lhe SLamp DuLies AcL 15 ol
1993. AlLhough Lhere is no requiremenL Lo regisLer Lhe peLroleum agreemenL,
Lhe sLamping Lhereol ensures LhaL Lhe conLracL is valid lor liLigaLion purposes.
SLamp duLies on Lhe conLracL are NS5.
Pegistration Iees
License holders are required Lo pay annual charges lor Lhe beneliL ol Lhe SLaLe
Revenue Fund, calculaLed by mulLiplying Lhe number ol square kilomeLers included
in Lhe block or blocks by Lhe amounLs provided lor in SecLion 67 ol Lhe PeLroleum
AcL. ln Lhe case ol exploraLion licenses, Lhe charge is calculaLed as lollows:
During Lhe lirsL lour years, NS60 per square kilomeLer
During Lhe nexL Lwo years, NS90 per square kilomeLer
During Lhe subsequenL Lwo years, NS120 per square kilomeLer
1herealLer, NS150 per square kilomeLer
ln Lhe case ol Lhe producLion licenses, Lhe lee is NS1,500 per square kilomeLer.
I. Cther
Covernment approach toward taking equity ownership oI proiects
No applicanL is compelled Lo oller NAMCOR a share in a license, and no
applicanL, Lherelore, is penalized lor noL making an oller Lo NAMCOR. However,
NAMCOR can parLicipaLe in licenses il Lhis is ollered during negoLiaLions, and il
NAMCOR decides Lo accepL Lhe inviLaLion Lo parLicipaLe. NAMCOR's inLeresLs
are carried ouL during Lhe exploraLion phase, buL iL conLribuLes lully lrom Lhe
developmenL phase onward.
Namibia
23
The NetherIands
Country code 31
Rctterdam CMT +1
Ernst & Ycunc
Bccmpjes 25
3011 XZ Rctterdam
NetherIands
TeI 407 1000
Fax 407 970
DiI and cas ccntacts
Marc De Lcuw
TeI 407 490
marc.de.IcuwnI.ey.ccm
Linda Dcnkers
TeI 407 493
Iinda.dcnkersnI.ey.ccm
A. At a glance
Fiscal regime
1he liscal regime LhaL applies in Lhe NeLherlands Lo Lhe peLroleum indusLry
consisLs ol a combinaLion ol corporaLe income Lax, a surlace renLal Lax, a sLaLe
proliLshare {SPS) levy and royalLybased LaxaLion.
RoyalLies 07 Lo 87
Bonuses None
PSC NoL applicable
CorporaLe income Lax 25.57; 207 applies Lo Lhe lirsL t200,000
5urIace rent tax:
ProducLion areas t695 per km
Reconnaissance areas t232 Lo t695 per km
SPS levy 507
117
CapiLal allowances U, L
118
lnvesLmenL incenLives R&D, addiLional depreciaLion on small lields
{SPS),
119
depreciaLion aL will {Cl1 and SPS)
B. Fiscal regime
1he liscal regime LhaL applies in Lhe NeLherlands Lo Lhe peLroleum indusLry
consisLs ol a combinaLion ol corporaLe income Lax, a surlace renLal Lax, a SPS
levy and royalLybased LaxaLion.
Filing requirements 1CIT/5P5)
1he sLandard Lax year, lor Cl1 and SPS purposes, is Lhe calendar year;
however, a company may use iLs own accounLs year as iLs Lax year. A book
year is esLablished by iLs arLicles ol incorporaLion and may end on any daLe
during Lhe year.
An annual Cl1 Lax reLurn musL be liled wiLhin six monLhs alLer Lhe end ol Lhe
year wiLh Lhe Lax lor corporaLe Laxes, unless Lhe company applies lor exLension
{generally, an addiLional nine monLhs). For SPS purposes, Lhe license holder
musL lile proliL and loss sLaLemenLs made in accordance wiLh Lhe provisions ol
Lhe Mining AcL, LogeLher wiLh a balance sheeL showing Lhe asseLs and liabiliLies
relaLing Lo Lhe producLion as ol Lhe linancial yearend.
1his SPS inlormaLion should be included as an exhibiL Lo Lhe DuLch corporaLe
income Lax reLurn.
117 1ne SPS |evv |s cecuct|o|e for |ncome tax uroses.
118 U: ca|ta| u||ft/crec|t, f: |mmec|ate wr|teoff for ex|orat|on costs.
119 |ntrocuct|on exectec cur|nc 2010 on tn|s |ncent|ve.
The Netherlands
237
Cl1 and SPS is paid on an assessmenL basis. 1he compeLenL auLhoriLy lor Cl1
and SPS assessmenLs is Lhe DuLch Lax auLhoriLies {under Lhe previous sysLem
ol SPS, Lhis was delegaLed Lo Lhe MinisLry ol Lconomic Allairs).
Corporate tax
CorporaLe income Lax is levied on residenL and nonresidenL companies.
ResidenL companies are companies incorporaLed under civil law as well as
companies LhaL have Lheir ellecLive place ol managemenL and conLrol in
Lhe NeLherlands. ResidenL companies are Laxable on Lheir worldwide Laxable
income. NonresidenL companies, primarily branch ollices ol loreign companies
doing business in Lhe NeLherlands, are Laxable only on specilic income sources,
such as business proliLs earned Lhrough a permanenL esLablishmenL {PL)
siLuaLed in Lhe NeLherlands.
lL is imporLanL Lo noLe LhaL Lhe SPS due is deducLible lor DuLch Cl1 purposes.
Tax rates
For 2010, Lhe sLaLuLory Cl1 raLe is 25.57. A raLe ol 207 applies Lo Lhe
lirsL t200,000.
Determination oI taxable income
1he proliL lor Lax purposes is noL necessarily calculaLed on Lhe basis ol Lhe
annual linancial sLaLemenLs. ln Lhe NeLherlands, all commercial accounLing
meLhods musL be reviewed Lo conlirm LhaL Lhey are accepLable under Lhe
liscal law. 1he primary leaLure ol Lax accounLing is Lhe legal concepL ol
"sound business pracLice."
Lxpenses incurred in connecLion wiLh Lhe conducL ol a business, in principle,
are deducLible. However, cerLain expenses are noL deducLible, such as lines and
penalLies and expenses incurred wiLh respecL Lo a crime. For companies LhaL do
noL have shareholders wiLh subsLanLial inLeresLs, no oLher resLricLions exisL,
excepL wiLh respecL Lo Lhe deducLibiliLy ol inLeresL.
Functional currency
1axpayers musL calculaLe Lheir Laxable income in euros. On requesL, DuLch
corporaLe Lax reLurns may be liled in Lhe luncLional currency ol Lhe Laxpayer,
provided Lhe linancial sLaLemenLs ol Lhe relevanL linancial year are prepared in
LhaL currency. 1he linancial sLaLemenLs may be expressed in a loreign currency
il Lhis is |usLilied by Lhe company's business or by Lhe inLernaLional naLure ol
Lhe company's group. ll Lhis regime is applied, in principle, Lhe luncLional
currency musL be used lor aL leasL 10 years.
Participation exemption
Cenerally, Lhe DuLch parLicipaLion exempLion provides lor a lull exempLion ol
DuLch corporaLe income Lax wiLh regard Lo dividends derived lrom and capiLal
gains in relaLion Lo a qualilying shareholding.
LllecLive lrom 1 January 2010, Lhe lollowing requiremenLs musL be saLislied Lo
qualily lor Lhe parLicipaLion exempLion in Lhe NeLherlands:
1he Laxpayer musL hold aL leasL 57 ol Lhe normal paidup share capiLal ol a
company, wiLh capiLal divided inLo shares
One ol Lhe lollowing LesLs is meL:
1he parLicipaLion is noL held as a porLlolio invesLmenL
{Lhe "moLive LesL")
Or
1he subsidiary is noL considered a lowLaxed porLlolio parLicipaLion,
which is deLermined by a Lwopronged LesL: 1. an asseL LesL and 2.
an ellecLive Lax raLe {L1R) LesL
The Netherlands
238
Motive test
1he moLive LesL requires a deLerminaLion as Lo Lhe Laxpayer's ob|ecLive ol
owning Lhe parLicipaLion. 1he moLive LesL is noL saLislied il Lhe Laxpayer only
aims aL earning a yield LhaL is similar Lo Lhe yield LhaL can be expecLed lrom
normal, acLive porLlolio asseL managemenL. ll Lhe Laxpayer has more Lhan one
moLive {e.g., Lhe subsidiary is parLly held as a porLlolio invesLmenL and parLly
lor business reason), Lhe predominanL moLive is decisive.
1he moLive LesL is generally saLislied when Lhe business carried on by Lhe
subsidiary is similar or complemenLary Lo Lhe business carried on by Lhe DuLch
Laxpayer. FurLher, Lhe moLive LesL is saLislied when Lhe Laxpayer plays an
essenLial role in Lhe business ol Lhe group because ol iLs acLiviLies in Lerms ol
managemenL, sLraLegy or linance. 1he moLive LesL is also saLislied il Lhe DuLch
Laxpayer is an inLermediary holding company LhaL acLed as a link beLween Lhe
ulLimaLe parenL and operaLing subsidiaries. ln LhaL case, Lhe moLive LesL is
also meL when Lhe inLermediaLe holding company is held by an inLermediaLe
holding company.
1he moLive LesL is deemed noL Lo be meL il {i) more Lhan hall ol Lhe
subsidiary's consolidaLed asseLs consisL ol shareholding{s) ol less Lhan 57 or
{ii) Lhe predominanL role ol Lhe subsidiary LogeLher wiLh Lhe roles perlormed
by iLs lower Lier subsidiaries is Lo puL cash or asseLs aL Lhe disposal ol oLher
group enLiLies, lor example, Lo acL as a group linance company.
Asset test
A parLicipaLion is considered a "porLlolio invesLmenL" il iLs asseLs consisL,
direcLly or indirecLly, predominanLly ol {more Lhan 507) "lree invesLmenLs."
"Free invesLmenLs" include porLlolio invesLmenLs oLher Lhan Lhose reasonably
required wiLhin Lhe scope ol Lhe business acLiviLies ol Lhe enLiLy holding Lhe
invesLmenLs. 1his also includes asseLs used lor acLiviLies LhaL predominanLly
consisL ol providing, direcLly or indirecLly, linancing Lo relaLed enLiLies or
linancing ol asseLs ol relaLed enLiLies, including making available asseLs or Lhe
righL Lo use asseLs.
Lxamples ol asseLs LhaL could qualily as lree invesLmenLs are bank deposiLs,
loan receivables, securiLies, real esLaLe and bonds.
Croup receivables are deemed Lo be lree invesLmenLs, unless {i) Lhe
parLicipaLion qualilies as an acLive group linance company, {ii) Lhe receivables
are mainly linanced {907 or more) lrom LhirdparLy debL, or {iii) income ol
Lhe receivables is sub|ecL Lo sullicienL LaxaLion {same meaning as lor purposes
ol Lhe 1ax 1esL see below). As ol 1 January 2010, asseLs used in acLive
leasing business are no longer deemed Lo be porLlolio invesLmenLs.
Real esLaLe is an asseL LhaL, in general, qualilies as a lree invesLmenL, unless
Lhe real esLaLe is used wiLhin Lhe scope ol Lhe company's business acLiviLies
{e.g., a hoLel or cinema). However, il Lhe asseLs ol Lhe company, on a
consolidaLed basis, consisL almosL exclusively {i.e., 907 or more) ol real
esLaLe LhaL is noL direcLly or indirecLly held by an enLiLy LhaL is a DuLch muLual
invesLmenL lund, Lhe parLicipaLion is qualilied as a real esLaLe parLicipaLion.
1his Lype ol parLicipaLion qualilies lor Lhe parLicipaLion exempLion in any case.
Only share inLeresLs ol aL leasL 57 are Laken inLo consideraLion lor consolidaLion
purposes. 1he aloremenLioned 907 criLerion is a sLricL one {i.e., receivables
relaLing Lo Lhe real esLaLe owned do noL qualily as real esLaLe).
ETP test
ll a parLicipaLion does noL meeL Lhe asseL LesL, iL musL be sub|ecL Lo a cerLain
level ol LaxaLion in order Lo en|oy Lhe parLicipaLion exempLion regime {Lhe L1R
LesL). ll Lhe parLicipaLion lails Lhe required level ol LaxaLion, income derived
lrom Lhe parLicipaLion could be sub|ecL Lo Lhe crediL sysLem raLher Lhan Lhe
exempLion. As ol 2010, Lhe L1R LesL is meL when Lhe parLicipaLion is sub|ecL
Lo a "realisLic levy" ol local LaxaLion. An ellecLive Lax raLe ol aL leasL 107 is
sullicienL lor passing Lhis LesL. As ol 2010, a lull recalculaLion Lo DuLch Lax
sLandards ol Lhe Laxable proliLs ol Lhe parLicipaLion should in principle no
The Netherlands
239
longer be required. lL should sLill be considered wheLher or noL Lhe Laxable
basis ol a parLicipaLion is deLermined in a manner LhaL does noL diller Loo
signilicanLly lrom DuLch sLandards. LisLed examples ol regimes LhaL would be
signilicanLly dillerenL lrom DuLch sLandards include, among oLhers, cosLplus
regimes il Lhe basis is Loo limiLed, noLional deducLions or exempLions LhaL
subsLanLially erode Lhe Laxable basis and Loo generous parLicipaLion exempLion
regimes {i.e., cerLain impuLaLion regimes).
Depreciation at will
For 2010, Lhe DuLch CovernmenL exLended Lhe period Lo Lemporarily
reinLroduce Lhe possibiliLy lor depreciaLion aL will ol business asseLs
Lo sLimulaLe invesLmenLs. lnvesLmenLs in mosL asseLs made beLween
1 January 2010 and 31 December 2010 may be depreciaLed aL will wiLh
a maximum ol 507 in 2010. 1he depreciaLion aL will is applicable Lo mosL
business asseLs {excepLions apply Lo, among oLhers, buildings, cerLain
inlrasLrucLure pro|ecLs, immaLerial lixed asseLs and asseLs acquired Lo be
leased Lo Lhird parLies). 1his laciliLy is also available lor SPS purposes.
5tate proIit share 15P5)
1he Mining AcL provides lor an SPS levy ol 507 on income resulLing lrom
mineral producLion acLiviLies {Lhe income relaLing Lo nonmineral producLion
acLiviLies may be ignored). As such, Lhe deLerminaLion ol Lhe Laxable basis lor
SPS is ring lencing. 1he holder or coholder ol a producLion license is sub|ecL Lo
Lhe levy ol Lhe SPS.
lL is unlikely LhaL gas sLorage acLiviLies lall wiLhin Lhe realm ol SPS. However,
conversion ol an upsLream siLe inLo a sLorage laciliLy may Lrigger "exiL Lax"
discussions wiLh Lhe DuLch Lax auLhoriLies.
Determination oI the taxable basis Ior 5P5 purposes
A separaLe proliL and loss accounL musL be prepared lor SPS purposes. ll Lhe
Laxpayer holds several licenses, iL may consolidaLe Lhe income derived lrom
iLs licenses. lL should be noLed LhaL no liscal uniLy or group rules exisL lor
SPS purposes.
1he Mining AcL specilically indicaLes LhaL Lhe deLerminaLion ol Lhe Laxable
income lor SPS purposes is based on Lhe same principles as Lhe DuLch
CorporaLe lncome 1ax AcL. For clarilicaLion, Lhe Mining AcL lisLs a number
ol income and expense iLems LhaL are eiLher included or excluded lrom Lhe
Laxable basis.
lncluded income and expense componenLs are:
1he movemenL ol invenLory
1he gain or loss realized in relaLion Lo Lhe sale ol a producLion license
CosLs perLaining Lo Lhe exploraLion phase, Lo Lhe exLenL LhaL Lhese have
noL already been deducLed lor proliLshare purposes
Lxcluded income/expense componenLs include:
AmorLizaLion ol Lhe purchase price ol a reconnaissance license, Lo Lhe
exLenL LhaL Lhe purchase price exceeds cosLs LhaL have noL been deducLed
belore lor proliLshare purposes. ln oLher words, Lhis provision implies LhaL
a paymenL lor a reconnaissance license is only deducLible lor proliLshare
purposes, Lo Lhe exLenL LhaL Lhis purchase price rellecLs cosLs LhaL have noL
been deducLed belore lor proliLshare purposes. As such, goodwill paid in
addiLion Lo Lhe Lrue cosLs ol an exploraLion license are noL deducLible
1he value ol exLracLed minerals LhaL have been used lor Lhe upsLream
acLiviLy iLsell
The Netherlands
240
1he Mining AcL provides lor a 107 uplilL ol all cosLs, wiLh Lhe excepLion ol:
Any Laxes and public levies LhaL are borne by Lhe license holder
1he amorLizaLion ol Lhe purchase price ol a producLion license, unless Lhe
purchase price rellecLs cosLs LhaL have noL been deducLed lor proliLshare
purposes already. As such, Lhe uplilL is only available lor "Lruly incurred
expenses" and noL lor a goodwill paymenL
DonaLions Lo a dismanLlemenL provision, Lo Lhe exLenL LhaL Lhe Lransleror
ol Lhe producLion license has already made donaLions Lo Lhe obligaLion
provision earlier {Lhis prevenLs mulLiple uplilLs)
1hirdparLy income, such as income derived lrom Lhe use ol plaLlorms or
pipelines ol Lhe license holder, is excluded lrom Lhe Laxable basis lor SPS
purposes. As a consequence, cosLs relaLing Lo LhirdparLy income should also
be excluded lrom Lhe Laxable basis.
Tax rate and credits
1he SPS raLe is seL aL 507. Based on currenL legislaLion, a loss may be carried
back lor Lhree years and carried lorward lor an indeliniLe period ol Lime. 1his
provision dillers lrom Lhe Cl1 loss carryback {one year) and Lhe carrylorward
{nine years) Lerms.
1he Mining AcL conLains a crediL lor DuLch Cl1 LhaL is borne on Lhe mineral
producLion acLiviLy. 1he crediL is deLermined as lollows:
1he SPS income is ad|usLed lor Lhe 107 uplilL
1he ad|usLed SPS income is reduced by SPS LhaL will be due alLer crediLs
1he number compuLed under Lhe previous iLem is Lhen mulLiplied wiLh Lhe
DuLch Cl1 raLe prevailing lor Lhe year
Excluded licenses
1he DuLch Mining AcL conLains a number ol LransiLional rules relaLing Lo some
old licenses. From an SPS perspecLive, ArLicle 1^7 ol Lhe Mining AcL is ol
parLicular relevance. Under Lhis provision, linancial regulaLions embedded
in producLion licenses LhaL have been granLed prior Lo 1965 will remain in
lorce. As such, Lhese linancial provisions may overrule Lhe currenL proliL
share provisions.
ln addiLion, ArLicle 1^9 conLains a number ol LransiLional rules lor Lhe LaxaLion
ol sLorage acLiviLies LhaL were previously noL sub|ecL Lo a license.
5urIace rental
Surlace renLal is a Lax levied on each license holder LhaL eiLher has an ollshore
reconnaissance license or an ollshore producLion license aL 1 January ol a
calendar year. 1he 2010 raLe amounLs Lo t695 per km lor producLion areas
and t232t695 per km lor reconnaissance areas.
1he surlace renLal is paid on a "reLurn" basis. 1he ulLimaLe liling daLe is 1 April
ol Lhe calendar year in quesLion.
Poyalty regimes
RoyalLies are calculaLed on a licensebylicense basis by applying specilied raLes
Lo Lhe value ol onshore oil and gas producLion. ProducLion does noL include oil
and gas LhaL are used lor reconnaissance or exploraLion in Lhe license area, or
LransporL or LreaLmenL ol Lhe oil and gas.
The Netherlands
241
1he lollowing raLes apply lor 2010:
Bracket
Cil 1in thousand
meters cubed)
Cas 1in million
meters cubed)
0200 uniLs 07 07
201600 uniLs 27 27
6011,200 uniLs 37 37
1,2012,000 uniLs ^7 ^7
2,001^,000 uniLs 57 57
^,0018,000 uniLs 67 67
More Lhan 8,000 uniLs 77 77
1he above raLes increase by 257 in Lhe evenL LhaL Lhe average price ol an
imporLed barrel ol crude oil exceeds t25. A 1007 increase applies in Lhe evenL
ol an absence ol sLaLe parLicipaLion in Lhe license.
1he royalLy is paid on a reLurn basis. 1he ulLimaLe liling daLe is 1 April ol Lhe
year lollowing Lhe calendar year in quesLion.
New ZeaIand
Country code 4
WeIIinctcn CMT +12
Ernst & Ycunc
100 WiIIis Street Majestic Centre
WeIIinctcn
011
New ZeaIand
TeI 4 499 4
Fax 4 495 7400
DiI and cas ccntacts
AIan Judce
TeI 4 495 7393
aIan.judcenz.ey.ccm
Raymcnd Yee
TeI 4 470 0503
raymcnd.yeenz.ey.ccm
A. At a glance
Fiscal regime
New Zealand's liscal regime applicable Lo Lhe peLroleum indusLry consisLs ol a
combinaLion ol CorporaLe income Lax {Cl1) and royalLybased LaxaLion.
RoyalLies 07 Lo 207
lncome Lax raLe Cl1 raLe: 307
CapiLal allowances D, L
120

lnvesLmenL incenLives L
121

B. Fiscal regime
1he liscal regime LhaL applies Lo Lhe peLroleum indusLry in New Zealand
consisLs ol a combinaLion ol Cl1 and royalLybased LaxaLion.
Corporate tax
New Zealand residenL corporaLions are sub|ecL Lo income Lax on Lheir
worldwide income aL Lhe raLe ol 307.
120 0: acce|eratec cerec|at|on, f: |mmec|ate wr|teoff for ex|orat|on costs.
121 |: |osses can oe carr|ec forwarc |ncef|n|te|v.
The Netherlands New Zealand
242
Cl1 is levied on Laxable income. 1axable income is delined as assessable
income less deducLions, less any available neL losses. Assessable income
includes ordinary income {deLermined under common law) and sLaLuLory
income {amounLs specilically included in Lhe lncome 1ax AcL). ln general,
deducLions include expendiLures incurred in deriving assessable income or
expendiLures incurred in Lhe course ol carrying on a business lor Lhe purpose
ol deriving assessable income.
An expendiLure ol a capiLal naLure is generally noL deducLible when incurred,
alLhough depreciaLion deducLions may be available. However, deducLions lor
cerLain oil and gas expendiLures ol a capiLal naLure are available under a
specilic peLroleum mining regime {reler Lo SecLion C lor an ouLline ol
exploraLion and developmenL cosLs).
Ping Iencing
New Zealand does noL generally apply ring lencing in Lhe deLerminaLion ol
corporaLe Lax liabiliLy. However, expendiLures on peLroleum mining operaLions
underLaken Lhrough a loreign branch ol a New ZealandresidenL company
cannoL be ollseL againsL oLher New Zealandsourced income. OLherwise, Lhe
same Lax enLiLy may ollseL losses againsL any ol iLs pro|ecL proliLs {or oLher
group companies wiLh aL leasL 667 ol common ulLimaLe ownership). New
Zealand has Lax consolidaLion rules under which various wholly owned New
Zealand enLiLies may lorm a Lax consolidaLed group and Lhereby be LreaLed
as a single Lax enLiLy.
Capital gains tax 1CCT)
1here is currenLly no comprehensive CC1 in New Zealand. However, generally,
all gains on linancial arrangemenLs are sub|ecL Lo Lax. FurLher, gains on Lhe
sale ol properLy LhaL is purchased lor Lhe purpose ol resale, or as parL ol a
proliLmaking scheme, are Laxable. An amounL LhaL has been derived lrom a
business is also Laxable, unless Lhe amounL is ol a capiLal naLure. 1he specilic
Laxing provisions LhaL apply Lo peLroleum miners may override Lhese general
principles. For example, special provisions Lax Lhe proceeds lrom Lhe sale ol
peLroleum mining asseLs, such as license areas and geological inlormaLion.
Dividends
New Zealand has a dividend impuLaLion regime. 1he beneliL ol a Lax
paid by a New Zealand company can be passed on Lo iLs New Zealand
residenL shareholders.
A nonresidenL shareholder can receive a dividend LhaL is lully impuLed{sourced
lrom Lax paid lrom proliLs) lrom a New Zealand company wiLhouL lurLher Lax
cosLs under Lhe loreign invesLor Lax crediL {Fl1C) regime. However, Lhe
mechanism is somewhaL complex. ln briel, Lhe New Zealand company may:
DeducL nonresidenL wiLhholding Lax {NRW1)
Pay a supplemenLary dividend Lo Lhe nonresidenL shareholder equivalenL
Lo Lhe amounL ol NRW1 LhaL musL be deducLed lrom Lhe iniLial and
supplemenLary dividend
A New Zealand company can receive an Fl1C equal Lo Lhe supplemenLary
dividend LhaL can be used Lo obLain a relund ol Lax paid or as a crediL againsL
income Lax payable. 1hus, Lhe Lax crediL lunds Lhe supplemenLary dividend.
1reaLy reliel may also be available. From 1 February 2010, a lully impuLed
dividend paid Lo a nonresidenL shareholder who holds a 107 or more
direcL voLing inLeresL will be sub|ecL Lo NRW1 aL 07. 1he Fl1C regime will
be inapplicable in Lhis case.
New Zealand
243
Mineral royalties
1he royalLy regime applies Lo peLroleum permiLs granLed on or alLer
1 January 1995. 1he royalLy provisions apply Lo mining permiLs buL noL Lo
exploraLion or prospecLing permiLs. RoyalLies are payable il peLroleum is
discovered and sold, used in Lhe producLion process as luel or exchanged
or Lranslerred ouL ol Lhe permiL boundaries. However, no royalLy is payable
in respecL ol:
PeLroleum llared or oLherwise unavoidably losL
PeLroleum reLurned Lo a naLural reservoir wiLhin Lhe permiL area {e.g.,
rein|ecLed gas)
PeLroleum removed lrom an approved underground sLorage laciliLy and
upon which a royalLy has previously been paid by Lhe producer
Mining permiLs issued under Lhe Crown Minerals AcL 1991 prior Lo
1 January 1995, or mining licenses issued under Lhe PeLroleum AcL 1937
prior Lo Lhe passage ol Lhe Crown Minerals AcL 1991, conLinue Lo pay Lhe
royalLy specilied aL Lhe Lime Lhe permiL or license was granLed.
A company wiLh a permiL granLed prior Lo 1 January 1995 may apply Lo Lhe
secreLary ol commerce Lo have Lhe royalLy calculaLed as il Lhe permiL was
granLed on or alLer 1 January 1995.
Discoveries between 30 June 2004 and 31 December 2009
ln summary, lor any discoveries made beLween 30 June 200^ and
31 December 2009, Lhe royalLy regime is a hybrid regime LhaL sLipulaLes
an annual paymenL ol Lhe greaLer ol:
An ad valorem royalLy componenL ol 17 on naLural gas and 57 on oil, or an
accounLing proliLs royalLy {APR) componenL ol:
157 on:
1he lirsL NZS750 million {cumulaLive) gross sales lor an
ollshore discovery
1he lirsL NZS250 million {cumulaLive) gross sales lor an
onshore discovery
207 APR on addiLional producLion
Mining permiL holders are required Lo pay Lhe higher ol Lhe Lwo royalLies
in any year.
ProspecLing and exploraLion cosLs incurred anywhere in New Zealand beLween
30 June 200^ and 31 December 2009 are deducLible lor Lhe purposes ol
calculaLing Lhe APR.
1he special royalLy provisions applying Lo discoveries made and prospecLing
and exploraLion cosLs incurred beLween 30 June 200^ and 31 December 2009
are Lo encourage increased exploraLion Lo idenLily new gas discoveries, given
Lhe decline ol exisLing lields.
All other petroleum production beIore and aIter 30 June 2004
to 31 December 2009
For all oLher peLroleum producLion in respecL ol discoveries ouLside Lhe above
period, Lhe royalLy regime comprises a 57 ad valorem royalLy or a 207 APR,
whichever is Lhe greaLer in any given year.
1he APR deducLions can only relaLe Lo Lhe mining permiL lor which Lhe royalLy
applies, noL Lhe acLiviLies ol Lhe permiL holder overall.
Application oI ad valorem and APP
ApplicaLion ol Lhese royalLies is deLermined by Lhe neL sales revenue earned in
a period and Lhe Lype ol permiL held.
ll a mining permiL has never had neL sales revenue ol more Lhan NZS1 million
in a reporLing period, Lhe permiL holder is liable Lo pay only Lhe ad
valorem royalLy.
New Zealand
244 New Zealand
ll Lhe permiL holder anLicipaLes having revenue lrom a mining permiL exceeding
NZS1 million, Lhen royalLy is payable aL Lhe higher ol Lhe APR and ad valorem.
DeLailed records ol allowable operaLing and capiLal expenses should be kepL in
order Lo claim allowable APR deducLions.
Calculation oI APP
1he lollowing deducLions are permiLLed in calculaLing Lhe APR:
ProducLion cosLs
CapiLal cosLs, including exploraLion, developmenL, permiL acquisiLion and
leasibiliLy sLudy cosLs
lndirecL cosLs
AbandonmenL cosLs
OperaLing and capiLal overhead allowance
OperaLing losses and capiLal cosLs carried lorward
AbandonmenL cosLs carried back
1hese cosLs are wriLLen oll againsL sales revenues and any excess is carried
lorward Lo Lhe succeeding reporLing periods. NoLe LhaL Lhe cosLs are noL
amorLized on a Lime or producLion basis.
UnlorLunaLely, Lhe prescripLion lor calculaLing Lhe accounLing proliL does
noL specily:
1he manner in which exploraLion cosLs are Lo be LreaLed {successlul meLhod
or unsuccesslul meLhod)
Cuidelines lor associaLed producLs {which may have maLerial value) and
byproducLs {which have relaLively insignilicanL value)
C. Capital allowances
Specilic income Lax provisions relaLed Lo expendiLures incurred in Lhe course ol
peLroleum mining operaLions.
ClassiIication oI petroleum expenditures
An expendiLure on peLroleum mining is caLegorized as eiLher a peLroleum
exploraLion expendiLure, a peLroleum developmenL expendiLure or a
residual expendiLure.
1he key leaLures ol Lhe currenL peLroleum regime are as lollows:
A peLroleum exploraLion expendiLure is allowed as a deducLion in Lhe year
Lhe expendiLure is incurred
PeLroleum developmenL expendiLures musL be capiLalized and deducLed
over seven years or on a depleLion basis
1he various Lypes ol expendiLures are delined below.
Petroleum exploration expenditure
1he deliniLion ol a peLroleum exploraLion expendiLure encompasses:
LxploraLory well expendiLures
ProspecLing expendiLures
LxpendiLures Lo acquire a prospecLing license, a prospecLing permiL
lor peLroleum or an exploraLion permiL lor peLroleum
lL does noL include:
Residual expendiLures
LxpendiLures on peLroleum mining asseLs required Lo be LreaLed as
peLroleum developmenL expendiLures
As discussed above, a peLroleum exploraLion expendiLure is lully deducLible in
Lhe income year in which iL was incurred.
245 New Zealand
Petroleum development expenditure
1he deliniLion ol a peLroleum developmenL expendiLure includes an expendiLure
incurred LhaL:
DirecLly concerns a permiL area
ls lor acquiring, consLrucLing or planning peLroleum mining asseLs
lL does noL include:
Residual expendiLures
PeLroleum exploraLion expendiLures
OLher expendiLures oLherwise allowed as a deducLion elsewhere in Lhe
lncome 1ax AcL
1he Lerm "peLroleum mining asseL" is delined as an inLeresL in:
A peLroleum permiL
An asseL LhaL has an esLimaLed lile dependenL on, and which is no longer
Lhan, Lhe remaining lile ol Lhe permiL area, and is acquired by a peLroleum
miner lor Lhe purpose ol carrying on in a permiL area any acLiviLy in
connecLion wiLh:
Developing a permiL area lor producing peLroleum
Producing peLroleum
Processing, sLoring or LransmiLLing peLroleum belore iLs dispaLch Lo a
buyer, consumer, processor, relinery or user
Removal or resLoring operaLions
However, any asseL acquired by a peLroleum miner lor Lhe purposes ol lurLher
LreaLmenL LhaL Lakes place alLer Lhe well sLream has been separaLed and
sLabilized inLo crude oil, condensaLe or naLural gas {by way ol liquelacLion
or compression, Lhe exLracLion ol consLiLuenL producLs or Lhe producLion ol
derivaLive producLs) is specilically excluded lrom Lhe deliniLion ol a peLroleum
mining asseL and is, Lherelore, noL LreaLed as a peLroleum developmenL
expendiLure. An excepLion applies il Lhe LreaLmenL Lakes place aL Lhe
producLion laciliLies.
Land is specilically excluded lrom Lhe peLroleum mining asseL deliniLion.
As discussed above, a peLroleum developmenL expendiLure is LreaLed as a
delerred deducLion LhaL is currenLly deducLible over seven years on a
sLraighLline basis, or on a depleLion basis.
Pesidual expenditure
An expendiLure excluded lrom Lhe deliniLion ol boLh peLroleum
exploraLion expendiLures and peLroleum developmenL expendiLures is a
residual expendiLure.
Pesidual expenditure consists oI:
An expendiLure on scienLilic research, oLher Lhan a capiLal expendiLure
An applicaLion lee paid Lo Lhe Crown in respecL ol a peLroleum permiL
An insurance premium or royalLy paid under Lhe PeLroleum AcL 1937
or Lhe Crown Minerals AcL 1991
Land Lax or raLes, and inLeresL
lnLeresL or an expendiLure under a linancial arrangemenL enLered inLo prior
Lo 20 May 1999
Lease expenses in respecL ol land or buildings
A residual expendiLure is deducLible in Lhe year iL is incurred, sub|ecL Lo Lhe
general deducLibiliLy rules as discussed above.
D. Incentives
Exploration
A peLroleum mining exploraLion expendiLure is immediaLely deducLible lor
income Lax purposes.
24
Tax holiday
New Zealand does noL have a Lax holiday regime.
Ability to carry Iorward losses
Losses {including New Zealand branch losses ol a nonresidenL company) can
be carried lorward indeliniLely. However, Lhere is a requiremenL LhaL a company
saLislies a ^97 "conLinuiLy ol ulLimaLe shareholding" LesL lrom Lhe period when
Lhe losses are incurred unLil Lhe losses are used. 1his provision requires LhaL
Lhere is a ^97 shareholder conLinuiLy based on voLing inLeresLs or, il applicable,
based on Lhe markeL value ol shares and opLions.
Losses may also be ollseL againsL Lhe income ol oLher companies in Lhe same
group {Lhe companies musL be in Lhe same group lrom Lhe daLe Lhe losses
were incurred unLil Lhe daLe Lhey are ollseL). 1o be considered in Lhe same
group, Lhe companies are required Lo have aL leasL a 667 ulLimaLe common
ownership. Losses incurred by a dual residenL company may noL be ollseL in
Lhis manner.
Losses lrom loreign branches ol New ZealandresidenL mining companies are
ring lenced againsL loreign income so LhaL Lhey cannoL be used Lo shelLer New
Zealandsourced income.
Exemption Ior drilling rigs and seismic ships
UnLil 31 December 2009, income earned lrom Lhe drilling ol exploraLory or
peLroleum developmenL wells in New Zealand and income earned lrom seismic
survey work relaLing Lo peLroleum in New Zealand, is exempL lrom Lax. 1he
acLiviLies musL be carried ouL by nonresidenL companies and musL be conlined
Lo ollshore peLroleum lields.
A Lax bill was inLroduced in November 2009 Lo exLend Lhe Lax exempLion Lo
31 December 201^.
E. Withholding taxes
NPWT
1he NRW1 rules apply Lo dividends or royalLies derived lrom New Zealand by a
nonresidenL and Lo New Zealandsourced inLeresL derived by a nonresidenL
LhaL is noL engaged in business Lhrough a lixed esLablishmenL in New Zealand.
Dividends paid by a New ZealandresidenL company Lo a nonresidenL are
sub|ecL Lo 307 NRW1, unless Lhe dividends are paid lrom Laxpaid proliLs
under Lhe Fl1C regime or a double Lax LreaLy applies {in which case, Lhe raLe
is generally reduced Lo 157 alLhough some LreaLies may reduce Lhe raLe Lo
eiLher 57 or 07). From 1 February 2010, a 07 NRW1 raLe may apply il Lhe
nonresidenL shareholder holds a 107 or more direcL voLing inLeresL and Lhe
dividend is lully impuLed {i.e., paid ouL ol Laxpaid proliLs). lnLeresL and
royalLies are sub|ecL Lo NRW1 aL a raLe ol 157 {reduced Lo 107 under mosL
LreaLies). 1he approved issuer levy {AlL) regime {see below) may also apply
Lo inLeresL paymenLs.
Interest
A residenL peLroleum mining company may deducL inLeresL cosLs on an accrual
basis {residenL companies are generally allowed an auLomaLic deducLion lor
inLeresL wiLhouL esLablishing a nexus wiLh assessable income), sub|ecL Lo Lhin
capiLalizaLion and Lransler pricing consLrainLs {see SecLion F).
As noLed above, inLeresL paymenLs Lo nonresidenLs are generally sub|ecL Lo
157 NRW1 {reduced Lo 107 under mosL LreaLies). However, Lhe Lax LreaLmenL
varies depending on Lhe residence ol Lhe borrowing company and Lhe source
ol Lhe borrowings.
New Zealand has an AlL sysLem LhaL allows a company Lo pay inLeresL Lo a
nonassociaLed lender wiLhouL having Lo deducL NRW1. 1he AlL is payable
Lo Lhe lnland Revenue aL Lhe raLe ol 27 {ol Lhe inLeresL payable), which is
generally Lax deducLible.
New Zealand
247
New Zealand has no resLricLions on Lhe repaymenL ol loans or loreign
currency LransacLions.
Poyalties
RoyalLies are generally Lax deducLible il Lhey are ol a revenue naLure and
Lhey are incurred in Lhe producLion ol assessable income. RoyalLy paymenLs
are generally sub|ecL Lo NRW1 when paid ollshore {see inlormaLion abouL
NRW1 above).
Lease expenses
1he Lax LreaLmenL ol lease paymenLs is dependenL on wheLher or noL Lhe lease
in quesLion is a linance lease. A linance lease includes Lhe lollowing:
1he ownership ol Lhe asseL is Lranslerred aL Lhe end ol Lhe lease Lerm
1he lessee has Lhe opLion Lo buy Lhe asseL aL a subsLanLial discounL
1he Lerm ol Lhe lease exceeds 757 ol Lhe asseL's esLimaLed uselul lile
ln Lhe case ol a linance lease, Lhe lessee is LreaLed as having purchased Lhe
asseL, sub|ecL Lo a loan lrom Lhe lessor. 1he lessee, Lherelore, is enLiLled Lo
depreciaLion deducLions on Lhe leased asseL and inLeresL deducLions in respecL
ol Lhe deemed loan.
ll Lhe lessor is noL engaged in business in New Zealand Lhrough a lixed
esLablishmenL in New Zealand, Lhe lessor is poLenLially sub|ecL Lo NRW1 on
Lhe deemed inLeresL componenL ol Lhe lease paymenLs. 1he amounL ol NRW1
may be reduced under a relevanL double Lax agreemenL. AlLernaLively, a
borrower may choose Lo pay a 27 approved issuer levy under Lhe AlL regime
{insLead ol NRW1) il Lhe parLies Lo Lhe deemed loan are noL associaLed.
ll Lhe lease is noL a linance lease, Lhe lessee is generally enLiLled Lo deducL Lhe
lease paymenLs as Lhey are incurred.
Nonresident contractors
ConLracL paymenLs paid by a peLroleum mining company Lo "nonresidenL
conLracLors" lor services perlormed in New Zealand are LreaLed lor Lax
purposes as paymenLs liable lor nonresidenL conLracLors wiLhholding Lax
{NRCW1) deducLions.
NRCW1 musL be deducLed lrom paymenLs made Lo nonresidenLs in respecL
ol any "conLracL acLiviLy." 1he deliniLion ol conLracL acLiviLy is very broad
and includes:
Perlorming any work in New Zealand
Rendering a service ol any kind in New Zealand
Hiring personnel or equipmenL Lo be used in New Zealand
lL should be noLed LhaL Lhe work or services musL be carried ouL in New
Zealand. ll Lhe work or services are carried ouL in any oLher counLry, Lhe
conLracL paymenLs are noL liable lor NRCW1, even Lhough Lhey may relaLe Lo a
New Zealand pro|ecL. Some paymenLs are expressly excluded lrom LreaLmenL
as a conLracL paymenL Lo a nonresidenL conLracLor. 1hese are:
RoyalLy paymenLs, which are sub|ecL Lo NRW1
CosL reimbursing paymenL, which consLiLuLe a reimbursemenL ol
expendiLures incurred by Lhe nonresidenL conLracLor; Lhis exclusion does
noL apply, however, il Lhe parLies Lo Lhe cosL reimbursemenL paymenL are
associaLed persons
OLher exempLions also apply
Branch remittance tax
Branch remiLLance Lax does noL apply in New Zealand.
New Zealand
248
F. Financing considerations
Thin capitalization
New Zealand's income Lax sysLem conLains signilicanL rules regarding Lhe
classilicaLion ol debL and equiLy insLrumenLs and rules impacLing Lhe
deducLibiliLy ol inLeresL.
New Zealand's Lhin capiLalizaLion rules also require Lhe raLio ol debL Lo asseLs
Lo noL exceed 757. lnLeresL deducLions are noL allowed, Lo Lhe exLenL LhaL
Lhe debLLoasseLs raLio exceeds Lhis raLio. However, Lhe rules allow one
excepLion: when Lhe debL percenLage ol Lhe New Zealand Laxpayer is noL more
Lhan 1107 ol Lhe consolidaLed worldwide debLLoasseL raLio ol Lhe conLrolling
nonresidenL group.
TransIer pricing
New Zealand also has a Lransler pricing regime in respecL ol crossborder
paymenLs beLween associaLed parLies. Broadly, Lhe rules require Lhe paymenLs
Lo be calculaLed on an arm's lengLh basis.
C. Transactions
Pemoval or restoration expenditure
An immediaLe deducLion lor removal or resLoraLion operaLions is permiLLed in
Lhe year when Lhe expendiLure is incurred. lL is recognized LhaL Lhese cosLs
generally arise alLer Lhe well has ceased producLion. Accordingly, any loss
LhaL cannoL be ollseL can be carried back and ollseL againsL prioryear proliLs
il necessary.
Pelinquishment oI petroleum license
ll a peLroleum permiL or license is relinquished, any delerred deducLions LhaL
have noL been deducLed previously are deducLible in Lhe year ol relinquishmenL
{or oLherwise carried back and ollseL againsL prioryear proliLs).
Disposal oI petroleum mining assets
ConsideraLion received by a peLroleum miner lrom Lhe disposal ol a peLroleum
mining asseL is assessable income in Lhe year Lhe consideraLion is derived. Any
delerred expendiLure noL yeL deducLed is deducLible aL LhaL Lime, sub|ecL Lo Lhe
rule below in respecL ol associaLed person LransacLions.
ll a peLroleum mining asseL is sold Lo an associaLed person, a peLroleum miner's
deducLion lor Lhe balance ol Lhe delerred expendiLure is limiLed Lo Lhe amounL
ol assessable income {i.e., consideraLion) Lhe person derives lrom Lhe
disposal. 1his rule prevenLs a peLroleum miner lrom claiming a loss on disposal
by selling Lhe asseLs below value Lo an associaLed person. 1he balance ol any
delerred expendiLure can be claimed by Lhe associaLed person il Lhe asseL
subsequenLly is sold Lo a Lhird parLy.
Use oI exploratory well Ior commercial development
ll an exploraLory well is subsequenLly used lor commercial producLion, Lhe
"exploraLory well expendiLure" LhaL has been deducLed in respecL ol LhaL well
musL be added Lo Lhe assessable income ol Lhe operaLor. 1he expendiLure
incurred is Lhen LreaLed as a peLroleum developmenL expendiLure and deducLed
over seven years on a sLraighLline basis or on a depleLion basis.
Dry well expenses
ll a well LhaL has commenced producLion subsequenLly becomes dry,
Lhe balance ol any delerred expendiLure is immediaLely deducLible.
New Zealand
249
Farm in and Iarm out
Cenerally, Lhe larmin parLy's conLribuLion Lo exploraLion or developmenL work
underLaken on a peLroleum license area is deducLible lor Lhe larmin parLy
according Lo wheLher or noL iL is a peLroleum exploraLion or developmenL
expendiLure. 1he larmin parLy's conLribuLions are specilically excluded lrom
being assessable income lor Lhe larmouL parLy.
Disposal oI petroleum mining shares
1he proceeds lrom Lhe sale ol shares in any "conLrolled peLroleum mining
enLiLy" are noL Laxable in New Zealand.
H. Indirect taxes
Import duties
lmporL duLies are payable on Lhe imporLaLion ol some goods inLo New Zealand.
lmporL Coods and services Lax {CS1) may also be payable, buL is relundable il
Lhe imporLer is CS1 regisLered.
VAT/C5T
CS1 is imposed under Lhe Coods and Services 1ax AcL 1985 on Lhe supply ol
goods and services in New Zealand.
From an economic perspecLive, CS1 is ulLimaLely paid by Lhe consumer or end
user. 1he Lax is paid {and reclaimed) aL each sLep along Lhe chain ol ownership,
unLil Lhe goods or services reach Lhe end user {who cannoL reclaim Lhe CS1).
CS1 is charged aL Lhe raLe ol 12.57 on goods and services supplied by a
regisLered person. 1he principal exempLions are lor Lhe supply ol residenLial
accommodaLions and linancial services.
Cenerally, CS1 is noL imposed on goods exporLed lrom New Zealand {i.e., Lhey
are zeroraLed lor CS1 purposes).
1he CS1 LhaL a company pays when purchasing goods and services is called
"inpuL Lax." RegisLraLion enables a company Lo claim Lhis amounL back lrom
lnland Revenue il Lhe goods and services are purchased lor Lhe principal
purpose ol carrying on a "Laxable acLiviLy."
1he CS1 LhaL Lhe regisLered company is liable Lo charge on Lhe supplies made is
called "ouLpuL Lax." 1he company collecLs Lhe ouLpuL Lax lrom Lhe consumer
and reporLs iL Lo Lhe lnland Revenue.
CS1 regisLraLion is compulsory il Lhe LoLal value ol goods or services supplied
exceeds {or will exceed) NZS60,000 in any 12monLh period.
PeLroleum mining companies exploring in New Zealand may noL make supplies
and, Lherelore, are noL required Lo regisLer. However, Lhey do have Lhe opLion ol
volunLarily regisLering lor CS1, which Lhen allows Lhem Lo recover CS1 charged
on supplies received.
1he CovernmenL released a discussion documenL in November 2009,
proposing Lo alLer Lhe rules relaLing Lo properLy sales or services over NZS50m
by inLroducing a domesLic reverse charge. ll enacLed, Lhis change will require
Lhe purchaser {noL Lhe supplier) Lo accounL lor all CS1 on Lhe supply.
Export duties
No duLies apply Lo goods exporLed lrom New Zealand. However, a lee may be
paid Lo Lhe exporLing company lor Lhe documenLaLion necessary in Lhe process
ol exporLing goods.
5tamp duty
No sLamp duLy applies in New Zealand.
Local authority rates
Local auLhoriLies in New Zealand levy raLes on land owners lor Lhe purpose ol
lunding Lheir acLiviLies. 1hese are based on Lhe CovernmenL's valuaLion ol Lhe
properLy held. 1he amounL charged varies lrom disLricL Lo disLricL.
New Zealand
250
Climate change emissions trading
LegislaLion has been enacLed in New Zealand Lo inLroduce a carbon Lax on
greenhouse gases and an emissions Lrading scheme. 1he emissions Lrading
scheme will enable organizaLions Lo manage Lheir carbon Lax obligaLions.
Niceria
Country code 234
Laccs CMT +1
Ernst & Ycunc
2A, Bayc Kuku Rcad, !kcyi
01
Niceria
TeI 1 4 304 79 0
Fax 1 4 304 79 1
DiI and cas ccntacts
Abass Adeniji
TeI 1 4 304 790
abass.adenijinc.ey.ccm
DcIapc AIIi
TeI 1 4 304 790
dcIapc.aIIinc.ey.ccm
FcIabi Akanni-AIIimi
TeI 1 4 304 790
fcIabi.akanni-aIIiminc.ey.ccm
A. At a glance
Fiscal regime
Companies carrying on peLroleum operaLions are deemed Lo be in Lhe
upsLream regime and Laxed under Lhe PeLroleum ProliLs 1ax AcL {PP1A)
200^ {as amended). PeLroleum operaLions are delined under Lhe PP1A as
winning or obLaining and LransporLaLion ol chargeable oil in Nigeria by, or on
behall ol, a company lor iLs own accounL. PeLroleum operaLions include any
drilling, mining, exLracLing or oLher such operaLions or process {noL including
relining aL a relinery) in Lhe course ol a business carried on by a company,
including all operaLions incidenLal LhereLo and any sale ol, or any disposal ol,
chargeable oil by, or on behall ol, Lhe company.
Nigeria operaLes boLh Lhe licensing and Lhe conLracLual regimes. Under Lhe
licensing regime, Lhere are Lwo arrangemenLs LhaL are Lhe |oinL venLures
beLween Lhe Federal CovernmenL ol Nigeria and Lhe inLernaLional oil company
{lOC) and Lhe sole risk operaLor {SRO). 1he conLracLual arrangemenLs are Lhe
risk service conLracLs {RSC) and Lhe producLion sharing conLracLs {PSC).
lL should be noLed LhaL, ol Lhe lour arrangemenLs, Lhe RSC operaLors are
noL deemed Lo be carrying on peLroleum operaLions buL are placed under
perlormance schemes wiLh Lhe Federal CovernmenL and are paid as service
providers. 1herelore, Lhey are Laxable under Lhe Companies lncome 1ax AcL aL
a lar lower raLe and noL under Lhe PP1A. 1he Federal CovernmenL ol Nigeria,
under all Lhe arrangemenLs, operaLes Lhrough Lhe Nigerian NaLional PeLroleum
Company {NNPC).
RoyalLies .......................07 Lo 207
Bonuses ............................ Yes
122

PSC ................................. Yes
123
122 / comanv to wn|cn a concess|on nas oeen crantec to ex|ore for anc rocuce o|| |s
||ao|e to av tne s|cnature oonus as cons|cerat|on for tne awarc of tne concess|on.
1ne amount avao|e |s cenera||v f|xec at tne aoso|ute c|scret|on of tne Covernment
anc mav not oe ceterm|nec |n acvance.
123 1ne PSC Covernment snare |s oasec on rocuct|on.
New Zealand Nigeria
251
Income tax rate
Under SecLion 21 ol Lhe PP1A {Cap P13) LFN 200^, Lhe raLes apply as lollows:
FirsL live years {newcomers) 65.757
FirsL live years {exisLing companies) 857
SubsequenL years {all companies) 857
Resource renL Lax Yes
CapiLal allowances D
124
lnvesLmenL incenLives L
125
B. Fiscal regime
Corporate tax
All companies liable Lo pay peLroleum proliLs Lax are assessed Lax on Lhe
currenLyear basis. As a resulL, Lhe accounLing period, which should cover Lhe
assessable proliL, is lrom 1 January Lo 31 December ol Lhe relevanL Lax year,
excepL in Lhe year ol commencemenL or cessaLion ol business, when iL may
be shorLer. For a company LhaL is engaged in upsLream crude oil operaLions,
iLs proliLs lor any accounLing period are made up ol Lhe lollowing:
1he proceeds lrom sales ol all chargeable oil sold by Lhe company
in LhaL period
1he value ol all chargeable oil disposed ol by Lhe company in LhaL period
All income ol Lhe company during LhaL period incidenLal Lo and arising lrom
any one or more ol iLs peLroleum operaLions
ln arriving aL Lhe Laxable proliLs ol Lhe company, SecLion 10 ol Lhe PP1A
provides lor deducLible expenses Lo include expenses "wholly, exclusively,
necessarily and reasonably" incurred in obLaining Lhe proliLs.
1o deLermine Lhe assessable proliLs ol an oilproducing company lrom iLs
ad|usLed proliLs, Lhe law allows all unrecouped losses sullered by Lhe company
during any previous accounLing periods Lo be deducLed lrom iLs ad|usLed
proliLs. ll all Lhe losses cannoL be relieved lrom Lhe ad|usLed proliLs ol any
accounLing period {e.g., because Lhere is insullicienL proliL lrom which such
losses could be ollseL), Lhe PP1A allows Lhe unrelieved losses Lo be carried
lorward Lo Lhe succeeding accounLing periods.
P5C
PSCs have been Lhe vehicle ol choice lor Nigeria in parLicipaLing in Lhe
exploraLion ol peLroleum resources over Lime. A PSC is an agreemenL beLween
Lhe sLaLe oil company, Lhe NNPC, and any oLher exploraLion and producLion
company or companies lor Lhe purpose ol exploraLion and producLion ol oil in
Lhe deep ollshore and inland basins. ln Nigeria, Lhe PSC is governed by 1he
Deep Ollshore and lnland Basin ProducLion Sharing ConLracLs Decree No. 9
1999 AcL Cap. D3 L.F.N. 200^, amended by Lhe Deep Ollshore and lnland
Basin ProducLion Sharing ConLracLs {AmendmenL) Decree No. 26 1999.
Under a PSC, Lhe conLracLor lunds exploraLion and producLion acLiviLies and
only recovers Lhe cosL ol winning crude oil. A PSC is based on a producLion
spliL, shared beLween Lhe parLies in agreed proporLions. 1he conLracLor
underLakes Lhe iniLial exploraLion risks and recovers iLs cosLs il and when oil is
discovered in commercial quanLiLies. ll no oil is lound, Lhe company receives
no compensaLion. Under Lhe PSC, Lhe conLracLor has Lhe lull righL Lo only cosL
oil {i.e., oil Lo recoup producLion cosLs) and equiLy oil {i.e., oil Lo guaranLee a
reLurn on invesLmenL). 1he conLracLor can also dispose ol Lax oil {i.e., oil Lo
delray Lax and royalLy obligaLions) on behall ol Lhe NNPC.
124 0: acce|eratec cerec|at|on.
125 |: |osses can oe carr|ec forwarc |ncef|n|te|v.
Nigeria
252
1he balance ol Lhe oil {il any) is shared beLween Lhe parLies. 1he conLracLor is
sub|ecL Lo a peLroleum proliLs Lax aL 507 ol Lhe chargeable proliL.
Pesource rent tax
1hese are annual or periodic charges made in respecL ol licenses granLed under
Lhe PeLroleum AcL. 1he renL payable is deLermined as lollows:
=N=200.00 lor each square kilomeLer or parL Lhereol lor an oil prospecLing
license {OPL)
=N=300.00 lor each square kilomeLer or parL Lhereol lor a nonproducing
oil mining lease {OML)
=N=500.00 lor each square kilomeLer or parL Lhereol ol a producing OML
Poyalty regimes
Any company engaged in upsLream gas operaLions is required Lo pay royalLies
in accordance wiLh Lhe provisions ol Lhe PeLroleum AcL and Lhe PeLroleum
Drilling RegulaLions 200^. 1his is usually in Lhe lorm ol monLhly cash paymenLs
aL an agreed percenLage ol Lhe quanLiLy ol oil produced, alLer making
ad|usLmenLs lor LreaLmenL, handling and relaLed expenses. 1he royalLy payable
is dependenL on Lhe concession agreemenL beLween Lhe company and Lhe
Federal CovernmenL.
RoyalLy raLes lor |oinL venLure operaLions:
Onshore producLion 207
ProducLion in LerriLorial waLers 18.57 and conLinenLal shell
Up Lo 100 meLers waLer depLh
Ollshore producLion beyond 16.677
100 meLers
1he Deep Ollshore and lnland Basin ProducLion Sharing ConLracLs AcL specilies
Lhe royalLy raLes LhaL apply Lo producLion lrom PSC lields beyond 200 meLers
as lollows:
Area Pate 17)
Up Lo 200 meLers waLer depLh 16.67
ln areas lrom 201 Lo 500 meLers
waLer depLh
12
ln areas lrom 501 Lo 800 meLers
waLer depLh
8
ln areas lrom 801 Lo 1,000 meLers
waLer depLh
^
ln areas in excess ol 1,000 meLers
waLer depLh
0
lnland basin 10
C. Capital allowances
Under Lhe PP1A, accounLing depreciaLions are noL allowable lor Lax
calculaLions. lnsLead, Lhe PP1A gives boLh peLroleum invesLmenL allowance
{PlA) and annual allowance {AA) Lo oilproducing companies LhaL have
incurred a "qualilying capiLal expendiLure" {OCL). 1hese allowances are
allowed againsL Lhe assessable proliL Lo arrive aL Lhe chargeable proliLs.
1he relevanL Lax raLe is applied Lo Lhe chargeable proliLs Lo deLermine Lhe
amounL ol peLroleum proliLs Lax payable.
PIA
1he PlA is an allowance granLed Lo an exploraLion and producLion {L&P)
company in Lhe lirsL year when iL incurs OCL lor Lhe purpose ol iLs operaLions.
1he raLes depend on Lhe liscal regime {conLracL lorm) under which Lhe
L&P company operaLes. 1he lollowing raLes apply Lo companies in |oinL
venLure operaLions.
Nigeria
253
For Lhe purpose ol compuLing Lhe PlA, Lhe lollowing raLes apply,
depending on locaLion:
Onshore operaLions 57
OperaLions in areas up Lo 100 meLers waLer depLh 107
OperaLions in areas beLween 101 meLers and 200 meLers waLer depLh 157
OperaLions in areas beyond 200 meLers waLer depLh 207
Annual allowance 1AA)
1he AA is an allowance granLed annually aL a llaL raLe ol 207 on Lhe original
cosL ol an asseL, sub|ecL Lo Lhe requiremenL LhaL Lhe Laxpayer reLains 17 ol Lhe
original cosL in iLs books unLil Lhe asseL is linally disposed. 1he reLenLion ol Lhe
17 cosL in Lhe books ol Lhe company means, ellecLively, Lhe AA granLed lor Lhe
lilLh {and lasL) year is 197 raLher Lhan 207, as lor Lhe previous lour years.
For Lhe ease ol relerence, Lhe raLes ol AA are as lollows:
FirsL year 207
Second year 207
1hird year 207
FourLh year 207
FilLh year 197
1he capiLal allowance lor which reliel may be claimed in any parLicular Lax year
is Lhe sum ol any PlA and AA.
OCL means capiLal expendiLures incurred in an accounLing year in respecL ol:
PlanL, machinery and lixLures
Pipelines and sLorage Lanks
ConsLrucLion ol buildings, sLrucLures or works ol a permanenL naLure
AcquisiLion ol righLs in or over oil deposiLs, searching lor, or discovering and
LesLing, peLroleum deposiLs or winning access LhereLo or consLrucLion ol any
work or buildings likely Lo be ol liLLle value when Lhe peLroleum operaLions
lor which Lhey were consLrucLed cease
No capiLal allowance is granLed lor any expendiLure LhaL would have been a
qualilying expendiLure, excepL in respecL ol deducLions LhaL have been made
in arriving aL Lhe ad|usLed proliL ol Lhe company pursuanL Lo SecLion 10 ol
Lhe PP1A.
ITC and ITA
A company engaged in peLroleum operaLions in Lhe deep ollshore and inland
basin, pursuanL Lo a PSC execuLed in 1993, is allowed an l1C aL Lhe raLe ol
507 ol Lhe qualilying expendiLure, in accordance wiLh Lhe Lerms ol Lhe PSC
lor Lhe accounLing period when Lhe asseL was lirsL used lor Lhe purpose ol iLs
peLroleum operaLions. ln Lhe same way, a company LhaL has execuLed a PSC
alLer 1 July 1998 is enLiLled Lo l1A aL a llaL raLe ol 507 ol Lhe qualilying
expendiLure in Lhe accounLing year in which Lhe relevanL asseL is lirsL used in
Lhe business.
Pestrictions on capital allowances
Under Lhe PP1A, Lhe capiLal allowance reliel LhaL can be claimed is Lhe
aggregaLe capiLal allowance lor Lhe relevanL Lax year. 1his, however, is sub|ecL
Lo a limiLaLion. CapiLal allowance reliel is limiLed Lo Lhe lower ol eiLher Lhe
aggregaLe capiLal allowance compuLed lor Lhe Lax year or a sum equal Lo 857 ol
Lhe assessable proliLs ol Lhe accounLing period, less 1707 ol Lhe LoLal amounL
ol Lhe deducLion allowed as PlA lor LhaL period. 1he purpose ol Lhis resLricLion
is Lo ensure LhaL Lhe Lax chargeable Lo Lhe company is no less Lhan 157 ol Lhe
Lax LhaL would have been chargeable il no deducLion had been made lor capiLal
allowances. Unrelieved capiLal allowances may be carried lorward unLil Lhey are
linally relieved.
Nigeria
254
D. Incentives
ln iLs bid Lo encourage Lhe developmenL and uLilizaLion ol Lhe counLry's gas
resources, Lhe lollowing incenLives are available:
An invesLmenL required Lo separaLe crude oil and gas lrom Lhe reservoir inLo
usable producLs is considered parL ol Lhe oillield developmenL
A capiLal invesLmenL in laciliLies equipmenL Lo deliver associaLed gas in a
usable lorm aL uLilizaLion or Lhe designaLed cusLody Lransler poinL is LreaLed,
lor Lax purposes, as parL ol Lhe capiLal invesLmenL lor oil developmenL
CapiLal allowances, operaLing expenses and Lhe bases lor Lax assessmenLs
are sub|ecL Lo Lhe provisions ol Lhe PP1A and Lhe Lax incenLives under Lhe
revised memorandum ol undersLanding
CondiLions lor Lhe incenLives include:
CondensaLes exLracLed and rein|ecLed inLo Lhe crude oil sLream are
LreaLed as oil buL Lhose noL rein|ecLed are LreaLed under Lhe exisLing
Lax arrangemenL
1he company pays Lhe minimum amounL charged by Lhe minisLer ol
peLroleum resources lor any gas llared by Lhe company
1he company musL, where pracLicable, keep Lhe expenses incurred in Lhe
uLilizaLion ol associaLed gas separaLe lrom Lhose incurred in crude oil
operaLion, and only expenses noL able Lo be separaLed are allowable againsL
Lhe crude oil income ol Lhe company under Lhe AcL
Lxpenses idenLilied as incurred exclusively in Lhe uLilizaLion ol associaLed
gas are regarded as gas expenses and are allowable againsL Lhe gas income
and proliL Lo be Laxed under Lhe Companies lncome 1ax AcL
Only companies LhaL invesL in naLural gas liquid exLracLion laciliLies Lo supply
gas in usable lorm Lo downsLream pro|ecLs, including aluminium smelLer and
meLhanol, meLhyl LerLiary buLyl eLher and oLher associaLed gas uLilizaLion
pro|ecLs, beneliL lrom Lhe incenLives
All capiLal invesLmenLs relaLing Lo Lhe gasLoliquids laciliLies shall be
LreaLed as a chargeable capiLal allowance and recovered againsL Lhe
crude oil income
Cas Lranslerred lrom Lhe naLural gas liquid laciliLy Lo Lhe gasLoliquids
laciliLies incurs 07 Lax and 07 royalLy
1he ellecL ol Lhese incenLives is Lo give wider laLiLude Lo gasproducing
companies on expendiLures lor which Lhey can claim capiLal allowance reliel.
E. Withholding taxes 1WHT)
Under Nigerian law, cerLain income is sub|ecL Lo WH1 regulaLions. lncome
sub|ecL Lo WH1 includes renL, inLeresL, dividends, lees, commissions and
paymenLs in respecL ol conLracLs. 1hus, il a company makes a paymenL on one
ol Lhese Lypes ol income, Lhe payer company is required by law Lo deducL WH1
lrom Lhe paymenL aL Lhe applicable raLe and remiL Lhe sum Lo Lhe FlRS or Lhe
SlRS. 1he relevanL Lax auLhoriLy issues a receipL lor Lhe paymenL, which is
lorwarded Lo Lhe payee as evidence ol paymenL ol Lhe WH1 on iLs behall.
However, WH1 does noL apply Lo dividends declared lrom proliLs LhaL have
sullered PP1.
1he WH1 raLes are as lollows:
lnLeresL 107
RoyalLies 107
1echnical services 107
NonresidenL conLracLors 57
Branch remiLLance Lax NoL applicable
Nigeria
255
F. Financing considerations
Thin capitalization
A company is Lhinly capiLalized il iLs capiLal is made up ol a much greaLer
proporLion ol debL Lhan equiLy. 1he Lax auLhoriLies perceive LhaL Lhis siLuaLion
creaLes problems because Lhey are concerned abouL abuse Lhrough excessive
inLeresL deducLions. Some Lax auLhoriLies limiL Lhe applicaLion ol Lhin
capiLalizaLion rules Lo corporaLe groups wiLh loreign enLiLies Lo avoid "Lax
leakage" Lo lower Lax |urisdicLions. Nigeria does noL have a specilic Lhin
capiLalizaLion rule, buL iL does apply general anLiLax avoidance rules. Under
SecLion 15 ol Lhe PP1A 200^, il Lhe Lax auLhoriLies believe LhaL any disposiLion
is noL, in lacL, given ellecL Lo or LhaL any LransacLion LhaL reduces or would
reduce Lhe amounL ol Lax payable is arLilicial or licLiLious, Lhe auLhoriLies may
disregard Lhe disposiLion or direcL LhaL ad|usLmenLs be made in respecL ol Lhe
liabiliLy Lo Lax as Lhe auLhoriLies consider appropriaLe Lo counLeracL Lhe
reducLion in Lhe liabiliLy Lo Lax, or Lhe reducLion LhaL would oLherwise apply,
resulLing lrom Lhe LransacLion. 1he companies concerned are accordingly
sub|ecL Lo Lax. 1he expression "disposiLion" includes any LrusL, granL, covenanL,
agreemenL or arrangemenL. 1he lollowing LransacLion is deemed Lo be arLilicial
or licLiLious: a LransacLion beLween persons il one ol Lhem has conLrol over Lhe
oLher or beLween persons il boLh ol Lhem are conLrolled by anoLher person il, in
Lhe opinion ol Lhe Lax auLhoriLies, Lhe LransacLion has noL been made aL arm's
lengLh {i.e., on Lhe Lerms LhaL mighL have been lairly expecLed Lo be made by
independenL persons engaged in Lhe same or similar acLiviLies dealing wiLh one
anoLher aL arm's lengLh).
P5C expenditure recovery exclusions Ior Iinancing costs
All Lhe expenses incurred in respecL ol exploraLion acLiviLies prior Lo Lhe
ellecLive daLe ol Lhe PSC are operaLing cosLs recoverable by Lhe conLracLor
lrom cosL oil.
C. Transactions
Asset disposals
ll a company disposes ol a capiLal asseL, capiLal gains accruing lrom Lhe
disposal are sub|ecL Lo Lax under Lhe CapiLal Cains 1ax AcL 200^ aL Lhe raLe
ol 107. 1he amounL ol capiLal gains is calculaLed alLer deducLing expenses
associaLed wiLh Lhe disposal ol Lhe asseLs. A company may claim rollover reliel
and, Lherelore, posLpone Lhe Lax liabiliLy il Lhe proceeds lrom Lhe disposal are
used Lo acquire an asseL similar in naLure Lo Lhe one disposed.
Farm in and Iarm out
1he Nigerian PeLroleum {AmendmenL) Decree 1996 {Decree No. 23)
provides LhaL larm ouL means "an agreemenL beLween Lhe holder ol an oil
mining lease and a Lhird parLy which permiLs Lhe Lhird parLy Lo explore,
prospecL, win, work and carry away any peLroleum encounLered in a specilied
area during Lhe validiLy ol Lhe lease." Farming in is, Lherelore, a way ol
acquiring a license inLeresL and, conversely, larming ouL is a way ol disposing ol
a license inLeresL. 1he Lerms "license inLeresL" or "concession inLeresL" are used
in Lhis chapLer Lo include Lhe bundle ol righLs owned by a parLicipanL in an oil or
gas |oinL venLure.
5elling shares in a company
1he sale ol shares does noL aLLracL CapiLal gains Lax {CC1) lor residenL
and nonresidenL shareholders. A minimal sLamp duLy applies Lo Lhe share
Lransler ol documenLs. lL is imporLanL Lo noLe LhaL sales ol inLeresLs in
asseLs aLLracL CC1.
Nigeria
25
H. Indirect taxes
Import duties
Cenerally, cusLoms duLies are payable on various goods, including planL,
machinery and all equipmenL according Lo Lhe provisions ol Lhe CusLoms,
Lxcise 1arill {ConsolidaLion) AcL 200^.
1he AcL provides LhaL any machinery, equipmenL or spare parL imporLed inLo
Nigeria by a company engaged in exploraLion, processing or power generaLion
Lhrough uLilizaLion ol Nigerian oil and gas is exempL lrom cusLoms duLies. Unlike
Lhe VA1 exempLion, Lhe beneliL lor cusLoms duLy reliel may be claimed by a
company engaged in Lhe upsLream or downsLream secLor ol Lhe oil indusLry.
VAT
Under Lhe Value Added 1ax AcL 200^, VA1 is imposed aL Lhe raLe ol 57 on Lhe
supply ol all goods and services, excepL Lhe supply ol any goods and services
LhaL have been exempLed specilically under Lhe AcL. 1axable supplies include
Lhe sale, hire, lease and any oLher disposal ol Laxable goods. VA1 charged by
vendors in Lhe oil and gas indusLry is deducLed aL Lhe source and remiLLed Lo
Lhe Federal lnland Revenue Service {Lhe FlRS).
VAT incentive Ior oil and gas businesses
VA1 is noL payable on Lhe supply ol planL, machinery and equipmenL imporLed
or purchased locally lor uLilizaLion ol oil and gas businesses in downsLream
peLroleum operaLions. ln addiLion, VA1 is noL payable on supplies ol exporLed
goods and services, including oil and gas producLs.
1he lollowing LransacLions are placed on zero raLe in line wiLh Lhe Value Added
1ax {amendmenL) AcL 2007:
a. Nonoil exporL
b. Coods and services purchased by diplomaLs
c. Coods purchased lor use in humaniLarian donor pro|ecLs
I. Cther
Education tax
An educaLion Lax is assessed alongside Lhe peLroleum proliLs Lax or Lhe income
Lax liabiliLy ol a company. LducaLion Lax is assessed aL 27 ol Lhe assessable
proliLs ol a company. For a company sub|ecL Lo Lax under Lhe PP1A, Lhe
educaLion Lax paid is an allowable deducLion under SecLion 10 ol Lhe PP1A in
arriving aL Lhe ad|usLed proliLs ol Lhe company lor Lax purposes.
Cil terminal dues
Sub|ecL Lo Lhe provisions ol Lhe 1erminal Dues AcL and Lhe Nigerian PorLs
AuLhoriLy AcL {Lhe NPA AcL), SecLion 1 ol Lhe Oil 1erminal Dues AcL sLipulaLes
LhaL Lerminal dues may be levied on any ship evacuaLing oil aL any oil Lerminal
and in respecL ol any services or laciliLies provided under Lhe AcL. Under Lhe Oil
1erminals {1erminal Dues) RegulaLions, Lhe amounL payable as Lerminal dues
is USS0.02 per barrel ol oil loaded onLo a ship.
PursuanL Lo Lhe NPA AcL, Lhe PorL AuLhoriLy has Lhe power Lo levy harbor dues
on any ship. 1he harbor dues levied apply Lo all goods discharged or loaded
wiLhin a harbor. 1he raLe lor a cargo ol crude oil as specilied under Lhe NPA AcL
{1erminal Dues) RegulaLions is =N=0.1166 per Lon.
Cil pipeline license Iees
ll a company seeks Lo consLrucL and operaLe an oil pipeline lor LransporLaLion
ol mineral oil or naLural gas Lo any desLinaLion, iL musL obLain a license
lrom Lhe relevanL auLhoriLy. 1he applicaLion lor, and Lhe granL ol, licenses
aLLracL separaLe lees under Lhe Oil Pipelines AcL. Annual lees, chargeable
in accordance wiLh Lhe lengLh ol Lhe pipelines, are also payable.
Nigeria
257
1he applicaLion is made Lo Lhe minisLer ol peLroleum resources Lhrough Lhe
DeparLmenL ol PeLroleum Resources {Lhe DPR). 1he lees are as lollows:
ApplicaLion lor permiL =N=20 lor submission
CranL ol permiL =N=50
ApplicaLion lor license =N=50 lor submission ol applicaLion
CranL ol license =N=200
VariaLion ol permiL =N=50
VariaLion ol license =N=200
Annual lee on each license =N=20 per mile ol Lhe lengLh ol Lhe pipeline
sub|ecL Lo a minimum ol =N=200
lL should be noLed LhaL a holder ol a license is required Lo pay a lee ol
=N=100 upon submiLLing iLs applicaLion lor an order resLricLing anyone lrom
consLrucLing any building or Lype ol building or similar sLrucLures on lands
ad|oining pipelines. A maximum lee ol =N=^00 is payable upon Lhe granL
ol Lhis order.
5tate and local Covernment rates
1he 1axes and Levies {Approved LisL lor CollecLion) AcL 200^ seLs ouL Lhe
various Laxes and levies LhaL may be collecLed by Lhe Lhree Liers ol CovernmenL
in Nigeria. By virLue ol Lhe provisions ol SecLion 10 ol Lhe PP1A, all Lhese raLes
and levies are allowable as deducLions in arriving aL Lhe ad|usLed proliLs ol a
company sub|ecL Lo Lax under Lhe PP1A. Some ol Lhe local Laxes LhaL may apply
Lo oil and gas businesses are discussed below.
5tate Covernment
Business registration Iees
For a business locaLed in an urban area, Lhe maximum lee payable on
regisLraLion is =N=10,000, while =N=5,000 is Lhe maximum payable upon
annual renewal ol Lhe regisLraLion. For a business locaLed in a rural area, Lhe
maximum lees are =N=2,000 and =N=1,000 lor iniLial regisLraLion and
renewal, respecLively.
Pight oI occupancy Iees
RighL ol occupancy lees apply on lands in urban areas ol a sLaLe. 1he raLes vary
lrom sLaLe Lo sLaLe.
Local Covernment
Tenement rates
1enemenL raLes are raLes chargeable on a building, payable by Lhe occupier{s)
ol Lhe building. 1he various sLaLe CovernmenLs have enacLed sLaLuLes under
which LenemenL raLes are imposed. 1he acLual collecLion ol Lhe raLes is done by
Lhe local auLhoriLy lor Lhe area where Lhe relevanL building is siLuaLed. 1he
LenemenL raLe is usually assessed on Lhe renLal value ol a building. ln Lagos
SLaLe, lor example, Lhe LenemenL raLe is assessed aL Lhe raLe ol 107 ol Lhe
renLal value ol a building.
5ignboard and advertisement permit
1he raLe lor a signboard and adverLisemenL permiL varies beLween dillerenL
local CovernmenLs.
Cil and Cas Export Processing Zone
Under Lhe Oil and Cas LxporL Free Zone AcL 200^, any approved enLerprise
esLablished wiLhin Lhe Oil and Cas LxporL Processing Zone Onne is exempLed
lrom all Laxes, levies and raLes imposed by Lhe lederal, sLaLe or local
CovernmenLs in Nigeria.
Nigeria
258
Ncrway
Country code 47
Stavancer CMT +1
Ernst & Ycunc
Vassbctnen 11
P.D. Bcx 015
Stavancer
N40
Ncrway
TeI 51 70 00
Fax 51 70 01
DiI and cas ccntacts
Eivind CaIta
TeI 51 70 77
eivind.caItanc.ey.ccm
CeciIie Rasmussen
TeI 51 70 7 73
ceciIie.rasmussennc.ey.ccm
Einar Brask
TeI 24 00 22 07
einar.brasknc.ey.ccm
KIaus KIausen
TeI 51 70 90
kIaus.kIausennc.ey.ccm
A. At a glance
RoyalLies None
Bonuses None
ProducLion sharing
conLracLs {PSC) None
lncome Lax raLe 287
Resource renL Lax 507
CapiLal allowances O, L
Ollshore invesLmenLs are depreciaLed over six years.
An addiLional 307 uplilL applies againsL Lhe special
Lax lor upsLream acLiviLies
lnvesLmenL incenLives L
Losses lrom ollshore acLiviLies may be carried
lorward indeliniLely wiLh inLeresL
B. Fiscal regime
A company LhaL is involved in exLracLive acLiviLies {i.e., upsLream acLiviLies)
wiLhin Lhe geographic areas described in Lhe Norwegian PeLroleum 1ax AcL
{P1A) SecLion 1 is sub|ecL Lo a marginal Lax raLe ol 787 on iLs neL operaLing
proliLs {287 ordinary corporaLe Lax and 507 special Lax) derived lrom Lhe
exLracLive acLiviLies. 1he area covered, generally, is acLiviLies underLaken wiLhin
Norwegian LerriLorial borders or on Lhe Norwegian conLinenLal shell {NCS).
1he Lax basis lor calculaLing Laxes on exLracLive acLiviLies is essenLially
Lhe same as lor ordinary Laxes excepL lor Lhe LreaLmenL ol inLeresL cosLs
and uplilL allowances.
Cil and gas companies
1oIIshore tax regime)
Cther companies
1onshore tax regime)
Ordinary Lax 287 287
Special Lax 507 None
1oLal Lax 787 287
Norway
259
1ransporLaLion and exLracLive acLiviLies {including relaLed acLiviLies) perlormed
ouLside Lhe Norwegian LerriLorial borders may be sub|ecL Lo Norwegian Lax il
Lhe Norwegian auLhoriLies have secured Lhe righL Lo impose Lax on Lhese
acLiviLies under inLernaLional law or bilaLeral agreemenLs.
12
ln addiLion,
supporL acLiviLies perlormed onshore {by oil and gas companies) are sub|ecL
Lo Lhe 787 Lax raLe.
1he Norwegian peLroleum Lax sysLem is based on Lhe LaxaLion ol Lhe enLiLy
raLher Lhan on specilic asseLs and licenses. 1herelore, Lhere is no ring lence
beLween dillerenL licenses or lields on Lhe NCS.
lncome derived lrom ollshore acLiviLies, in principle, may noL be ollseL againsL
losses incurred lrom onshore acLiviLies or vice versa. However, 507 ol a
company's onshore losses may be ollseL againsL income lrom ollshore acLiviLies
LhaL are sub|ecL Lo Lhe ordinary Lax raLe ol 287. Similarly, losses lrom ollshore
acLiviLies may be ollseL againsL income lrom onshore acLiviLies LhaL are sub|ecL
Lo Lhe ordinary Lax raLe ol 287.
See SecLion C lor an explanaLion ol Lhe LreaLmenL ol boLh exploraLion cosLs and
developmenL cosLs.
See SecLion F lor an explanaLion ol Lhe allocaLion ol inLeresL cosLs beLween Lhe
onshore and ollshore acLiviLies.
Croup relieI
Norway does noL have a "group reliel regulaLion." However, under SecLion 10^
ol Lhe Ceneral 1ax AcL {Lhe C1A), il a company holds more Lhan 907 ol Lhe
shares in a subsidiary, each enLiLy may conLribuLe proliLs Lo Lhe oLher company
Lo ollseL losses incurred by Lhe oLher company. WiLh respecL Lo oil and gas
companies, such conLribuLions are limiLed Lo disLribuLions lrom onshore
acLiviLies {e.g., an upsLream company wiLh onshore income, such as inLeresL
income or loreign exchange gains, may conLribuLe Lhis income Lo iLs 907 owned
subsidiary Lo ollseL any losses lrom onshore acLiviLies incurred by LhaL enLiLy).
Norm price
A "norm price" or adminisLraLively deLermined price is used Lo calculaLe Lhe
Laxable income derived lrom Lhe sale ol peLroleum producLs {currenLly only
crude oil), regardless ol Lhe acLual sales price obLained. ll Lhe sales price
achieved is higher Lhan Lhe norm price, Lhe addiLional amounL is Lax lree.
Correspondingly, il Lhe price achieved is lower Lhan Lhe norm price, Lhe seller is
sLill Laxed aL Lhe norm price. 1he norm price is published quarLerly and is based
on acLual prices obLained, alLhough Lhe Norm Price Board seLs Lhe norm price
lor crude oil lrom each lield or blend on a monLhly basis.
C. Capital allowances
For Laxable income sub|ecL Lo a LoLal 787 Lax, invesLmenLs in producLion
laciliLies, pipelines and insLallaLions {Langible asseLs) used in Lhe exLracLive
acLiviLy are depreciaLed raLably over a sixyear period beginning wiLh Lhe year
ol invesLmenL.
AddiLional allowances are permiLLed aL a raLe ol 307 when calculaLing Lhe
special Lax basis lor Lhe 507 Lax raLe {i.e., 7.57 each year over a louryear
period). 1his means LhaL 937 [i.e., 507 + 287 + {307 x 507)| ol ollshore
invesLmenLs are evenLually deducLible.
OLher invesLmenLs/asseLs locaLed onshore {e.g., buildings and ollice
equipmenL) used in Lhe exLracLive business are depreciaLed on a declining
balance meLhod {lrom 27 Lo 307); however, depreciaLions lrom such
invesLmenLs or asseLs are deducLible in Lhe ollshore regime aL Lhe 787 Lax raLe.
D. Incentives
Losses may be carried lorward indeliniLely lor ollshore acLiviLy. lnLeresL on such
losses is seL by Lhe MinisLry ol Finance annually; lor 2009, Lhe raLe was 1.87.
12 Cf. P1/ Sect|on 1.
Norway
20
ln addiLion, losses can be Lranslerred in connecLion wiLh Lhe sale ol Lhe LoLal
acLiviLy, by a merger wiLh anoLher "upsLream" company. 1he Lax value ol Lhe
losses can be relunded when Lhe exLracLive acLiviLy on Lhe NCS ceases. 1hese
rules apply lor losses incurred ellecLive lrom 1 January 2002 and lor cessaLion
ol peLroleum acLiviLy alLer 1 January 2005. 1hus, a company sub|ecL Lo Lhe
ollshore Lax regime is guaranLeed Lhe lull Lax value ol all cosLs incurred.
LllecLive lrom 1 January 2005, an upsLream company may also be relunded
Lhe Lax value ol exploraLion expenses lor each Lax year loss, including direcL
and indirecL expenses relaLed Lo exploraLion acLiviLies on Lhe NCS {excepL lor
linancing cosLs). 1he relund is made on 22 December in Lhe year lollowing Lhe
Lax year lor which Lhe expenses were incurred. For example, MNOK100 spenL
on exploraLion expenses in 2010 may resulL in a cash relund ol MNOK78 on
22 December 2011.
1he relund ol exploraLion cosLs has opened up Lhe opporLuniLy lor Lhird parLies
Lo lund exploraLion acLiviLies. 1he claim on Lhe sLaLe can also be pledged. ln
general, banks may Lypically be willing Lo lund 807 Lo 907 ol Lhe Lax value ol
Lhe exploraLion Lax relund {i.e., 657 Lo 707 ol Lhe exploraLion cosL basis).
E. Withholding taxes 1WHT)
WH1 is noL levied on disLribuLions lrom ollshore income. However, onshore
income may be sub|ecL Lo a proraLed dividend WH1, depending on where Lhe
parenL company is locaLed.
Dividend disLribuLions lrom onshore acLiviLy are noL sub|ecL Lo WH1 il Lhe
shareholder is a company residenL wiLhin Lhe LLA area, Lhe shareholder
perlorms economic acLiviLy Lhrough an esLablishmenL in Lhe LLA area and
Norway has enLered inLo an agreemenL concerning Lhe exchange ol such
inlormaLion or Lhe shareholder can provide such documenLaLion lrom Lhe
Lax auLhoriLies.
ll Lhe receiving company is siLuaLed ouLside Lhe LU/LLA area, WH1 may be
levied on dividend disLribuLions pending lurLher condiLions.
F. Financing considerations
Thin capitalization
LllecLive lrom 1 January 2007, Lhere are no Lhin capiLalizaLion rules. However,
under Lhe Norwegian company law, a limiLed company musL, as a general rule,
have aL leasL a 107 equiLy raLio Lo make dividend disLribuLions.
ll a company has enLered inLo an inLernal lunding agreemenL, Lhe company
may risk a discreLionary deviaLion il Lhe raLes and Lerms agreed are noL in
compliance wiLh Lhe arm's lengLh principle {e.g., il Lhe company exceeded iLs
loan capaciLy compared wiLh whaL iL would have been able Lo obLain in Lhe lree
markeL on a sLandalone basis).
LllecLive lrom 1 January 2007, only a porLion ol inLeresL cosLs {and relaLed
loreign exchange) is deducLible in Lhe ollshore Lax regime. 1he remaining
inLeresL cosLs are sub|ecL Lo onshore LaxaLion aL Lhe ordinary 287 Lax raLe.
1he allocaLion ol inLeresL cosL Lo Lhe ollshore disLricL is calculaLed as lollows:
{lnLeresL cosLs
and relaLed
loreign exchange)
X 507 X 1ax value ollshore relaLed asseLs per yearend
Average inLeresLbearing debL
ll Lhe company has no invesLmenLs or asseLs, all inLeresL cosLs and relaLed
loreign exchange are allocaLed onshore. However, il Lhe company has no oLher
onshore income, Lhe linancial cosLs may be allocaLed back Lo Lhe ollshore
regime lor deducLion againsL Lhe 287 corporaLe Lax raLe {and iL may be carried
lorward wiLh inLeresL).
1he maximum amounL ol inLeresL cosLs LhaL is deducLible in relaLion Lo an
ollshore acLiviLy is Lhe company's LoLal inLeresL cosL incurred.
Norway
21
C. Transactions
Asset disposals
ln general, Lhe disposal ol asseLs is Laxable or deducLible aL Lhe 787
Lax raLe. Disposal ol lixed asseLs ollshore, like plaLlorms, will require a
SecLion 10 approval.
TransIer oI license interests
All Lranslers ol producLion licenses {including larm ins and larm ouLs) require
approval lrom Lhe MinisLry ol Lnergy and PeLroleum. 1he Lax LreaLmenL musL
be approved by Lhe MinisLry ol Finance; on 1 July 2009 a new adminisLraLive
regulaLion was passed Lo simplily Lhe SecLion 10 approval process. ll Lhe
respecLive LransacLion is covered by Lhe regulaLion, Lhe approval lrom Lhe
MinisLry ol Finance is granLed auLomaLically.
ll Lhe LransacLion is noL covered by Lhe regulaLions an applicaLion lor a SecLion
10 ruling has Lo be submiLLed Lo Lhe MinisLry ol Finance.
SecLion 10 rulings have been simplilied compared wiLh previous regulaLions.
1he sLandard condiLions include:
License sales are LreaLed as nonLaxable lor Lhe seller and as nondeducLible
lor Lhe buyer {alLerLax basis)
1he buyer inheriLs Lhe seller's basis lor depreciaLion and uplilL
1he carrying ol cosLs is on a preLax basis
All oLher cosLs or income {relunds) lollow Lhe normal rules
Relerence is made here Lo Lhe SecLion 10 guidelines issued by Lhe MinisLry ol
Finance on 1 July 2009.
CapiLal gains on Lhe disposal ol shares in Norwegian residenL companies
are exempL lrom LaxaLion, provided LhaL Lhe owner is a NorwegianresidenL
company {an AS or ASA) or a nonresidenL company comparable Lo a
Norwegian AS or ASA il Lhe Norwegian parLicipaLion exempLion rules. 1hree
percenL ol capiLal gains or dividend disLribuLions covered by Lhe parLicipaLion
exempLion rules are, however, sub|ecL Lo 287 Lax {i.e., 37 x 287=0.8^7).
H. Indirect taxes
VAT
Supplies ol goods and services Lo drilling companies, licensee owners, and
owners and lessees ol plaLlorms, rigs and specialized vessels lor use in
peLroleum acLiviLies ouLside Norwegian LerriLorial waLers are exempL lrom VA1
according Lo a special VA1 regulaLion. 1he exempLion lor supply ol services
applies regardless ol wheLher Lhe services are perlormed ollshore or onshore
provided Lhe services rendered are relaLed Lo insLallaLion or equipmenL lor use
in peLroleum acLiviLies ouLside Norwegian LerriLorial waLers.
1ransporLaLion beLween ollshore laciliLies ouLside Norwegian LerriLorial waLers
and onshore is also exempLed lrom VA1. From 1 January 2010, a new VA1
AcL came inLo lorce. Supplies ol goods and services "enLirely lor use ouLside
Norwegian LerriLorial waLers" are now regarded as exporL abroad and
consequenLly zeroraLed/exempL lrom VA1 in general. Belore 2010, only
supplies abroad were exempL lrom VA1 and did noL apply Lo supplies lor use
on Lhe NCS, hence Lhe special exempLion lor peLroleumrelaLed acLiviLies.
ConsequenLly, Lhere is currenLly an overlap beLween Lhe general exporL
regulaLion and Lhe special exempLion lor goods and services Lo be used in
relaLion Lo peLroleum acLiviLies on Lhe NCS.
Besides some adminisLraLive changes regarding exporL and cusLom clearance,
Lhe new VA1 AcL does noL imply any maLerial amendmenLs lor supplies ol
goods and services relaLed Lo peLroleum acLiviLies on Lhe NCS. lmporLs Lo
Norway lrom Lhe NCS are liable Lo imporL VA1. However, Lhis does noL apply
Lo, lor example, imporL ol peLroleum producLs exLracLed on Lhe NCS, plaLlorms
lor use in peLroleum acLiviLies ollshore, and specialized ships lor use in
peLroleum acLiviLies.
Norway
22
Environmental taxes
UpsLream companies are sub|ecL Lo CO
2
Lax, which is levied on gas consumed
or llared on producLion insLallaLions ollshore. 1he CO
2
Lax lor upsLream
companies NOK0.^6 ellecLive lrom 1 January 2010.
A lee ol NOK16.1^ per kilogram per daLe is levied on NOx emissions {ellecLive
lrom 1 January 2007). However, Lhe Norwegian Oil lndusLry AssociaLion {Lhe
OLF) and several oLher indusLry associaLions reached an agreemenL wiLh Lhe
MinisLry ol LnvironmenL Lo esLablish a lund Lo reduce NOx emissions.
Companies LhaL endorse Lhe agreemenL will be exempL lrom NOx Lax lor Lhree
years {i.e., 2008, 2009 and 2010); however, parLicipaLing companies musL
commiL Lo emission reducLions, and a lee equal Lo approximaLely NOK11 per
kilogram musL be paid Lo Lhe lund {a Lax deducLion ol 787 is granLed when Lhe
paymenL is made).
SubsequenLly, any conLribuLion lrom Lhe lund will be regarded as Laxable
income when Lhe conLribuLion is made. lnvesLmenLs made ollshore in order
Lo reduce Lhe emissions will be sub|ecL Lo a sixyear, sLraighLline deducLion
and uplilL.
1he NOx lund aims Lo reduce annual emissions by 30,000 Lons and Lhe lund is
esLimaLed Lo reach a value ol NOK1.5 billion during Lhree years. 1he deLails
concerning how Lhe indusLry will reduce Lhe emissions is noL known yeL buL,
based on Lhe esLimaLed cosLs Lo implemenL necessary measures, Lhe shipping
and lisheries secLors are expecLed Lo be Lhe mosL cosLellicienL secLors, where
Lhe greaLesL poLenLial lor reducLions can be aLLained.
Area Iees
All producLion licenses are sub|ecL Lo an area lee LhaL is paid alLer Lhe iniLial
exploraLion period has expired.
127
1he exploraLion period is normally lour Lo six
years. 1he annual area lee is increased lrom NOK30,000 per square meLer in
year one Lo a maximum ol NOK120,000 per square meLer in year Lhree and
LherealLer. Special rules and excepLions apply lor conLinued exploraLion
acLiviLies beyond Lhe iniLial period.
I. Cther
Tax return and tax assessment
Companies involved in exLracLive acLiviLies musL calculaLe and pay advanced
Lax. 1he lirsL Lhree insLallmenLs are due on 1 AugusL, 1 OcLober and
1 December in Lhe year ol income. 1he remaining Lhree insLallmenLs are
due on 1 February, 1 April and 1 June in Lhe lollowing year.
1he Lax reLurn is due on 30 April in Lhe year lollowing Lhe year ol income.
A dralL assessmenL lrom Lhe Oil 1axaLion Ollice is available lrom mid
November, and Lhe linal assessmenL is published on 1 December. 1he Laxpayer
has Lhree weeks lrom 1 December Lo lile a complainL wiLh Lhe appeals board.
1he Lax exploraLion relund is made on 22 December lollowing Lhe
year ol income.
TransIer pricing reporting and documentation requirements
1he Norwegian Lax auLhoriLies have increased Lheir locus on inLragroup
LransacLions and Lransler pricingrelaLed Lopics wiLh obligaLions lor new
reporLing and documenLaLion. Any legal enLiLy LhaL is obliged Lo lile a Lax
reLurn in Norway, and has LransacLions wiLh relaLed parLies, is covered by Lhe
reporLing and documenLaLion requiremenLs.
A company involved in exLracLive acLiviLies and sub|ecL Lo Lhe P1A is only
exempL lrom Lhe reporLing obligaLion {and subsequenLly Lhe Lransler pricing
documenLaLion obligaLion) provided LhaL Lhe LoLal LransacLions are less Lhan
MNOK10 during Lhe year and less Lhan MNOK25 in receivables or debLs aL Lhe
end ol Lhe year {real values are based on arm's lengLh principle).
127 Cf. 1ne Petro|eum /ct, 410.
Norway
23
1he reporLing obligaLion enLered inLo lorce on 1 January 2007 and requires a
sLandard lorm Lo be liled wiLh Lhe Lax reLurn on 30 April 2010. 1he purpose ol
Lhe reporLing lorm is Lo give Lhe Lax auLhoriLies an overview ol Lhe exLenL and
naLure ol Lhe Laxpayer's inLragroup LransacLions.
LllecLive lrom 1 January 2009, Lhe Lax auLhoriLies can requesL documenLaLion
Lo demonsLraLe LhaL inLragroup LransacLions are in compliance wiLh Lhe arm's
lengLh principle as ouLlined in Lhe OLCD guidelines. 1he deadline lor Lhis
documenLaLion is ^5 days lrom Lhe daLe ol Lhe requesL. Norwegian auLhoriLies
Lend Lo have an aggressive approach when reviewing Lhese reporLs. Lven il Lhe
Norwegian documenLaLion requiremenLs are based on Lhe OLCD guidelines,
Lhe inLerpreLaLion and implemenLaLion requiremenLs mighL diller slighLly lrom
oLher counLries' pracLices.
Dman
Country code 98
Muscat CMT +4
Ernst & Ycunc
AI 0urum, Dppcsite CCC
4th FIccr, Ernst & Ycunc BuiIdinc
P.D. Bcx 1750
Ruwi, 112
Muscat
Dman
TeI 24 559559
Fax 24 5043
DiI and cas ccntacts
Sridhar Sridharan
TeI 24 559559
sridhar.sridharancm.ey.ccm
Ahmed Amcr AI-Esry
TeI 24 559559
ahmed.amcrcm.ey.ccm
A. At a glance
Fiscal regime
1he liscal regime LhaL applies in Oman Lo Lhe peLroleum indusLry consisLs ol
corporaLe income Lax in accordance wiLh Lhe ProducLion sharing conLracL
{PSC) arrangemenL.
RoyalLies NoL applicable
Bonuses Applicable lor PSC conLracLs only
PSC Concession agreemenL on proliL oil alLer allocaLing
cosL oil
lncome Lax raLe CorporaLe Lax raLe is 557 {see SecLion B)
Resource renL Lax NoL applicable
CapiLal allowances Specilic depreciaLion raLes lor specilic Lypes ol asseLs,
noL applicable lor PSC
lnvesLmenL incenLives DependenL on Lhe concession agreemenL
B. Fiscal regime
Corporate income tax 1CIT)
PeLroleum companies are Laxed aL Lhe raLe ol 557 on Lheir Laxable income.
1axable income is deLermined in accordance wiLh Lhe concession agreemenL
Lo which Lhe PSC is covered. PSC arrangemenLs generally involve Lhe
lollowing elemenLs:
LxpendiLures lor exploraLion, producLion and relaLed acLiviLies are lully
lunded by Lhe company {concession holder) {i.e., Lhe CovernmenL does
noL lund any acLiviLy)
Norway Cman
24
1he CovernmenL shares in producLion
ProducLion sharing depends on producLion lor Lhe period valued aL prices
deLermined by Lhe CovernmenL
From Lhe producLion lor Lhe period, cosL oil is lirsL deLermined. Depending
on Lhe PSC, Lhere may be a cap on Lhe recovery ol cosL oil as a percenLage
ol Lhe LoLal producLion lor a given year. However, il Lhe cosL oil required
Lo recover cosLs lully is less Lhan Lhe maximum cap allowed, cosL oil is
allocaLed only Lo Lhe exLenL required lor cosL recovery. 1he remaining cosL,
noL recovered, is carried lorward lor luLure recovery {no Lime limiL is seL
under PSCs lor carrylorward ol cosLs lor luLure recovery). 1he remaining oil
{i.e., alLer allocaLing cosL oil) is proliL oil. lL is shared beLween Lhe company
and Lhe CovernmenL in accordance wiLh Lhe sharing percenLage agreed in
Lhe concession agreemenL. 1he CovernmenL generally Lakes a ma|or share
ol Lhe proliL oil
1he PSC does noL involve royalLy paymenLs
1he lollowing paymenLs may be made Lo Lhe CovernmenL depending on Lhe
Lerms agreed in Lhe concession agreemenL:
Annual renLal paymenLs
SignaLure bonus upon signing ol agreemenL
A renewal bonus upon renewal ol agreemenL
A oneLime discovery bonus upon declaraLion ol Lhe lirsL commercial
discovery ol oil or gas
A oneLime anniversary bonus alLer Lhe lirsL anniversary ol
commercial producLion
LxpendiLures qualilying lor cosL recovery. Cenerally, Lhe PSC requires LhaL
cosLs and expenses ol acLiviLies carried ouL by Lhe company or iLs alliliaLes
are Lo be included in recoverable cosLs only Lo Lhe exLenL LhaL such cosLs
and expenses are direcLly or indirecLly idenLiliable wiLh such acLiviLies, and
should be limiLed Lo Lhe acLual cosLs LhaL are lair and reasonable. CerLain
cosLs are specilically prohibiLed lor cosL recovery. Lxcluded cosLs include
bonus and renLal paymenLs made by Lhe company Lo Lhe CovernmenL
in accordance wiLh Lhe PSC, Lhe company's Omani income Laxes paid in
accordance wiLh Lhe PSC, loreign income Laxes or oLher loreign Laxes paid
by Lhe company, eLc
A Lax raLe ol 557 applies Lo Laxable income, which is compuLed in
accordance wiLh Lhe lormula seL ouL in Lhe PSC. 1axable income is arrived aL
by applying Lhe lollowing lormula:
1l = Nl 557 1l
1l = 1axable income
Nl = NeL income deLermined as Lhe markeL value ol oil or gas lilLed by Lhe
company, less recoverable cosLs
1he CovernmenL seLLles Lhe company's Lax liabiliLy lrom Lhe CovernmenL's
share ol producLion. 1his implies LhaL Lhe company does noL physically
seLLle any Laxes. 1he share ol proliL oil by Lhe company is considered neL ol
Laxes. However, Lhe Lax auLhoriLies issue a Lax receipL and a Lax cerLilicaLe
lor Lhe Laxes LhaL apply Lo Lhe company
5ervice contracts
LllecLive lrom 1 January 2010, service conLracLs are Laxed aL 127 {up Lo
31 December 2009, 127 lor local companies and 307 lor branches ol
loreign companies).
Pesource rent tax
Resource renL Lax does noL currenLly apply in Oman.
Bonuses
Bonuses apply Lo PSCs only, as explained above. OLherwise, bonuses
do noL apply.
Cman
25
Poyalty regimes
RoyalLy regimes do noL currenLly apply in Oman.
C. Capital allowances
1he Lax law provides specilic depreciaLion raLes lor specilied Lypes ol asseLs,
lor example: pipelines 107, vehicles and heavy equipmenL 33 1/37. However,
capiLal allowances do noL apply in respecL ol PSCs because Lhe enLire
capiLal expendiLure qualilies as recoverable cosL in accordance wiLh Lhe
concession agreemenL.
D. Investment incentives
All incenLives, such as Lax holidays and R&D uplilL, are dependenL on Lhe
concession agreemenL.
Losses may be carried lorward lor live years buL may noL be carried back.
NeL losses incurred by companies beneliLing lrom Lax holidays may be
carried lorward wiLhouL any Lime limiL under cerLain circumsLances.
Loss carrylorwards do noL apply Lo PSCs because Lhe enLire cosL is carried
lorward lor luLure recovery.
E. Withholding tax 1WHT) and double tax treaties
1he lollowing paymenLs made Lo loreign persons noL having permanenL
esLablishmenLs in Oman are sub|ecL Lo a linal WH1 aL Lhe raLe ol 107:
RoyalLies
ConsideraLion lor R&D
ConsideraLion lor use or righL Lo use compuLer solLware
ManagemenL lees
WH1 is also applicable where a loreign company has permanenL esLablishmenL
buL Lhe permanenL esLablishmenL does noL accounL lor income LhaL is sub|ecL
Lo WH1.
1he Lax is linal, and loreign companies have no liling or oLher obligaLions in
Lhis regard.
1he Lerm "royalLy" is delined Lo include paymenLs lor Lhe use or righL Lo use
solLware, inLellecLual properLy righLs, paLenLs, Lrademarks, drawings,
equipmenL renLals and consideraLion lor inlormaLion concerning indusLrial,
commercial or scienLilic experience and concessions involving minerals.
WH1 is noL imposed on dividends or inLeresLs. 1he 107 WH1 on royalLies under
Omani domesLic law applies Lo royalLies paid Lo companies residenL in Lhe oLher
LreaLy counLries. Under Lhe France, MauriLius and UK LreaLies, no WH1 is
imposed on royalLies paid Lo companies residenL in Lhose counLries, sub|ecL Lo
Lhe saLislacLion ol cerLain condiLions.
Oman has enLered inLo double Lax LreaLies wiLh Algeria, Belarus, Canada,
China, France, lndia, lLaly, Lebanon, MauriLius, Moldova, PakisLan, Seychelles,
Singapore, SouLh Alrica, SouLh Korea, Sudan, Syria, 1hailand, 1unisia, UniLed
Kingdom, UzbekisLan, VieLnam and Yemen. Oman has signed double Lax
LreaLies wiLh Brunei, Belgium, CroaLia, LgypL, lran, Morocco, NeLherlands,
Russian FederaLion, UzbekisLan and 1urkey buL Lhese LreaLies are noL yeL in
lorce. 1he double Lax LreaLies wiLh Brunei, Cermany and KazakhsLan have noL
been raLilied yeL.
F. Financing considerations
Thin capitalization
1he lollowing deducLions will be sub|ecL Lo execuLive regulaLions Lo be issued:
lnLeresL paid Lo sole proprieLor or anoLher person conLrolled by
sole proprieLor
lnLeresL payable by Omani company {oLher Lhan banks and
insurance companies)
Cman
2
lnLeresL paid by a PL Lo head ollice or conLrolled enLiLy
Head ollice overheads
1he Lhin capiLalizaLion rules are sub|ecL Lo Lhe execuLive regulaLions
Lo be issued.
ln addiLion, individual PSC may conLain rules regarding deducLibiliLy ol
inLeresL cosL.
C. Transactions
An expendiLure LhaL qualilies lor cosL recovery {opex and capex) is explained in
SecLion B. OLher ma|or LransacLions are explained below.
Asset disposals
Under Lhe PSC, il Lhe asseLs LhaL qualily lor cosL recovery are sold, Lhe
proceeds are remiLLed Lo Lhe CovernmenL {i.e., Lhey are considered Lo be
Lhe CovernmenL's asseLs). A balancing charge or allowance does noL apply,
as explained in SecLion C.
Pelinquishment
Cenerally, a PSC requires a specilied percenLage ol Lhe sLake held by a
company Lo be relinquished lrom Lime Lo Lime. For example, Lhe PSC may sLaLe
LhaL Lhe company should relinquish lrom Lime Lo Lime iLs sLake in Lhe conLracL
Lo reLain no more Lhan 507 ol Lhe original conLracL area by a cerLain daLe.
A PSC also allows a company Lo relinquish all or any parL ol Lhe conLracL area
aL any Lime, as long as Lhe company lullills iLs obligaLion under Lhe conLracL.
H. Indirect tax
CusLoms duLy is Lhe only indirecL Lax imposed in Oman.
Customs duty
1he CovernmenL ol Lhe SulLanaLe ol Oman, as a member ol Lhe Cull
CooperaLion Council {CCC), lollows Lhe Unilied CusLoms AcL across Lhe CCC;
Lhe unilorm cusLoms duLy ol 57 applies on all imporLs. 1his means LhaL any
goods LhaL come inLo a porL ol enLry ol a CCC Member SLaLe LhaL have been
sub|ecLed Lo cusLoms duLy in LhaL sLaLe are noL sub|ecLed Lo cusLoms duLy again
il Lhe goods are Lranslerred Lo anoLher CCC Member SLaLe.
An exempLion/reimbursemenL ol cusLoms duLy will depend on Lhe wording
ol Lhe PSC.
ln laLe 2005, Oman enLered inLo a lree Lrade agreemenL {F1A) wiLh Lhe US.
1he F1A is ellecLive lrom 1 January 2009.
VAT
CurrenLly, Lhere is no VA1 in Oman.
Pegistration Iees
RegisLraLion lees are payable Lo various minisLries. However, Lhe amounLs ol
Lhese lees are noL signilicanL.
Municipality and other taxes
Oman does noL impose esLaLe Lax, gilL Lax or dividends Lax. MunicipaliLies may
impose cerLain consumpLion Laxes, including Lax on Lhe income caLegories
ouLlined below:
HoLel and resLauranL bills 57
HoLels, moLels and Lourism resLauranLs ^7
1ax aL a raLe ol 27 on elecLriciLy bills exceeding OMR50 per monLh
1ax aL a raLe ol 37 on lease agreemenLs, payable by landlords
ln addiLion, a border Loll lee is levied on all vehicles LhaL cross Lhe Oman border
aL any poinLs ol enLry.
Cman
27
I. Cther
Payroll taxes and employee beneIits
1he Social SecuriLy Law {Royal Decree No. 72 ol 1991) inLroduced a sysLem
ol social securiLy Lo insure employees againsL old age, disabiliLy, deaLh and
occupaLional in|uries and diseases. 1he law currenLly applies exclusively Lo
Omanis working in Lhe privaLe secLor. Under Lhe law, privaLesecLor employers
musL make monLhly conLribuLions Lo Lhe Public AuLhoriLy lor Social lnsurance
aL a raLe ol 9.57 ol each Omani employee's monLhly wage. Lmployees
conLribuLe aL a raLe ol 6.57 ol Lheir monLhly wages. Lmployers conLribuLe an
addiLional 17 ol each Omani employee's monLhly wage as securiLy againsL
occupaLional in|uries and diseases. 1he CovernmenL conLribuLes 27 ol each
Omani employee's monLhly wage. 1he Public AuLhoriLy lor Social lnsurance
invesLs all lunds received, and iL pays ouL sums due Lo employees upon Lheir
reLiremenL and as compensaLion lor in|uries and diseases.
ln accordance wiLh Lhe labor law {Royal Decree No. 35 ol 2003), employers
musL pay an endolservice beneliL {LSB) Lo Lheir loreign employees. 1he
LSB is calculaLed on an employee's linal wage and paid according Lo Lhe
lollowing guidelines:
For Lhe lirsL Lhree years ol service, an equivalenL ol 15 days' basic pay lor
each year worked
For each subsequenL year, an equivalenL ol one monLh's basic pay
5pecial requirements Ior Ioreign nationals
An employer musL make an annual conLribuLion ol OMR100 Loward Lhe
vocaLional Lraining levy lor each nonOmani employee.
Pakistan
Country code 92
Karachi CMT +5
Ernst & Ycunc
01, Prccressive PIaza, Beaumcnt Rcad
Karachi
SD
75530
Pakistan
TeI 21 355 0007
Fax 21 35 195
DiI and cas ccntacts
Mustafa KhandwaIa
TeI 21 355 0007
mustafa.khandwaIapk.ey.ccm
KhaIiI Waccan
TeI 21 355 000
khaIiI.waccanpk.ey.ccm
A. At a glance
Fiscal regime
1he liscal regime LhaL applies Lo Lhe peLroleum indusLry in PakisLan consisLs
ol a combinaLion ol CorporaLe income Lax {Cl1), a windlall levy and royalLy in
respecL ol Lhe exploraLion license.
RoyalLies 12.5X
Bonuses Varied amounLs, linked wiLh Lhe level ol
commercial producLion
ProducLion sharing
conLracL {PSC) ProducL sharing applies only Lo ollshore
operaLions, on a sliding scale basis
Cman Pakistan
28
lncome Lax raLe ^07 as envisaged under Lhe PeLroleum
LxploraLion ProducLion Policy 2009
CapiLal allowances D: acceleraLed depreciaLion
B. Fiscal regime
PeLroleum exploraLion and producLion {L&P) acLiviLies in PakisLan may be
underLaken in accordance wiLh Lwo dillerenL Lypes ol agreemenLs:
1. For onshore operaLions, a sysLem based upon a peLroleum concession
agreemenL {PCA)
2. For ollshore operaLions, a sysLem based upon a producLion sharing
agreemenL {PSA)
Corporate tax
ln accordance wiLh Lhe PeLroleum LxploraLion ProducLion Policy 2009, Lhe
raLe ol corporaLe Lax is ^07 ol Lhe amounL ol proliLs or gains lrom all new
PCAs and PSAs.
1he lncome 1ax Ordinance 2001 {Lhe Ordinance) is Lhe governing income
Lax legislaLion. ParL l ol Lhe FilLh Schedule Lo Lhe Ordinance deals wiLh Lhe
compuLaLion ol Lhe proliLs and gains or income lrom peLroleum L&P acLiviLies
in PakisLan. 1he FilLh Schedule provides LhaL all expenses incurred alLer
commencemenL ol commercial producLion, LhaL are noL capiLal or personal in
naLure, are deducLible provided Lhey are incurred "wholly and exclusively" lor
Lhe purpose ol peLroleum L&P acLiviLies. However, cerLain expenses, such as
royalLy paymenLs and depreciaLion, are deducLed based on specilic provisions
ol Lhe Ordinance.
ln accordance wiLh Lhe provisions ol Lhe FilLh Schedule Lo Lhe Ordinance, Lhere
is no concepL ol ring lencing lor corporaLe Lax calculaLions.
Dry hole
Any expendiLure lor searching, exploring and inquiring LhaL resulLs in a "dry
hole" is LreaLed as a loss on iLs compleLion or a surrender ol Lhe area back Lo
Lhe CovernmenL. As may be opLed lor by Lhe working inLeresL owner in Lhe PCA
or PSA, Lhis loss is ad|usLed in eiLher ol Lhe lollowing ways:
1he loss in any year is seL oll againsL Lhe income ol LhaL year chargeable
under Lhe heading "income lrom business" or any income chargeable
under any oLher heading ol income {oLher Lhan income lrom dividends).
Lxcess losses are carried lorward lor no more Lhen six years lrom
Lhe year incurred
1he loss in any year is ollseL againsL Lhe income ol such underLaking in
Lhe Lax year in which commercial producLion commenced. Where Lhe loss
cannoL be wholly ollseL againsL Lhe income ol such underLaking in LhaL year,
Lhe excess is carried lorward lor no more Lhan 10 years
CIIshore operations
ln respecL ol ollshore operaLions, Lhe cosL limiL is 857 including Lhe royalLy ol
12.57. 1he conLracLor can recover 1007 ol Lhe cosL lrom up Lo a maximum ol
857 ol Lhe gross revenues.
A sliding scale PSA is used lor ollshore operaLions insLead ol direcL CovernmenL
parLicipaLion. 1he agreemenL is generally execuLed by Lhe conLracLor wiLh a
CovernmenLowned enLiLy, which is also granLed Lhe exploraLion license and Lhe
developmenL and producLion lease. 1he conLracLor, Lherelore, iniLially receives
Lhe oil and gas proliL shares and is responsible lor managing Lhe PSAs.
Pakistan
29
1he proliL spliL is esLablished on Lhe basis ol a sliding scale lor shallow, deep
and ulLradeep grids. 1he sliding scale is based on Lhe cumulaLive producLion,
permiLLing a rapid recovery ol invesLmenLs and a higher neL presenL value.
1he proliL spliL is seL ouL below:
1. ProliL oil and gas share lor wells in shallow grid areas ol less Lhan 200
meLers waLer depLh wiLh a depLh Lo reservoir shallower Lhan ^,000 meLers:
Cumulative available
oil or available gas
Irom contract area
Covernment holdings share
oI proIit oil or proIit gas in
contract area
Contractor share oI
proIit oil or proIit gas
in contract area
MMBCE
Crude oil,
LPC or
condensate
Natural gas
Crude oil,
LPC or
condensate
Natural gas
0 100 207 107 807 907
> 100 200 257 157 757 857
> 200 ^00 ^07 357 607 657
> ^00 800 607 507 ^07 507
> 800 1,200 707 707 307 307
> 1,200 807 807 207 207
2. ProliL oil and gas share lor wells in deep grid areas ol more Lhan or equal Lo
200 meLers and less Lhan 1,000 meLers waLer depLh, or deeper Lhan
^,000 meLers Lo Lhe reservoir in Lhe shallow grid area:
Cumulative available
oil or available gas
Irom contract area
Covernment holdings share
oI proIit oil or proIit gas in
contract area
Contractor share oI proIit
oil or proIit gas in
contract area
MMBCE
Crude oil,
LPC or
condensate
Natural gas
Crude oil,
LPC or
condensate
Natural gas
0 200 57 57 957 957
> 200 ^00 107 107 907 907
> ^00 800 257 257 757 757
> 800 1,200 357 357 657 657
> 1,200 2,^00 507 507 507 507
> 2,^00 707 707 307 307
3. ProliL oil and gas share lor wells in ulLradeep grid areas ol more Lhan or
equal Lo 1,000 meLers waLer depLh:
Cumulative available
oil or available gas
Irom contract area
Covernment holdings share
oI proIit oil or proIit gas in
contract area
Contractor share oI proIit
oil or proIit gas in
contract area
MMBCE
Crude oil,
LPC or
condensate
Natural gas
Crude oil,
LPC or
condensate
Natural gas
0 300 57 57 957 957
> 300 600 107 107 907 907
> 600 1,200 257 257 757 757
> 1,200 2,^00 357 357 657 657
> 2,^00 3,600 ^57 ^57 557 557
> 3,600 607 607 ^07 ^07
WindIall levy
A windlall levy also applies Lo onshore concessions. 1he windlall levy on oil
{WLO) applies Lo crude oil and condensaLe lrom an onshore concession using
Lhe lollowing lormula :
WLD = 0.5 x 1M - R) x 1P - B)
WLO = windlall levy on crude oil and condensaLe
M = neL producLion
R = royalLy
Pakistan
270
P = markeL price ol crude oil and condensaLe
B = base price:
1he base price lor crude oil and condensaLe is USS30 per barrel
1his base price increases each calendar year by USS0.25 per barrel sLarLing
lrom Lhe daLe ol lirsL commercial producLion in Lhe conLracL area
WLO applies Lo crude oil and condensaLe lrom an ollshore PSA, using Lhe
lollowing lormula:
WLD = 0.5 x 1P - R) x SCD
WLO = windlall levy on share ol crude oil and condensaLe
P = markeL price ol crude oil and condensaLe
SCO = share ol crude oil and condensaLe allocaLed Lo a conLracLor
R = base price:
1he base price lor crude oil and condensaLe is USS30 per barrel
1his base price increases each calendar year by USS0.25 per barrel sLarLing
lrom Lhe daLe ol lirsL commercial producLion in Lhe conLracL area
For Lhe sale ol naLural gas Lo parLies oLher Lhan Lhe CovernmenL, a windlall levy
on gas {WLC) applies Lo Lhe dillerence beLween Lhe applicable zone price and
Lhe LhirdparLy sale price using Lhe lollowing lormula:
WLC = 0.5 x 1PC - BR) x V
WLC = windlall levy on share ol naLural gas
PC = LhirdparLy sale price ol naLural gas
BR = base price
V = volume ol gas sold Lo Lhird parLy excluding royalLy
1he base price is Lhe applicable zone price lor sale Lo Lhe CovernmenL.
ll Lhe LhirdparLy sale price ol gas is less Lhan or equal Lo Lhe base price,
Lhe WLC is zero.
1he windlall levy does noL apply Lo sales ol naLural gas made Lo Lhe CovernmenL.
Poyalty regimes
A royalLy is payable in respecL ol onshore operaLions aL Lhe raLe ol 12.57 ol
Lhe value ol Lhe peLroleum aL Lhe lield gaLe. AL Lhe opLion ol Lhe CovernmenL,
Lhe royalLy musL be paid in cash or in kind on liquid and gaseous hydrocarbons
{such as LPC, NCL, solvenL oil, gasoline and oLhers), as well as on all
subsLances, including sulphur, produced in associaLion wiLh such hydrocarbons.
1he lease renL paid during Lhe year is noL deducLible lrom Lhe royalLy paymenL.
A royalLy is LreaLed as an expense lor Lhe purpose ol deLermining Lhe income
Lax liabiliLy.
1he lollowing royalLy schedule applies Lo ollshore operaLions:
1he lirsL ^8 calendar monLhs alLer commencemenL ol commercial
producLion no royalLy
MonLhs ^9 Lo 60 inclusive 57 ol lield gaLe price
Calendar monLhs 61 Lo 72 inclusive 107 ol lield gaLe price
Calendar monLhs 73 onward 12.57 ol lield gaLe price
Similar Lo onshore operaLions, aL Lhe opLion ol Lhe CovernmenL, Lhe royalLy
is payable eiLher in cash or in kind on liquid and gaseous hydrocarbons
{such as LPC, NCL, solvenL oil, gasoline and oLhers), as well as lor all
subsLances, including sulphur, produced in associaLion wiLh such hydrocarbons.
1he lease renL paid during Lhe year is noL deducLible lrom Lhe royalLy paymenL.
RoyalLies are LreaLed as an expense lor Lhe purpose ol deLermining Lhe
income Lax liabiliLy.
Pakistan
271
For Lhe purpose ol calculaLing Lhe amounL due by way ol royalLy, Lhe value ol
Lhe peLroleum produced and saved musL be deLermined by using Lhe acLual
selling price in Lhe lollowing manner:
1. ll Lhe peLroleum is sold in Lhe naLional markeL, Lhe acLual selling price means
Lhe price deLermined in accordance wiLh Lhe relevanL sale and purchase
agreemenL beLween Lhe peLroleum righL holder and Lhe CovernmenL or iLs
designee, less allowed LransporLaLion cosLs beyond Lhe delivery poinL
2. ln all oLher cases, Lhe acLual selling price means Lhe greaLer ol:
a) 1he price aL which Lhe peLroleum is sold or oLherwise disposed ol,
less allowable LransporLaLion cosLs
b) 1he lair markeL price received Lhrough arm's lengLh sales ol Lhe
peLroleum less Lhe allowed LransporLaLion cosLs
c) 1he price applicable Lo Lhe sales made under subrule2. {a) above
C. Capital allowances
1he lollowing depreciaLion raLes apply lor onshore operaLions:
On successlul exploraLion and developmenL wells 107 on a
sLraighLline basis
On dry holes {exploraLory wells) expensed immediaLely upon
commencemenL ol commercial producLion or relinquishmenL,
whichever is earlier
Belowground insLallaLion 1007 upon commencemenL ol commercial
producLion or relinquishmenL, whichever is earlier
lniLial allowance in respecL ol eligible depreciable asseLs in Lhe year ol use or
commencemenL ol commercial producLion, whichever is laLer 507 ol cosL
FirsLyear allowance in respecL ol eligible planL, machinery and equipmenL
insLalled in a specilied rural and underdeveloped area 907 ol cosL
Normal depreciaLion raLe on planL and machinery 157 using Lhe
diminishingbalance meLhod
Carrylorward ol unabsorbed depreciaLion lor a maximum period ol six
years. ll a depreciable asseL is compleLely used and noL physically available
aL Lhe Lime ol commencemenL ol commercial producLion and iL relaLes
Lo a dry hole, iL becomes a losL expendiLure and iL can be amorLized on a
sLraighLline basis over a period ol 10 years alLer Lhe commencemenL ol
commercial producLion {see Lhe LreaLmenL ol a losL expendiLure above).
ln Lhese circumsLances, Lhe enLire cosL ol Lhe asseL is amorLized as parL ol
Lhe losL expendiLure and noL as depreciaLion
1he lollowing depreciaLion raLes apply Lo ollshore operaLions:
On successlul exploraLion and developmenL wells 257 on a
sLraighLline basis
On dry holes {exploraLory wells) expensed immediaLely upon
commencemenL ol commercial producLion or relinquishmenL,
whichever is earlier
Noncommercial well {exploraLion wells) expensed upon
relinquishmenL ol license
On laciliLies and ollshore plaLlorms 207 using Lhe
decliningbalance meLhod
Belowground insLallaLion 1007 upon commencemenL ol commercial
producLion or relinquishmenL, whichever is earlier
lniLial allowance in respecL ol eligible depreciable asseLs in Lhe year ol use or
commencemenL ol commercial producLion, whichever is laLer 507 ol cosL
Normal depreciaLion raLe on planL and machinery 157 using Lhe
diminishingbalance basis
Carrylorward ol any unabsorbed depreciaLion in respecL ol planL and
machinery is permiLLed unLil Lhe depreciaLion is lully absorbed
Pakistan
272
A depleLion allowance, alLer commencemenL ol commercial producLion, is
allowed aL Lhe lesser ol:
157 ol Lhe gross receipLs represenLing wellhead value ol Lhe producLion
507 ol proliLs ol such underLaking belore depleLion allowance
D. Incentives
ln accordance wiLh Lhe PeLroleum LxploraLion ProducLion Policy 2009,
prequalilied L&P companies incorporaLed in PakisLan LhaL pay dividends and
receive paymenLs lor peLroleum sold in PakisLan rupees {PKR) are enLiLled Lo
Lhe lollowing incenLives:
L&P companies are encouraged Lo operaLe exploraLion blocks
wiLh 1007 ownership
ln case ol |oinL venLures wiLh loreign L&P companies, local L&P companies
have a working inLeresL ol 157 in Zone l, 207 in Zone ll and 257 in Zone
lll on a lullparLicipaLion basis {required minimum PakisLani working
inLeresL). Local L&P companies musL conLribuLe Lheir share ol exploraLion
expendiLures {denominaLed in PKR) up Lo Lhe required minimum PakisLani
working inLeresL
On a casebycase basis, during Lhe exploraLion phase, local L&P companies
are enLiLled Lo receive loreign exchange againsL paymenL in PakisLani
currency Lo meeL Lheir dayLoday obligaLions under permiLs, licenses
and PCAs or PSAs. AlLer commercial discovery, local L&P companies are
paid up Lo 307 ol Lheir sale proceeds in loreign currency Lo meeL Lheir day
Loday operaLional requiremenLs. For pro|ecL linancing alLer commercial
discovery, local L&P companies are required Lo make Lheir own loreign
exchange arrangemenLs, excepL lor companies in which COP holds a
ma|oriLy shareholding
FurLher, Lhe Schedule Lo Lhe RegulaLion ol Mines and Oillields and Mineral
DevelopmenL {CovernmenL ConLrol) {AmendmenL) AcL 1976 {Lhe AcL)
provides Lhe lollowing concessions Lo an underLaking engaged in exploraLion or
exLracLion ol mineral deposiLs. Please noLe LhaL Lhe concession noLed in iLems
1. Lo 8. below are applicable Lo peLroleum operaLions:
1. 1here is Lhe concepL ol "lreezing ol law" in respecL ol mining operaLions.
1he ellecL is LhaL any provisions ol Lhe mining rules or amendmenL in Lhe
Ordinance, made alLer Lhe ellecLive daLe ol an agreemenL lor Lhe granL
ol a license or a lease Lo explore, prospecL or mine peLroleum, LhaL are
inconsisLenL wiLh Lhe Lerms ol Lhe agreemenL, do noL apply Lo a company
LhaL is a parLy Lo Lhe agreemenL, Lo Lhe exLenL LhaL Lhey are incompaLible
wiLh Lhe agreemenL.
2. Belore commencemenL ol commercial producLion ol peLroleum, any
expendiLure on searching lor, or on discovering and LesLing a peLroleum
deposiL, or on winning access Lo Lhe deposiL LhaL is allowable Lo a
surrendered area and Lo Lhe drilling ol a dry hole, is deemed Lo be losL aL
Lhe Lime ol Lhe surrender ol Lhe area or Lhe compleLion ol Lhe dry hole
lor Lhe purpose ol Lhe Second Schedule Lo Lhe AcL. A losL expendiLure is
allowable in one ol Lhe Lwo ways menLioned in SecLion B.
3. 1he income derived by Lhe licensee or lessee lrom Lhe use ol, and surplus
capaciLy ol, iLs pipeline by any oLher licensee or lessee is assessed on Lhe
same basis as income lrom peLroleum iL produced lrom iLs concession area.
^. A licensee or lessee company incorporaLed ouLside PakisLan, or iLs assignee,
is allowed Lo exporL iLs share ol peLroleum alLer meeLing Lhe agreed porLion
ol Lhe inLernal requiremenL lor PakisLan.
5. Sale proceeds ol Lhe share ol peLroleum exporLed by a licensee or lessee
incorporaLed ouLside PakisLan, or iLs assignee, may be reLained abroad
and may be used lreely by iL, sub|ecL Lo Lhe condiLion LhaL iL shall bring
back Lhe porLion ol Lhe proceeds LhaL is required Lo meeL iLs obligaLion
under Lhe lease.
6. No cusLoms duLy or sales Lax is levied on Lhe imporL ol machinery and
equipmenL specilied in Lhe PCA or PSA lor purposes ol exploraLion and
drilling prior Lo commercial discovery.
Pakistan
273
7. A concessionary, ad valorem cusLoms duLy raLe ol 57 or 107 applies on
imporL ol specilic planL, machinery and equipmenL by L&P companies, and
Lheir conLracLors and subconLracLors, on lullillmenL ol specilied condiLions.
Such planL, machinery and equipmenL are exempL lrom sales Lax and
Federal Lxcise duLy.
8. Foreign naLionals employed by a licensee, a lessee or Lheir conLracLor may
imporL commissary goods lree ol cusLoms duLy and sales Lax Lo Lhe exLenL
ol USS550 per annum, sub|ecL Lo Lhe condiLion LhaL Lhe goods are noL sold
or oLherwise disposed ol in PakisLan.
9. Foreign naLionals employed by a licensee, a lessee or Lheir conLracLor may
imporL used and bona lide personal and household ellecLs, excluding moLor
vehicles, lree ol cusLoms duLy and sales Lax, sub|ecL Lo Lhe condiLion LhaL
Lhe goods are noL sold or oLherwise disposed ol in PakisLan.
10. All daLa in respecL ol areas surrendered by a previous licensee or
lessee musL be made available lor inspecLion Lo a prospecLive licensee
lree ol charge.
11. lniLial parLicipaLion by Lhe lederal CovernmenL in exploraLion is Lo Lhe exLenL
as may be agreed upon beLween Lhe lederal CovernmenL and Lhe licensee.
E. Withholding taxes 1WHT)
Dividends
1he general raLe ol WH1 on paymenL ol a dividend is 107 ol Lhe gross amounL
ol Lhe paymenL. 1he Lax wiLhheld consLiLuLes a lull and linal discharge ol Lhe Lax
liabiliLy ol Lhe recipienL shareholder il Lhe shareholder is an individual or an
associaLion ol persons. For corporaLe Laxpayers, Lhe Lax deducLed consLiLuLes
an advance Lax and is ad|usLable againsL Lhe evenLual Lax liabiliLy lor Lhe
relevanL Lax year, which is 107 ol Lhe gross dividend.
Interest
1he general raLe ol WH1 on inLeresL is 107 ol Lhe gross amounL ol inLeresL il
Lhe recipienL is a residenL ol PakisLan. 1he Lax wiLhheld consLiLuLes Lhe lull and
linal discharge ol Lhe Lax liabiliLy ol Lhe recipienL il Lhe recipienL is a residenL
individual or an associaLion ol persons. For corporaLe Lax payers, such Lax
wiLhheld consLiLuLes an advance Lax and is ad|usLable againsL Lhe evenLual
Lax liabiliLy ol Lhe company lor Lhe year. ll inLeresL is paid Lo nonresidenLs
noL having a permanenL esLablishmenL in PakisLan, Lhe raLe ol wiLhholding
is 107 ol Lhe gross amounL. 1he Lax wiLhheld consLiLuLes an advance Lax lor
Lhe recipienL lender and is ad|usLable againsL Lhe evenLual Lax liabiliLy ol Lhe
nonresidenL recipienL.
Poyalties and technical services
ReceipLs in respecL ol royalLies and Lechnical services, LhaL are noL aLLribuLable
Lo Lhe permanenL esLablishmenL in PakisLan ol a nonresidenL person, are
sub|ecL Lo WH1 aL Lhe raLe ol 157 ol Lhe gross amounL ol Lhe paymenL.
1he Lax wiLhheld consLiLuLes Lhe lull and linal discharge ol Lhe Lax liabiliLy
ol Lhe recipienL.
Nonresident contractors
PaymenLs made Lo nonresidenL conLracLors lor consLrucLion, assembly or
insLallaLion pro|ecLs in PakisLan, including services rendered in relaLion Lo such
pro|ecLs, are sub|ecL Lo WH1 aL Lhe raLe ol 67 ol Lhe gross amounL ol Lhe
paymenL. 1he Lax wiLhheld consLiLuLes Lhe lull and linal discharge ol Lhe Lax
liabiliLy ol Lhe nonresidenL conLracLor, provided iL opLs lor Lhis LreaLmenL
by liling a wriLLen declaraLion Lo LhaL ellecL wiLh Lhe LaxaLion auLhoriLies in
PakisLan wiLhin Lhree monLhs ol Lhe commencemenL ol Lhe conLracL. ll Lhe
opLion is noL exercised, Lhe neL proliL is Laxable aL Lhe 357 corporaLe raLe ol Lax.
Pakistan
274
F. Financing considerations
Thin capitalization rules
1he income Lax law has a Lhin capiLalizaLion rule, whereby il a loreignconLrolled
residenL company or a branch ol a loreign company operaLing in PakisLan,
oLher Lhan a linancial insLiLuLion, has a loreign debLLoloreignequiLy raLio in
excess ol 3:1 aL any Lime during a Lax year, Lhe deducLibiliLy ol inLeresL as a
business expense is capped. lnLeresL on debL paid by a company in LhaL year
is noL a permissible deducLion Lo Lhe exLenL iL exceeds Lhe 3:1 raLio. ln oLher
words, only Lhe inLeresL expense arising lrom Lhe loans LhaL meeL Lhe debLLo
equiLy raLio requiremenL may be deducLed.
For purposes ol Lhe Lhin capiLalizaLion rule, loreign debL includes any amounL
owed Lo a loreign conLroller or nonresidenL associaLe ol Lhe loreign conLroller
lor which proliL on Lhe debL is payable and deducLible lor Lhe loreignconLrolled
residenL company and is noL Laxed under Lhis ordinance, or is Laxable aL a raLe
less Lhan Lhe corporaLe raLe ol Lax applicable on Lhe assessmenL Lo Lhe loreign
conLroller or associaLe.
Interest guaranteeing
lnLeresL guaranLeeing is noL applicable in PakisLan
P5C expenditure recovery exclusions Ior Iinancing costs
Whereas cosL pushdown is noL permiLLed by Lhe head ollice Lo Lhe local branch,
all expenses, including head ollice expenses, incurred wholly and exclusively Lo
earn Lhe income, are allowable lor Lax purposes.
C. Transactions
1he working inLeresL owner is noL permiLLed Lo sell, assign, Lransler, convey or
oLherwise dispose ol all or any parL ol iLs righLs and obligaLions under a license,
lease or an agreemenL wiLh a Lhird parLy or any ol iLs alliliaLes wiLhouL Lhe prior
wriLLen consenL ol Lhe regulaLory auLhoriLies. 1his permission, however, is
generally noL wiLhheld.
1he Lransler ol any inLeresL or righL Lo explore or exploiL naLural resources in
PakisLan consLiLuLes a disposal lor Lax purposes. 1he amounL ol gain arising
on Lhe disposal ol a righL is compuLed as Lhe dillerence beLween Lhe
consideraLion received lor Lhe Lransler and Lhe cosL relaLed Lo Lhe righLs.
ConsideraLion is expliciLly provided Lo be Lhe higher ol Lhe amounL received
or Lhe lair markeL value.
1he amounL ol Lhe gain is Laxable aL Lhe raLe ol Lhe Lax applicable lor Lhe
relevanL Lax year.
1he Ordinance expliciLly provides LhaL Lhe amounL ol gain arising lrom
alienaLion ol any share in a company, Lhe asseLs ol which consisL wholly or
mainly, direcLly or indirecLly ol properLy or a righL Lo explore or exploiL naLural
resources in PakisLan,consLiLuLes PakisLansourced income ol Lhe Lransleror.
1he amounL ol Lhe gain is compuLed as Lhe dillerence beLween Lhe
consideraLion received and Lhe cosL ol Lhe asseL. ll Lhe consideraLion received
is less Lhan Lhe lair markeL value, Lhe lair markeL value is deemed Lo be Lhe
consideraLion lor Lax purposes. ll Lhe shares have been held lor a period ol
more Lhan one year, only 757 ol Lhe gain is Laxable aL Lhe raLe ol Lhe Lax
applicable lor Lhe relevanL Lax year.
H. Indirect taxes
5ales tax
VA1 is called sales Lax in PakisLan and is governed under Lhe Sales 1ax AcL
1990 {Lhe Sales 1ax AcL). All supplies made in Lhe course ol any Laxable
acLiviLy and all goods imporLed inLo PakisLan are sub|ecL Lo sales Lax {excepL
Lhose lisLed in Schedule 6 ol Lhe Sales 1ax AcL).
CerLain services have also been broughL wiLhin Lhe ambiL ol sales Lax ellecLive
lrom 1 July 2000, including services supplied by hoLels, clubs and caLerers;
Pakistan
275
cusLoms agenLs, ship chandlers and sLevedores; courier services; and
adverLisemenLs on Lelevision and radio {excluding adverLisemenLs sponsored by
Lhe CovernmenL, iLs agencies and NCOs, wiLh cerLain prescribed social causes).
ln addiLion, Lhe lederal excise duLy is levied and collecLed Lhrough sales Lax on
cerLain excisable goods and services, including edible oil, vegeLable ghee and
cooking oil; adverLisemenLs on closed circuiL Lelevision and adverLisemenLs on
cable Lelevision neLworks; carriage ol goods by air, services provided or
rendered in respecL ol air Lravel by passengers wiLhin Lhe LerriLorial limiLs ol
PakisLan; services rendered by shipping agenLs; and services rendered by
persons engaged in LelecommunicaLions work in respecL ol Lelephone,
Lelegraph, Lelex, Lelelax and similar services {exclusions apply).
1he general raLe ol sales Lax is 167 ol Lhe value ol Lhe supplies made or Lhe
goods imporLed. However, lor goods specilied in Schedule 3 ol Lhe Sales 1ax
AcL, sales Lax is charged on supplies aL Lhe raLe ol 167 ol Lhe reLail price.
ln addiLion, cerLain goods aLLracL higher sales Lax raLes ol 18.57 and 217.
Coods exporLed lrom PakisLan, goods specilied in Schedule 5 ol Lhe Sales 1ax
AcL and some specilied goods are sub|ecL Lo a zero raLe ol Coods and services
Lax {CS1). Supply and imporL ol planL, machinery and equipmenL are zero
raLed, wiLh cerLain excepLions.
Coods specilied in Schedule 6 ol Lhe Sales 1ax AcL {and any oLher goods Lhe
lederal CovernmenL may specily by a noLilicaLion in Lhe Ollicial CazeLLe) are
exempL lrom sales Lax.
L&P companies are required Lo be regisLered under Lhe Sales 1ax AcL because
Lhe supply ol L&P producLs aLLracLs sales Lax.
A regisLered enLiLy may recover inpuL Lax paid on imporLs and Lhe purchase ol
Laxable goods or services acquired in respecL ol making Laxable supplies. lnpuL
Lax is generally recovered by being ollseL againsL Lhe sales Lax payable on Lhe
Laxable supplies.
Import duties
1he CusLoms AcL 1969 {Lhe CusLoms AcL) governs Lhe Laxes LhaL apply on
Lhe imporL or exporL ol duLiable goods. SecLion 18 ol Lhe CusLoms AcL provides
LhaL cusLoms duLies are levied aL such raLes as prescribed in Lhe Schedule 1
{aLLached below) and Lhe Schedule 2 {or under any oLher law in lorce aL Lhe
Lime) on:
Coods imporLed inLo or exporLed lrom PakisLan
Coods broughL lrom any loreign counLry Lo any cusLoms sLaLion and,
wiLhouL paymenL ol duLy Lhere, shipped or LransporLed, or Lhence carried Lo,
and imporLed aL, any oLher cusLoms sLaLion
Coods broughL in bond lrom one cusLoms sLaLion Lo anoLher
Cenerally, Lhe raLe ol cusLoms duLy applied Lo Lhe cusLoms value ol imporLed
goods ranges lrom 57 Lo 357; Lhe raLe depends on several lacLors, including
Lhe Lype ol commodiLy, Lhe consLiLuenL maLerial and Lhe counLry ol origin.
CusLoms duLy on Lhe imporL ol planL, machinery, equipmenL and oLher
accessories made by L&P companies, Lheir conLracLors, subconLracLors and
service companies is governed by SRO.678{1)/200^ daLed 7 AugusL 200^
{SRO) and issued under SecLion 19 ol Lhe CusLoms AcL.
1he SRO provides Lwo exempLions lrom cusLoms duLy:
1. All machinery, equipmenL, maLerials, specialized vehicles or vessels,
pickups {lourwheel drive), helicopLers, aircralL, accessories, spares,
chemicals and consumables noL manulacLured locally LhaL are imporLed
by L&P companies, Lheir conLracLors, subconLracLors or service companies
in excess ol 57 by value
2. 1he goods lisLed above LhaL are manulacLured locally and imporLed by L&P
companies, Lheir conLracLors, subconLracLors or service companies and
oLher peLroleum and public secLor companies in excess ol 107 by value
Pakistan
27
1hese cusLoms duLy concessions are available exclusively lor L&P companies
LhaL hold permiLs, licenses, leases, PSCs or PSAs and LhaL enLer inLo
supplemenLal agreemenLs wiLh Lhe CovernmenL ol PakisLan. Moreover, Lhe
exempLion under Lhe SRO is available in respecL ol Lhe specilied goods sub|ecL
Lo saLislying condiLions specilied in Lhe noLilicaLion.
lLems imporLed aL concessionary raLes ol duLy LhaL become surplus, scrap, |unk,
obsoleLe or are oLherwise disposed ol or Lranslerred Lo anoLher L&P company
are also exempL {upon noLilicaLion ol Lhe sales Lax deparLmenL). However, il
Lhese iLems are sold Lhrough a public Lender, duLies are recovered aL Lhe raLe ol
107 on Lhe value ol Lhe sale proceeds.
Federal excise duty
Lxcise duLy is a singlesLage duLy levied aL varied raLes on specilied goods
produced or manulacLured in PakisLan, imporLed inLo PakisLan, produced or
manulacLured in nonLarill areas and broughL Lo Larill areas lor sale or
consumpLion, and specilied services provided or rendered in PakisLan. 1able l
ol Schedule 1 ol Lhe Federal Lxcise AcL 2005 idenLilies goods sub|ecL Lo excise
duLy, including cemenL, various oils, luels and lubricanLs, LPC and oLher
liquelied peLroleum gases and peLroleum biLumen. 1he currenL raLes ol excise
duLy on oil and gasrelaLed producLs are lisLed in Lhe aLLached appendix.
ln addiLion Lo Lhe normal excise duLy, a special excise duLy is levied aL Lhe raLe
ol 17 ol Lhe value ol Lhe goods. However, cerLain goods and cerLain classes ol
persons have been excluded lrom duLy, including peLroleum oils and oils
obLained lrom biLuminous minerals, crude, POL producLs, naLural gas and LPC.
5tamp duty
Under Lhe SLamp AcL 1899, sLamp duLy is paid on insLrumenLs. lL is a
provincial or sLaLe levy and iLs applicaLion varies lrom province Lo province.
1he raLes ol sLamp duLy also vary lrom insLrumenL Lo insLrumenL. 1he Lerm
"insLrumenL" means a wriLLen deed, will or oLher lormal legal documenL lor
Lransler ol properLy.
I. Cther
Pental payment
ln respecL ol an onshore concession, all holders ol exploraLion licenses are
required Lo pay an advance renLal charge aL Lhe lollowing raLes:
PKRs3,500 per square kilomeLer or parL Lhereol in respecL ol Lhe live years
ol Lhe iniLial Lerm ol Lhe license
PKRs800 per square kilomeLer or parL Lhereol in respecL ol each year ol Lhe
iniLial Lerm ol Lhe license
PKRs5,000 per square kilomeLer or parL Lhereol in respecL ol each renewal
ol Lhe license
PKRs2,750 per square kilomeLer or parL Lhereol in respecL ol each year ol
Lhe renewal ol Lhe license
For onshore operaLions, during Lhe lease period, Lhe lollowing annual advance
renLal charges apply:
PKRs7,500 per square kilomeLer or parL Lhereol covering Lhe lease area
during Lhe iniLial lease period
PKRs10,000 per square kilomeLer or parL Lhereol covering Lhe lease area
during Lhe renewal period ol a lease and lurLher lease Lerm exLension
ConLracLors engaged in ollshore operaLions are required Lo pay an advance
annual acreage renLal lor Lhe area covered under Lhe PSA ol USS50,000,
plus a lurLher raLe ol USS10 per square kilomeLer or parL Lhereol every year.
RenLal expenses are allowable deducLions lor payers.
Pakistan
277
Production bonuses
A producLion bonus is payable lor onshore operaLions on a conLracL area
basis as lollows:
Cumulative production
1MMBCE)
Amount
1U55)
AL sLarL ol commercial producLion 0.6 million
30 1.2 million
60 2 million
80 5 million
100 7 million
ln respecL ol ollshore operaLions, a producLion bonus is payable as per
Lable below.
Cumulative production
1MMBCE)
Amount
1U55)
AL sLarL ol commercial producLion 0.6 million
60 1.2 million
120 2 million
160 5 million
200 7 million
Domestic supply obligation
Sub|ecL Lo Lhe consideraLions ol inLernal requiremenLs and naLional
emergencies, L&P companies are allowed Lo exporL Lheir share ol crude oil
and condensaLe as well as Lheir share ol gas based on exporL licenses granLed
by Lhe regulaLor. For Lhe purpose ol obLaining an exporL license lor gas, Lhe
exporL volume is deLermined in accordance wiLh Lhe "L15" concepL, provided a
lair markeL value is realized lor Lhe gas aL Lhe exporL poinL. Under Lhe L15
concepL, Lhe gas reserves LhaL exceed Lhe neL proven gas reserves in PakisLan
{including Lhe lirm imporL commiLmenLs visvis Lhe pro|ecLed gas demand
lor Lhe nexL 15 years) can be considered lor exporL. Once gas has been
dedicaLed lor exporL, any exporL licenses lor agreed volumes cannoL be
subsequenLly revoked.
1he lollowing is Lhe appendix Lo Schedule 1 ol Lhe CusLoms AcL {exLracL)1able l
{excisable goods)
5. no.
Description oI
goods
Heading or
subheading
number Pate oI duty
{1) {2) {3) {^)
17 SolvenL oil
{noncomposiLe)
2710.1150 13 PKRs
per liLer
18 OLher 2710.1190 88 paisa
per liLer
21 OLher luel oils 2710.19^9 185 PKRs per
meLric Lon
22 LubricaLing oil in
packs noL
exceeding
10 liLers
2710.1951
107 ol Lhe
reLail price
23 LubricaLing oil in
packs exceeding
10 liLers
2710.1952
107 ol Lhe
reLail price
Pakistan
278
5. no.
Description oI
goods
Heading or
subheading
number Pate oI duty
2^ LubricaLing oil in
bulk {vessels,
bouzers, lorries,
eLc.)
2710.1953
7.15 PKRs per
liLer
25 LubricaLing oil
manulacLured
lrom reclaimed
oils, sludge or
sedimenL sub|ecL
Lo Lhe condiLion
LhaL, il sold in
reLail packing or
under brand
names, Lhe loads
manulacLured
lrom reclaimed
oil, sludge or
sedimenL should
be clearly prinLed
on Lhe pack
RespecLive
headings
2 PKR per liLer
26
Mineral greases 2710.1992
25 PKRs per
kilogram
27 Base lubricaLing
oil
2710.1993 7.15 PKRs per
liLer
28 1ranslormer oil 2710.1997 107 ol Lhe reLail
price or 7.15
PKRs per liLer,
whichever is
higher
29 OLher mineral oils,
excluding sewing
machine oil
2710.1999 157 ad valorem
30 WasLe oil 2710.9100 and
2710.9900
107 ol Lhe reLail
price or 7.15
PKRs per liLer,
whichever is
higher
31 Liquelied naLural
gas
2711.1100 17.18 PKRs per
100 cubic
meLers
32 Liquelied propane 2711.1200 17.18 PKRs per
100 cubic
meLers
33 Liquelied buLanes 2711.1300 17.18 PKRs per
100 cubic
meLers
3^ Liquelied
eLhylene,
propylene,
buLylenes and
buLadiene
2711.1^00 17.18 PKRs per
100 cubic
meLers
Pakistan
279
5. no.
Description oI
goods
Heading or
subheading
number Pate oI duty
35 OLher liquelied
peLroleum gases
and gaseous
hydrocarbons
2711.1910 17.18 PKRs per
100 cubic
meLers
36 NaLural gas in
gaseous sLaLe
2711.2100 5.09 PKRs per
million BriLish
1hermal UniL
{MMB1u)
37 OLher peLroleum
gases in gaseous
sLaLe
2711.2900 5.09 PKRs
per MMB1u
39 Carbon black oil
{carbon black
leedsLock),
including residue
carbon oil
2707.9910,
2713.9010 and
2713.9020
7.15 PKR
per liLer
Papua New Cuinea
Country code 75
CMT +10
Ernst & Ycunc
LeveI 5, Waterfrcnt PIace
1 EacIe Street
Brisbane, 0ueensIand 4000
AustraIia
TeI +1 7 3011 3333
Fax +1 7 3011 3100
DiI and cas ccntacts
Brent Ducker
J]ka\]flaf:jakZYf]!
TeI +1 7 3243 3