Ireland's Oil and Gas Industry: Snapshot Comparison of Global Tax Regimen

There have been a number of recent reports in the media of increased oil and natural gas exploration activity off the Irish coast. These reports point to the potential for large volumes of high quality crude oil and natural gas that could have a market value in the several hundred billions of euro. These exploration activities are being undertaken by a range of exploration companies, ranging from small scale dedicated exploration companies to large scale international energy companies, such as the leading energy market player Exxon Mobil.

All this activity naturally raises the question of how Ireland will benefit. This is a very controversialtopic that has been and continues to be actively and heatedly discussedin the media and online, with very different opinions and viewpoints coming from Government, industry and protest groups. In light of this ongoing debate, I thought it would be useful to present some facts and figures around the Irish tax regime in comparison to tax regimes in other countries ranging from comparable small economies with limited oil and gas industries up to large economies with well-established oil and gas industries. The table below provides an interesting snapshot comparison of global tax regimes in the oil and gas industry, drawn from the impressively comprehensive Ernst and Young 2012 report on the subject. This is a great resource for those interested in taxation issues pertaining to the global oil and gas industry.I am not a tax expert and so I am not offering a critical assessment of the various tax regimes. But even this high level comparison is insightful for informing opinion on the ongoing debate here in Ireland.

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Full technical details of the Irish and global tax regimes are available in the Ernst and Young report. But to summarise Ireland's position, income to the Irish economy from oil and gas exploration and production comes in the form of a 25% Corporation Tax and a 5%-15% Resource Rent Tax (RRT). Importantly, both taxation rates are based on profits only and not on revenues the current regime does not apply royalties or any other special charge to oil and gas revenues, unlike in other jurisdictions. The RRT is applied on a scaled basis depending on the profit ratiofor a given field fields are treated on a ring-fenced basis so that losses from one field activity cannot be offset against profits from another field activity. The profit ratio is defined as the cumulative after-tax profits on a specific field divided by the cumulative level of capital investments on the field. The RRT scale works as follows:

  • profit ratio <1.5: 0% additional tax;
  • profit ratio >1.5 but <3.0: 5% additional tax;
  • profit ratio >3.0 but <4.5: 10% additional tax;
  • profit ratio > 4.5%: 15% additional tax.

The net effect of the Corporation Tax and the RRT is that taxation on oil and gas profits may range from 25%-40% depending on profitability. However, the tax provisions allow for 100% deduction of both exploration and development expenditures that become available when petroleum extraction commences (in the case of exploration expenditures) and when production in commercial quantities commences (in the case of development expenditures). So the payment of corporation tax potentially may take many years subsequent to the commencement of extraction and production.

 

The table below shows how this regime compares globally.

 

Country

Royalties

Bonuses

Production Sharing Contract

Corporate

Income Tax

Other Taxes and Charges

Ireland0%0%-25% Corporation Tax on petroleum activities.5%-15% Resource Rent Tax depending on field profitability relative to capital investment.United Kingdom---30% Corporation Tax ring-fence; Lower rates for non-ring fence 23% on 1 April 2013 and 22% on 1 April 2014.30% Revenue Tax (for fields that received development consent before 16 March 1993); 32% Supplementary Charge (from 24 March 2011).Norway0%0%-28% Corporate Income Tax50% Resource Rent Tax.The Netherlands0-8%0%-25% Corporation Income Tax 20% on first 200,000.Surface Rent Tax of 703 per km2 (production areas) and 235-703 per km2(reconnaissance areas); 50% State Profit Share.Denmark0%0%-Combination of the following: 25% Chaper 2 Corporation Tax;70% Chapter 3 Hydrocarbon Tax; 52% Chapter 3A Hydrocarbon Tax.-Cyprus-YesYes10% Corporation Income Tax.20% Captial Gains Tax;0.4%-0.8% Immovable Property Tax; 10% Branch Tax; 17% VAT.Iceland---20% Corporate Income Tax.5% Production Levy; Progressive Special Hydrocarbon Tax.New Zealand0-20%--28% Corporation Income Tax.-Australia0-12.5%--30% Corporate Income Tax.40% Resource Rent Tax.United StatesOnshore: 12.5% to 30%;Offshore: 18.75%, 16.667% or 12.50% depending on lease age.Onshore and offshore-35% Corporate Income Tax.Severance tax is payable to the state where the product is extracted, including onshore and offshore state waters.CanadaCrown royalties 10-45% special regime for oil sands; Varying freehold royalties.--15% Federal Corporate Tax in 2012 for income subject to tax in a province;Provincial Corporate Tax varies from 10-16%.-

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Posted in Business Service Post Date 10/23/2015


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