Taxation is a very fundamental aspect of any economy. Taxes and other related allowances are applied in ways that some industries do not consider to be fair. Some criteria are normally used in determining the amount of tax rates to be applied to different industries. The uniqueness of the factors that make the taxation of the petroleum and mining enterprises and the manner of choice of the tax instruments on the influence on a country’s development needs to be understood.
Furthermore, it is vital to assess the varied types of tax systems and instruments used in the gas and oil sector in order to better understand the application of tax allowances and the associated benefits and usefulness. Abstract In both UK and other parts of the world, the taxation in the upstream sector is a very crucial issue of consideration. Various taxation regimes do exist in UK’s upstream market. Taxes and other supplementary charges are also normally imposed in the order to regulate the market while at the same time ensuring that fair competition in the market and efficient and cost affective service delivery.
The ring fenced corporation regime and the petroleum revenue tax regimes are crucial in the UK oil and gas market operations. However, the fact that mineral taxation systems vary across border of countries such as Canada, UK, Nigeria, and France is very evident. The taxation is also regulated by the principles and practices of taxation which aims at ensuring that all stakeholders, shareholders, and the entire society benefit from the tax systems used. Introduction Taxation in the United Kingdom involves various payments made to at least two levels of the UK government.
This paper aims to carry out an in-depth comparison of how mineral resources such as crude oil and gas are taxed in the UK in comparison to other taxation systems in related upstream markets in the world. Through its evaluation of the fiscal regimes of the UK oil and gas industries, the various issues related to taxation and allowances would be analyzed. Additionally, the various uses and the overall importance of allowances in the gas and oil industry would be assessed and various arguments substantiated in order to arrive at a valid conclusion related to the issues.
Based on the upstream sector, both within and outside the UK, taxation and allowance trends would be assessed in order to fully understand the likely future trends and how such trends would impact on the performance of the oil and gas industries. To address the paper’s aim, an analytical research would be done with critical overview of the various issues of concern. Comparison through an in-depth critiquing method would also be used in order to ensure that relevant information related to the theme is presented. The core constraints on the data would be time.
In this respect, only recent information that ranges from the year 1980s up to date would be utilized. On the other hand, only the upstream market in the oil and gas industries would be used with core emphasis being accorded to the UK and a few other regimes. The paper is crucial since it would enable the UK government, industry shareholders, and other stakeholders to have a better view of the importance and usage of the taxes in the industry and why taxation and application of certain allowances to the industry is vital. Analytical Framework
In order to efficiently and effectively attain the intended goal of the paper, an analytical framework would be employed. This would be done through comparison of the various tax rates and allowance related concepts of the UK oil and gas companies to those of other regimes. The comparison would also be undertaken by ensuring that the size of the companies being used are closely related to ensure that no big gaps, which could otherwise compromise the quality of the findings are, does exist. Tax rates, income brackets, and the trends of the companies’ expenditure would also be assessed.
CHAPTERS 1: TAXATION IN THE GAS AND OIL INDUSTRY The tax paid by the UK oil and gas industries varies between 50 to 75 percent depending on the field’s age and other environmental factors. Taxes collected in the two related industries are of two categories – The first category relates to the tax of the corporate organizations (the companies) while the second category relates to the tax on the workforce within the gas and oil industry. Gas and Oil Taxation In the UK various taxation regimes are applied to the oil, gas and other related industries.
To begin with, the corporation system of the ring fence tax is calculated in a similar manner to the standard corporation tax which is applicable to the major companies in the UK. All capital expenditures have an additional 100% to their allowances in the first year. The ring fence taxation system prevents the taxable profits related to the gas and oil extraction industries within United Kingdom’s continence society (UKCS) and the UK to be reduced the losses that are likely to be incurred from related business activities in the industry.
The losses could also be realized through the excessive money payments as a way of treating the ring fenced related activities as a different trade. In the UK, the gas and oil industries are also commonly affected by the various supplementary charges of 20%. The taxation system of supplementary tax system is applied on the industries’ profits that exclude the financial costs. These charges were introduced in the UK taxation in 2002. On the other hand, the petroleum tax revenue is a unique tax applied on gas and oil producing industries from UKCS and UK.
The taxation system is a field based system of taxing in which the taxes are charged on the individual oil fields’ taxes. PRT is a very special tax on gas and oil production. The current rate of the PRT is in UK is 50%. PRT is a tax system that is deductible as an expense that is against the corporation tax and supplementary charges. Currently, 50% is the new upstream fields’ marginal tax rate while 75% is the marginal tax rate for the fields that pay PRT. Various challenges are meant to alter the way of operation of the North Sea’s fiscal regime.
The previous regimes have witnessed charges of royalty though the charging of royalty was abolished in the year 2002 after which the supplementary charge was then introduced. UK’s oil and gas industries’ royalty was levied at 12. 5% of the then gross value of the gas and oil. The royalty was previously paid on a license basis, and this was always in exchange of the rights that were granted under license in order to adequately extract the oil and gas that was perceived to have been the crown’s belonging. The Fiscal Regimes of UK Oil and Other Upstream Markets
UK’s future of the fiscal regime is subject to the ongoing discussions between the HM treasury and the oil and gas industry stakeholders. Oil and other petroleum related products’ tax system is regulated and managed under the United Kingdom continental shelf taxation regime. The regime constitutes elements that are very vital to the tax control and regulation system. The income tax regime is applicable to UK, Nigeria, Bangladesh, and other countries and states that engage in crude oil and gas production on large and competitive scales.
This is applied through tax depreciation which applies in a separate manner in cases where equipment, buildings, and the actual development of mineral projects are involved. Unlike the UK’s physical regime, Nigeria tends to experience a relatively different scenario. However, some of the taxes within UK are dependent on the various circumstances that are paid to both companies and individuals. The national insurance contributions are payable to employers, employees, and individuals who are self employed.
According to the corporations of UK’s tax estimates, the UK itself comprises of the core mainstream taxes that are charged on the ACT set off. The dividends are normally based on the actual tax charged. Major determinants of various tax liabilities comprise the annual production, the sterling, and the total involved expenditure. Profits related to the extraction of gas and oil in the UK lies within two major fiscal regimes. The two regimes are the ring fenced corporation of the tax regime (RFCT) and the petroleum tax revenue – PRT.
The RFCT incorporates the supplementary charge (SCT) while PRT is indeed field based tax that can result into an assessable profit and, at times, an allowable loss. According to UK’s gas and oil economic report of 2008, it was estimated that two hundred and forty eight billion dollars were in tax revenue and this was over the previous four decades. The Oil and Gas UK Company has argued that there is a desired need to reduce the oil and gas related taxes in order to facilitate better investments in the industry and offer the consumers competitive and affordable prices.
The need to introduce field allowances has been identified as a very vital factor in the industry. According to the analysis done, taxation in the oil and gas industry takes various dynamics which together comprises of unique taxation systems and strategies in the UK and other upstream markets within the mineral and petroleum sectors. CHAPTER 2: COMPARISON OF MINERAL RESOURCES TAXATION Mineral Tax Systems Mineral tax systems vary across various countries. The different types of tax levies also determine the extent to which various components of the minerals could be taxed.
Income tax is one type of the many mineral levies that are implemented to the sector. Income tax, which is also called the corporate tax, is the most crucial levy that is applied by the government in UK, Nigeria, and France among other regions as a general tax power. It is applied as a more general tax structure that comprises of the basic structure of tax at a single rate, provision for certain items deductions tax base, supplementary tax levies, withholding of provisions and as a tax incentives mechanisms too.
Mineral Resources Taxation Mineral resources taxation strategies being applied by different countries varies on both the concerned government’s policies and the self set standards by the specific countries all over the world. Petroleum taxation in Nigeria plays a very pivotal role in the country’s national economy. According to the country’s petroleum profit tax, a special fiscal regime for the petrol industry needs to be established.
The crucial legislation that deals with mineral resources taxation and ownership are the petroleum Act. In its 350 cap, Nigeria’s law of federation, taxation measures and regulations are outlined with certain government measures aimed at controlling agitation being outlined. In Brazil, a relatively similar state of resource ownership is employed in the taxation of mineral resources. The petroleum law number 9478 of the year 1997 and the Brazilian constitution guide in the taxation process.
The title, in Brazil, of the concessionaire to the gas and oil is normally guaranteed ones extraction has been done though this is normally subject to the government bonus payment, royalties of about 10% in the production process, excessive productivity, and an annual rent payment for the retention of the concession area. Revenues from the special participation are normally paid if higher production than the anticipated ones is realized. Taxes are imposed on various mineral resources in France.
However, mineral resources such as petroleum products, which are normally destined for use in the aviation industry, for the aircrafts that are engaged in the commercial flights operation beyond the customs territories of the continental Republic of France are normally exempted from taxes. The exemption of such domestic taxes and custom duties are aimed at making aircraft transport in the desired territories affordable to the majority of the population hence boost the oil and gas markets.
Taxation Principles and Practices The taxation of minerals and related petroleum products is dependent on a number of interrelated factors, laid down principles, problems faced and the set practices. As the owner of natural resources, most governments employ principles that guide in the utilization of the natural resources that are closely guided through various tax systems. The UK, Canada, and France tax systems are controlled through the sovereign tax power vested in their governments.
The sovereign tax powers are then exercised through income taxation; import duties, lease bonuses, rent royalties, equity policies, and resource rent taxes. The ownership of the crude oil companies, whether private or public (government owned), determines to a greater extent the taxation rates to be imposed. During the determination and implementation of tax rate in the mineral and petroleum industry, which include gas production, like other governments, the UK government applies various taxation principles which are aimed at ensuring fairness, equity, and efficiency in the taxation process.
The principles applied include the principle of adequacy, the broad basing tax principle, the compatibility principle, the voluntary compliance through convenience principle, equity and neutrality, predictability, restricted tax exemptions, and the taxation principle of simplicity which demands that tax determination in the oil and gas industry be easily understood by an average tax-payer.
This chapter therefore clearly elaborates on the various tax systems and the guiding policies and principles in the market with close attention being paid to various countries and industries within the upstream sector of the oil and gas industry. CHAPTER 3: USE AND IMPORTANCE OF ALLOWANCES Taxation in the oil and gas industry has proved to be of great significance in various ways. It is evident that the economy of UK and other regimes such as Libya, Saudi Arabia, and Nigeria has indeed been driven; to a large extend, with their respective oil and gas industry.
Allowances Rates and Benefits Apart from the depreciations of assets, other costs that include the feasibility study costs, development costs, oil and gas pre-production and the exploration costs, operating costs, and the post exploration and production costs, royalty related payments, stamp taxes, the payroll taxes in the industry, the oil and gas export duties, various interests on the long term debts, and taxes on withholding taxes on dividends, interests, and fees for various technical assistance offered are incurred.
The tax deductions and the usage of the resource rent tax in the UK also have other related benefits that relate to the industry needs that in turn generate allowances that are later invested in the business market. Tax investments from the Nigerian petrol industry are invested by the government in other central economies with the view of ensuring that other related industries in the country are boosted in order to stimulate faster economic growth. Nigeria’s tax regimes facilitate the increment of the revenue base through the overall deduction of the tax burden.
Nigeria’s economic rent that is generated from the oil industry is much higher than that generated from other industries. Like in UK, petroleum taxation the governments in Nigeria and France aims at guiding the tax payers’ behaviors and enhancing the economic and social development of the country. However, the taxation in the oil industry in Nigeria, like many other countries, is hindered by the patrimonial factor. As public assets, taxing helps the government regain and exercise control of the oil industry.
Tax and tax allowance implementation enables the government to regulate the number of existing and likely new entrants into the market hence discouraging rapid depletion to take place. Additionally, the revenue factor has contributed to the government ability to efficiently regulate the oil market. This is also closely related to the need for wealth redistribution in Russia, Nigeria, UK, France, and other related countries. Russia’s tax system imposes varied tax rates for the oil industry, the natural gas, and the petroleum gas though excessive tax is normally laid down on the motor fuel.
It is clear from the research done that in Russia, avia-gasoline, heavy oils, jet fuel, auto-gas and natural oil do not attract exesive taxes on their normal prices though the country’s value added tax on the taxes and fuel stands at 18%. According to the country’s ministry of energy and industry, the full tax rate to the oil and gas industry is 55%. This is a huge contrast to the UK’s 15% VAT in the same industry despite UK’s unleaded petrol tax having increased to 0. 5619 per litre. British’s taxes are expected to continuously increase from this year (2010) till 2013.
Diesel, which is aimed at being used by farmers, is colored red and is tax free. This is similar to the jet fuel which attracts neither VAT nor duty because of its usage in the international aviation industry. Importance of Allowances in the UK Mineral and Petroleum Tax Government intervention through taxation systems is crucial in ensuring equitable distribution of resources. Optimal exploration of resources is also enhanced through the various tax systems and regimes implemented by the government.
In UK, Bangladesh, and Nigeria among other countries, allowances are utilized as forms of ameliorating the high tax burden and difficulties in the fiscal regimes in order to promote, induce and sustain investment in the regimes. Tax stabilization, tax credit, tax holiday, accelerated depreciation, depletion allowances, loss carry back allowances, flow through shares, negotiated MOU, and the unlimited loss carry allowance are some of the taxes imposed to the gas and oil industries in USA, Canada, UK, Nigeria, among other upstream sectors.
Ones the deduction of the royalty oil, tax oil, and cost oil is done in most upstream sectors, the profits that remain are shared between the government and the contractors. In Nigeria, the sharing is done in accordance with the stipulated agreement of the memorandum of understanding. The royalty oil is allocated in accordance to the holder or the NNPC and should be in line with the terms of the PSC. The cost oil is however given to the contractor in kind in order to enable him to adequately offset his operating costs.
Tax oil is normally allocated to the respective contractor and is normally equal to the monthly PPT liability incurred. It is the NPC holder who has the responsibility of paying the rental fees, the PPT, and the royalty. In the Nigeria market, all the allowable deductions are always treated as the charges that are against the income and should wholly be expenses that are solely incurred for the oil operations. Both capital and the investment tax credit taxes are issues in order to cater for the issued taxes. The global oil taxation trends aim at emphasizing very affordable tax rates to the additional profits being made.
Countries such as Tunisia, Abu Dhabi – Dubai, and Venezuela do not share in the production. Yemen, Egypt, and Argentina share in their production though they have tax rates that range from zero to forty percent (0-40%). It is vital for the tax regimes in UK to be more flexible so as to accommodate the necessary changes that affect the global oil and gas industry. This explains why it is important to address other issues such as political risks, the rule of law, the state of the infrastructure, and corruption, which affect the market.
The allowances therefore play a very pivotal role in promoting investment in the UK oil and gas industry. Usage of Taxes and Allowances in the Oil and Gas Industry Taxes and other related allowances are vital to the gas and oil industry in various unique ways through which they facilitate the betterment of the business environment. To begin with, tax collection is a mechanism of regulating the oil and gas industry and check on the competitive nature of the enterprises involved. The collected taxes are also reinvested in the infrastructure which is necessary for the general business operations.
Road construction and rehabilitation of airstrips, maintenance of the mines and enhancement of a healthy business environment are some of the key uses of tax and tax allowance in the United Kingdom and in other countries’ upstream sectors involved in the production, distribution, and sale of gas and petroleum products. Additionally, taxes are necessary since they help fund other activities in industries which the government considers to be of great importance to the entire society. This is mainly achieved in governance through fair representation.
The taxes also help in the sustainability of the established institutions. Furthermore, compulsory taxation systems such as income tax systems are crucial since they facilitate the government’s ability to guard its territorial boundaries. The upstream taxation that is applied to the major UK and related markets aim at ensuring sustainability of the market. UK’s ring fence taxation of the corporate business, the supplementary charge in the market, and the petroleum revenue taxes are all mainly geared towards long term sustainability of the market.
Taxation on the profits associated with individual oil fields through the PRT help enhance a level-business playing ground. The expenditure based on ring fence strategy is meant to assist the upcoming oil and gas companies that do not have taxable income for the corporation tax hence they are facilitated with a base for their appraisal, exploration and development. Collection and imposition of tax and allowance in the gas and oil industry also help in the maximization of mineral rents while at the same time maintaining the set environmental standards.
This also leads to the provision of incentives for the reinvestment of the mineral rents that are acquired from the oil and gas industry in both the United Kingdom and other related oil and gas markets. In conclusion of this chapter, it is clear from the analysis and discussion that taxation in the oil and gas industry is not only aimed at benefiting the tax collector who in most instances is the government of the day, but is also aimed at benefiting the existing market players, new entrants to the market, and the entire community.
Conclusion Taxes and allowances are vital in the UK gas and oil industries and in the growth of the country’s economy. Misappropriation of taxes, unfair distribution of national resources, unfair and inequitable application of taxation systems in the upstream sector are some of the contentious issues currently facing the taxation industry in the UK and other regimes. Corrupt practices have led to the rich gas and oil endowed countries either being poor or very rich. References
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