Presentation 8

Petroleum Project Economics Econ210D

Presentation 8

Petroleum TaxationWeek 8

1

Learning Objectives

Calculation of Taxes for petroleum operations governed by E&P licenses, namely:

•PPL

•UL

•PI

•SPT

2Petroleum Taxation Week 8

Petroleum Taxes Act (1974)

• The Petroleum Taxes Act is administered by the Minister of Finance through the Board of Inland Revenue

• The act consists of a two-tier system consisting of:

1.Production based taxes (royalties)2.Profit based taxes (corporation taxes)• Incentives and allowances to encourage

investment, particularly in exploration projects and enhanced oil recovery schemes

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Production Based Taxes

These taxes also called royalties are based

on the value of oil produced (gross income)

1.Production Levy

2.Supplemental Petroleum Tax

3.Green Fund Levy

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Profit Based taxesThese are taxes are based on the taxable profits. Taxable profit is the difference between revenue and tax deductible allowances. The tax allowances include: operating costs and capital allowances. The two profit based taxes in T&T are:

•Petroleum Profits Tax

•Unemployment Levy

5Petroleum Taxation Week 8

Petroleum Taxes Act

• The petroleum taxation system was

revised in 1992 to enhance its

competitiveness by providing additional

relief to new investors, and the

introduction of an S.P.T. rate structure

sensitive to oil price variation.

• Any other recent revisions? 6Petroleum Taxation Week 8

Production Levy

• A Production Levy (P.L) of up to 3% of

gross income from the production and

sale of crude oil.

• The levy provides the subsidy for

petroleum products sold on the domestic

market such as gasoline and dieseline.7Petroleum Taxation Week 8

Supplemental Petroleum Tax

• A Supplemental Petroleum Tax (S.P.T.) is

computed on gross revenue from the

production based on an oil price sensitive

rate structure.

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Supplemental Petroleum Tax (S.P.T.) Crude Oil Price SPT Rate Crude Oil Price SPT Rate Crude Oil Price SPT Rate

$ 13.01 0% $ 21.00 16% $ 29.00 32%

$ 13.50 1% $ 21.50 17% $ 29.50 33%

$ 14.00 2% $ 22.00 18% $ 30.00 34%

$ 14.50 3% $ 22.50 19% $ 30.50 35%

$ 15.00 4% $ 23.00 20% $ 31.00 36%

$ 15.50 5% $ 23.50 21% $ 31.50 37%

$ 16.00 6% $ 24.00 22% $ 32.00 38%

$ 16.50 7% $ 24.50 23% $ 32.50 39%

$ 17.00 8% $ 25.00 24% $ 33.00 40%

$ 17.50 9% $ 25.50 25% $ 33.50 41%

$ 18.00 10% $ 26.00 26% $ 34.00 42%

$ 18.50 11% $ 26.50 27% $ 34.50 43%

$ 19.00 12% $ 27.00 28% $ 35.00 44%

$ 19.50 13% $ 27.50 29% $ 35.50 45%

$ 20.00 14% $ 28.00 30%

$ 20.50 15% $ 28.50 31% 9Petroleum Taxation Week 8

Supplemental Petroleum Tax (S.P.T.)

• Companies are eligible for a "productivity allowance“

equivalent to a 20% reduction in S.P.T. rate, on all

production in excess of 90% of the preceding year's

average.

• A "small field" allowance equivalent to a 20% reduction in

the S.P.T. rate is also granted for fields in which the

production rate is less than 200 barrels a day for each well.

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Green fund levy (G.F.L.) at a rate 0.1 %

of Gross income from the production and

sale of crude oil.

Computed on the Gross income for the

financial year (i.e. Jan to Dec)

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Green Fund Levy

Petroleum Taxation Week 8

Taxable Profit

Taxable profits =

• Revenue

Less

• Operating Expenses

• Capital allowances

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Capital Allowances

This is a tax allowable deduction based on

the amount of capital expenditure. Capital

expenditure can be categorized into:

•Tangible capital expenditure

•Intangible capital expenditure 13Petroleum Taxation Week 8

Capital Allowances

Capital allowances for taxation purposes in T&T are based on the following:

• Tangible capital expenditure – 20% in the initial year followed by 20% straight line depreciation in subsequent years.

• Intangible capital expenditure - 10% in the initial year followed by 20% declining balance depreciation in subsequent years.

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PART I – INDUSTRIAL BUILDINGS

Initial Allowance 10 % Annual Allowance 5 % (Straight Line)

PART II – PLANT & MACHINERY – E & P

Initial Allowance 20 % Year 1

Annual Allowance 20 % Year 1-5

PART III (INTANGIBLES)

Initial Allowance 10 % Year 1

Annual Allowance 20 %

- Exploration (Year 1)

- Development (Year 2 or from commencement of commercial

production)15

Capital Allowance

Petroleum Taxation Week 8

Petroleum Profits Tax P.P.T.

• This is based on taxable profits earned

by businesses in the course of petroleum

operations falling under the Petroleum

Taxes Act.

• The PPT rate is 50%.

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Unemployment Levy

• An Unemployment Levy of 5% is also charged on taxable profits less further eligible deductions.

• These include production levy and Supplementary Petroleum Tax payments as well as a heavy oil allowance on projects designed to recover crude of 18 degrees API specific gravity or lower.

• Rate 5 % of gross income from the production and sale of crude oil.

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Question 1A company has the following production

profile over life of field.

Year Production Price2010 1800,000 $50.002011 1700,000 $60.002012 1600,000 $75.002013 1500,000 $80.002014 1400,000 $100.002015 1300,000 $100.002016 1200,000 $100.00

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E&P license - Taxation

The contractor is liable to make all payments

relating to royalties and petroleum profit

taxes to the government as outlined in the

petroleum taxes act.

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Question 1Operating expenses are estimated at $5m per annum during the production phase and $2m during exploration and development.

Capital expenditure are:•Intangibles $10m•Tangibles $10m

Calculate the following:

1.Annual Gross income over life of field

2.Annual Capital allowances

3.All royalty taxes on an annual basis

4.All profit based taxes on an annual basis 20Petroleum Taxation Week 8

Question 2

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An oil company plan to develop an oil field in a country with a concessionary system. The prognosis shows gross revenue of 200 million USD and a total cost of 90 million. The royalty is 20 % and all capital and operational cost are deductible against revenue. The taxable income is taxed on two levels: 10 % provincial taxes and 40 % federal taxes. Provincial taxes are deductible against federal taxes.

Calculate the following:•Net revenue•Taxable income•Effective tax rate•Total profit•Contractor take and government take•Profit margin

Remember the right sequence: first royalty, then deductions and last taxes Petroleum Taxation Week 8

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