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Assignement Fiscla Regime Comparison
1. Tax & licensing regimes in the UK,
Norway, Newfoundland, and
Falkland Islands
Lionel Wandfluh – OGEM – 18/04/2010
MICROSOFT
18 avril 2010
Créé par : Lionel Wandfluh
2. TAX & LICENSING REGIMES IN THE UK, NORWAY,
NEWFOUNDLAND, AND FALKLAND ISLANDS
Lionel Wandfluh – OGEM – 18/04/2010
Table of Contents
EXECUTIVE SUMMARY .................................................................................................... 2
INTRODUCTION ............................................................................................................ 2
UNITED KINGDOM ........................................................................................................ 2
BACKGROUND .......................................................................................................... 2
TAXATION OF UK’S OIL DEVELOPMENT ............................................................................ 2
ANALYSIS ................................................................................................................ 3
NORWAY.................................................................................................................... 3
BACKGROUND .......................................................................................................... 4
TAXATION OF NORWAY’S OIL DEVELOPMENT ..................................................................... 4
ANALYSIS ................................................................................................................ 5
NEWFOUNDLAND ......................................................................................................... 5
BACKGROUND .......................................................................................................... 5
Tax & licensing regimes in the UK, Norway, Newfoundland, and Falkland Islands | 18/04/2010
TAXATION OF CANADA NEWFOUNDLAND’S OIL DEVELOPMENT ............................................... 5
ANALYSIS ................................................................................................................ 6
FALKLAND ISLANDS ........................................................................................................ 6
BACKGROUND .......................................................................................................... 6
TAXATION OF FALKLAND ISLANDS’ OIL DEVELOPMENT .......................................................... 7
ANALYSIS ................................................................................................................ 7
CONCLUSION............................................................................................................... 8
RECOMMENDATION ....................................................................................................... 8
BIBLIOGRAPHIE ................................................................................................................ 9
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4. Licensing
The Petroleum Act 1998, the latest instalment of the Petroleum Act 1993 & the Continental Shelf Act 1964,
gives the rights to all oil & gas in Great Britain and its territorial sea to the Crown, and gave the UK Government
the exclusive right to grant licences to explore and exploit these resources. Effectively, the Department of Energy
and Climate Change (DECC - formerly the Department of Trade and Industry) issues the terms of licenses in
which exploration and production can be undertaken. The information to be included for the application, the fee
to be paid, the size and shape of the area, the regulations, and so on can vary for each licence (OPSI, 1998).
Generally, licensing blocks in the UKCS measure 10 minutes of latitude and 12 minutes of longitude. Some
blocks are divided further into part blocks where some areas are relinquished by previous licensees.
During the now annual licensing round, companies or consortium of companies apply for the licenses on offer.
Blocks are awarded on the basis of the work programme bid by the participants. After the licenses have been
awarded, the detailed program also has to be approved by the DBERR (Department for Business, Enterprise and
Regulatory Reform) (HM Revenue & Custom, 2008).
Fiscal Regime (HM Revenue & Custom, 2008)
Royalty
None- abolished from 1st January 2003, used to be 12.5%
Petroleum Revenue Tax
The PRT was a field-based tax (50%) that was abolished for all new fields’ development consents after the 16th
Tax & licensing regimes in the UK, Norway, Newfoundland, and Falkland Islands | 18/04/2010
March 1993.
Ring Fence Corporation Tax
RFCT is the standard Corporation Tax of 30% that applies to all companies with the addition of a “ring fence”.
This ring fence imposes restrictions to companies when trying to dilute their profit from oil exploration with
losses from any other business activities. As Corporation Tax, RFCT is taxable on income which is defined as
gross revenues less all capex and opex in the year they are spent. Losses can be carried forward indefinitely and
earn interest at the rate of 6% per year for the first 6 years of carry-forward. Reduction of the Corporate Tax
introduced in FA 2007 and effective from 1st April 2008 does not apply to the RFCT.
Supplementary Charge
The tax rate is a 20% supplementary charge on the income from a ring fence trade as defined above. Losses can
also be carry-forward and earn interest as above, except for financing costs.
Analysis
UK has a concessionary tax system. This means that it allows private ownership of the petroleum resources. This
system is favored by IOCs because it gives credit to their shares valuation. Indeed with this system we own the
reserves. The main disadvantage is that the full risk of the exploration/production has to be sustained by us. UK
licensing system is based on a work program; the advantage of this method is that exploration of an area tends to
be extensively undertaken because companies have to stick to their program even if primary results are
disappointing. The disadvantage of this method is often the lack of competitiveness; licenses are mainly attributed
to major companies even though the level of exploration proposed by them is far from being optimal. Concerning
the fiscal regime, UK now mainly focuses on taxing income revenues. The advantage of such a regime is that it is
less likely to cause disincentives to field development. A disadvantage is the lack of encouragement to show high
profits to shareholders because they will be highly taxed, encouraging less control in expenses, and other sectors
losses transfer. Although the later cannot be achieved here because of UK’s ring fence policy.
Norway
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6. petroleum tax. Discussion has been undertaken to replace it with tradable “Emissions Quotas” (Norwegian
Petroleum Dictorate, 1996) (Norwegian Petroleum Dictorate, 1996).
Income Tax
This is the normal Norwegian corporation tax. Its rate is 28% based on gross revenue less exploration costs, opex,
capex (deprecated on a 6 years straight-line), and the CO2 tax. Losses can be carried forward with interest
(Norwegian Petroleum Directorate, 2009).
Spec ial Petroleum Tax
Due to the high profitability of petroleum revenue, the Norwegian government had also add for petroleum
activities a special petroleum tax (SPT) of 50%. Its taxable base is the same as for the normal Norwegian
corporation tax apart from an extra deduction in the form of an uplift. This uplift amounts to 30% of the capital
investment (excluding exploration costs) (Norwegian Petroleum Directorate, 2009).
Analysis
Norway has also a concessionary tax system. However as explained above the State tends to participate as an
active shareholder in every oil & gas project. The advantage of this participation is that Norway shares some of the
risks associated with exploration and production. The disadvantage is that it allows less flexibility for the company
to manage the oil reserves. A disadvantage very often enhanced by the fact that Norway, during licensing ground,
generally favors consortium of companies instead of individuals, putting itself as the dominant shareholder. One
of the main advantages of its licenses’ allocation is the possibility for companies to nominate blocks they are
Tax & licensing regimes in the UK, Norway, Newfoundland, and Falkland Islands | 18/04/2010
interested in. The fiscal regime is, as UK, profit based. However, unlike UK, the Norway’s petroleum industry is
more specifically tax compare to other industries. Generally speaking the tax system is less attractive.
Newfoundland
Background
It is less relevant to discuss about the historic development of the oil industry in the Newfoundland because
offshore oil industry in Newfoundland is relatively new. Indeed, a significant oil discovery was only found there in
1979, and oil production only started in 1997 due to major technical obstacles. Thus the fiscal regime has yet to
be properly assessed (Fusco, 2006).
Taxation of Canada Newfoundland’s oil development
This is a summary of the main features of the tax and licensing regime for the oil industry in Newfoundland.
Licensing
“The Canada-Newfoundland and Labrador Offshore Petroleum Board (Board) is responsible, on behalf of the
Government of Canada and the Government of Newfoundland and Labrador, for petroleum resource
management in the Newfoundland and Labrador Offshore Area.” Thus, the Board is responsible to issue and
administrate all exploration & development licenses in the region (C-NLOPB)
The size of licensing parcels depends on the area. 3 types of licenses exist: exploration license, significant
discovery licence, and the production licence.
Each fall, the Board issues an official call for nominations. As for Norway, this call allows interested parties with
the opportunity to nominate lands of interest to be included in the future bid. After deliberation and upon receipt
of Ministerial approval, the Board will come up with a list of areas offered for bidding including or not including
the one nominated. A call for bids must address the sole criterion that the Board will apply in assessing bids that
are submitted. This sole criterion is expressed in terms of a cash bonus bid or work expenditure bid. Cash bid are
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8. Even though oil was discovered in the Falkland Islands a long time ago, the instability due to political tension
between Argentina and UK has severely delayed any major oil development there until the end of the 90’s.
Nowadays the situation is still very tense, hostilities between Argentina and UK are easily keen to resurface and
make the headlines as could recently been seen with the Desire Petroleum’s drilling platform Ocean Guardian
story.
Taxation of Falkland Islands’ oil development
This is a summary of the main features of the tax and licensing regime for the oil industry in the Falkland Islands.
Licensing
The licensing system of the Falkland is discretionary and is divided between two types of licenses: exploration
licences and production licenses.
Exploration licences allow companies to acquire proprietary seismic, gravity, magnetic, geochemical and sea-bed
data. They are not area specific and can be made at any time for a £1000 application fee. However, explorations
licenses can only be converted into production licenses with the consent of the production licence holder or after
a negotiation with the government. Exploration licences are normally issued for one year, renewable for up to
three years. The holder of a production license does not need any exploration licenses for its production license
area.
Production licenses allow the search for and extraction of petroleum. Historically, they have been issued two
different ways: through a competitive round (only happened in 1996), through open-door on a
Tax & licensing regimes in the UK, Norway, Newfoundland, and Falkland Islands | 18/04/2010
company/government negotiation basis. Even though the open-door production license is discretionary, a work
programme will be accepted only if it contains a few essential elements. Both last 35 years (Falkland Islands
Governement Department Of Mineral resources, 2009).
Fiscal Regime
Variable ac reage rental
Variable acreage rental are not subject to any deduction. Licensees for their first license have to pay an acreage
rental of $30,000 during the initial term and second exploration term. A further $10,000 must also be paid
during the initial term and second exploration term for each for each further licences held by the licensee. An
extra $375,000 must be paid in relation to a discovery area and an extra $375,000 for every square kilometre of a
production field (this can be deducted if the company is already paying royalties) (Falkland Islands Governement
Department Of Mineral resources, 2003).
Royalty
The royalty rate is levied at a 9% on production (Falkland Islands Governement Department Of Mineral
resources, 2003).
Corporation tax
The corporate tax is levied at a 25% on incomes. Incomes are defined as gross revenues less all capex, opex, and
other allowances (see The Taxes (Amendment) Ordinance 1997 and The Taxes (Amendment) Ordinance 1997).
Losses can be carried forward indefinitely (Falkland Islands Governement Department Of Mineral resources,
2003).
Analysis
Falkland Islands have also a concessionary tax system and are easily the most readable tax system of the different
oil provinces analyzed here. The Falkland government, due to the political instability, follows to trends: oil
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10. Bibliography
CERA. (2007, October 18). A Comparison of Fiscal Regimes. Retrieved March 12, 2010, from CERA:
http://lba.legis.state.ak.us/aces/doc_log/2007-11-
10_cera_a_comparison_of_fiscal_regimes_presented_to_sen_fin.pdf
C-NLOPB. (n.d.). Legal and Land. Retrieved March 15, 2010, from C-NLOPB:
http://www.cnlopb.nl.ca/land_issuance.shtml#Exploration
Falkland Islands Governement Department Of Mineral resources. (2009). Offshore Petroleum (Licensing)(Amendment)
Regulations 2009. Retrieved March 16, 2010, from Falkland Islands Governement Department Of Mineral
resources: http://www.bgs.ac.uk/falklands-oil/download/F1GazetteSub.pdf
Falkland Islands Governement Department Of Mineral resources. (2003). Taxes (Amendment) Ordinance 2003.
Retrieved March 14, 2010, from Falkland Islands Governement Department Of Mineral resources:
http://www.bgs.ac.uk/falklands-oil/download/TaxesAmendmentBill2003.pdf
Fusco, L. (2006). Offshore Oil: An Overview of Development in Newfoundland and Labrador.
HM Revenue & Custom. (2008, January). International - taxation of UK oil production . Retrieved March 13, 2010,
from HM Revenue & Custom: http://www.hmrc.gov.uk/international/ns-fiscal2.htm
Nakhle, C. (2008). Petroleum taxation: sharing the oil wealth : a study of petroleum taxation yesterday, today and
Tax & licensing regimes in the UK, Norway, Newfoundland, and Falkland Islands | 18/04/2010
tomorrow. Routledge.
Norwegian Petroleum Dictorate. (1996). CO2 discharge tax . Retrieved March 14, 2010, from Norwegian
Petroleum Dictorate: http://www.npd.no/en/Regulations/Acts/CO2-discharge-tax/
Norwegian Petroleum Directorate. (2009). Governement Petroleum Revenues. Retrieved March 14, 2010, from
Norwegian Petroleum Directorate: http://www.npd.no/global/engelsk/3%20-
%20publications/facts/facts2009/chapters/kap3.pdf
NPD. (2010). Production licence – licence to explore, discover and produce. Retrieved March 13, 2010, from NPD:
http://www.npd.no/en/topics/production-licences/theme-articles/production-licence--licence-to-explore-
discover-and-produce-/
OPSI. (1998). Petroleum Act 1998. Retrieved Mars 14, 2010, from OPSI:
http://www.opsi.gov.uk/acts/acts1998/ukpga_19980017_en_1
Petroleum and Natural Gas Act. (2003, July 8). Royalty Regulations. Retrieved march 16, 2010, from House of
Assembly of Newfoundland : http://www.assembly.nl.ca/legislation/sr/regulations/rc030071.htm
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