www.pwc.com Taxation regime for oil & gas industry in Romania Andreea Mitirita Tax & Legal Services Director Romania
Agenda Overview of tax systems applicable in upstream (oil and gas industry) Specific conditions of oil and gas industry in Romania 2
Overview of tax systems applicable in upstream (oil and gas industry) 3
Of the three types of fiscal regimes applicable, in OECD countries the dominant one is Concessionary (including Romania) 1 Concessionary (CC) 2 Production sharing agreement (PSA) 3 Service Contracts (SC) CC SC PSA/ SC PSA CC / PSA CC / SC CC / PSA/ SC * Countries indicated in grey were not analysed 4
Characteristics of concession type systems Tax base System Description Profit linkage Flat rate o o Single royalty rate Discourages investments in marginal fields (with small productions/difficult conditions) Minimum Revenue Sliding scale o o Production- based dependent on the volume of production per field Price based dependent on the prices of oil and gas Medium to High Where Romania is Profit Flat rate - supplementary R-Factor o o Supplementary tax on profit, additional to regular corporate income tax, with deductions for different types of fields Royalty / hydrocarbon tax rates increase when ratio between cumulative revenues and costs of project is higher than defined thresholds High Maximum Mixed (revenue and profit) o Tax on both revenue and profit, based on a combination of the 4 systems from above. Medium to Maximum Where Romania might be Beyond the pure financial analysis, the use of each system must also take into consideration the complexities of implementation. 5
Tax system based on revenue versus based on profit Issues considered System based on revenue System based on profit The impact on state revenues Certainty of revenue State revenues are not certain, due to the fact that they depend on the profit obtained from fields exploitation Time record of revenue Since the start of production Later, after making profit Challenge of implementing Reduced efforts for monitoring High administrative efforts for monitoring and control, because usually it involves determining profitability. 6
Specific conditions of oil and gas industry in Romania 7
1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 In Romania conventional deposits have a high maturity and a natural decline accentuated 120.00 100.00 80.00 60.00 40.00 20.00 0.00 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0-104 23 114 33 Evolution of oil production (Mbbl / year) 53 Evolution of natural gas production (bcm/year) 28 37 11 31 10 Natural decline of oil production is about 10% per year To compensate the natural decline, major investments are needed in production capacities Source: BP Energy Statistical Yearbook 2016 8
Romania Gas production trends & forecasts Dry natural gas production, bcm 16 14 12 10 8 6 4 2 0 14.6 14.8 13.1 14.4 14 9.9 9.9 9.7 9.4 9.1 8.8 2016e 2017f 2018f 2019f 2020f 2021f 2022f 2023f 2024f 2025f 2026f Source: BMI Romania Oil and Gas report Q2 2017 Black Sea discoveries: OMV & Exxon Mobile Domino Project in the Neptune block ; Estimated volume 42-84 bcm; Investment decision: 2019 ; Estimated production: 2021; Lukoil Lira -1 discovery in Trident block Estimated production 30 bcm; Investment decision: 2016 (up to this date no new info) ; Postponement reason: waiting for a fully liberalised market New licensing round: potentially 2017 NAMR 11 th tender expected for: o 28 onshore blocks o 8 offshore Black Sea blocks 9
Tax principles Stability and predictability Flexibility and progressiveness Competitiveness Neutrality Certainty of taxation Efficient administration 10
A tax system should be stable and predictable Romania - Revenue based royalties* Production sliding scale (for oil in 000 tonnes / quarter; for gas in mn cm / quarter) Production sliding scale on an annualised basis 1 (for oil in 000 tonnes / year; for gas in mn cm / year) Royalty (per field) Oil 3.5% - 13.5% Range 1: Small fields <10 3.5% Range 2: Small fields 10-20 5.0% Range 3: Medium 20-100 7.0% Range 4: Large >100 13.5% <40 3.5% 40-80 5.0% 80-400 7.0% >400 13.5% Gas 3.5% - 13.0% Range 1: <10 3.5% Range 2: 10-50 7.5% Range 3: 50-200 9.0% Range 4:>200 13.0% <40 3.5% 40-200 7.5% 200-800 9.0% >800 13.0% *no differentiated rates for onshore vs offshore Payable by 25 th of the month following the quarter Royalties rates were introduced in 2002 and were not amended since 11
A tax system should be stable and predictable 60% 0.5% 1.5%/ 1% Supplementary tax on supplementary revenues* from liberalization of prices for natural gas, with: Allowances for investments, capped at 30% Deduction of royalties paid Tax on revenue from crude oil** Tax on special construction*** * Introduced as of 1 February 2013 **Introduced as of 1 February 2013 *** Introduced as of 1 January 2014 and abolished as of January 2017 These are transitional taxes until the upstream fiscal regime enters into force. 12
A tax system should be flexible and progressive Romania considers a new tax system for the upstream industry A mixed system based on revenue and profits Royalty rates potentially adjusted and differentiated for onshore and offshore Supplementary tax on profits (with allowances) 13
A tax system should be competitive Corporate Income Tax features 16% CIT rate No ring fencing rules Deductions for provisions & reserves Specific depreciation rules for upstream Royalties deducted for corporate tax purposes 14
A tax system should be competitive - Corporate Income Tax features Joint venture agreements Tax consolidation allowed only for PEs of foreign companies Exemption of reinvested profit Tax on capital gains from disposal of right over natural resources Losses can be carried forward for 7 years R&D allowances IFRS and RAS for accounting purposes 15
A tax system should be neutral, certain and easy to administer A new tax system should not negatively impact ongoing investments Viability of projects should be protected Tax provisions should be clear and transparent Ring fencing rules for upstream activities Rules for determining the tax base The tax system should be easy to administer 16
What attracts investors? Tax system Privatisation New concessions Transfer of concessions Cooperation with authorities Gas price liberalisation Concession agreements (royalty rates); Stability clause; 2004: OMV Petrom; 2013: Romgaz - listed on the stock exchange (BVB, LSE); Tender rounds for new concessions; New potential round in 2017; Farm in, Farm out, Joint Venture agreements; Enhanced production contracts; Open consultation with market players, both with the regulator (NAMR, NAER) and tax authorities (Ministry of Finance, NAFA); The Romanian Government negotiated a calendar for the gradual liberalisation (despite EU restrictions); Infrastructure Undeveloped infrastructure, however investments are envisaged. 17
Thank you! Andreea Mitiriţă Director, Tax and Legal Services Romania Tel.: +40.21.225.3727 +40. 0722.942.017 E-mail: andreea.mitirita@ro.pwc.com
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