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TAXAND GLOBAL ENERGY SURVEY 2013
Quality taxadvice, globally
2 Quality tax advice, globally1 Quality tax advice, globally
Taxand Global Energy Survey 2013
There is a growing sense that tax systems around the world are on the cusp of major change, driven by current economic imperatives. Globalisation of businesses is critical for growth. Tax risks and tax opportunities need to be identi� ed and managed.
In the developed and developing world, governments are seeking more effective methods to collect tax. Energy businesses are traditionally major contributors to national budgets and closely policed by governments who license their activities. Yet governments have also learned that excessive taxation can tip the balance against economic development in their country.
We surveyed Taxand’s global energy tax team to explore how tax conditions are helping, or hindering, the commercial
development of the energy sector. Our survey focused on exploring 4 key areas impacting multinationals’ activities.
1. Carbon trading
Carbon tax and carbon pricing schemes around the world are designed
to incentivise reduction in carbon dioxide or equivalent emissions. But, what
are the pitfalls and opportunities?
2. Renewable energy
Renewable energy investment globally increased 17% in 2011 and then fell
11% in 2012. With a 5% drop in investment can we continue to justify
renewables? And can it stand the shale gas revolution?
3. Emerging markets
Emerging markets are growing faster than mature economies. Governments
are using tax incentives to increase inward investment. But there’s a catch: tax
risk. How do we maximise the incentives on offer whilst also
minimising risk?
4. Decommissioning
Creating certainty over tax relief for decommissioning expenditure is critical.
What can we learn from the UK experience?
Taxand’s Take
Carbon Tax to tackle the issue of climate change, the message is clear: C02 emissions are being cut using tax
incentives. Through careful tax planning, taking account of local variances in incentive schemes, opportunities
can be seized by multinationals
Renewables are a long term solution to coping with potential future energy shortages. Assessing your
investment portfolio from a global perspective, modelling tax incentives country by country, will ensure tax
bene� ts are leveraged. Also consider negotiating with tax authorities to set your project-related tax incentives
now and for the future, to negate legislative change
Emerging markets are now a critical destination for energy multinationals. Only through considered tax
planning can multinationals fully identify the tax incentives, opportunities and tax risks when investing in
emerging markets
Decommissioning globally lacks tax relief and brings uncertainty to tax planning activities. The UK is
addressing these concerns to ensure a fair return for taxpayers. Multinationals and governments worldwide can
learn from the UK’s experience
Balancing supply and demand, sustainability, security risk, cost and the need to act responsibly is challenging for multinationals. Establishing tax ef� cient energy structures to drive business performance is therefore key.
Jimmie van der Zwaan, Taxand Global Energy Tax Service Line Leader
www.taxand.com 2
Carbon caps and credit trading have been the key features of international carbon reduction agreements for many years. However, they raise issues of how to classify income for corporation tax under international tax treaties. The classi� cation of how indirect tax costs are managed in different countries also varies.
To tackle the issue of climate change, a number of
governments have, or are, introducing ‘cap and trade’
carbon reduction schemes. Supply and demand controls,
and the tax treatment of acquiring, using and trading of
permits, are key factors for consideration. The OECD’s
emission permit guidelines are under review to better
understand how the schemes interact with each other to
minimise costs.
Not all jurisdictions will operate their schemes on a fully
market driven price. For example, the UK has implemented
a � oor price, while in Australia there is a � xed price until 2015
and a pricing ceiling until at least 2018. These differences
mean multinationals need to plan carefully when operating
across borders.
Acquiring, banking and trading of permits within your group could create opportunities. Particularly in countries where free
or concessional permits may still be available. Depending on how these permits are allocated, businesses could obtain
windfalls from over-allocations.
Care is needed, however, particularly where a multinational operates in a jurisdiction where carbon reduction schemes are
politically controversial and may be repealed, such as in Australia.
Additionally, in jurisdictions where no � oor price has been implemented, multinationals should be aware of the risks of
governments intervening in the supply / demand equation to boost market prices. Governments do this to maintain the
incentive for companies to reduce their emissions and invest in renewable and clean technologies.
International harmonisation of C02 reduction targets is desirable. However, given the different stages of economic development between countries, this is unlikely to be achievable.
Jonathon Leek, Taxand Australia
Cutting C02 = Growing Incentive
3 Quality tax advice, globally
Tax & the Cost of Permits
75% of countries surveyed con� rmed there is no VAT relief on the acquisition or disposal of emission permits or units.
Our survey indicates that the value added tax (VAT) or
goods and services tax (GST) implications of acquiring and
disposing of permits differs between jurisdictions. Where
VAT or GST is imposed, it is often on a reverse charge basis.
Knowing when you will be subject to reverse charges and
whether you are entitled to an offsetting credit will inform
both compliance obligations, as well as the effective cost of
acquiring the permit.
Taxand’s Take
While carbon tax incentive schemes share some similarities, they also display important differences. Without careful
planning there may be unexpected pitfalls and also opportunities that could be easily missed. To tackle the issue of
climate change, however, the message is clear: we need to cut C02 emissions using tax incentives.
Understand the differences between ‘cap and trade’ schemes in the countries in which you operate
Remember carbon schemes will change over time, affecting future planning
Over-allocation of permits in one jurisdiction could present opportunities to offset compliance costs elsewhere
Free permits can be an alternative funding source for businesses experiencing cash � ow issues
Assess VAT / GST reverse charges to understand their impact on the effective cost of the permit, where there is
no full input credit entitlement, and to ensure compliance
Longer term, consider ways in which your business could reduce its carbon emissions, for example by switching
to renewable energy sources
Yes 75%
No 25%
Does VAT or GST apply to the acquisition
or disposal of emission permits or units?
Yes, with reverse
charge mechanisms
41.67%
Yes, not reverse
charged 33.33%
No 25%
VAT / GST on dealings in permits
www.taxand.com 4
In 2011, global investment in renewable energy increased 17% to almost EUR 235 billion, establishing a new record. In 2012 clean energy investment fell 11% after governments cut subsidies for renewables. However, the EUR 210 billion invested still made 2012 the second most successful year on record for the global clean energy sector.
In the absence of technical energy storage solutions,
renewables have always had a struggle to justify themselves
economically. Particularly when faced with competition from
cheaper fossil fuel options such as shale gas, which seems
to be the latest game changer. However, the pressure to
reduce carbon emissions has ensured governments are
incentivising investments in renewable resources with a
focus on the generation of clean electricity.
Taxes on ‘dirty energy’ and incentives for ‘clean energy’ will continue to determine who can afford investments. The � nancing for these projects can be funded with up to 35% tax bene� ts in the right places. Understanding the global landscape and risks strengthens the return on your portfolio.
Layne Albert, Taxand US
Renewable Energy Tax Incentives
Go Electric
Solar 28%
Wind 23%
Hydro (Incl. wave) 15%
Biomass/Biogas 21%
Other (terestrial heat, geothermal, waste etc) 13%
What are the alternative renewable energy
sources in your jurisdiction?
Countries around the world have started setting standards for renewable energy usage at 20% - 30% per year of all energy
consumed over the coming decades. Maintaining these standards will be challenging due to a con� uence of government
and economic factors including:
Cheap and abundant traditional fossil fuels
Lack of global noxious gas emission limitations
Large � nancial investment required to develop and maintain renewable energy sources
5 Quality tax advice, globally
This interplay has resulted in tax incentives (and disincentives) to encourage the development of renewable energy
generation facilities and discourage the reliance on fossil fuels.
Our survey reveals 81% of countries surveyed offer tax incentives for the production of energy from renewable sources.
Taxand’s Take
Renewables are a long term solution to coping with potential future energy shortages. Most countries have set
minimum standards for renewable energy which multinationals are expected to meet. With renewable incentives
rising to meet the growing demand for electricity, investment in renewables can strengthen the return on your
portfolio. Multinationals should:
Assess your portfolio from a global perspective, modelling tax incentives country by country, to ensure tax
bene� ts are leveraged
Blend ‘clean’ and ‘dirty’ investments to bene� t from renewables tax incentives where viable
Consider negotiating with tax authorities to set your project-related tax incentives now and for the future, to
negate legislative change
Yes 81%
No 19%
Does your government provide tax incentives for
the production of energy from renewable sources?
Tax
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Key countries incentivising renewables are:
China: provides for nearly all of the above tax incentives with the exception of tax holidays
France: only incentivises investments in renewables using tax credit
Mexico: provides for accelerated depreciation on equipment
US: provides a credit for wind power that has limited life spans and is set to expire
www.taxand.com 6
Emerging markets are growing faster than mature economies. The major developing markets have now in essence ‘emerged’. Their tax systems are evolving and are often unpredictable. Governments are using tax incentives to increase inward investment. How can multinationals best navigate these tax systems to maximise the incentives on offer whilst also minimising risk?
Our survey reveals that half of the emerging markets grant
tax incentives to promote investment, with energy and high
technology sectors being a key focus.
6 Quality tax advice, globally
Multinationals must engage in effective tax planning to structure both investments in emerging markets, and the eventual exit. Be mindful of the risks and take advantage of tax incentives to drive the ef� ciency of your business.
John McClure, Taxand Canada
Is it Time to Take a Tax Holiday in the
Emerging Markets?
Yes 50%
No 21%
N/A 29%
Does the emerging market offer any economic or
investment development initiatives, such as R&D tax
credits, subsidies, tax holidays or other tax relief?
Tax holidays appear most popular, followed by investment allowances, tax credits, accelerated depreciation
and investment subsidies.
Emerging Market Energy Tax Incentives
Brazil Exemptions from corporate income tax granted by government agencies that administer
various incentive programs
China Preferential corporate tax rates in resource, high tech and energy saving sectors
India Tax holidays in various industries and regions
Indonesia 5 - 10 year tax holidays in certain industries. Additional 2 year 50% exemption for
pioneer industries.
Korea Tax incentives for foreign investment in designated areas, industries and high tech
Poland Tax incentives for businesses operating in designated regions of high unemployment, R&D tax
credits and preferential tax rates for high tech
Russia Tax holidays for offshore crude oil production, reduced tax rate for new technology
Singapore Tax incentives available for foreign entities with regional headquarters in Singapore
7 Quality tax advice, globally
But there’s a catch: tax risk. Developing countries with emerging
economies face considerable challenges in establishing effective
and ef� cient tax systems. Many have not adopted the OECD
model tax convention for bilateral tax treaties.
Our survey results show that 57% of emerging markets’
investments use an international holding company structure.
Of particular concern is the expansive concept of ‘permanent
establishment’ adopted by many jurisdictions around
the world. Uncertainty related to ‘service PEs’ and the
increasingly aggressive transfer pricing challenges by tax authorities in emerging markets, such as India, Indonesia, Korea
and Russia, are all recurring themes and contribute to the risks facing multinationals when engaging in acceptable tax
planning structures across borders.
Emerging markets are closing the gap with the developed world. Internationally, authorities are becoming increasingly
aware of multinationals’ advanced tax planning structures, and therefore taking a more sophisticated approach to cross
border tax issues.
Even multinationals with extensive experience of emerging markets transactions face uncertainty. However, there are ways
to leverage tax planning and develop tax structures to help overcome these obstacles.
Taxand’s Take
Globalisation is transforming the business world. The emerging markets are now a critical destination for energy
multinationals that are seeking access to natural resources to make supply chains more ef� cient. By engaging in
effective tax planning, multinationals can fully identify the tax incentives, opportunities and tax risks for investment in
emerging markets.
Take advantage of tax holidays and other incentives that offer potential bene� ts
It is vital that key tax risks be correctly understood and effectively managed, engaging in effective tax planning
to substantively structure both your investment and eventual exit
The tax regimes of many emerging market jurisdictions are not always in line with international norms so it’s
important you ensure your business appreciates the latest tax laws, and behaviour of local tax authorities, to
minimise risk
Tax authorities in emerging markets are quickly catching up: international trade, corporate tax planning and
dealing with more re� ned audit methods are now priorities for multinationals
Yes 57%
No 21%
N/A 21%
Are investments into the emerging markets
gernerally structured using an internal holding
company structure?
8
Uncertainties over the decommissioning of mature oil and gas installations in the UK North Sea were � rst highlighted in the 1980s. However, it was only recently that some clarity and partial tax relief was sanctioned. These tax changes to decommissioning policy could be a feature of any tax system. Without doubt certainty is needed as the tax treatment of decommissioning expenditure impacts investment and capital � ows worldwide.
For governments and taxpayers who ultimately bear the ‘cost’ of
decommissioning tax relief, it is a huge burden. Procrastination in addressing the
uncertainty around decommissioning discourages late entrants and encourages
the premature closure of � elds.
Our survey reveals that tax relief is generally only available when the decommissioning
expenditure is actually incurred. What is not so clear is the timing and extent of
the tax relief. As decommissioning is likely to occur towards the end of a � eld’s
life, suf� cient taxable pro� ts may not be available to monetise the tax relief and
governments may not honour a full deduction of costs and issue cash tax refunds.
In many European countries, tax relief for decommissioning is valuable given the
relatively high marginal tax rates that apply to production pro� ts for example 75%
in Norway, and up to 81% in the UK. This is important to consider not only when
modelling an E&P project for investment purposes, but also when potentially
divesting future monetisation of decommissioning expenditure.
The UK Continental Shelf
The UK is setting the stage for decommissioning policy. A number of � elds in the
UK Continental Shelf (UKCS) are coming to the end of their useful economic life.
It is currently estimated that the total cost of decommissioning in the UKCS is
almost £36bn, of which over £20bn will be in the form of tax relief. The latter is an
eye watering amount for any government to fund in the current economic climate.
The UK’s recent focus has been on managing decommissioning to bene� t offshore
environments. In particular, the UK government is seeking to ensure that securitisation
arrangements for decommissioning are effected on a post-tax basis, and the same
post tax approach can be adopted for modelling and � nancing purposes, thus
freeing up much needed capital for investment.
Yes 57%
No 43%
Would you consider there to be
suf� cient certainty over the tax
treatment of decommissioning in
your country?
Decommissioning: Call for Certainty
Taxand’s Take
The UK is now leading the way for change, announcing measures to address the concerns facing companies
carrying out exploration and production activities in the UK North Sea, and providing greater certainty and fair return
for taxpayers. Multinationals and countries worldwide can learn from the UK’s experience.
For forecasting: review how your future decommissioning costs are being treated for tax purposes, and how
reliable countries where you have investments are, in honouring tax deductions and refunds
For provisions carried as deferred tax assets: check their accuracy and security in light of future legislative change
Consider opportunities to release cash from security arrangements to be channelled into further investment or
working capital and for new investments, stress-test � nancial model cash � ows to accommodate potential tax
changes and corresponding � nancing needs
Continue to seek protection agreements to mitigate the risk of losing tax relief bene� ts on expenditure
Assess the implications of new legislation, and whether this provides you with suf� cient comfort to adopt a
post-tax approach to decommissioning provisions and security arrangements
9 Quality tax advice, globally
Most countries with oil and gas reserves currently provide tax relief for decommissioning expenditure.
Andrew Gavan, Taxand UK
Taxand’s worldwide energy tax team of seasoned professionals brings the bene� t of extensive knowledge across nearly 50
countries. Partner-led from start to � nish our team will work with you in close cooperation with colleagues in other areas of
taxation, as well as legal advisors, to maximise your tax advantage.
Our highly experienced team of experts provide a well-informed approach to drive the ef� ciency of your business,
leveraging deep technical knowledge to address your speci� c energy issues. Our independence means we can act quickly
to deliver the answers you need, mitigating risk and increasing your competitive advantage. Drawing on our deep industry
knowledge, our tightly knit organisation provides considered tax advisory services to a wide range of energy clients
including listed and non-listed companies.
Would you consider there to be
suf� cient certainty over the tax
treatment of decommissioning in
your country?
Taxand has conducted its � rst Taxand Global Energy survey leveraging the expertise of our Taxand Global Energy Tax team
across Asia, Europe and the Americas. Our survey asked key energy Taxanders a selection of quantitative and qualitative
questions designed to explore four key areas impacting multinationals’ energy activities: carbon trading schemes;
decommissioning; emerging markets; and renewables.
Taxand’s Global Energy survey explores how current tax conditions are helping, or hindering, the commercial development
of the energy sector. The survey results are supported by Taxand’s Take: Taxand’s opinion on the � ndings and calls to
action for multinationals.
Notice: As provided in Treasury Department Circular 230, this publication is not intended or written by any Taxand � rms to be used, and cannot be used, by a client or any other person or entity for the purpose of avoiding tax penalties that may be imposed on any taxpayer. The information
contained herein is of a general nature, is up to date as of May 2012 and is subject to change. Readers are reminded that they should not consider this publication to be a recommendation to undertake any tax position, nor consider the information contained therein to be complete. Before any
item or treatment is reported, or excluded from reporting on tax returns, � nancial statements or any other document, for any reason, readers should thoroughly evaluate their speci� c facts and circumstances, and obtain the advice and assistance of quali� ed tax advisors. The information reported in this publication may not continue to apply to a reader’s situation due to changing laws and associated authoritative literature, and
readers are reminded to consult with their tax or other professional advisors before determining if any information contained herein remains applicable to their facts and circumstances. Even though all reasonable care has been taken in the preparation of this guide, Taxand and all of its � rms do not accept any liability for any errors that it may contain or lack of update before going to press, whether caused by negligence
or otherwise, or for any losses, however caused, or sustained by any person. Descriptions of, or references or access to, other publications within this publication do not imply any endorsement of them. Taxand is a global organisation of tax advisory � rms. Each � rm in each country is a separate and independent legal entity responsible for delivering client services.
Methodology
Taxand provides high quality, integrated tax advice worldwide. Our tax professionals, more than 400 tax partners and over
2,000 tax advisors in nearly 50 countries – grasp both the � ne points of tax and the broader strategic implications, helping
you mitigate risk, manage your tax burden and drive the performance of your business.
About Taxand
About Taxand Global Energy Tax
10
Quality tax advice, globally
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KEY CONTACTSTo discuss our energy tax survey report and how these issues may impact your business, contact:
Taxand Global Energy Tax Service Line LeaderJimmie Van der ZwaanE. [email protected]
ARGENTINAMatias Olivero VilaE. [email protected]
AUSTRALIAJonathon LeekE. [email protected]
Reynah TangE. [email protected]
AUSTRIAHerta VanasE. [email protected]
BELGIUMGeert De NeefE. [email protected]
BRAZILDebora BacellarE. [email protected]
CANADAJohn McClureE. [email protected]
CHILEFernando BarrosE. [email protected]
CHINAKevin WangE. [email protected]
COLOMBIAMauricio PinerosE. [email protected]
CYPRUSBoris LazicE. [email protected]
DENMARKThomas FrobertE. [email protected]
FINLANDLauri AhokallioE. [email protected]
FRANCEDavid ChaumontetE. [email protected]
GERMANYPeter Schaeffl erE. peter.schaeffl er@luther-lawfi rm.com
GREECEMaria ZoupaE. [email protected]
INDIAGokul ChaudhriE. [email protected]
INDONESIAKelvin HandriyantoE. [email protected]
IRELANDMartin PhelanE. [email protected]
ITALYPietro BraccoE. [email protected]
JAPANEiki KawakamiE. [email protected]
KOREAStephan KimE. [email protected]
LUXEMBOURGJamal AfakirE. [email protected]
MALAYSIAThang Mee LeeE. [email protected]
MALTAWalter CutajarE. [email protected]
MAURITIUSGyaneshwarnath (Gary) GowreaE. [email protected]
MEXICOHoracio de Uriarte FloresE. [email protected]
NETHERLANDSJimmie Van der ZwaanE. [email protected]
NORWAYHarald JohannessenE. [email protected]
PAKISTANIkram-ul-HaqE. [email protected]
PANAMAAmbrosio GonzálezE. [email protected]
PERURocio LiuE. rliu@mafi rma.com.pe
PHILIPPINESEuney Marie J. Mata-PerezE. [email protected]
POLANDPawel TonskiE. [email protected]
PORTUGALMiguel C. ReisE. [email protected]
PUERTO RICOJuan ZaragozaE. [email protected]
ROMANIAAngela RoscaE. [email protected]
RUSSIAAndrey TereschenkoE. [email protected]
SINGAPORELeon Kwong WingE. [email protected]
SOUTH AFRICAErnie Lai KingE. [email protected]
SPAINDaniel ArmestoE. [email protected]
SWEDENNiklas BangE. [email protected]
SWITZERLANDKurt WildE. [email protected]
THAILANDHatasakdi Na PombejraE. [email protected]
TURKEYUluc OzcanE. [email protected]
UKAndrew GavanE. [email protected]
Jagdip BharijE. [email protected]
UKRAINEOksana IlchenkoE. [email protected]
USALayne J. AlbertE. [email protected]
VENEZUELAManuel CandalE. [email protected]
General Enquiries:Taxand Global Head of MarketingLynne SandlandE. [email protected]
