Tax Laws

Legislation Governing the Upstream Petroleum Sector

 

Background and Legislation

In Trinidad and Tobago Government’s revenues in the form of taxes and/or levies from the upstream petroleum sector are extracted under various legislations. The key legislations through which revenues are derived from the upstream petroleum sector are as follows:

 

1. The Petroleum Act and Regulations, Chap 62:01

This legislation governs the contractual arrangements under which companies can explore and develop the resources within the country. These arrangements include Exploration and Production Licences (E&Ps) (both Public Petroleum Rights and Private Petroleum Rights) and Production Sharing Contracts (PSCs). The licensing regime that was predominantly used before the 1990’s was the E&P arrangement, normally referred to as a tax/royalty regime or concessionary arrangement. Under the Act, companies are required among other things to pay a royalty that is stipulated in the licence as well as contribute to the Petroleum Impost which is used to cover the administrative costs of the Ministry of Energy.

 

Royalty rates vary from company to company. With respect to crude oil, the rate ranges from 10% to 12.5% of the Field Storage Values. Up until 1989, the Field Storage Value was based on the Royalty Lease Evaluation 1 Method (RLE1). This method provides for a price for crude oil that was determined by the values of the crude oil fractions (light oils, diesel and fuel oil) less a percentage for refining and handling charges. For licences signed from 1989, the Field Storage Values are determined using international market prices of reference crudes. In the case of natural gas, the royalty rate ranges from 0% to 15% of the value of natural gas.

 

In the 1980s as the petroleum fields reached maturity, a new form of contractual arrangements, viz, sub-licences referred to as farm-outs and lease operatorship agreements were introduced to attract more cost effective operators and ensure continued activities.

 

Exploration and Production Licences were the main contractual arrangements used during the period 1900 – early 1970s. However given the rapid development of the sector, better administration of the contractual arrangements was necessary.  Therefore in 1974, the first two Production Sharing Contracts (PSCs), for acreage off the east coast of Trinidad, were signed. These earlier PSCs did not provide for cost recovery, they allowed government a share of production based on production levels and were also ring-fenced.

 

In 1995, with the adoption of the World Bank PSC Model by Government, the PSC was extensively expanded with enhanced contractual terms and conditions. These included provisions for cost recovery, relinquishment, abandonment, shares of Profit Petroleum to the government that were based on both price and production levels, minimum work obligations during the exploration period, procedure to encourage the development of natural gas markets and financial obligations such as signature bonus, research and development, training of nationals and technical equipment bonus. Like the earlier PSCs, these continued to be ring-fenced and assured the Government of a steady revenue stream. In addition, under these PSCs the Contractor’s tax liabilities were paid by the Government out of its share of profit petroleum.  Simultaneously, similar type provisions were slowly being introduced in the E&P licences.

 

A review of the petroleum fiscal regime undertaken in 2005, led to the introduction of a new styled PSC, referred to as a “taxable PSC” that comprised three major features. Firstly, Government received a Share of Profit Petroleum in lieu of some taxes viz Supplemental Petroleum Tax, Royalty, Petroleum Impost and Petroleum Levy. Contractors were therefore exempt from payment of the aforementioned taxes but were required to pay all other taxes namely, Petroleum Profits Tax, Unemployment Levy, Green Fund Levy and Withholding Tax directly to the Ministry of Finance; this represented a departure from the earlier models in which the government paid these taxes on behalf of the Contractor. Secondly a windfall profits feature was introduced to capture higher shares of profit petroleum as petroleum prices increased. Thirdly consolidation of the new PSCs, by type either deep water or land/shallow marine was permitted. This was to promote multi-block development and facilitate investment by consortia and in so doing minimize their exposure to risks.

 

Also included were provisions for re- openers, accessibility of natural gas supplies for both the domestic and export markets, improved funding procedures for abandonment, and assignments and transfers. A special incentive that provides for an uplift of 40% on the drilling of exploration wells in the deep water was also introduced. In 2010, the legislation regarding the “taxable PSC” was repealed and the 1995 model PSC reintroduced with the following changes:

 

• Cost recovery levels fixed at 50%, 55% and 80% for shallow, average and deep-water areas respectively.
• Financial obligations are also fixed
• Only two biddable items Government’s profit share and minimum work program.
• Signature bonus is no longer compulsory.

 

2. The Petroleum Production Levy And Subsidy Act, Chap 62:02.

Established in 1974 to buffer large increases in petroleum product prices and provide a general level of market stability, this Act provides for the subsidization of petroleum products that are sold to the domestic market. The subsidy was initially offset through levy payments made by oil producing companies.

 

In 1992, amendments were made to the Petroleum Production Subsidy and Levy Act. The changes placed a ceiling on each company’s gross levy payments of not more that 3% (later increased to 4%) of its value of its gross income derived from the sale of crude; and included those companies, previously exempt with production level of less than 3,500 barrels of oil per day. Any excess levy payments above the cap are to be made by the Government.

 

3. The Income Tax Act, Chap 75:01

This Act together with the Corporation Tax Act set out the over-arching framework and principles under which companies are required to pay taxes or other impositions. These are the fore-bearers to legislation that was enacted later on. The Income Tax Act provides for the payment of Withholding Tax at a specified rate on the “after tax profits” of a branch/agency of a non-resident company.

 

4. The Petroleum Taxes Act, Chap 75:04

The Petroleum Taxes Act was enacted by Act 22 of 1974 and is applicable to all companies engaged in petroleum operations specifically production business and/or refining business. The Act addresses the two main taxes paid by petroleum companies. These are Petroleum Profits Tax (Part 1 of the Act) and Supplemental Petroleum Tax (Part 11) as follows:

 

4.1 The Petroleum Profits Tax:

The Petroleum Profits Tax (PPT) is applicable to all oil and gas producers as well as refinery operators and is applied to the net profits (chargeable income) from operations. The net profit is derived by deducting from the gross income all operating expenses, capital allowances and other allowable deductions. The deductions for oil and gas producers include royalties, Supplemental Petroleum Tax, Petroleum Levy/Impost, decommissioning/abandonment costs and management fees paid to non-resident companies (limited to 2% of expenditure). Other special allowances are granted for signature and production bonuses, dry holes, work-overs, qualifying sidetracks, heavy oil and exploration costs(the latter available for the years 2014 – 2017). The current applicable tax rate charged on producers as well as refinery operators is 50% (reduced to 35% from income year 2011 for deep water operations only) , Over the years, amendments have been made to the PPT as market conditions changed. The last change was in 2014, when increased allowances were granted on capital expenditure

 

4.2 The Supplemental Petroleum Tax (Part 11 of the PTA)

Introduced by Act 5 of 1981, the Supplemental Petroleum Tax (SPT) has been amended on several occasions. SPT is imposed on income generated from production of crude oil net of royalty and over-riding royalty. Prior to the review that was undertaken in 2005, SPT was levied on the gross income from the disposals of crude oil (not natural gas income) less certain allowances based on expenditure incurred in specified exploration and development activities. Although the tax was imposed on crude oil sales, companies involved in both oil and gas activities benefitted from the allowances since they were broadly applied to exploration and development field activities. This significantly contributed to the development of the natural gas industry in Trinidad and Tobago.

 

The SPT rates varied for marine and land operations and for licences or contracts that were agreed prior or post 1988. In 2006, SPT rates for deep-water operations were fixed as those for land operations post 1988.  SPT rates were also based on a sliding scale for prices ranging from US$15.00 to $49.50 per barrel, thereafter the rate remained fixed. Over the years, as economic and industry related factors warranted, several amendments were made to this tax. During the period 2011 to 2013 incentives in the form of discounts/ tax credits were introduced to further stimulate the production of crude oil. The following is the    new SPT rate schedule applicable from 1/1/2013:

 

Prices (US$/bbl.)	Marine Licences		Land Licences /Deep Water
	Marine	New Field*
P ≤ $50.00	0.0%	0.0%	0.0%
$50.00 < P ≤ $90.00**	33.0%	25.0%	18.0%
$90.00 < P ≤ $200.00	SPT Rate = Base SPT Rate + 0.2% (P – 90.00)
P > $200.00	55.0%	47.0%	40.0%

 

*New Fields: Where recoverable reserves <50mmbbls and production commences from 1/1/13.

** Base SPT

5. The Income Tax (In Aid of Industry) Act Chap. 85:04

Enacted in 1950, this act provides, among other things, mechanisms, through accelerated allowances to encourage investment. The capital allowances are granted in accordance with the category set out under the Income Tax (In Aid of Industry) Act. These categories are as follow:

• Part I – Industrial Buildings
• Part II – Plant & Machinery (Tangibles)
• Part IIA – Plant & Machinery – Refinery
• Part III – Mines, Oil Wells etc. (Intangibles)

Under each of these categories initial and annual allowances are granted. Effective January 1^st 2014, the allowances under Parts 11 and 111 have been increased for production companies only. The new rates applicable for Parts 11 and 111 are:

• 50% initial allowance in the year expenditure was incurred
• 30% and 20% respectively in years 2 and 3.

 

6. The Unemployment Levy Act Chap 75:03

This Act was enacted in 1970 and is intended to provide funds to assist in the Government’s social programmes. Initially the levy was applicable to individuals as well as all businesses but this was amended by Act 6 of 1989 to apply only to companies charged to Petroleum Profits Tax. The applicable rate is 5% of the chargeable income before loss relief plus any exempt income, other than those exempted under the PTA.

 

7. The Green Fund Levy                       

This Levy came into effect from January 2001, under the Miscellaneous Taxes Act Chapter 77:01.   It was increased from 0.1% to 0.3% of the gross sales or receipts effective January 2016, and it is not tax deductible.  This levy is used in the maintenance, reforestation, restoration and conservation of the environment.