Box 6.3 Elements for Action on Taxation of Transfer of EI Interest (continued) 3. Define the gain or profit/loss related to a transfer and the ways to tax such gain or profit, taking into account the following six considerations: i. Is the gain considered to be ordinary income subject to normal corporate income tax (CIT) or at a different rate applicable to capital gains? What rate is applicable when activity is subject to an additional profits tax? How should one allocate the transaction cost between several blocks? ii. Why should gain be taxed? Why should the value of the transaction take into account the applicable taxation on gain? iii. Does the petroleum tax legislation define a special gain taxation regime for the oil and gas
6.5 SPECIAL EI FISCAL TOPICS AND PROVISIONS Extractives fiscal prices
Price determination for fiscal purposes can be complicated in the EI sectors. In all cases, the goal in tax administration is to set or agree to a fair price for tax purposes as close as possible to that which would be realized in a genuine thirdparty, arms-length market sale. This is important for several reasons: 1. To avoid fiscal revenue loss by underpricing of the resource (see the section on Transfer Pricing below). 2. To avoid government overpricing of the resource to raise revenues. 3. To help ensure the availability of foreign tax credits to investors (see the subsection “Foreign Tax Credits in Home Country”). The goal is most easily accomplished in the case of oil, where well-established international markets exist and reference price quotes, together with price adjustments for crude oil quality and transport differentials, are almost continuously available. The fiscalization point (at the point of export, ex-field, or another agreed point of delivery) must be agreed to by the parties but need not present particular difficulties as long as associated taxes or royalties are adjusted to reflect the choice made. Establishing fiscal prices for mining and natural gas is more problematic, because their market prices may be harder to identify or observe.
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exploration and production sector? This should normally be the case, especially to deal with farm-in, swap of licenses, reinvestment in the country, and so on. iv. What are the accounting issues for the transferor and the transferee regarding acquisition costs? v. Is there an impact of the cost of acquisition on cost recovery under production-sharing contracts? Should the acquisition cost not be a recoverable cost even when the transfer is subject to CIT? vi. How should the impact of favorable double taxation treaties and international oil companies’ tax planning strategies be mitigated?
In the case of gas, competitive markets currently exist only in the United States, the United Kingdom, and a few other countries; readily observable prices for fiscal purposes do not exist outside those markets and are often set on a project-by-project basis. Further, the marketing of natural gas and some minerals may be integrated all the way from the petroleum field gate or agreed delivery point or mine mouth through processing or smelting and transport all the way to final consumer with different tax regimes along the integrated chain. Setting the value of the resource along that chain will, as a result, have significant implications for total fiscal revenues and their sharing among fiscal jurisdictions. Good practice generally calls for “netting” the price paid by the final consumer back to the agreed field gate or delivery point or mine mouth in such a way that fiscal valuation accrues at those points. Transfer pricing and interest deductibility
Transfer pricing refers to the pricing of sales to, or purchases from, parties affiliated with the EI sector investor (Daniel et al. 2016, 42–110). It applies not only to the sale of products and goods but also to the supply of services and the terms and pricing of loans or credit instruments such as prefinancing arrangements. More than one half of all crossborder transactions carried out are likely to be between companies that are affiliated, so the importance of this subject should not be underestimated (RWI et al. 2013, 96). Transfer pricing is considered abusive when underpricing a sale or overpricing a purchase results in shifting profits
