Page 356 - Hydrocarbon Exploration and Production Second Edition

Petroleum Economics 343

Tax to host government
50% taxable income
Taxable income
Revenue to oil company

Capital allowance + Opex allowance
Fiscal
allowances

Royalty
12.5%

Figure 14.3 Split of the barrel under a typical tax and royalty system.

These are deducted from the gross revenues prior to applying the tax rate.
Taxable income ¼ Revenues fiscal allowances ð$Þ
Tax payable ¼ Taxable income ð$Þ tax rate ð%Þ

Royalty is charged from the start of production, but tax is only payable once there
is a positive taxable income. At the beginning of a new project the fiscal allowances
may exceed the revenues, giving rise to a negative taxable income. Whether the
project can take advantage of this depends on the fiscal status of the company and the
project. A ‘ring-fenced’ project would not be able to claim a negative taxable income as
a rebate, whereas a ‘non-ring fenced project’ may be able to claim a rebate for its
negative taxable income by offsetting it against taxable income from another project.
It is normally the host government which decrees the fiscal status of the project
(Figure 14.3).

14.2.2.3. Capital allowances
Fiscal allowances for investment in capital items (i.e. CAPEX) are made through
capital allowances. The method of calculating the capital allowance is set by the
fiscal legislation of the host government, but three common methods are discussed
below.
It should be noted that a capital allowance is not a cashflow item, but is only
calculated to enable the taxable income to be determined. The treatment of capital
allowance for this purpose is a petroleum economics approach, used to calculate the
tax payable. Capital allowance may differ from depreciation, which is a calculation
made by the accountant when calculating net book values and annual profit.