Reduction in corporate tax for E&P companies recommended to attract foreign investment

KARACHI: Federal Board of Revenue (FBR) has been recommended to reduce corporate tax rate for exploration and production companies in order attract foreign investment in this sector and generate more revenue for the country.

The Overseas Investors Chamber of Commerce and Industry (OICCI) in its tax proposals for budget 2019/2020 said that the applicable tax rate for the Oil and Gas Exploration and Production sector is 40 percent.

Before the promulgation of Income Tax Ordinance, 2001, the tax rate was 50 percent to 55 percent, however, the royalty payment to government was adjusted against the tax liability, resulting in effective tax rate of approximately 35 percent or less.

Applicability of effective 40 percent tax rate has in fact increased the tax expense of the Oil and Gas Exploration and Production Companies, as against the incentives given to other sectors of the economy, whereby the tax rate will be gradually reduced to 30 percent.

The OICCI recommended that in order to incentivize oil and gas exploration in the country especially after the massive reduction in the international oil prices, the corporate tax rate on E&P sector should be reduced from the current 40 percent to the rate applicable to other corporate sector by making necessary amendments in the Income Tax Ordinance 2001 and Regulation of Mines and Oilfield and Mineral Development (Government Control) Act, 1948.

Giving rationale, the OICCI said that foreign investment will be encouraged in the country, which will eventually increase the tax collection of the government and will also greatly help to overcome the energy crises in the country.

The OICCI highlighted another issue of limitation on payment to federal government and taxes, and said that the rate of tax applicable on E&P companies on their Oil & Gas profits are given in their respective PCAs signed with government.

Under Rule 4AA of Part I of the Fifth Schedule to the Income Tax Ordinance, Super tax has been imposed at 3 percent for E&P companies earning Rs 500million (equivalent to US$ 5million).

It recommended that it is critical for E&P sector and recommended that the tax applicable should be calculated strictly in accordance with the provisions of the respective PCAs signed between Government and each E&P company and are legally binding, without changes throughout the full Lease period.

The chamber said that this will remove the negative investment scenario, and potential for litigation – due to the varying interpretations by the FBR from time to time (despite the signed PCAs with Government)

The OICCI said that tax credits under section 65A and 65B are not currently being allowed to E&P companies by the tax authorities despite the fact that appellate Tribunal decided the matter in favour of E&P companies.

Therefore, it is suggested that necessary clarification needs to be provided by tax authorities to assessing authorities.

In view the current energy deficit in the country and recent decision of appellate Tribunal, these credits should be allowed to the E&P companies to promote further investments in this sector.

Regarding depletion allowance, the OICCI said that clarity over definition of well head value for computation of depletion allowance is required.

As per clause 3 of Fifth Schedule, depletion is calculated at 15 percent of the gross receipts representing well-head value of production, but not exceeding 50 percent of taxable income.

E&P industry interprets above by calculating depletion at 15 percent of gross revenue before royalty deduction.

Tax authorities calculate depletion at 15 percent of Gross Revenue after deduction of royalty.

Therefore, it is proposed that amendment be introduced in the relevant clause in favor of E&P companies i.e. depletion to be calculated at 15 percent of revenues before royalty deduction.

The matter is under litigation at High Court level for various E&P companies. Clarification in the definition of Well head value will ease unnecessary burden of these litigations for E&P Companies, the OICCI added.

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