Oil and gas is a national asset and due to the high profile of the industry, businesses in this sector are often subject to particular scrutiny of their tax affairs.
The Oil & Gas sector is therefore at the forefront of changes relating to transparency and it will be important for it to both comply with additional regulatory requirements and ensure it is clearly seen as fully contributing to the national economy.
Proposals for financial reporting by companies on a country-by-country basis have emerged in recent years. A number of companies in the sector are already demonstrating a proactive approach to tax transparency, and have developed sophisticated global reporting processes, with disclosures in their annual reports in respect of tax contributions by country.
Others in the sector are starting to consider the potential benefits of being proactive in managing the messaging around their tax contribution, but greater urgency may be required. It is important that all interested parties engage in and inform the debate including regulators, lobbyists, the media and also businesses.
There are several potential answers to the transparency debate. Some companies have supported schemes such as the Extractives Industries Transparency Initiative, or other enhanced disclosures of taxes paid. Such approaches may help to demonstrate the tax contribution made in each country, particularly given the high effective tax rates that often apply to oil and gas production.
Quantifying the contribution made in each country has the potential to be an effective and tangible way of demonstrating both investment credibility and social responsibility to governments and other stakeholders. This must, of course, be balanced against the undoubted additional effort required to collate and present the necessary information.
The compliance costs can be substantial.
For example, the cost of complying with the tax transparency provisions of the US Dodd-Frank Act has been estimated by the SEC to be US$2.5 billion over the first five years.
EU shake-up of regulation
The EU has recently reached an agreement to adopt new tax transparency rules that will impact oil and gas companies.
These will require them to publish details of the payments they make to governments for access to resources in every country in which they operate. These rules will apply to all payments of at least €100,000 made for each individual resource project, including taxes on income, production and profits, royalties, fees and a number of other payments.
A key motivation for the new rules is to highlight the tax received by countries outside the EU, and to make these governments more accountable to their citizens regarding how this money is spent.
The rules will be included in the new EU Accounting Directive and the new EU Transparency Directive. Between these two directives, large companies that are registered in the EU, along with EU listed companies, will be covered if they operate in the extractive or logging sectors.
The US perspective
In the US, the Dodd-Frank Act was passed in 2010, with new tax transparency requirements applying from October 2013 to SEC-registered companies in the extractive industries sector (section 1504).
Like the proposed EU rules, reporting is required by project and by country. The scope of payments includes profit taxes, royalties, infrastructure improvements and licence fees – with a US$100,000 threshold.
In July 2013, a US District Court vacated the SEC rules that provided detailed guidance of the implementation of the section 1504 requirements. The court found that the Dodd-Frank Act did not require public disclosure of payments to governments and “set aside” the SEC rules. The decision demonstrates the complexity of tax transparency across jurisdictions. The SEC is reviewing this judgement, and it may go to a higher court or need further legislation before the matter is settled.
Looking to the future, rather than allowing an over-simplistic focus on the headline corporate tax paid, many organisations will increasingly seek to educate customers, shareholders, governments and the general public about the total tax contribution, plus other non-tax investments that deliver wider economic benefit.
The focus on tax transparency is likely to increase in the coming months and years. As a result, it will be more important than ever for oil and gas companies to be proactive and prepared for the challenges and opportunities ahead. Implementing robust processes to collate and analyse tax information in a meaningful way will be an essential prerequisite in order to seize the opportunity.
Tax Partner, KPMG
+44 (0)20 76943751
Tax Director, KPMG
+44 (0)20 73112158