Australian Oil and Gas Industry Await Petroleum Tax Overhaul (1)

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By Peter Hill

Australia’s oil and gas producers have waited nearly seven months for possible government changes to a tax on the country’s massive oil and gas projects.

And the government won’t say when or if changes will be announced.

While the government is considering whether to make changes amid declining revenue from the Petroleum Resource Rent Tax (PRRT), major companies like Chevron Australia Pty Ltd, ExxonMobil Australia Pty Ltd, Shell Australia Pty Ltd, and Woodside Energy Limited have pushed hard against a major overhaul.

Potential reforms come amid the government’s ongoing overhaul of the country’s approach to tackling multinational tax avoidance and its push to lower the general company tax rate form 30 percent to a more competitive 25 percent.

“While the PRRT remains the preferred way to achieve a fair return to the community for the extraction of petroleum resources without discouraging investment, changes should be made to the PRRT arrangements to make them more compatible with the developments that have taken place in the Australian oil and gas industry,” an independent review of the tax said in a report handed to the government April 2017.

But any uncertainty over multi-billion dollar investment decisions caused by the silence emanating from Canberra is “an acceptable trade-off” to the more important task of “getting it right,” an industry source told Bloomberg Tax.

Revenue Drop Raises Questions

The PRRT taxes the profits of oil and gas projects at 40 percent. It has brought in more than A$33 billion ($26 billion) in revenue since payments began in 1989, but annual revenue has been on the decline for more than a decade.

With the tax now bringing in less than A$1 billion on average a year, the government commissioned an independent review of the regime “to help better protect Australia’s revenue base and to ensure that oil and gas projects are paying the right amount of tax on their activities in Australia.” That review, the Callaghan review, finished April 2017 and recommended a comprehensive consultative process to update the PRRT, with any changes to factors such as transfer of deductions and uplift rates to only apply to new projects. It also included a raft of specific administrative reforms.

The government agreed with the Callaghan Review’s suggestion that any change to the tax regime, and the timing of any such change, “should be the outcome of a considered, comprehensive and consultative process.” This was because of the range of uncertainties involved in large, long-term petroleum investments, and the need for stable fiscal settings when seeking to influence the country’s investment attractiveness, the government said.

Accordingly, the government asked the Treasury department to undertake a further consultation process and advise the government on options to address the PRRT design issues raised by the review.

In late June the Treasury released a detailed consultation paper which canvassed a range of options and asked 35 specific questions covering those options, but only gave four weeks for industry to respond.

The Treasurer’s office didn’t respond to questions about the status of the review. However in a Feb. 15 email to Bloomberg Tax, it confirmed that it had given its post-review report on any changes to the government.

Industry Critiques

An industry source also told Bloomberg Tax that there was a feeling that the Treasury consultation paper generally betrayed “pre-conceived ideas” about the way ahead for the PRRT regime which didn’t adequately reflect its specific design features.

“The options for consideration regarding deductibility order raised in the paper appear to have the sole objective of increasing Government take,” ConocoPhillips Co. said in its August submission.

Senex Energy Ltd. asked the government in its August submission to leave the regime “unaltered,” but also said it hadn’t had enough time to fully gauge the impact of proposed changes.

The integrated nature of the PRRT regime was the most common element of all industry submissions made to the Treasury during its short consultative window. And despite the Treasury making it clear in its consultation paper that PRRT’s integrated nature “means that all options need to be considered as a package,” many companies expressed concern that the way the options were expressed indicated changes might be made in isolation.

And overall, oil and gas companies are resistant to change.

Shell Australia said in its August submission it was “confident that the PRRT is working as originally designed and intended” and that it provides an “appropriate balance of economic rent to resource holders and risk incentives for investors.”

BHP Billiton Petroleum Pty Ltd.—which has paid over A$11.2 billion in PRRT and royalties and excises since 2000,making it Australia’s largest PRRT payer—made it clear in its submission that it didn’t support the Callaghan Review’s recommendations to change the design of the PRRT. The company didn’t believe there was a compelling case to make any changes.

A spokesperson for ConocoPhillips told Bloomberg Tax in an email March 2 that the company engaged constructively with the review and trusts that the government “will not impose changes that would immediately stop huge investments, costing thousands of jobs and billions in tax revenue.”

Where to Now?

Diane Kraal, a senior lecturer at Monash University in Melbourne who participated in the review, told Bloomberg Tax in an email Feb. 27 that “it seems politics have now taken centre stage over whatever economic/legislative changes Treasury has recommended.”

The only practical development since the Callaghan Review concluded its review of the PRRT was the release by the Australian Tax Office in December 2017 of a draft ruling addressing the uncertainty over the treatment and definition of closing down expenditure for PRRT purposes.

That draft ruling was quickly turned around into a final ruling ( TR 2018/1) released Jan. 24 and was the outcome of consultation with industry.

Noel Mullen, deputy chief executive of the Australian Petroleum Production and Exploration Association in Canberra, told Bloomberg Tax in an email Feb. 13 that the PRRT has allowed Australia to become a world leader in the development of the country’s petroleum resources.

He added that the industry had provided both the Callaghan Review and the subsequent Treasury consultation processes with detailed technical and project information “to ensure the respective reviews were undertaken on a fully informed and factual basis.”

Woodside Petroleum Ltd. chairman Michael Chaney said in the company’s 2017 annual report that “it is encouraging that on this matter the Government seems to have taken a rational approach thus far. Any changes, particularly retrospective changes, which jeopardised future exploration and development would be very short-sighted.”

In an email to Bloomberg Tax Feb. 15, a spokesperson from Woodside declined to elaborate on the chairman’s reference to the government’s “rational approach.”

To contact the reporter on this story: Peter Hill in Sydney at correspondents@bloomberglaw.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bloombergtax.com

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