CHAPTER 3

Profit Resource Rent Tax

Overview

This Chapter applies a taxation regime to petroleum profits from discoveries made from 2007 onwards.

The Chapter provides for a tax called a “profit resource rent tax”. This tax applies at rates of 5%, 10% or 15% in addition to the corporation tax rate of 25% that currently applies to profits from petroleum activities. It applies when profits exceed certain defined levels. This is worked out by a formula that relates the profits from a petroleum field to the capital investment in the field. While the legislation specifically refers to petroleum, oil and gas are also covered.

When the new tax is applied, the tax rates on relevant petroleum profits will range from 30% to 40%.

696B Interpretation and application (Chapter 3)

(1) The definitions used in this section are as follows —

“cumulative field expenditure” is the denominator in the profit ratio equation (see below). It is the accumulated level of capital investment incurred by a company in relation to a taxable field since 1 January 2007. Taxable field expenditure for a company for an accounting period is defined separately, and this figure is the sum of the taxable field expenditure amounts.

“cumulative field profits” is the numerator in the profit ratio equation. This is the accumulated profits (less 25% corporation tax) earned by a company in relation to a taxable field since 1 January 2007. Net taxable field profits in relation to a company for an accounting period is defined separately, and this figure is the sum of the net taxable field profits amounts.

“net taxable field profits” is defined in terms of an accounting period of a company for a taxable field. It is the taxable field profits figure (also defined) net of 25% corporation tax.

“profit ratio” is defined as the cumulative field profits divided by the cumulative field expenditure, both of which are defined above. This is the figure that is used to determine whether a company is liable to pay the profit resource rent tax, and if so, the rate at which it will apply.

“profit resource rent tax” is the tax, defined in section 696C.

“specified licence” is defined as an exploration licence or a reserved area licence granted on or after 1 January 2007 or a licensing option. The tax applies in respect of discoveries on foot of such licences.

“taxable field” is an area covered by a petroleum lease awarded on foot of a specified licence. Petroleum leases are granted under section 13(1) of the Petroleum and Other Mineral Development Act 1960.

“taxable field expenditure” is the capital expenditure incurred by a company in an accounting period, in relation to a taxable field. It covers abandonment expenditure, exploration expenditure and development expenditure. These terms are already defined in section 684(1).

“taxable field profits” for a company in relation to taxable field is the amount of petroleum profits (defined in section 684(1)) of the company in respect of the field in an accounting period.

(2)(a) Provision is made to ensure that the existing interpretations in section 684 can be applied in this Chapter too, with any necessary modifications. This allows for the use of terms like developments expenditure, petroleum profits, petroleum activities, etc. without having to redefine them specifically to refer to these rules.

(2)(b) As taxable field is defined in terms of a petroleum lease, it is necessary to include capital costs incurred after 1 January 2007 but before the lease was issued, to ensure that the correct cumulative expenditure figure is used in the denominator of the profit ratio. Without a provision like this, the capital costs figure would be too low, resulting in companies reaching the cut off point too soon.

(3)(a) The activities covered by licences issued on or after 1 January 2007 are treated separately, for the purposes of the additional tax. Petroleum trades carried on by companies are already ring-fenced under the 1992 legislation. The purpose of this subsection is to carve out the activities covered by the new regime, in respect of each taxable field.

(3)(b) Any necessary apportionments are made in computing taxable field profits or expenditure. This provision follows on from the fact that a ring-fencing rule is introduced at subsection (3)(a).

(3)(c) & (d) The charges, interest and losses ring-fencing provisions from the 1992 legislation apply in respect of each “new” field and that each such field is totally ring-fenced.

Relevant Date: Finance Act 2021