Revenue Note for Guidance
This Chapter introduces a new tax, “petroleum production tax”, which will apply to petroleum profits from discoveries made under petroleum authorisations granted from 18 June 2014 onwards. While the legislation specifically refers to petroleum, oil and gas are also covered. The petroleum production tax will apply on a field by field basis and will be calculated on a field’s net income using a rate that operates on a sliding scale between 0% and 40%. The tax rate is determined by reference to the profit ratio of each field which is calculated using a formula set out in this Chapter. A 10% tax rate will apply where the profit ratio of a field is equal to 1.5, a pro rata tax rate applies for a profit ratio between 1.5 and 4.5 and a maximum tax rate of 40% applies where the profit ratio is equal to 4.5 or above. However, a minimum tax payment of 5% is to be charged, in each year of production, on the gross revenue less transportation costs of a field where the tax payable, based on the formula, would be less than the 5% rate. Petroleum production tax will be payable in addition to the existing 25% corporation tax rate that currently applies to profits from oil and gas production. It will be payable on an annual basis at the same time as corporation tax with the scope for more frequent payments if necessary. Petroleum production tax payments will be deductible for the purposes of calculating the amount of corporation tax due.
(1) The definitions used in this section are as follows—
“cumulative field costs” is the denominator in the profit ratio (R factor) equation. It is the total of all field costs (both capital and operating costs) incurred by a company in relation to a taxable field since 18 June 2014. Field costs for a company for a relevant period (also defined) is defined separately, and this figure is the sum of the field costs.
“cumulative field gross revenue” is the numerator in the profit ratio (R factor) equation. It is the total of gross revenues (less petroleum production tax paid for the same taxable field for all preceding relevant periods) earned by a company in relation to a taxable field since 18 June 2014. Gross revenue in relation to a company for a relevant period is defined separately, and this figure is the sum of the gross revenue amounts.
“eligible expenditure” is defined in terms of a relevant period of a company for a taxable field. It is the total of all expenditure, including exploration and development expenditure, incurred by the company and includes any expenditure, including exploration and development expenditure incurred in any preceding period providing that a deduction for such expenditure has not been allowed in computing petroleum production tax. An allowance for abandonment expenditure which can be claimed under section 695 is also included in the definition.
“field costs” is defined in terms of a relevant period of a company for a taxable field. It is the total of all expenditure including exploration, development and transportation expenditure incurred by the company whilst carrying out petroleum activities.
“gross revenue” is defined in terms of a relevant period of a company for a taxable field. It is the total amounts derived from the sales of petroleum extracted from a taxable field and includes any amounts derived from the assignment, disposal or sale of any assets, interests, options or rights in respect of a taxable field.
“net income” is defined in terms of a relevant period of a company for a taxable field. It is the gross revenue less eligible expenditure incurred in respect of that taxable field.
“petroleum production tax” is the new tax, defined in section 696H.
“relevant period” is the accounting period or part of an accounting period of a company which commences on or after 18 June 2014.
“R factor” is defined in terms of a relevant period of a company for a taxable field. It is the formula used to derive the profit ratio of a taxable field and will determine what rate of tax is applicable. It is defined as the cumulative field gross revenue divided by the cumulative field costs, both of which are defined above.
“specified licence” is defined as an exploration licence, a reserved area licence or a licensing option granted on or after 18 June 2014. It excludes an exploration licence resulting from the exercise of a licencing option issued prior to 18 June 2014.
“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 Minerals Development Act 1960.
“transportation expenditure” is defined as those costs incurred in transporting the petroleum from the taxable field via pipeline to a place where it is landed in the State or, if produced on a platform, from the wellhead to the carrier, if the carrier serves as the point of export.
(2) Provision is made to ensure that existing interpretations in section 684 can be applied in this Chapter too, with any necessary modifications. This allows for the use of terms like development expenditure, exploration expenditure, abandonment expenditure, etc. without having to redefine them specifically to refer to the new rules.
(3)(a) Any necessary apportionments are made in computing taxable field profits or expenditure where the accounting period differs from the relevant period.
(3)(b) As taxable field is defined in terms of a petroleum lease, it is necessary to include expenditure incurred after 18 June 2014 but before the lease was issued, to ensure that the correct cumulative field costs figure is used in the denominator of the profit ratio.
Relevant Date: Finance Act 2021