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Changing Times for the Energy Sector
Taxand recently conducted an energy survey that solicited feedback related to tax trends of our clients based on the developments in the energy industry. At our recent Taxand Global Energy Seminar in Amsterdam, the outcome of the survey was presented. During the seminar, we discussed trends in the energy sector and how governments and industrial stakeholders are, or should be, responding to these trends. Taxand's Energy Tax Team identified the latest developments and more importantly key trends to watch out for if you are operating in the energy sector.
The demand for energy and supply, and the security of energy reserves, are the most important factors facing the energy sector, and determine the geopolitical playing field. The demand for energy is increasing, especially in developing countries, and energy is becoming increasingly important to drive economies. Countries now focus on sufficiency when it comes to energy. This comes as a result of a less-reliable Middle East over the past year, and political hiccups that, from time to time, slow down energy supply. The energy mix (the use of several sources of energy) gas, oil, wind, solar, etc, which goes hand in hand with the global trend to reduce CO2, is also significant in this respect. These developments should, of course, be viewed in light of the current global economy, which triggers a need to increase government budgets.
A number of trends are discernable. Governments are increasing their grip on the exploration and exploitation of oil and gas by, for instance, nationalising production and its licensees. The public-private partnership is also frequently applied. More governments attempt to claim their "fair share" by increasing royalties on production. There is a stronger focus on transfer pricing and taxation of branches (permanent establishments) in an endeavour to expedite taxation transparency and tax planning in the industry. On a more positive note, many governments have put regimes in place to facilitate alternative energy and innovation.
70% of the survey respondents have noticed the move to alternative energy and natural gas. The downside is that a significant number of respondents also saw an increase in the tax burden for oil and gas production and exploration (including royalties) and a stronger position for local oil companies.
Although a significant number of respondents saw an increase in incentives for alternative resources and innovation, it is questionable whether incentives are the most important stimulus to move towards alternative energy. Many stakeholders have indicated that competition is still the most important reason for the success of new developments in this field as high energy prices drive jurisdictions towards augmenting domestic E&P, ultra-deep projects, natural gas and alternative energy. These developments carry a greater risk which is accepted as an inseparable part of the business.
Transfer pricing and Permanent Establishment ("PE") issues are perceived as a challenge by tax departments of the respondents. These departments must identify where operations are expanding or downsizing, and use this information to determine the correct pricing. Compliance is high on the tax departments' agendas. Furthermore, tax departments are becoming more responsible for reviewing tax risks, insurance risks, M&A risks, etc more frequently. Consequently, many companies must apply greater resources to manage their tax position.
In addition to these core tax issues, there is a development regarding 'soft skills' in taxation that is equally threatening. For instance, terms like "tax evasion" are increasingly being used in the media to describe legitimate "tax avoidance". This is one of the consequences of Government's desire for companies to show they have a transparent tax position. Together, this leads to an increase in the number of disclosures and is thus an increased tax risk for businesses. There is a need for greater transparency and coordination with tax authorities.
Accordingly, board of directors must clearly understand their company's tax strategy to communicate rapidly and effectively, to rationalise the company's tax position for external audiences and to help manage public scrutiny. Placing tax higher on the Board's agenda will help drive operational efficiency from the outset.
Your Taxand contacts for further queries are:
Jimmie van de Zwaan
T. +31 20 301 66 33
T. +1 713 221 3919
As a result of market trends, tax is becoming a more important factor in the energy sector. Given the emerging tax environment and the increase in tax risks, taxes are now a higher up priority and a focus by the company's top management. What's more, Boards must be familiar with their company's tax position to be able to explain to the public how and why certain positions are chosen to effectively manage public and media scrutiny.
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