Albania: Overview of the current fiscal environment
Global oil & gas tax newsletter
Highlighting tax developments of current interest to companies operating in the oil and gas industry, whether upstream or downstream, and businesses in the oilfield services, engineering and construction industries.
This article is also published in the Global Oil & Gas Tax Newsletter - July 2019 edition
The exploration and production of hydrocarbons in Albania commenced in the early 20th century, when a number of foreign companies entered into concession agreements with the Albanian government for the exploration and exploitation of onshore and offshore oil-bearing fields. In 1946, with the introduction of the communist regime in Albania, all industries, including oil and gas, became state owned. However, exploration and development continued, achieving the highest production peak in 1974, with an annual production equivalent to 38,408 barrels per day.
After the end of the communist regime in 1992, the new government introduced industryspecific legislation, namely, the Petroleum Law in 1993 and the Petroleum Fiscal Law in 1994.
The National Agency of Natural Resources (NANR) is the government-appointed regulator for the deployment of natural resources in the mining, petroleum and energy sectors. NANR negotiates petroleum agreements and supervises their implementation through regular technical and financial audits. Albpetrol is the state-owned oil company that administers all operating oilfields in Albania, and some exploration blocks. Albpetrol is entitled to sub-grant the exploration and production rights on the oilfields under its administration to oil and gas companies through petroleum agreements, in which case it obtains a share of the oil and gas produced.
The main form of these agreements is the Production Sharing Agreement (PSA). Many multinational companies have entered into PSAs with the Albanian government for the exploration and production of oil and gas onshore and offshore since 1992. The most important current agreements are the PSA for the investment in, and operation of, the Patos-Marinza oilfield—considered the largest onshore oilfield in continental Europe—extracting around 90 percent1 of total crude oil production in Albania, and the PSAs for the exploration activities in onshore Blocks 2-3 and Block 4.
Albania stands among 51 countries adhering to the Extractive Industry Transparency Initiative (EITI), a global initiative that seeks to improve the governance of the extractives sector.
Crude oil produced in Albania is mostly exported to be refined abroad. Overall in 2016, for example, exports of crude oil contributed to around 8 percent of Albania’s exports.
Albania currently has little natural gas production (and production mostly serves the oil industry).
The Petroleum Law expressly recognizes the Albanian state as the sole owner of all petroleum deposits existing in their natural condition in strata laying within the jurisdiction of Albania, and permits the Ministry of Energy to enter into a PSA (or other form of agreement) granting an oil company exclusive rights to explore and produce oil and gas for a limited period.
Under a PSA, the contractor assumes the financial and technical risk of operating the petroleum project in exchange for recovering its costs under the PSA from revenues from the sale of oil produced from the contract area. The Albanian state’s interests in PSAs are administered by Albpetrol and AKBN, which derive from PSAs (as the case may be): bonuses, their share of oil, their share of profit petroleum, as well as revenue arising from contract breach and termination, such as penalties, executed guarantees, etc.
PSAs for oilfields discovered are granted for an initial production period no longer than 25 years and can be extended for up to another five years. Exploration activities are limited to five years but may be further extended if approved by the Ministry of Energy.
The Petroleum Law guarantees oil companies operating under petroleum agreements the right to export their share of production derived from operations in Albania (unless there is an emergency call on the supply of crude oil in the local market) and to freely withdraw the revenue earned out of Albania. Foreign investors may negotiate fiscal stability terms to mitigate the negative effect of future changes in the applicable tax legislation, although the implementation period of the stability terms has been limited to 12 years from the date production commences.
Petroleum fiscal regime
The Petroleum Fiscal Law of 1994 is a short and outdated law that is due to be reformed to ensure legal clarity and consistency for current and potential investors. New industry-specific legislation has been prepared by the Ministry of Finance and Economy, with the assistance of the International Monetary Fund and is being discussed among stakeholders. The law is expected to be finalized and enter into force in 2020. This article describes the current petroleum fiscal regime (changes brought about by the proposed law will be addressed in future issues of this publication).
Petroleum profit tax
Under the Petroleum Fiscal Law, petroleum contractors calculate the petroleum taxable profits by recognizing as recoverable costs all capital, operating and administrative expenditure and by recovering such costs from the revenues earned: (a) in accordance with the relevant PSAs, (b) based on criteria agreed by the minister, and (c) in line with international best practices.
The term “recoverable costs” is specific to the industry and means the costs incurred by the contractor during the exploration, development and production phase that will be recovered/covered by revenue from the sale of oil mostly in the production phase. The petroleum costs incurred in a year, which are audited and approved by NANR, are included in a “pool of recoverable costs” that is carried forward indefinitely over the PSA period. Depending on the PSA, a share of the oil production (“available petroleum”) may be allocated to Albpetrol (in kind or in cash). Revenue from the sale of oil after deducting Albpetrol’s share and the royalty tax (see below) gradually will cover/recover the costs by reducing the pool of recoverable costs until it becomes zero. After that time, any excess revenue will constitute profit petroleum. A share of the profit petroleum generally is allocated to NANR, and the remaining share belonging to contractors constitutes the taxable profit subject to the industry-specific tax rate of 50 percent.
However, the lack of a separate declaration form for petroleum profit tax results in some difficulties in presenting industry-specific items.
Royalty tax currently represents the principal revenue stream paid from the oil and gas sector to the state budget. Royalty tax is calculated at 10 percent of the sales value of the extracted crude oil. For domestic sales, the royalty tax is self-assessed and self-declared by the contractors and is subject to audit and eventual re-assessment by the tax authorities. For exports of crude oil, royalty tax applicable is assessed and collected by the customs authorities up-front and is paid by the contractors as a prerequisite to complete the customs export procedures.
Value added tax (VAT)
Albania’s VAT law is significantly harmonized with the EU VAT directive, with a view to the country attaining EU membership.
VAT on domestic sales of crude oil and gas is 20 percent and VAT on exports is zero percent.
An exhaustive list of eligible supplies of goods and services purchased/imported by contractors during the exploration phase may be exempt from VAT if the contractor follows certain procedures and obtains written approval from NANR.
Social and health insurance contributions
A law introduced in 2017 addressing petroleum employees results in additional insurance costs for contractors and a number of benefits for current and former employees that have the status of petroleum/gas employees.
An additional social security contribution amounting to 5 percent of gross salary must be paid for employees in the petroleum and gas industry (3 percent payable by the employer, 2 percent by theemployee). The salary of petroleum/gas employees should not be less than 150 percent of the minimum salary applicable in Albania.2 Among other benefits, persons with the status of petroleum/gas employees that are or become unemployed in certain cases benefit from a certain amount of financial remuneration for a certain period. The beneficiaries of the status of petroleum/gas employees undergo free medical examinations twice a year and receive medical treatment free of charge (for diseases that are confirmed as being caused directly or indirectly from their work in the petroleum and gas industry).
Personal income tax on employment income
Monthly personal income earned from employment up to ALL 30,000 (approximately USD 258) is exempt, income exceeding ALL 30,000 and up to ALL 130,000 (approximately USD 1,123)3 is taxed at 13 percent and income exceeding this threshold is taxed at 23 percent. Tax is withheld at source by the employer.
Many PSAs provide that expatriate personnel of contractors will be exempt from Albanian taxes, but this exemption is not enforced under the Petroleum Fiscal Law or other tax laws and is not applicable in practice (see below).
Excise tax, carbon tax and circulation tax
Excise tax,4 carbon tax5 and circulation tax6 are imposed on imports or domestic production of several materials used by contractors as combustible materials in petroleum operations.
Other tax aspects
There are certain other tax aspects that potential investors need to consider. For example, a PSA may provide for an exemption of the contractor from national and local taxes, duties, excise taxes etc., but these exemptions may not be properly enforced by tax laws and, therefore, may not be applicable in practice. Potential investors should consider obtaining local tax and legal advice before and during their negotiations for a PSA with the Albanian government, to possibly secure these tax advantages.
A look into the future
The proposed petroleum fiscal legislation is expected to address most of the tax challenges faced by the industry in recent years such as:
- The hierarchy of audit rights over petroleum profit tax between NANR and the tax administration;
- Clarification of certain fiscal aspects applicable to Joint Operation Agreements;
- Ring fencing; and
- Introduction of a specific declaration form for petroleum profit tax, etc.
Looking ahead, the Trans-Adriatic Pipeline (TAP), scheduled to commence operations in 2020, is expected to play a major role in developing Albania’s energy market and facilitating the country’s objective of becoming a gas hub in the Western Balkans. Being one of the largest foreign direct investments in Albania to date, the TAP will be about 215 km onshore and 37 km offshore in the Albanian section of the Adriatic Sea. The Albanian government has approved the National Gas Master Plan, paving the way for important private investments for the construction of gas infrastructure.
In summary, Albania offers opportunities for investment by multinational oil and gas companies. It has a long record of oil production, operations and available oil and gas exploration blocks, expertise built through decades by Albanian petroleum employees and subcontractors, improved infrastructure, and an expected fiscal regime for oil and gas.