Tax certainty for the oil and gas industry

A few years ago, the government introduced a favourable tax regime for oil and gas companies in the form of the Tenth Schedule to the South African Income Tax Act. This schedule, which incentivises oil and gas exploration, also sets out to create fiscal certainty for companies embarking on oil and gas activities in SA.

The Tenth Schedule is relatively new and has already been amended several times so that companies benefit as intended. That said, it is clear that that there are various issues which warrant further consideration and clarification.

The schedule provides a 200%/150% super tax deduction for capital expenditure incurred for exploration and post-exploration respectively, in terms of an oil and gas right. This is one of the most favourable incentives. However, it is not clear which capital costs are intended to benefit from these special tax deductions. For example, would personnel costs (salaries), rentals, interest etc. incurred during the exploration phase, qualify for this super tax deduction? Clarification is thus required in this regard.

The ability of an oil and gas company to enter into a fiscal stability agreement is also a significant incentive offered by the Tenth Schedule. This allows companies to stabilise their tax regime at a certain point in time, creating certainty regarding tax consequences. Clarification could be provided on the mechanism under which companies may enter into a royalty fiscal stability agreement for purposes of the Mineral and Petroleum Resources Royalty Act of 2008 (the Royalty Act). Currently, these provisions are potentially deficient as it does not stabilise certain inputs into the calculation of the royalty. 

We also hope for clarification on personal tax, by way of a definition as to what comprises “international traffic” for purposes of the tax exemption applicable to remuneration earned by individuals engaged in international shipping. For example, does this very favourable exemption cover employees working in the oilfield services sector that transport staff or goods to drilling rigs or service rigs offshore?

An incentive regime would also be welcomed for the oilfield services industry to stimulate growth and encourage investment.

There are still many hurdles to cross in the oil and gas industry. It is clear that continued investment in the sector will continue to depend on SA having a stable and fair regulatory framework, including tax, to govern the industry. Failure to achieve this may result in disinvestment from SA. That said, no major changes are expected to the tax legislation governing oil and gas companies as currently the legislation is being consolidated and applied.

How can Deloitte help:

Deloitte’s Oil and Gas professionals work with clients to help maximize business potential across the full spectrum of the industry - from super majors and trading businesses to independents - to deliver services, perspectives and solutions that best suit the business and its people.