Letter from... the Caribbean

Linda Hutchinson-Jafar reports on the changes to Trinidad and Tobago's petroleum tax

According to the Trinidad and Tobago Government, the petroleum tax reform has corrected certain anomalies and shortcomings in the previous law, while the amended petroleum legislation is less ambiguous, more transparent and easier to administer.

The comprehensive review by the Government has led to amendments to the fiscal regime, with a view to expanding exploration and development activities, balancing the allocation of gas for export and domestic uses, achieving fair market value prices for gas and revisiting the system of incentives for the liquefied natural gas (LNG) industry.

The centrepiece of the legislative framework governing the petroleum sector is the Petroleum Taxes Act, which imposes two different taxes: the Petroleum Profits Tax (PPT) and the Supplemental Petroleum Tax (SPT). The PPT yields about 60% of the tax and the SPT about 30%.

Under the old regime, the tax base for the SPT was determined after deducting capital allowances that invariably included expenses in respect of both oil and gas exploration and development. SPT was assessed annually, but paid on a quarterly basis, often reducing the Government’s cash flow pending end of year adjustments.

Under the new regime, SPT payments are based on a weighted average price of crude, calculated quarterly instead of annually.

The PPT will be determined through the removal of the first year allowance for both tangible and intangible expenditure.

Capital allowances exploration expenditure will be calculated on a 10% initial allowance; a 20% annual allowance on a declining balance from the year of expenditure and for development expenditure; a 10% initial allowance and 20% annual allowance on a declining balance from year two or the year in which there is commercial production, whichever is earlier.

It will also shift to quarterly tax payments calculated on a current year basis; non-deferral of capital allowances and allowing decommissioning and abandonment costs, only when they are incurred, and limiting deductible management charges to 2% of expenditure.

The increase in petroleum revenue, arising out of the revised legislation, is estimated at US$158m annually.

The second phase of the reform of the energy sector’s fiscal regime involves the establishment of a separate regime for gas.

Although income from natural gas contributes over 62% of the total petroleum revenue, the tax paid to the Government from natural gas is 49% of the total petroleum tax receipts.

The largest energy company operating in the country, BP Trinidad and Tobago (BPTT), has also agreed to advance the 10% royalty payment to 2008 from 2017, which began on phased basis in 2005.

The Government has said that, with the new gas regime, the concept of fair market value provides the underlying basis for determining the taxable income, thus ensuring a fair return to all.

The increase in revenue attributable to the new gas regime is estimated at US$316m on an annual basis.

The Patrick Manning administration has acknowledged that in an environment of increasing oil and gas prices, there is a need to balance the economic and financial interests of both producers and the Government.

In the last six years, the Government in the southern Caribbean country collected revenues amounting to US$26bn, of which US$11.1bn was derived from the energy sector and US$15bn from the rest of the economy.

‘The high level of energy tax collections reflected buoyant oil and gas prices and the Government’s successful efforts at oil and gas tax reform, which increased the country’s tax take from any windfall revenues received by the companies,’ Prime Minister Manning said during his recent presentation on the US$7bn national budget for the fiscal year 2007/08.

The budget, based on oil prices remaining on average at US$50 per barrel and gas price at US$3.55 per MMBtu, is projecting real GDP growth of 7% and an average inflation rate of 6% in 2008. Based on the Government’s assumptions, total revenue in the current fiscal year is forecast at US$6.4bn, comprising energy sector revenue of US$2.4bn and non-energy tax collections of US$3bn.

Trinidad and Tobago exports oil to Caribbean countries and is the world’s leading exporter of ammonia and methanol. The US also imports about 67% of its LNG supplies from the twin-Caribbean Republic.

Linda Hutchinson-Jafar is a business writer based in the Caribbean.