CHAPTER 10 TAX ISSUES

• Jurisdiction: United States

International Resources Law II: A Blueprint for Mineral Development
(Feb 1995)
CHAPTER 10
TAX ISSUES
James M. Roach
Exxon Exploration Company
Houston, Texas

INTERNATIONAL RESOURCES LAW II

A BLUEPRINT FOR MINERAL DEVELOPMENT

TAX ISSUES

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OVERVIEW

• BALANCE OF OBJECTIVES

• STRUCTURE OF FOREIGN OPERATIONS

• FORM OF AGREEMENT

— TAX/ROYALTY REGIME

— PRODUCTION SHARING CONTRACT (PSC)

— SERVICE CONTRACT

• EVOLUTION OF PETROLEUM AGREEMENTS AND OIL PRICES

• PRACTICAL OVERALL PSC AND FISCAL CONSIDERATIONS

• GOVERNMENT TAKE SERIATIM

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STRUCTURE OF FOREIGN OPERATIONS

• U.S. COMPANIES TAXED ON WORLDWIDE INCOME

— FOREIGN TAX CREDIT ALLOWED TO PREVENT DOUBLE TAXATION

• INCOME EARNED OUTSIDE U.S. BY FOREIGN BRANCH OF U.S. SUBSIDIARY

— TAXED CURRENTLY BY U.S.

+ PROFITS TAXED RESULTING IN POSSIBLE MISMATCH OF U.S./FOREIGN INCOME

+ LOSSES CURRENTLY ALLOWED IN U.S. CONSOLIDATED RETURN

• INCOME EARNED OUTSIDE U.S. BY FOREIGN INCORPORATED SUBSIDIARY

— GENERALLY TAXED WHEN RECEIVED AS DIVIDEND BY FIRST U.S. CORPORATION

— "DEFERRAL" OF U.S. TAX MAY BE ACHIEVED BY DELAYING DIVIDENDS

+ MORE TAX PLANNING OPPORTUNITIES EXIST

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FORM OF AGREEMENT

OWNERSHIP OF FACILITIES AND PRODUCTION	INVESTOR FINANCIAL ARRANGEMENT
• EQUITY CONCESSION (TAX/ROYALTY)	COMPANY	PAYS ROYALTY AND TAX TO GOVERNMENT
• NON-EQUITY FORMS
— PRODUCTION SHARING CONTRACT (PSC)	GOVERNMENT	TAKES PRODUCTION SHARE TO RECOVER COSTS AND EARN PROFIT
— RISK SERVICE CONTRACT	GOVERNMENT	PAID IN CASH FOR COST RECOVERY AND PROFIT

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TAX/ROYALTY

• TAXES/ROYALTIES STANDARDIZED AND GENERALLY APPLICABLE

• COMPANY OWNS 100% OF PRODUCTION (AFTER ROYALTIES)

— GOVERNMENT COMPANY MAY BE PARTNER

• LITTLE FLEXIBILITY IN NEGOTIATIONS

• GENERALLY FOUND IN DEVELOPED COUNTRIES

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PRODUCTION SHARING CONTRACTS

• ROYALTY MAY NOT APPLY, MAY BE SET FORTH IN STATUE, MAY BE PAID BY STATE COMPANY OR MAY BE SEPARATELY NEGOTIATED

• COMPANY RECEIVES "COST OIL" TO COVER EXPLORATION, DEVELOPMENT AND EXPLORATION COSTS

• IN SOME COUNTRIES, INCOME TAX CAN ALSO BE COVERED IN PSC, HENCE SEPARATELY NEGOTIATED

• "PROFIT OIL" IS SPLIT BETWEEN PARTIES

• DIRECT GOVERNMENT PARTICIPATION IS OPTIONAL

• MORE FLEXIBILITY AND THE PERCEPTION OF CONTROL ARE BIGGEST INCENTIVES

• GENERALLY FOUND IN DEVELOPING COUNTRIES

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RISK SERVICE CONTRACTS

• COMPANY EXPLORES, DEVELOPS AND OPERATES AT OWN RISK AND WITH OWN RESOURCES

• IF SUCCESSFUL, FEE PAID TO COVER COSTS AND PROVIDE PROFIT

— NORMALLY DIRECTLY RELATED TO...