Tax & Legal
Domestic and International Tax Implications for FLNG 3 December 2013
Michael Bona, Partner, PwC Sara Mattsson, Director, PwC
Agenda
1 Domestic and International Tax Implications for FLNG: The Basics
2 Case study
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Disclaimer
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PwC, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
© 2013 PwC. All rights reserved. In this document, “PwC” refers to PwC Australia which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.
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Domestic and International Tax Implications for FLNG: The Basics
An overview of Australian tax Direct Taxes
• Corporate tax rate is 30%.
• Australian resident companies are taxed on worldwide income.
• Foreign resident companies (including Australian Branches / PEs) are taxed on Australian sourced income.
• Petroleum Resource Rent Tax (PRRT) applies to onshore and offshore O&G projects, at a rate of 40%.
• Project based tax: each participant is responsible for their PRRT liability.
• PRRT is deductible for income tax purposes: Effective tax rate of 58%.
• Research & development (R&D) tax incentive – up to 45% refund/credit on R&D expenditure.
Section 1 – Domestic and International Tax Implications for FLNG: The basics
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An overview of Australian tax Indirect Taxes
• Onshore: state-based “stamp duty” regime – generally applicable to acquisitions of real estate, business assets or shares in land rich companies.
• Offshore: registration fee of 1.5% - applicable to transfers of offshore petroleum titles [Note: Repealed from 1 November 2013].
• Carbon “Tax” repeal.
• Goods and Services Tax (GST) rate is 10% (VAT equivalent).
• Exports of LNG free from GST.
• GST may be deferred on importation (GST deferral scheme).
• Customs duty concessions – importation of vessels generally duty free (consider treatment of facilities and ancillary equipment).
• Customs duty clearance prior to importation.
• Enhanced Produce Bylaw Scheme (EPBS) - duty rate may be reduced from 5% to 0% on goods imported into Australia to be used on a project (% local content required).
Section 1 – Domestic and International Tax Implications for FLNG: The basics
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An overview of Australian tax Legal entity type
• Company / Partnership / Trust / Joint Venture
- Company:
◦ Taxable entity separate from its shareholders.
◦ Taxable Income: Assessable Income less Allowable Deductions.
- Joint Venture (JV):
◦ Each participant (JVP) shares in the product of the project (not receipt of income) and contributes assets.
◦ Each JVP individually responsible for income tax – deductions and losses “passed on” to JVP.
• Mixed company / JV structures now more common for integrated LNG projects.
Section 1 – Domestic and International Tax Implications for FLNG: The basics
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An overview of Australian tax Funding and foreign investors
• Financial instruments classified based on substance rather than legal form:
- Returns on debt interests are generally deductible (subject to thin cap);
- Returns on equity instruments are not deductible.
• Australia has entered into Double Tax Agreements (DTAs) with 40+ countries.
• Withholding tax rates (generally):
Section 1 – Domestic and International Tax Implications for FLNG: The basics
Dividends (franked = paid out of taxed profits) 0%
Dividends (unfranked & paid to non-DTA country) 30%
Dividends (unfranked & paid to DTA country) 0% - 15%
Interest 10%
Royalties (non-DTA country) 30%
Royalties (DTA country) 10%
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An overview of Australian tax Foreign investors
• Capital gains tax exemption for non-residents, if:
- < 10% interest in an Australian company; or
- Australian company not “land rich”.
- Budget proposal to implement a 10% WHT on proceeds paid to non-residents disposing of Australian real property (from 1 July 2016).
• “Unusual” Australian tax features:
- Consolidation regime.
- General anti-avoidance regime.
• Base Erosion and Profit Shifting (BEPS) & Transparency measures.
Section 1 – Domestic and International Tax Implications for FLNG: The basics
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International Tax concepts Permanent Establishments
• Permanent Establishment (PE): generally defined as a fixed place of business through which the business of an enterprise is wholly or partly carried on.
• Typically includes:
- Place of Management.
- Branch, office, factory or workshop.
- Mine, oil or gas well, quarry or any other place relating to the exploration for or exploitation of natural resources.
- Carrying on supervisory activities for more than 6 months in connection with a building site, a construction, installation or assembly project.
- Substantial equipment used for more than 12 months in exploration for, or the exploitation of, natural resources (or activities connected with such exploration or exploitation).
• Attributable taxable profits.
Section 1 – Domestic and International Tax Implications for FLNG: The basics
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International Tax concepts Transfer Pricing
• Based on the arm’s length principle – how independent parties would transact in the same or similar circumstances:
• LNG sales to marketing hub / related party.
• Tolling / fees to related parties.
• Margin on O&M contract, vessel rental, design work and use of IP etc.
• Cross border intercompany funding.
• Australia’s approach to transfer pricing is broadly consistent with most other developed and developing nations.
• The Australian Tax Office (ATO) has been very active in conducting transfer pricing reviews and audits for many years.
• One key risk management tool actively promoted and supported by the ATO is an Advance Pricing Arrangement (APA).
Section 1 – Domestic and International Tax Implications for FLNG: The basics
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Domestic and International Tax FLNG lifecycle – tax implications
Section 1 – Domestic and International Tax Implications for FLNG: The basics
Acquire and
Explore Feasibility
Construction /
Development
Produce and
Sell
Decommission /
Exit
FID
• International tax &
acquisition
structuring
• Tax due diligence
• Upfront
deductions for
income tax and
PRRT purposes
• Transaction advice
• Transaction taxes
– GST and stamp
duty
• Tax registration
and compliance
• Expatriate
management
• Tax implications of
farm-outs
• R&D
• Project structuring –
income tax and PRRT
• Engage with tax
authorities and
treasury
• Transfer Pricing and
Advance Pricing
Arrangements
• Tax modelling
• Tax implications of
support sell-downs /
unitisations
• Tax treatment of
FEED costs for PRRT
and income tax.
• Tax structuring of
contracts and
identifying tax
obligations
• Customs and GST
advice on
importation
• Tax issues
associated with
mobility & migration
• Management of PE
risk
• Implementation of
systems for
taxation, GST and
PRRT compliance
• Timing of tax write-
offs and
deductions: R&D,
asset write-offs
• Implications of tax
law changes
• Assist with
defence of
regulatory review
• Tax compliance
and annuity work
• Ongoing transfer
pricing compliance
/ documentation
requirements
• Development of exit
strategy
• Divestment coordination
from a tax perspective
• Redeployment of
vessel?
• PRRT closing down
refund
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Case study
Case study Investment considerations
• Australian vs Foreign owned / operated?
• Alterative holding company jurisdictions?
• Margin on vessel / engineering services?
• Company vs JV? Or combination of both?
• Integrated / non-integrated project?
• Funding / project financing?
Section 2 – Case study
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Case study Owner / Operator in Australia
• Aus Co owns and operates the FLNG project in Australia.
Section 2 – Case study
Aus Co
Upstream
Assets FLNG
Issues to Consider
• Legal Entity
• Profit Repatriation
• Project Lifecycle
• Income Tax / PRRT
• Funding
LNG Sales Contract
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Case study Multinational inbound investment
Section 2 – Case study
• For Co (a non-Australian resident) owns and operates the FLNG project
Issues to Consider
• Source / margin
• Legal Entity
• Transfer Pricing
• Profit Repatriation
• Project Lifecycle
• Income Tax / PRRT
• Funding
• Double Tax Agreements
• Withholding Tax
Upstream
Assets
For Co For Co
(Operator)
Service fee
Upstream
Assets
For Co
FLNG FLNG
FLNG
Overseas
Overseas
Australia
Australia
LNG Sales Contract
LNG Sales Contract
Service / Charter fee
O&M Contract
Tolling fee
Tolling fee
Charter fee
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Contact details
Michael Bona Tax Partner
PwC Perth
Tel. +61 8 9238 3339
Mobile +61 405 136 010
Sara Mattsson Tax Director
PwC Perth
Tel. +61 8 9238 3671
Mobile +61 401 475 199