Oil price volatility highlights tax structure vulnerabilities of exporting countries

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The FINANCIAL — Exporting countries around the world are reconsidering how they tax the oil and gas industry in the wake of ongoing oil price volatility, according to EY’s Global oil and gas tax guide 2015, launched on June 16, which summarizes the oil and gas corporate tax regimes in 84 countries.

Alexey Kondrashov, EY Global Oil & Gas Tax Leader, says:

“Over the last decade, and especially in the last five years, governments of exporting countries around the world have gradually introduced or adjusted their fiscal regimes to capitalize on the high oil price environment. The dramatic oil price drop that started a year ago exposed the vulnerabilities of many of these tax structures and is forcing jurisdictions to focus on revising them.”

Fiscal regimes in many countries involve taxation on a per barrel basis. But taxing based on volume hasn’t served exporting countries well amid oil price volatility. Countries that tax profit are best positioned to withstand further dips in oil price.

Kondrashov says: “Many tax regimes include terms that automatically respond to oil price variations, but even these are being stretched in the current price environment. For projects to remain economically viable, some countries will need to impose new incentives or make adjustments to existing tax regimes.”

A number of jurisdictions have already begun adjusting fiscal terms. For example, Argentina, the UK, Colombia, Kazakhstan and China have introduced important changes to their regimes to support and intensify investments.

Kondrashov says: “Tax regimes can’t depend on a high oil price environment. Governments must work with industry to create a regime with the flexibility to withstand price fluctuations and incentives to encourage investment regardless of price point. A sustainable model is in reach.”

 

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