Sara Mattsson & Michael Bona, PwC: Domestic and international tax implications for FLNG

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• Offshore: registration fee of 1.5% - applicable to transfers of offshore petroleum titles [Note: Repealed from 1 November 2013].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).


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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.


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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):


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.


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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.


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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).


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Domestic and International Tax FLNG lifecycle – tax implications


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.


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


• 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

[email protected]

Sara Mattsson Tax Director

PwC Perth

Tel. +61 8 9238 3671

Mobile +61 401 475 199

[email protected]

Sara Mattsson & Michael Bona, PwC: Domestic and international tax implications for FLNG

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