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

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Michael Bona, Partner, and Sara Mattsson, Director, PwC delivered this presentation at the 2013 FLNG Forum in Perth. The two day conference brings attendees key insights into the technology and …

Michael Bona, Partner, and Sara Mattsson, Director, PwC delivered this presentation at the 2013 FLNG Forum in Perth. The two day conference brings attendees key insights into the technology and concepts that will unlock Australia’s stranded gas reserves. This event brings together case studies, keynote and technical presentations from the experts at the forefront of the Floating LNG projects. For more information about the forum, please visit the event website: http://www.informa.com.au/flngforum2013

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  • 1. Tax & Legal Domestic and International Tax Implications for FLNG 3 December 2013 Michael Bona, Partner, PwC Sara Mattsson, Director, PwC
  • 2. Agenda 1 Domestic and International Tax Implications for FLNG: The Basics 2 Case study 2
  • 3. 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. 3
  • 4. Domestic and International Tax Implications for FLNG: The Basics
  • 5. Section 1 – 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. 5
  • 6. Section 1 – Domestic and International Tax Implications for FLNG: The basics 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). 6
  • 7. Section 1 – Domestic and International Tax Implications for FLNG: The basics 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. 7
  • 8. Section 1 – Domestic and International Tax Implications for FLNG: The basics 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% 8
  • 9. Section 1 – Domestic and International Tax Implications for FLNG: The basics 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 nonresidents 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. 9
  • 10. Section 1 – Domestic and International Tax Implications for FLNG: The basics 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. 10
  • 11. Section 1 – Domestic and International Tax Implications for FLNG: The basics 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). 11
  • 12. Section 1 – Domestic and International Tax Implications for FLNG: The basics Domestic and International Tax FLNG lifecycle – tax implications FID Acquire and Explore • 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 Feasibility • 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. Construction / Development Produce and Sell • 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 writeoffs 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 Decommission / Exit • Development of exit strategy • Divestment coordination from a tax perspective • Redeployment of vessel? • PRRT closing down refund 12
  • 13. Case study
  • 14. Section 2 – 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? 14
  • 15. Section 2 – Case study Case study Owner / Operator in Australia • Aus Co owns and operates the FLNG project in Australia. LNG Sales Contract Aus Co Issues to Consider • Legal Entity • Profit Repatriation FLNG Upstream Assets • Project Lifecycle • Income Tax / PRRT • Funding 15
  • 16. Section 2 – Case study Case study Multinational inbound investment LNG Sales Contract For Co Service / Charter fee Overseas • For Co (a non-Australian resident) owns and operates the FLNG project Australia Upstream Assets FLNG FLNG Issues to Consider Tolling fee • Source / margin • Legal Entity For Co (Operator) • Transfer Pricing LNG Sales Contract For Co • Profit Repatriation • Project Lifecycle Service fee O&M Contract Overseas Australia • Income Tax / PRRT Charter fee • Funding • Double Tax Agreements Upstream Assets FLNG • Withholding Tax Tolling fee 16
  • 17. Contact details Michael Bona Tax Partner PwC Perth Tel. +61 8 9238 3339 Mobile +61 405 136 010 michael.bona@au.pwc.com Sara Mattsson Tax Director PwC Perth Tel. +61 8 9238 3671 Mobile +61 401 475 199 sara.e.mattsson@au.pwc.com

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