Investors need clear tax regime

A MOVE by the Obama administration to raise the taxes on the US oil and gas industry could create opportunities in the African resources market, Business Day reported yesterday.

The paper quoted Cameron Kotze, a tax partner at Ernst & Young Namibia, saying that South Africa, and indeed Africa as a continent, is very attractive from a resources point of view. ‘However, unpredictability in tax regimes and its enforcement tend to inhibit international investment as companies are unable to definitively predict tax expenses,’ he said. Kotze said greater clarity and consistency in the application and enforcement of the various tax regimes would facilitate increased investment in the region. ‘If African countries are able to present clear and predictable tax parameters, they may be able to benefit off the upward tax trajectories of other countries.’ The Obama administration had proposed several international tax changes in the oil and gas industry. These included the repeal of the 3% deduction for manufacturing based in the US; the end of the current tax break for companies producing oil and gas in the Gulf of Mexico and levying an excise tax on the area’s oil and gas production; and the repeal of the expensing of intangible drilling costs, requiring that ‘ordinary and necessary’ business expenses such as buying fuel, making repairs, scouting out drilling sites and transporting supplies be capitalised. A number of other jurisdictions had imposed windfall taxes which had taken the form of an additional tax on profits when the crude oil price crossed a certain threshold. For example, last year Venezuela introduced a windfall tax which would tax 50% of oil revenue above 70 a barrel and 60% of revenue above 100 a barrel. The new tax is expected to have an effect on oil companies that have existing operations in the country. However, one company has pointed out that the new tax could delay the expansion of its operations until the full effect of the new legislation can be evaluated. The South African government opted recently not to impose a tax on windfall profits earned by producers of synthetic fuel as it would have discouraged investment in additional fuel capacity. Instead, it took steps to initiate an intergovernmental process to promote the long-term development of the domestic liquid fuel industry. Kotze said jurisdictions would be competing for investment and the growing availability of foreign funds in Africa . Funding would follow the government that offered the definitive operating environment into the coming years, Kotze said. – Business Day