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TAXATION OF EXPLORATION & PRODUCTION COMPANIES
Exploration and Production (E & P) companies operate with the business structure of Joint Venture Operations. One of the JV Partner act as operator while others act as non-operating partners. All operational and administrative functions are performed by the operating partner while all such costs are shared by JV Partners in proportion of their working interest in the JV.
The regulatory framework followed by E & P companies include Petroleum Concession Agreement (PCA) entered with the Government of Pakistan including other tax and corporate laws as applicable in Pakistan. The provisions of PCA have overriding effect over the provisions of other laws and regulations.
The taxation of profits and gains from the pipeline operations of exploration and production companies is governed by Section 100 to the Income Tax Ordinance 2001. As per Section 100 to the Income Tax Ordinance 2001, tax on profits and gains from the pipeline operations of exploration and production companies is calculated as per rules specified in Part I of the Fifth Schedule to the Income Tax Ordinance 2001.
The profits and gains of such undertaking are computed in the manner applicable to income, profits and gains chargeable under the head “Income from Business” and deduction for expenditures is allowed subject to rules specified under Part I of the Fifth Schedule to the Income Tax Ordinance 2001.
Deduction in respect of expenditures incurred prior to the commencement of commercial production is allowed @ 10% of the aggregate amount in case of onshore drilling and @ 20% of the aggregate amount in case of offshore drilling. Royalty paid or payable to the Government is also allowed as deduction.
Oil and Gas reservoirs are bound to deplete with the passage of time and accordingly the law also provides for deduction in respect of depletion allowance. Such deduction is allowed @ 15% of the gross receipts representing the well head value of the production to the extent that it is not higher than 50% of the profits and gains of such undertaking before the deduction of such allowance. Similarly, deduction is also allowed in respect of decommissioning cost as certified by a Chartered Accountant or a Cost and Management Accountant.
Other allowable deductions include drilling expenditure, depreciation deduction, amortization deduction and other administrative costs incurred by the taxpayer.
The profit of E & P Company, determined as above is taxed @ 50%.
It is also pertinent to mention that Fifth Schedule is application only in case of profits and gains from pipeline operations of E & P Companies i.e under normal tax regime while income subject to FTR (e.g export of petroleum products) will be excluded from the calculation of such profits and gains and taxed as provided in the applicable section.
Mohsin Alizai
September 10, 2020
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