Offshore Law was adopted by the Senate; interesting mechanism for investment deductions

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The Senate Plenary adopted on Monday the new draft of the Offshore Law with the changes introduced last week by PSD and ALDE senators in the specialized committees after the Presidency asked for a re-examination of the project. The final vote is to be made in the Chamber of Deputies, and new changes are still possible. The adopted form introduces an interesting mechanism for investments deduction. Thus, Article 19, paragraph 3, refers the investment being deducted from the tax, while the point 4 introduces a maximum limit for deduction at “60% of the total additional income”. It seems that, in the case of Upstream offshore investments equal to or above the value resulting from the calculation of the tax on additional income, this amount could be zero, even when the maximum tax rate of 50% of the additional income is applied.

One of the most important amendments shows that the current royalties will apply for the oil production at the Black Sea. Another important amendment is that for the entire period of oil agreements, ie decades to come, the royalties and the tax regime will not change. In addition, investments made until the moment the law enters into force, as well as those in progress and future investments will be eligible for deductions.

The draft was adopted with 81 votes in favor, 9 against and 15 abstentions and will go to the Chamber of Deputies, which is a decision body. In its current form, the law clarifies and simplifies many key issues for starting offshore oil operations, including access and transit rights, obtaining permits, various issues of applicable terminology.

3 categories of adopted amendments

FISCAL STABILITY The titleholders for petroleum offshore perimeters operating on the date of entry into force of this law shall benefit from the percentages of oil royalties, the gross production thresholds associated with these quotas and the specific tax regime existing at the date of the entry into force of the law. “The provisions of Government Ordinance 7/2013 on the introduction of the tax on the supplementary income resulting from the deregulation of prices in the natural gas sector, as subsequently amended and supplemented and GO 6/2013 on the introduction of special measures for taxation of the exploitation of natural resources other than natural gas, approved with amendments and additions by Law 261/2013, as amended, shall not apply to the titleholders of petroleum offshore perimeters in operation at the date of entry into force of this law.”

NAMR and the titleholders may conclude additional acts on petroleum offshore perimeters agreements in force at the date of entry into force of this law to reflect in contracts the provisions of the new law.

The royalty regime and the tax regime will not change, no matter what form, throughout the duration of subsequent agreements and extensions, is set out in Article 21.

TAX ON ADDITIONAL INCOME The titleholders for petroleum offshore perimeters, including their subsidiaries and / or entities belonging to the same economic interest group carrying out both extraction activities and sales activities with natural gas extracted from these perimeters, are required to calculate, declare and pay the tax on offshore additional income. Additional income is the difference between the weighted average price of natural gas sold from own domestic production in offshore perimeters and the purchase price of natural gas from domestic production for household and non-household customers in 2012, which is 45.71 lei/MWh, multiplied by the volumes of gas sold off domestic production in offshore perimeters.

The offshore supplementary income tax is calculated by applying one or more percentages of the revenue from the sale of natural gas extracted from offshore perimeters, as determined in accordance with Annex 2 which is an integral part of this law, a tax of which the value of investments in the Upstream segment is deducted. The offshore extra income tax considers the reference price set by ANRM for the calculation of royalties. Transactions below the reference price are taxed at the reference price. The percentages for the calculation of the tax shall be calculated on the basis of the selling prices of natural gas practiced by the titleholders for petroleum offshore perimeters, based on a price grid starting, on 1 January 2019, indexed with the annual price index.

DEDUCTION The maximum limit for deducting investments in the Upstream segment may not exceed 60% of total additional income.

The value of investments is the cumulative amount of Upstream segment investments recorded in the accounting records under the legal regulations in force from the entry into force of the law up to the month for which the offshore additional income tax is calculated, and the amount of the expenses related to investments in the works carried out and reported to NAMR on the basis of oil agreements that were recorded in the accounts until the law came into force, deducting the cumulative value of taxes on offshore additional earnings computed, but not maturing, until that month, following the deduction for investments being applied.

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