Oil and gas taxation in New Zealand Contents 1.0 Summary 1 7.0 Withholding taxes 7 2.0 Corporate income tax 1 7.1 Overview 7 2.1 In general 1 7.2 Dividends 7 2.2 Rates 1 7.3 Interest 7 2.3 Taxable income 1 7.4 Rents and royalties 7 2.4 Revenue 1 7.5 Other 7 2.5 Deductions and allowance 2 7.6 Tax treaties 8 2.6 Losses 4 8.0 Indirect taxes 8 2.7 Foreign entity taxation 4 8.1 Goods and services tax 8 3.0 Other corporate income tax§4 8.2 Import, export, and customs 8 duties 3.1 Additional taxation 4 8.3 Fringe benefit tax 8 4.0 Tax incentives 5 8.4 Excise tax 9 4.1 General incentives 5 8.5 Stamp tax 9 5.0 Payments to related parties 5 9.0 Other 9 5.1 Transfer pricing 5 9.1 Choice of business entity 9 5.2 Thin capitalization 5 9.2 Foreign currency 10 5.3 Interest deductibility 6 9.3 Employee rights and 10 6.0 Transactions 6 remuneration 6.1 Capital gains 6 9.4 Environmental taxes 11 6.2 Asset disposals 6 10.0 Oil and gas contact information 12 6.3 Like-kind exchanges and 6 involuntary conversions 6.4 Abandonment 6 6.5 Sharing arrangements and 7 farm-outs Deloitte Taxation and Investment Guides www.deloitte.com/taxguides Oil and Gas Tax Guide Tax professionals of the member firms of Deloitte Touche Tohmatsu Limited have created the Deloitte International Oil and Gas Tax Guides, an online series that provides information on tax regimes specific to the oil and gas industry. The Guides are intended to be a supplement to the Deloitte Taxation and Investment Guides, which can be found at www.deloitte.com/taxguides. For additional information regarding global oil and gas resources, please visit our website: www.deloitte.com/oilandgas 1.0 Summary The principal New Zealand taxes and rates applicable to companies in the oil and gas extraction business are: • Corporate income tax 28% • Goods and services tax 15% • Non-resident withholding tax* – dividends 30% – interest 15% – royalties 15% * Subject to reduction under an applicable tax treaty New Zealand does not have an excess profits tax or alternative minimum tax. Royalties are payable to the New Zealand Government upon extraction of oil and gas, such payments are covered in Section 3.0. 2.0 Corporate income tax 2.1 In general A New Zealand resident company is subject to tax on all income, whether derived locally or from abroad. A non-resident company is liable for tax only on income sourced from New Zealand. The definition of residence for tax purposes encompasses any company that is incorporated in New Zealand, has its head office in New Zealand or has its center of management in New Zealand, or a company over which control is exercised by directors in New Zealand, regardless of whether they also make decisions outside New Zealand. As New Zealand’s rules defining corporate residence are broad, a company resident in New Zealand may also be resident in another country. Special consideration should be given to how any relevant tax treaties will address this situation. Extraction activities undertaken in New Zealand, or above or within the continental shelf beyond New Zealand’s territorial sea (as defined in Section 3 of the Territorial Sea, Contiguous Zone, and Exclusive Economic Zone Act 1977) will be regarded as having a source in New Zealand. This essentially equates to the New Zealand “exclusive 200 mile zone”. Special rules apply to the acquisition and disposal of petroleum mining permits, exploration and development expenditure and production wells (including costs relating to failed production wells). 2.2 Rates The corporate tax rate is 28% with effect from the beginning of the 2012 and future income years. A branch is taxed at the same rate as a subsidiary. 2.3 Taxable income Taxable income is broadly “assessable income” less any allowable deductions. Assessable income includes amounts derived from business, and may also include amounts derived from the disposal of land if the land was acquired with the purpose of disposal or as part of dealing in such property. Assessable income also includes attributed income from controlled foreign companies (“CFCs”) and foreign investment funds. Most ordinary and necessary business expenses are deductible in arriving at taxable income. 2.4 Revenue For a New Zealand resident company, assessable income includes all worldwide income and gains. Non-residents are subject to tax on New Zealand sourced income only, subject to the provisions of relevant tax treaties. In addition to ordinary concepts of revenue, a petroleum miner will specifically derive assessable income from the consideration received for the disposal of exploratory material or a petroleum mining asset. Oil and gas taxation in New Zealand 1 2.5 Deductions and allowances Exploration costs Exploration costs are deductible in the year in which the expenditure is incurred. Specific rules apply where exploration costs are incurred on property which is subsequently disposed. Petroleum exploration expenditure includes: • exploratory well expenditure (expenditure on planning, drilling, testing, completing and abandoning an exploratory well); • prospecting expenditure (including prospecting by electrical, geochemical, gravimetric, magnetic, radioactive, seismic or other geological methods); and • expenditure to acquire an existing privilege, prospecting or exploration permit for petroleum. It is important to note that certain expenditure on petroleum mining assets and ‘residual expenditure’ is specifically excluded from the definition of petroleum exploration expenditure. Residual expenditure includes: • application fees payable for a petroleum permit; • insurance premiums; • royalties paid under the Petroleum Act 1937 or Crown Minerals Act 1991; • rates; • land or building lease payments; • interest; and • certain financial arrangements entered into before 20 May 1999. These items are likely to be deductible under the general rules. Development costs A petroleum miner is allowed a deduction for petroleum development expenditure incurred by them. This expenditure may be allocated to an income year by one of two methods: • the straight line method, whereby expenditure is allocated evenly over the seven years from the income year when the expenditure is incurred; or • the units of production (‘reserve depletion’) method. The reserve depletion method allows all petroleum development expenditure to be allocated over the life of the field (based on proven and probable 2P reserves) as the petroleum reserves deplete. In this way, deductions for petroleum development expenditure better match the field’s decline in value. However this method is only able to be used: • once the field commences production, and • only in relation to petroleum development expenditure incurred from the first year the field goes into production. It is also important to note that any election to use this method is irrevocable. Development expenditure allocated to future income years may become deductible in full in the income year in which the permit is relinquished or disposed of for consideration. Special provisions will apply if the permit is disposed of to an associated person or a person holding the permit on behalf of the petroleum miner. Costs relating to failed or dry production wells are deductible in the year of abandonment, instead of deductions being spread over seven years. A deduction for any remaining well development expenditure can be claimed in the year that the production well ceases producing and is abandoned, if the taxpayer is allocating development expenditure under the reserve depletion method. Oil and gas taxation in New Zealand 2 Depletion Where a well ceases to produce petroleum in commercial quantities and is abandoned, and the petroleum miner is deducting development expenditure incurred on the reserve depletion basis, the remaining deduction which is unallocated to an income year is deductible in the income year that the well is abandoned. Removal or restoration costs A petroleum miner is allowed a deduction for expenditure that they incur on removal or restoration operations, including abandonment. Where this deduction results in a tax loss available to be carried forward, the amount of the deduction may be spread backwards to offset taxable income in earlier income years (as discussed at point 2.6 below). In circumstances where deductions are not allowed via the spreading method above, but the expenditure is incurred in relation to the monitoring, mitigation or restoration of harm incurred as a result of the discharge of a contaminant, a deduction will be allowed in the year the amount is incurred. Petroleum mining outside New Zealand Prior to 4 March 2008, a petroleum miner carrying on petroleum mining operations outside New Zealand through a branch or a CFC could apply New Zealand tax provisions to the foreign operations and deduct expenditure incurred outside New Zealand on exploration or development activities against New Zealand-sourced income where the foreign operations were of substantially the same nature as the New Zealand activities. However, this position has since been revised and any expenditure incurred in relation to a foreign petroleum mining operation on or after 4 March 2008 can only be offset against foreign-sourced income from petroleum mining operations. General deductions A deduction from assessable income is allowed for expenditure or losses incurred in deriving assessable or excluded income, or carrying on a business for the purpose of deriving assessable income or excluded income. This general rule is subject to certain limitations. For example, capital expenditure (with the exception of certain expenses of petroleum miners), expenditure of a private or domestic nature, expenditure incurred in producing exempt income and expenditure relating to employment are generally not allowed as deductions. In addition, expenditure that relates to exempt income or to the derivation of non-resident passive income is also not deductible.