Keep existing fiscal regime for oil and gas - Davis Tax Committee | Fin24

Keep existing fiscal regime for oil and gas - Davis Tax Committee

Nov 15 2017 12:03
Lameez Omarjee

Johannesburg – The fiscal regime for oil and gas is well-established and efficient, and major changes to it are not necessary, according to the Davis Tax Committee( DTC).

The DTC released its report on oil and gas on Monday. In the report it makes recommendations to the minister of finance regarding the tax system for companies operating in the industry. The DTC is only advisory in nature, and Finance Minister Malusi Gigaba may consider its recommendations as part of the normal budget and legislative processes of Treasury.

Announcements made by Gigaba are subject to normal consultative processes and Parliamentary oversight. The committee, which consists of nine members, is led by Judge Dennis Davis.

Given the “considerable” geological and policy uncertainty and low oil prices, the committee recommended that the existing, “attractive” fiscal regime for oil and gas companies is retained.

“The Davis Tax Committee recognises that South Africa currently has a well-established and efficient tax system on the whole, so major changes are not necessary. The major deterrents to investment in South Africa are posed by factors outside the tax system,” the report read.

The Tenth Schedule, which is part of the Income Tax Act and regulates taxation of oil and gas companies, has been identified by the committee as encouraging exploration and production of oil and gas and attracts oil and gas investors.

The DTC indicated that only minor changes are necessary. Among these being that government creates fiscal stability for first-mover companies who may face the greatest risks.

“This provides predictability to the ‘frontier’ investor, confronted by huge geological and commercial risk, which is difficult to quantify ex-ante (based on forecasts),” the report read. It also gives government flexibility once commercially viable resources can be determined more accurately.

The DTC is of the view that the proposed amendments to the Mineral and Petroleum Resources Development Act (MPRDA), especially in terms of state participation, has created policy uncertainty. This discourages investment by international players, the committee said.

Case for oil and gas

The DTC also unpacked the economic potential of oil and gas. The industry is currently in the budding stages of development and there is uncertainty on its size and the commercial recoverability of oil and gas reserves.

Currently the contribution to economic growth is insignificant compared to hard-rock mining, the committee noted.

“South Africa is an unproven hydrocarbon territory, which competes in a global arena with countries that have proven hydrocarbon resources,” the report read.

These global players have the advantage of being financially strong, with low development costs, economic stability and low political risk. They also have regional market demand to attract foreign direct investment.

The committee pointed out that the oil and gas industry may “hold the key” to SA’s energy security challenges.

Finds of shale gas in the Karoo and hydrocarbon finds in deep-water offshore could contribute between 3.3% and 9.6% of South Africa’s GDP at 2010 levels, or between 1.1% and 2.8% of GDP levels projected for 2035.

Its contribution to employment could be between 2.7% and 6.5% of 2010’s measured employment level. In terms of 2035’s projected employment levels this could be between 0.98% and 2.4%, if there is sustained growth of 4.5%.

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