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Profit surcharge to scare oil firms   2010-03-06 - VIR

Foreign contractors now face paying a surcharge on oil profits when crude oil prices rise.


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According to Circular No 22/2010/TT-BTC from the Ministry of Finance (MoF), from January 1, 2010, foreign oil field contractors no longer enjoy large profits from crude oil price increases. The contractors will now pay a surcharge on their share of oil profits after costs are deducted.


Specifically, for investment-encouraged projects, if average crude oil prices in a quarter increase by 20 per cent, foreign contractors will have to pay a surcharge equal to 30 per cent of profits.


For other projects, foreign contractors will have to pay progressive surcharges. If oil prices rise from 20 to 50 per cent, the surcharge will be 50 per cent of profits. If oil prices rise by more than 50 per cent, apart from the 50 per cent surcharge, the foreign contractor will have to pay 60 per cent of the gain margin from difference in prices.


“This surcharge may discourage new investments by foreign contractors exploring Vietnam and investments will instead flow to countries where foreign contractors derive a better return,” said Tom McClelland, a tax partner at Deloitte Vietnam.


McClelland said petroleum contractors were already contributing a significant amount to the state budget through corporate income taxes, royalties and other duties.  “The surcharge will affect new rather than existing petroleum contractors.  In this respect, it’s better than the earlier increase in the export duty rate from 2008, which was initially unclear on how it would be applied to existing investors and which may have caused a lower rate of investment licences,” he added.


In 2008, when oil prices rose to a record high, there was a global trend of governments proposing “windfall taxes” on petroleum companies, for them to share the windfall profits derived by petroleum companies from large oil price increases. 


In Vietnam, this trend was reflected in a significant increase in the export duty rate in 2008, which later reduced as oil prices came down. McClelland said oil prices were likely to remain volatile in the short to medium term, although long term prices would likely continue to rise.


MoF Minister Vu Van Ninh said companies operating in Vietnamese oil fields were currently required to pay royalties, environmental, export and corporate income taxes. No other charges were being levied, so foreign contractors stood to make windfall gains on oil profits when global prices went up.


It was estimated that foreign contractors’ oil profits accounted for 13.1 per cent of Vietnam’s total oil output value of 15.49 million tonnes last year, according to the National Assembly’s statistics. 

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