The last few years of high profile public, media and political attention to international taxation have led to a wholesale revision of the principles which underpin taxation globally, and increasingly also at domestic level. The debate has focussed on the taxation of multinationals, with some emphasis on technology and retail groups (e.g.: Google, Amazon, Apple and Starbucks). But the same considerations are relevant for the extractive industries, and in particular for the oil and gas industry.

The low oil price of recent years has impacted on stakeholders pre-tax returns, and this has in turn put pressure on governments to reduce the burden of taxation, in order to support acceptable post-tax returns. This has been expressing itself in a general trend of reducing tax rates (perhaps more noticeably in ageing basins), in revised legislative framework in some jurisdictions, and in the growing use of stabilisation and host government agreements for the purpose of providing fiscal and economic certainty going forward.

The combination of these drivers has been responsible for a number of themes which impact on the upstream world tax-wise. These are discussed briefly below.

The “fair share of tax” debate

The background to the discussion revolves around the ability of multinationals to arrange their businesses globally in a manner which allows profits to be booked for tax purposes in zero or low tax jurisdictions.

For example, intra-group charges (for services, for the use of IP, in the form of interest payable for intra group financing, or otherwise) may be made by companies set up in low or zero tax jurisdictions, to operating companies in high tax jurisdictions. The latter companies’ operating revenue is therefore sheltered by the intra group expenses, resulting in low taxable profits in high tax jurisdictions (coupled with high profit margins in low or zero tax jurisdictions). Such so-called base erosion or profit shifting techniques mean that little tax is paid in the jurisdictions where business revenue or value are generated. The OECD sponsored base erosion and profit shifting (“BEPS”) project has now concluded with a significant number of recommendations for law changes, domestically and through revisions to double tax treaties, which seek to ensure that tax is paid where business revenue is generated, or where value is created.

The wish to retain the ability to tax value creation in the jurisdiction of source has always been prevalent in the context of the oil and gas industry. In some jurisdictions it has expressed itself through resource nationalism. And in almost all jurisdictions it results in oil and gas activities being subject to special tax rules. The important point here is that the changing approach to taxation and the BEPS project mentioned above, have provided significant additional support for the overall sense that profits and value need to be taxed in the source jurisdiction.

Governments, in particular in the developing world where tax legislation may not have caught up with the new global approach, have been increasingly seeking to interpret existing legislation very widely (in some instances in a manner which may appear extra-statutory), to impose tax charges on participants and operators in ways which may not have been at the contemplation of the parties at the time the investment was originally made.

This trend has been most apparent in the context of M&A transactions. Typically a global oil company would own its interest in an upstream asset through a holding company outside the jurisdiction of the asset. A disposal of the interest could then take place by means of a sale of the holding company, as opposed to the sale of the asset itself. The former results in an indirect transfer of the asset (because control of the company holding the asset has changed), but it is a transaction which does not involve any property in the upstream jurisdiction, and which may therefore have no tax consequences in the upstream jurisdiction.

It is undeniable though that in economic terms this type of indirect disposal derives its value from assets situated in the upstream jurisdiction, irrespective that no disposal or transfer takes place in that jurisdiction. Increasingly governments have been seeking to charge such transactions to tax in the asset jurisdiction, many times by imposing the tax on the buyer through withholding taxes imposed on the consideration (as opposed to the seller which may post sale no longer have any presence in the jurisdiction), or even attaching the charge to the target asset itself or to its local holding company.

Because in many cases the relevant domestic legislation does not provide for such change of control tax charges, the tax is many times imposed on the basis of new and sometimes novel construction of existing legislation, or by invoking what many see as extreme forms of tax anti-avoidance principles. Challenging the tax charge in the asset jurisdiction courts is possible, but rarely successful. This has been in part inspired by the support of the OECD, World Bank and a number of other international and non-governmental, as noted above, for the notion that value should be taxed in the jurisdiction where it is created, or in the context of upstream asstes, in the upstream jurisdiction. (Note though, in a non-upstream context, the successful challenge to this type of taxation in the Vodafone litigation in India - which has led the Indian government to introduce retrospective legislation to overturn the court's decision!).

The type of uncodified change of control charges discussed here are difficult to due diligence at the pre transaction phase, and have therefore introduced significant uncertainty to upstream M&A work. Notably more jurisdictions have shown an intention to clarify their position on this type of charge through appropriate legislation, but the process is slow, and the legislation when introduced creates in many cases further complexity and uncertainty. We consider it likely that the topic will continue to feature in the context of upstream M&A work in the short to medium term.

Host government agreements and fiscal stabilisation

Continuing with the theme of tax uncertainty, we have seen significant amount of focus on fiscal stabilisation, to reduce uncertainty as to the operation of the tax system in the asset jurisdiction.

Upstream projects are almost inherently of a size, nature and complexity which lead to post-tax returns that can diverge significantly from pre-tax returns. In such an environment uncertainty as to tax may impact on the economics significantly. By way of example, development and M&A work in the UKCS had almost come to a standstill overnight when tax rates were increased by 10% in 2011. And Shell's withdrawal from a proposed acquisition of Cove back in 2012 was triggered by an unexpected tax charge raised by the Mozambique government.

Fiscal stabilisation through a contractual agreement with the relevant government is a powerful tool in restoring tax certainty to upstream projects. Unlike legislation, which as a constitutional matter can always be repealed or amended, a contractual commitment by government to keep tax at a certain rate, or to refrain from changing the tax regime, is generally enforceable. And where the stabilisation agreement contains an international arbitration clause (or where bilateral investment treaties apply), disputes may be adjudicated by a tribunal outside the jurisdiction, a matter which is seen as providing additional assurance.

Against the background of a changing tax environment (see comments in the previous section), and low oil price which results in more pressure on returns, we are seeing growing interest from oil companies in putting in place, or renegotiating, upstream host government agreements and stabilisation clauses. And we are also seeing governments which have not generally offered stabilisation as part of the contractual package associated with upstream concessions, willing to consider stabilisation in a different light. Contrary to some perception, it is also noticeable that fiscal stabilisation in one form or another is not limited to projects in developing economies only.

Fiscal stabilisation may be achieved on the basis of an agreement which sets out the position by reference to detailed tax rules, and tax rates. More recently, however, we are seeing growing interest towards a stabilisation of the economic impact of tax in general, as opposed to the detailed tax by tax approach. Under this approach, government commits to stabilising the economic impact of taxation. This means that government could, for example, increase the rate of income taxation but at the same reduce the impact of export duties, with the result that the overall tax burden is unchanged (or changed only modestly). It appears that this approach seems more transparent from the perspective of some governments, and is also less demanding in terms of legislative and parliamentary time which may be associated with the detailed, tax by tax approach. Governments may also favour this approach because it lends itself more easily to "two way stabilisation", whereby reduced overall tax burden may give rise to investors making payments to government, by way of compensation.

Low oil price

The low oil price environment of recent years has had a number of tax related consequences.

Firstly, and as already noted, in a low oil price environment the impact of tax on economic returns is more pronounced. This has tended to push down rates, not just as a matter of the overall global trend of decreasing corporate tax rates. By way of example, in the UKCS low oil price has led, in part, to the effective abolition of petroleum revenue tax (by zeroing the rate of the tax), as well as to a headline reduction in the upstream corporate tax rate, from 62% to 50%.

Low oil price has also impacted significantly on MA work, as noted already in a separate article in this publication, and on the way in which the burden of decommissioning liabilities is borne by current and future owners of a field (see our article on M&A trends available on Given the manner in which tax relief for decommissioning is provided in some jurisdictions, the prospect of the low oil price continuing into the future has given rise to tax capacity concerns, or in other words, a buyer of a field may in a low oil price environment end up with more tax relief in respect of decommissioning expenses, than tax paid overall in respect of production and sales. This results in a higher effective tax rates for new investors, and has had an adverse impact on M&A transactions, particularly in aging off shore basins, where decommissioning is both expensive and more imminent. 

By way of example and as also noted in our article on M&A trends (available on, the UK government is taking steps to address this issue through proposed changes in legislation, which will allow the transfer of "tax history" from seller to buyer. But the issue is not unique to the UK, even if the details differ because the design of the upstream tax systems is different between one jurisdiction and another.


Tax authorities around the world are likely to continue to express keen interest in ensuring that the tax system provides government with adequate revenue from oil and gas activities. Coupled with the complexities of the tax system, the special rules which apply to oil and gas taxation, and the low commodity prices of recent years, continued focus on tax as one of the factors which impacts on the stability of the oil and gas industry is likely to be one of the themes in the oil and gas world going forward.