Tax debate on oil and gas needs to await delivery

We are still waiting for new oil or gas finds to begin flowing ashore, but the debate on how they should be taxed continues unabated.

Under the current regime, which the Government is reviewing, profits on oil or gas production in the Republic, either onshore or offshore, are taxed at 25 per cent after costs, including those incurred during exploration. There is also a petroleum rent resource tax of up to 15 per cent, effectively bringing it up to 40 per cent for the most profitable fields.

This week, Alan McCrae, head of energy tax at PricewaterhouseCoopers UK, suggested that the Government consider getting rid of capital gains tax where producing oil or gas assets are sold. His argument is that this would get rid of a tax barrier for anyone who wants to exit, making them more transferrable and helping to make the regime here more attractive.

McCrae, who addressed a seminar at PwC in Dublin this week, argued that, if you have already taxed the profits on production, you are effectively taxing them a second time if somebody sells up. The experience in the UK, which he says has more or less done away with capital gains tax, was that businesses often sat on assets in which they were not willing to invest because the prospect of a large tax bill put them off selling them.

A review of the regime, promised last month by the Minister for Communications, Energy and Natural Resources Pat Rabbitte, is looking at ways of balancing the State’s interest in getting the most revenue possible from oil and gas while keeping the Republic attractive enough so that it can compete for investment.

There is pressure in some quarters to increase the tax, which is far below the levels imposed in the UK – where it can run to between 62 per cent and 81 per cent in some cases, or Norway, which charges 78 per cent.

However, any argument about tax – whether from the perspective of McCrea, the industry or those who are campaigning for high rates – remains academic until such time as we have oil and gas production.

The odds are more than 33/1 against a commercial find in Irish waters. The only real prospect in sight is Shell’s Corrib gas field. And the €3 billion cost of developing that, partly a result of the controversy that dogged the project, means the State may not recover a huge amount of corporate tax from the field.