Royalties and petroleum taxes

Which petroleum taxes are income taxes?

IAS 12 applies to taxes based on taxable profits. A tax computed on revenue less a meaningful deduction for costs, such as a resource rent tax, a special petroleum tax or a profits levy, is an income tax even if it is separate from corporate tax and applies only to oil and gas. A charge computed on volumes produced, on gross revenue, or on revenue above a price threshold without deducting costs is not an income tax. Applying IAS 12 brings current and deferred tax; applying IAS 37 means a liability is recognised only when the obligating event occurs. See IAS 12 income taxes.

Petroleum taxes and royalties: a worked example

A field earns revenue of US$ 200 million. It pays a royalty of 12.5% of revenue, has operating costs of 50 million and depreciation of 40 million. A resource rent tax of 40% applies to profit after royalty and costs, and corporate tax of 30% applies after deducting the resource rent tax.

The effective tax rate on profit before tax is 58%, and including the royalty the government takes 68% of the field's profit before royalty. Both taxes are in the income tax line; the royalty is above profit before tax.

How are royalties presented?

Where the state takes its royalty in barrels, those barrels never belong to the company, so its revenue and production exclude them. Where the royalty is paid in cash, practice varies: some companies present revenue net of royalties, others present revenue gross and the royalty in cost of sales. IFRS 15 does not settle it directly, because the royalty is not collected from customers on the state's behalf. The policy should be applied consistently and disclosed, as it changes reported revenue and margins. Royalties payable to private landowners or previous owners, common in the US, are treated the same way.

How does deferred tax work for special petroleum taxes?

Each income tax is computed separately, with its own tax bases. A resource rent tax often allows uplifted deductions for capital spending, or ring-fences each field, so the temporary differences differ from those for corporate tax. Deferred tax is measured at the rate of each tax, and where one tax is deductible for another, the combined effective rate is used. A temporary tax with an end date, such as the UK Energy Profits Levy, which was raised to 38% from November 2024 and extended to March 2030, gives deferred tax only for temporary differences expected to reverse before it ends. See temporary differences.

What about windfall levies on revenue?

A levy computed on revenue or on prices above a threshold, without deducting costs, is not an income tax. It is a levy under IFRIC 21: the liability is recognised when the activity that triggers payment occurs, as set out in the legislation, for example as revenue above the threshold is earned in the period, or on a single date if the law says so. It is presented as an operating expense, not as tax.

What about taxes under production sharing contracts?

Where the state pays the contractor's income tax out of its share of profit oil, the contractor assesses whether the tax is its own income tax. If it is, the contractor grosses up revenue and income tax expense; if not, it simply has a smaller entitlement. See production sharing contracts.

How does US GAAP compare?

ASC 740 also applies only to taxes based on income, so the analysis of which taxes are income taxes is similar. US royalties to landowners are usually excluded from revenue, as the royalty owner's share of production. See IAS 12 vs ASC 740 and oil and gas accounting.

This guide is general information. It is not tax or legal advice for your situation.