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Providing tax certainty in an uncertain oil and gas world

25 February 2020
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As another Budget Speech looms, one can only hope that the Minister of Finance will provide positive news to encourage further investment in the oil and gas industry. In particular, it would be helpful if the Minister could shed light on the proposed review of the tax regime, and the Government’s position on the continued availability of fiscal stability agreements (FSAs).  

Despite the fact that South Africa currently does not have significant proven oil and gas reserves, there is potential in this sector – the Brulpadda find by Total in 2019 indicates a large oil field. However, further exploration wells will have to be drilled before the parties will be able to decide whether to move to production phase.  Exploration activities are notoriously expensive and a company acquiring an oil and gas right in South Africa thus has to commit substantial amounts of capital with the risk that it may not be able to recover its investment.

In recent years, proposed changes to the regulatory regime, especially the 20% State participation, created substantial uncertainty.   

The favourable tax treatment of oil and gas companies South Africa is therefore encouraging.  The tax treatment is dealt with in the Tenth Schedule to the Income Tax Act. It not only provides for oil and gas companies to claim an ‘uplift’ of up to 200% in respect of capital expenditure during exploration, but it also does away with dividends tax (normally 20%) and interest withholding tax (normally 15%) for oil and gas companies.  In addition, it provides for the conclusion of FSAs between oil and gas companies and the Minister of Finance.  A FSA guarantees that the provisions of the Tenth Schedule as at the date on which the FSA was concluded, will continue to apply in respect of that right, as long as the right is held by the oil and gas company.

However, the Minister of Finance has not concluded any FSAs in the last five plus years.  In addition, the Minister of Finance announced in his 2019 Budget Speech that the tax regime applicable to oil and gas would be reviewed.  To date, no details have been released, nor has the oil and gas industry been consulted in respect of any proposed changes.

The fact that the Minister of Finance has not in recent years concluded any new FSAs is very concerning, especially considering the proposed review of the oil and gas tax regime and the proposed 20% State participation.

In light of the technically challenging exploration environment in South Africa and the massive amounts of cash required in order to conduct exploration activities, it is important that oil and gas companies who not only have the financial backing but also the relevant expertise, are encouraged to invest in South Africa. There is thus a strong need for more certainty and the conclusion of FSAs to encourage investors to commit to long-term projects within the oil and gas industry.