Mozambique considers LNG tax law to beat low oil price

Mozambique may introduce an LNG-specific tax regime for its giant Rovuma Basin projects if new petroleum tax regulations prove too tough for investors in today’s $30 per barrel oil environment.

“Amendments to the tax law framework that were made [when oil prices were high] may serve Mozambique less well right now in a period of low prices and greater competition for investment,” Samuel Levy, managing partner at law firm SAL & Caldeira Advogados, told delegates at the Deepwater East & Southern Africa Congress in Maputo on Thursday.

“We might see some LNG-specific tax legislation to try to change the rules a little bit,” he added.

Mozambique passed its latest petroleum operations tax law alongside its updated petroleum law in August 2014. However, the law’s regulations were only made available to the public late on Wednesday, when they were published in the official government bulletin.

The new legislation was written to reflect Mozambique’s new status as a major gas reserve holder and to maximise the benefits to the state from the country’s resources. It aims to do this by guaranteeing a higher take of the profits at a time of booming commodity prices and by encouraging gas flows to the domestic market to develop downstream industry.

For example, the government set the Petroleum Production Tax (PPT) for crude oil at 10% and for gas at 6%, which it can take in cash or in kind. However, there is a 50% reduction on the PPT when oil and gas is sold to the local market.

The new law also introduced ring-fencing rules so companies holding more than one concession cannot offset exploration costs and other expenses between licences.

Capital gains

Another sensitive issue the government wanted to pin down is the payment of capital gains tax (CGT) on asset sales.

CGT is payable at 32% on any transaction, direct or indirect, of an oil or gas asset in Mozambique – regardless of the tax residence of the transferee or whether the transaction occurs inside or outside the country.

“To enforce [this rule], the transferee of the asset is jointly liable with the transferor for the payment of the tax. So obviously if you’re a buyer you’re going to make sure the tax is paid as a contingency to your obligation,” said Levy.

These strict CGT payment rules were likely included in the legislation to avoid a repeat of the 2012 Cove Energy sale, in which Mozambique nearly missed out on millions of dollars in CGT.

Other payment obligations that used to be negotiable within Mozambique’s exploration and production concession contracts, such as the ‘R factor’ and cost recovery ceilings, are now contained within the tax law and have become non-negotiable.

“I can say more generally in terms of tax and negotiation in Mozambique […] that, under Mozambican law, you cannot negotiate any tax break that isn’t already provided in the law,” Levy told delegates.

“Unless parliament has created a tax break, or the availability of a break, the government has no power to give it to you. So don’t waste your time and political capital asking for tax breaks the government cannot give,” he said.

Mozambique will also introduce sector-specific local content regulation. Although Mozambique’s vision for how local content principles should be applied in its nascent oil and gas industry is reflected in the updated petroleum law, these regulations will give more specific guidance for the employment and training of Mozambicans and the use of local goods and services.

However, these new regulations will not apply to Eni and Anadarko’s Rovuma Basin LNG projects, which will operate instead under a separate decree law passed in December 2014. Under the decree law, the operators calculate the number of foreign workers they need and submit this in a workforce plan that needs to be approved by the government for each year.

Additional short-term workers will be permitted, even if they were not included in the original workforce plan, as long as they are only contracted to work for up to 180 days in Mozambique.

While the decree law should give the operators the flexibility to bring in the technical staff they need, there are concerns it may be haphazardly applied.

“Regulations are interpreted one way in Pemba, a different way in Maputo and another way in Tete, and when you work through the system to try to unify the application of the rules, you find that the rules, like the politics, get extremely local,” said Levy.