Amendment of Offshore Act 256/2018: progressive taxation of the supplementary revenues from Black Sea gas and sale on centralised markets.

The explanatory memorandum: Explanatory memorandum — The Solidarity Act

What the draft provides

Amendment of the Offshore Act 256/2018: restoration of the state’s fiscal instruments over Black Sea hydrocarbons, removal of the fiscal-stability clause frozen in favour of the concession holders, and royalties aligned with European levels.

Below, the full text of the draft, translated in its entirety. The Romanian text remains the authoritative one — the language in which the draft was drawn up, submitted and published.

The justification of this draft is to be found in the explanatory memorandum of the parent act — see here. The Facebook notes on this draft (section “The sources of the idea of the Third Republic”): no. 2; no. 3; no. 22; no. 119; no. 153; no. 223; no. 226; no. 228; among others.

LEGISLATIVE DRAFT AMENDING

THE “OFFSHORE ACT” No. 256 of 12 November 2018

on certain measures necessary for the implementation of petroleum operations by holders of petroleum agreements relating to offshore petroleum blocks

Article 1 is amended and supplemented and shall read as follows: → the reasons

“(1) This Act lays down certain measures necessary for the implementation of the petroleum operations of exploration, development and exploitation of petroleum deposits and of abandonment, as well as of the works/well works pertaining to petroleum operations, carried out by holders of petroleum agreements in respect of offshore petroleum blocks, in accordance with the provisions of the petroleum agreements concluded between the holders and the National Agency for Mineral Resources, hereinafter ANRM.

(2) Where a holder is party to a petroleum agreement relating both to petroleum blocks located onshore and to offshore petroleum blocks, or holds both a petroleum agreement or agreements relating to onshore petroleum blocks and one or more relating to offshore petroleum blocks, the provisions of this Act shall apply only to the petroleum operations carried out in respect of the offshore petroleum blocks.”

In Article 2, letters m), n), o), p) and r) are repealed. → the reasons

Article 18 is amended and shall read as follows: → the reasons

“Art. 18. – Holders of petroleum agreements relating to offshore petroleum blocks which are in course of performance on the date of entry into force of this Act shall be subject, throughout the term of those agreements, to the royalty level, the percentage royalty rates, the gross-production thresholds corresponding to those rates and the specific fiscal regime applicable to the exploration, development, exploitation and abandonment activities carried out under the laws in force on the date of entry into force of this Act.”

In Article 19, after paragraph 11 a paragraph (12) is inserted: → the reasons

“(12) The investments taken into account for the deduction from the tax on additional revenues shall not be taken into account in computing the fiscal result of the periods in which corporate income tax is payable, in the sense that no tax reductions or exemptions or cost deductions shall be accepted in respect of them, they being regarded as non-deductible in computing corporate income tax.”

Article 19 is amended and shall read as follows: → the reasons

“Art. 19. – (1) Holders of petroleum agreements relating to offshore petroleum blocks, including their subsidiaries and/or entities belonging to the same economic interest grouping which effectively carry out both extraction activities and activities of selling the natural gas extracted from those blocks, shall be liable to compute, declare and pay the tax on offshore additional revenues.

(2) Additional revenue means the difference between the weighted average price of the natural gas sold from own domestic production from the offshore blocks and the purchase price of natural gas from domestic production for household and non-household customers in 2012, namely 45.71 lei/MWh, multiplied by the volumes of gas sold from domestic production from the offshore blocks.

(3) The tax on offshore additional revenues provided for in paragraph (1) shall be computed by applying one or more computation percentages, as the case may be, to the additional revenues obtained from the sale of the natural gas extracted from the offshore blocks, as determined in accordance with Annex No. 2, from which tax the value of the investments in the upstream segment shall be deducted. The tax on offshore additional revenues shall take into account the reference price established by ANRM for the computation of royalties. Transactions carried out below the reference price shall be taxed at the reference price. The tax computation percentages shall be calculated on the basis of the natural gas selling prices applied by the holders of petroleum agreements relating to offshore petroleum blocks according to the price grid below, adjusted annually as from 1 January 2019 by the annual consumer price index, as follows:

50% of the additional revenue for prices up to and including 85 lei/MWh;

b) 15% of the additional revenues obtained from the application of prices higher than 85 lei/MWh and lower than or equal to 100 lei/MWh;

c) 30% of the additional revenues obtained from the application of prices higher than 100 lei/MWh and lower than or equal to 115 lei/MWh;

d) 35% of the additional revenues obtained from the application of prices higher than 115 lei/MWh and lower than or equal to 130 lei/MWh;

e) 40% of the additional revenues obtained from the application of prices higher than 130 lei/MWh and lower than or equal to 145 lei/MWh;

f) 50% of the additional revenues obtained from the application of prices higher than 145 lei/MWh and lower than or equal to 160 lei/MWh;

g) 55% of the additional revenues obtained from the application of prices higher than 160 lei/MWh and lower than or equal to 175 lei/MWh;

h) 60% of the additional revenues obtained from the application of prices higher than 175 lei/MWh and lower than or equal to 190 lei/MWh;

1. 70% of the additional revenues obtained from the application of prices higher than 190 lei/MWh.

(4) The maximum limit of the deduction of investments in the upstream segment may not exceed 30% of the total tax on offshore additional revenues.

(5) The economic operators referred to in paragraph (1) shall compute, declare and pay the offshore additional tax monthly, by the 25th day of the month following that for which the tax is due.

(6) The form and content of the return concerning the tax on offshore additional revenues shall be established by order of the President of the National Agency for Fiscal Administration, within 30 days of the date of entry into force of this Act.

(7) In so far as the application of these provisions requires the issuance of instructions concerning the tax on offshore additional revenues, those instructions shall be issued by joint order of the Minister of Public Finance and the Minister of Energy, with the opinion of ANRM.

(8) The sums owed by the holders of petroleum agreements relating to offshore blocks as tax on additional revenues shall be collected into a special account used for financing the establishment and extension of natural gas distribution networks and of the connections to the national natural gas transmission system, as well as other investments established by Government decision. The allocation of the sums collected shall be made by Government decision. The collection of the tax on additional revenues shall be administered by the National Agency for Fiscal Administration, in accordance with Act No. 207/2015, as subsequently amended and supplemented.

(9) The cumulated value of the investments in the upstream segment, recorded in the accounts in accordance with the legal rules in force, from the entry into force of this Act until the month for which the tax on offshore additional revenues is computed, as well as the value of the investments from the work programmes carried out and approved by ANRM under the petroleum agreements, which were recorded in the accounts before the date of entry into force of this Act, shall be reduced monthly by the value of the investments in the upstream segment deducted from the tax on offshore additional revenues. The deductions shall apply until the cumulated value of the investments in the upstream segment, approved by ANRM and recorded in the accounts in accordance with the laws in force, has been reached.

(10) In the event of the disposal of investments in respect of which the deduction provided for in paragraphs (3) and (4) has been enjoyed, the deduction granted shall be subtracted from the cumulated value of the investments in the upstream segment in proportion to the ratio between the value of the investments transferred and the value of the investments recorded in the upstream segment in the reference period in which it was granted.

(11) The investments taken into account for the deduction from the tax on additional revenues may not be the subject of any other deductions.”

Article 20 is amended and supplemented and shall read as follows: → the reasons

“Art. 20. – By way of derogation from the provisions of Article 177 of the Electricity and Natural Gas Act No. 123/2012, as subsequently amended and supplemented, holders of petroleum agreements relating to offshore petroleum blocks, including their subsidiaries and/or entities belonging to the same economic interest grouping, shall, as from the date of entry into force of this Act, in so far as they contract the sale of natural gas on the wholesale market in a calendar year, be under an obligation to conclude, in the calendar year in which they deliver the natural gas, contracts on the centralised markets, transparently, publicly and without discrimination, in accordance with the rules issued by the National Energy Regulatory Authority, hereinafter ANRE, for the sale of a minimum quantity of natural gas which may not be lower than that represented by a percentage of 90% of the quantity of natural gas from own production contracted for delivery in that calendar year, in the capacity of seller. The quantity of natural gas contracted on the centralised markets, transparently, publicly and without discrimination, shall be sold under a procedure approved by ANRE, so that purchasers of natural gas cannot be made subject to the condition of purchasing a minimum quantity imposed by the seller.”

Article 21 is amended and supplemented and shall read as follows: → the reasons

“Art. 21. – The percentage provided for in Article 20 shall remain unchanged throughout the term of the agreements.”

In Article 25, after letter m) a letter n) is added, reading as follows: → the reasons

“n) failure by the holders of petroleum agreements to comply with the provisions of Articles 19 and 20 shall be sanctioned by a fine corresponding to 30% of the turnover of the year in which the breach was established.

Article 33 is amended and shall read as follows: → the reasons

“Art. 33. – As from the date of entry into force of this Act, offshore petroleum agreements shall not be subject to the provisions of Government Ordinance No. 7/2013 establishing the tax on the additional revenues obtained as a result of the deregulation of prices in the natural gas sector, approved with amendments by Act No. 73/2018, as subsequently amended and supplemented, nor to those of Government Ordinance No. 6/2013 establishing special measures for the taxation of the exploitation of natural resources other than natural gas, approved with amendments and additions by Act No. 261/2013, as subsequently amended.”

Article 34 is amended and shall read as follows: → the reasons

“Art. 34. – With a view to the application of the provisions of Articles 18, 19 and 21, ANRM and the holders of petroleum agreements may conclude addenda to the petroleum agreements relating to offshore petroleum blocks under concession on the date of entry into force of this Act.”

Annex No. 1

Formula for computing the tax on offshore additional revenues

Depending on the level of the weighted average price of the natural gas sold from own domestic production from the offshore blocks, hereinafter PMPC, the following computation formulas shall apply:

1. if PMPC is lower than or equal to 85 lei/MWh, adjusted by the CPI where applicable, the total tax on offshore additional revenues due shall be computed by the formula:

IVST = IVSC - VID

IVSC = ISO_85 = 0.50 × VS_85 VS_85 = (PMPC – PRC) × VGC VID = min (VI, 0.3 × IVSC)

where:

IVST – the total tax on offshore additional revenues due; IVSC – the total tax on offshore additional revenues computed;

ISO_85 – the tax on offshore additional revenues due, computed at a PMPC lower than or equal to 85 lei/MWh;

VS_85 – the additional revenue from the offshore blocks, computed at a PMPC lower than or equal to 85 lei/MWh;

PMPC – the weighted average price of the natural gas sold from own domestic production from the offshore blocks, or the reference price, as the case may be;

PRC – the purchase price of natural gas from domestic production for household and non-household customers in 2012, namely 45.71 lei/MWh, adjusted annually by the CPI rate as from 1 January 2019;

VGC – the volumes of gas from domestic production from the offshore blocks sold;

CPI – the annual consumer price index of the preceding year published by the National Institute of Statistics of Romania;

VID – the value of the deductible investments in the upstream segment;

VI – the cumulated value of the investments in the upstream segment as provided for in Article 19(9), which is reduced monthly by the VID deducted;

2. Where PMPC is between 85 lei/MWh and 100 lei/MWh inclusive, adjusted by the CPI where applicable, the total tax on offshore additional revenues due shall be computed as follows:

IVST = IVSC - VID

IVSC = 0.5 × (85 - PRC) × VGC + ISO ISO = CI × VS

VS = (PMPC - PB) × VGC

VID = min (VI, 0.5 × IVSC) where:

ISO – the offshore additional tax computed on the additional revenues from the sale of natural gas following the application of PMPC prices between 85 lei/MWh and 100 lei/MWh inclusive, adjusted by the CPI where applicable;

CI – the rate of taxation of the additional revenues from the sale of natural gas [15% – in accordance with Article 19(3)(b)], applicable following the application of PMPC prices between 85 lei/MWh and 100 lei/MWh inclusive;

PB – the minimum base price of the corresponding computation bracket; for PMPC prices between 85 lei/MWh and 100 lei/MWh inclusive it is 85 lei/MWh;

VS – the additional revenue from the offshore blocks, computed from the sale of natural gas at PMPC prices between 85 lei/MWh and 100 lei/MWh inclusive;

3. Where PMPC exceeds 100 lei/MWh, adjusted by the CPI where applicable, the total tax on offshore additional revenues due shall be computed as follows:

IVST = IVSC - VID

IVSC = 0.5 × (85 - PRC) × VGC + ISO VID = min (VI, 0.5 × IVSC)

ISO – the sum of the offshore additional taxes computed for each price bracket in accordance with Article 19(3)(b) – (i), namely:

ISO = ISO1 + ISO2 + ... + ISOi

ISOi – computed in accordance with the formula in point 2, where the corresponding terms have the following meanings:

CI – the rate of taxation of the additional revenues from the sale of natural gas, for each corresponding price bracket in accordance with Article 19(3)(b) – (i);

PB – the minimum base price of the corresponding computation bracket, adjusted annually as from 1 January 2019 by the CPI;

VS – the additional revenue from the offshore blocks, computed for each corresponding price bracket.

Example of computation: for the sale of a volume VGC of 1 MWh at a selling price of 110 lei/MWh, the total tax on offshore additional revenues due is computed by applying the above formulas as follows:

IVST = IVSC – VID = 17.037 - 5.1111 = 11.9259 lei

IVSC = 0.5 × (85 - PRC) × VGC + ISO = 0.5 × (85 - 45.71) × 1 + 5.25 = 17.037 lei

ISO = CI1 × VS1 + CI2 × VS2 = 0.15 × 15 + 0.5 × 10 = 5.25 lei

VID = 0.5 × IVSC = 0.3 × 17.037 = 5.1111 lei where:

CI1 = 0.15 – the rate of taxation (15%) of the offshore additional revenues from the sale of natural gas applicable following the application of prices between 85 lei/MWh and 100 lei/MWh inclusive, in accordance with Article 19(3)(b);

CI2 = 0.3 – the rate of taxation (30%) of the offshore additional revenues from the sale of natural gas applicable following the application of prices between 100 lei/MWh and 115 lei/MWh inclusive, in accordance with Article 19(3)(c);

VS1 = (100 - 85) × 1 = 15 lei — the additional revenue from the offshore blocks, computed as the difference between 100 lei/MWh and 85 lei/MWh;

VS2 = (110 - 100) × 1 = 10 lei — the additional revenue from the offshore blocks, computed as the difference between PMPC (110 lei/MWh in the example given) and 100 lei/MWh (the minimum base price of the bracket);”