myanmar’s model oil and gas psc - vdb loi · myanmar’s model oil and gas psc ... psc provisions...
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At a Glance
Transactions Investment M&AResourcesReal estate Energy
Half Law, Half TaxWe sell results, not time.
Our Commitment
More than 60Professional Advisers
Laos
Cambodia
Singapore
Vietnam
Indonesia
6 countriesMyanmar
Taxation StructuringInternationalComplianceCustoms Controversy
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Key People on the Ground in MyanmarU Myo Nyunt is an advocate to the Supreme Courtof Myanmar and one of Myanmar’s mostdistinguished senior lawyers. He is the formerDirector of the Supreme Court and AppellateJudge, and a noted author on Myanmar law. He isa member of the Bar Council, and a member of theboard of editors of the Myanmar Law Review.
Marla is an American of Burmese descent with adegree in law from the College of Law of Englandand Wales and a bachelor’s degree from FordhamUniversity in New York. She advises on investmentand M&A transactions. She has seven years ofexperience with the United Nations and law firmsin New York. Marla lives in Yangon.
Cynthia qualified as a Chartered Accountant withErnst & Young in London. She is a member of theInstitute of Chartered Accountants of Scotland.She also holds a Master’s in engineering withbusiness finance (University College London, UK).She advises on investment projects and taxoptimization for mining, oil & gas, energy and realestate. Cynthia lives full‐time in Yangon.
Jean LoiManaging Partner
Jean Loi is widely recognized as one of the region’smost experienced professional advisers with a CPAbackground. She was formerly a partner withPricewaterhouseCoopers in Southeast Asia. As themanaging partner of VDB Loi, Jean has extensiveexperience with licensing energy, power, propertyand consumer product projects. Her Myanmar taxexperience is unsurpassed. She lives in Yangon.
Edwin VanderbruggenPartner, Yangon
Edwin was formerly with Loyens & Loeff and apartner at DFDL. He has 21 years of experience asa lawyer, academic and government advisor,including five years of experience on Myanmar taxand investment issues. Edwin has advised oilcompanies, distributors, property funds, andprivate equity funds on making investments inMyanmar. He lives full‐time in Yangon.
May May KyiDirector, Yangon
May directs our licensing team, focusing primarilyon investment permits, operating licenses andimport/export licensing. In addition, her practiceareas include customs duties, customs valuation,compliance and company establishment. She holdsa bachelor’s degree in Commerce from theInstitute of Economics, University of Yangon.
Paul Nikitopoulos Senior Counsel, Yangon
Paul is a US attorney with 15 years of experience,and was formerly with Clifford Chance andO’Melveny & Myers. He holds an MBA fromCambridge University and a J.D. from DukeUniversity. He has extensive experience inproviding integrated solutions for M&A and privateequity transactions. He lives full time in Yangon.
Kyi Naing is a Myanmar‐qualified lawyer withseven years of experience, most recently withDFDL in Myanmar. Experienced in cross‐borderlegal issues, he has assisted international clientswith their investment projects in Myanmar, andadvised on a wide range of corporate andcommercial issues.
U Myo NyuntSenior Counsel, Yangon
Marla BuAssociate, Yangon
Cynthia HermanTax Manager, Yangon
Kyi NaingAssociate, Yangon
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Our Offices in Myanmar
YangonLevel 8 Centrepoint Towers
No. 65 Sule Pagoda Rd & Merchant StKyauktada Township
Nay Pyi TawNo. 2, Thittsar (2) Street,
Pobathiri Township
Contact: edwin@vdb‐loi.comTel. No.: +95 942 112 9769
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Contents
Upcoming Tender Update
Impact of the New Foreign Investment Law
Fiscal Regime Misgivings
Accounting Obligations
Domestic Market Obligation
Farm‐in’s in Myanmar
Financing: Local Issues
Suitable International Structure
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Selection of Shortlisted Bidders
Select Contractor and Draft PSC
Access to Data
Individual Negotiations
Upcoming Tender Update Onshore and offshore
Expression of Interest (EoI)
Supporting Documentation
What information is in the Tender Format?
Government Evaluates EoI’s
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EXISTING PSCs
Tax holiday ‐ 3 years or 5 years? Customs duty exemption ‐ 3 years only or also during approved expansion?
NEW PSCs
Tax holiday ‐ 5 years from productionCustoms duty exemption ‐ 3 years plus any approved expansion
Art. 45 FIL 2012 Persons that have invested under the 1988 FIL are deemed
to have invested under this [new] law
Art. 52 FIL 2012Persons with existing investment contracts will continue to receive the benefits as provided under those contracts as
prescribed
Impact of the New Foreign Investment LawTax holiday of existing v new PSCs?
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Impact of the New Foreign Investment LawComparison
1988 ForeignInvestment Law
2012 Foreign Investment Law
Foreign Ownership 100% foreign ownership allowed 100% foreign ownership allowed
Minimum Capital $500K for manufacturing, $300K for services To be specified by regulations
Tax Benefits 3 year tax holiday 5 years tax holiday
Discretionary Tax Benefits
Customs duty free importation of machinery and equipment during construction period plus raw materials for 3 years
Same
Exemption from income tax profit that is reinvested within one year Same
Right to pay income tax at Myanmar citizen rates on behalf of foreign employees and to deduct the same from income of enterprise
Same
Deduct R&D costs and accelerate depreciation Same
Loss carry forward for 3 years SameExemption of customs duties for machinery and equipment if the investment amount is increased and the original business is expandedExemption from commercial tax on goods produced for export
Labor Restrictions None25% of workforce must be Myanmar citizens in first 2 years, 50% in second two years, and 75% in third two years
Land Lease 30 year land lease (Government only) 50 years land lease with two consecutive 10 year renewals (Government of private)
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PSC or Side‐Letter
“The applicable rate of Myanmar Income Tax is 30%”
Consideration by Government
EPD, MOGE and IRD will weigh in
Reference to FIL?
MIC Approval
Stabilization Clause
Can enter into effect if rate is increased, not if
reduced
Fiscal Regime of a PSC30% or 25% Income Tax?
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PSC Time vs Fiscal Regime
Exploration
3 Year
Development and Production
1 Year
1 Year
Signature BonusData Fee
Work Commitment Withholding Tax obligations
Training Fee
Study
6 Months
20 Year (from completion of development)
Production BonusRoyalty
MOGE’s Petroleum ShareIncome Taxes
Withholding Tax obligationsTraining Fee and R&D Fund
Drill 1 well, evaluation
Remote sensing, modeling
Drill 2 wells
Drill 1 well
Development Plan + bonus
Gas Sale Agreement
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Fiscal Regime of a PSC
Profit Petroleum Income Taxation
Available Petroleum(produced not used in operations)
MOGE
Royalty (in cash or in kind)
Cost Petroleum (Recoverable)capped at 50% or 60% of Available
Petroleum per quarter
Profit Petroleum Shared between Company and
Government (40‐60%)
IRD
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Fiscal RegimeOther payments
MOGE
Shareholders
Contractor Operator
PSCPSC
AREA
Signature Bonus
Production Bonus
Training Fee
R&D Fund
Data Fee
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Fiscal RegimeTop 5 common misunderstandings
1.Loss carry forward (!)
2.Miscalculation of royalties in the Income Taxfinancial model (!)
3.Capital gains implications of farm‐in or carry
4.Misunderstanding of tax complianceobligations of non‐operator Contractors
5.Cost recovery and Income Tax calculation incase of multiple PSCs
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Accounting RegimeCost Recovery
Item Issue
Operating costs When are operating costs deducted?
Capital expenditure What is the rate of amortization?
Capital expenditure for certainequipment
What if the Contractor uses equipment in multiple areas?
Employee costsAre benefits and taxes also recoverable?Do employees need to work in Myanmar
to trigger cost recovery?
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Accounting RegimeCost Recovery
Item Issue
Training fees paid to theGovernment
Is this cost recoverable?
Materials supplied by theContractor
Cost recoverable at FMV or cost price?
Legal fees Which portion is cost recoverable?
General administrative andexecutive expenses
Are general expenses allocated from the head office cost recoverable, or tax
deductible?
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Domestic Market ObligationPSC provisions
Specified in Section 16 of the PSC
•How much is the DMO?
• Crude Oil (proportion or 20%)
• Natural Gas (proportion or 25%)
•Selling price equals 90% of FMV
•Price applicable for Government purchases inexcess of the DMO
•Currency and remittance of purchase price?
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Farm‐ins in Myanmar Myanmar Capital Gains Tax
Tax on Capital GainsResidents 10%
Non‐residents 40%
Oil & gas sector
40% for gains up to US$100M
45% for gains between US$100M and US$150M
50% for gains above US$150M
Income Tax LawCapital Assets
includeAssets of enterprise
Land
Shares
Compliance: tax return is due within 1 month following execution of the transfer or the date of delivery of the asset, whichever is earlier.
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Farm‐in in MyanmarCapital gain consequences?
FarmorSpent costs:
1,000$
500$ Cash FarmineeObtains 50% Interest in the
PSC50% Interest
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Farm‐in in MyanmarCapital gain consequences?
FarmorSpent costs:
1,000$
Commitment to pay 500$ forward costs Farminee
Obtains 50% Interest in the
PSC50% Interest
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Farm‐in in MyanmarCapital gain consequences?
FarmorSpent costs:
1,000$
1000$ Cash FarmineeObtains 50% Interest in the
PSC50% Interest
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Farm‐in in MyanmarCapital gain consequences?
FarmorSpent costs:
1,000$
30% in other PSC FarmineeObtains 50% Interest in the Farmor’s PSC50% Interest
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Myanmar Tax RatesNon‐residents
Gains 40%Oil/gas 40‐45‐50%
DTA with Vietnam
Gains on shares: Myanmar may tax
DTA with MalaysiaGains on shares:
Myanmar may tax if participation is at least
35%
DTA with UK
No article on capital gains
DTA with India
Gains on shares: Myanmar may tax
Tax Implications of Selling and Oil & Gas Interest DTA Reductions?
DTAs in force at 1 August 2012. Various exceptions and conditions apply
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Myanmar Tax RatesNon‐residents
Gains 40%Oil/gas 40‐45‐50%
DTA with Thailand
Gains on shares: Myanmar may tax if participation is at
least 35%
DTA with KoreaGains on shares:
Myanmar may tax if participation is at least
35%
DTA with Singapore
Gains on shares: Myanmar may tax if
participation is at least 35% and the alienated shares amount to at least 20% of the
holding
Rate reduced to 10%
Tax Implications of Selling and Oil & Gas Interest DTA Reductions?
DTAs in force at 1 August 2012. Various exceptions and conditions apply
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Financing Petroleum Operations Cost recovery and income tax deduction
ExplorationPhase
DevelopmentPhase
ProductionPhase
Recoverable?
Income Tax?
Recoverable?
Income Tax?
Recoverable?
Income Tax?
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Will you be financing a branch or a subsidiary?
Withholding Tax on Interest
No DTA (US, Caymans, France, China, Russia, Australia, etc)
15%
UK No rule
India 10%
Korea 10%
Malaysia 10%
Thailand 10%
Vietnam 10%
Singapore 10% or 8%
Financing Petroleum Operations Withholding tax
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Parent Company
Project CoSingapore
SubsidiaryMyanmar
No dividend withholding tax on payments to non‐resident
shareholders
No Income Tax on dividends received from Project Co
(conditions)No Capital Gains Tax
0‐10% Myanmar tax on capital gains instead of 40% or more
(conditions)
No dividend withholding tax under Myanmar tax law
Suitable International Structure? DTA Reductions
Financing10%WHT instead of
15%
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Parent Company
Project CoSingapore
No dividend withholding tax on payments to non‐resident
shareholders
Credit (and Tax Sparing) for income received from Branch
(conditions)No Capital Gains Tax
10% Myanmar tax on capital gains instead of 40% or more
(conditions)
No branch remittance withholding tax under Myanmar tax law
Suitable International Structure? DTA Reductions
Financing15%‐10%WHT
Branch Myanmar