Natural Resource Taxation in the Asia-Pacific Region. A forum on

PETROLEUM FISCAL REGIME

– MALAYSIA’S EXPERIENCE

SYAKIRAH BT MD. NOR

MINISTRY OF FINANCE MALAYSIA

12 AUGUST 2015

AN OVERVIEW OF PETROLEUM ACTIVITIES IN MALAYSIA

 First commercial exploitation of crude oil began in MIRI, Sarawak in

the year 1910 by Shell. Oil Production of this well lasted till 1972.

 The offshore petroleum activities in Peninsula Malaysia began in

1954 by Exxon. Commercial exploitation only began in 1964.

 Malaysia began to export crude oil from Peninsula Malaysia in the

year 1974.

 The main exploration and production activities took place in the

broad continental shelf offshore of the states of Sabah and Sarawak

in East Malaysia, and offshore Terengganu.

Petroleum Operations in Malaysia:

 Concession System - The State Authority awarded

to companies with expertise such as Shell and

Esso.

 Production Sharing Contract (PSC) - exploration,

development and production of crude oil and

natural gas activities are undertaken and managed

through Production Sharing Contracts (PSC) with

PETRONAS.

AN OVERVIEW OF PETROLEUM ACTIVITIES IN MALAYSIA

 Malaysian Government enacted the Petroleum

Development Act in 1974 (PDA), and established its

national oil company, PETRONAS.

 PETRONAS has exclusive ownership right to the oil

and gas resources in Malaysia, and makes it the main

regulatory body for upstream oil and gas activities.

 Upstream activities, which are exploration,

development and production of resources, are carried

out through the production sharing contract (PSC).

AN OVERVIEW OF PETROLEUM ACTIVITIES IN

MALAYSIA

 ThepromulgationofthePDAin1974istoensure

that the nation’s petroleum resources could be

developed in line with the needs and aspirations of

the nation.

 The Act vests the entire ownership and control of

petroleum resources in PETRONAS.

 The upstream activities are subjected under the

"Production Sharing Contract” (PSC) agreement

with PETRONAS.

 PERTONAS is actively engaged in the exploration,

development and production of crude oil and

natural gas both at home and abroad.

 At the same time managing the upstream activities

through Production Sharing Contract (PSC) -

1 April 1975

PETROLEUM OPERATIONS IN MALAYSIA IS A JOINT

VENTURE ACTIVITY BETWEEN PETRONAS AND

CONTRACTORS

A partnership

PETRONAS and contractor

PETRONAS

Contractor -

Sole proprietor/ partnership

PSC

Petroleum

operation

Crude oil / Gas

Oil and gas

entitlement

Oil and gas

entitlement

PS Contractors

Profit

PETRONAS

Cost Oil

GOVERNMENT

Government take

• Royalty

• Taxes From

PETRONAS and PSC

• Dividend from

PETRONAS

PRODUCTION SHARING CONTRACTOR ENTITLEMENT

PSC

• Petronas Carigali

Sdn. Bhd.

• International Oil

Company

REVENUE CONTRIBUTION ON PETROLEUM

66,344.00

70,114.00

66,556.34

64,938.64

62,409.00

36%

34%

31%

29%

27%

10%

15%

20%

25%

30%

35%

40%

58,000.00

60,000.00

62,000.00

64,000.00

66,000.00

68,000.00

70,000.00

72,000.00

2011 2012 2013 2014r 2015e

Petroleum Related Revenue Contribution of petroleum related revenue

PETROLEUM INDUSTRIES MAIN SECTOR

PETROLEUM

(INCOME TAX) ACT

1967

INCOME TAX ACT

1967

Point of sale or Export

Upstream

Downstream

Petroleum

Agreement

Production Sharing Contract

( PSC )

( PITA )

(Petroleum Industry )

 Any person carrying on petroleum operation under a petroleum

agreement with PETRONAS or Malaysia Thailand Joint Authority

(MTJA)

 Different “chargeable person” for each petroleum agreement.

“CHARGEABLE PERSON” UNDER PETROLEUM

INCOME TAX (PITA)

One Person

PSC

One

Chargeable

Person (CP)

Company, partnership,

Corporation Sole

Ring-Fencing concept

where a person other than PETRONAS or MTJA carries on

petroleum operations under more than one petroleum agreement,

he shall be regarded as a separate chargeable person in respect

of each of those agreements

PETROLEUM INCOME TAX RATE IN

MALAYSIA

Assessment Year 1976 – 1993

Assessment Year 1994 – 1997

Assessment Year 1998 & current

45%

40%

38%

Joint Development Area (JDA)-

Malaysia/Thailand

First 8 years of petroleum production

Next 7 years of petroleum production

Subsequent years

10%

20%

PETROLEUM INCOME TAX COMPUTATION

ƒ Sale of crude oil and gas

ƒ Crude oil/gas delivered to refinery

ƒ Miscellaneous receipts

Total Income

(-)

Allowable deductions

Outgoings and expenses wholly and exclusively incurred during that period

in the production of the gross income

Interest on loans

Specific expenses

Bad debts written off

Contributions to approved fund (limited to 19%)

Intangible drilling expenses (on exploration, appraisal and development wells)

Qualifying Exploration Expenditure ( Schedule 1)

Royalty payments under Petroleum Development Act

Equipment for disabled person

Expenditure incurred on services, public amenities and contributions to a charity or

community project approved by the Minister

Maintenance of a child care centre

Managing a musical or cultural group

Sponsoring any arts and cultural activity

Scholarship provision

Expenditure of obtaining certification for recognized quality systems and standard

Provision of practical training

 Deductions on expenditure determined by Minister of Finance

[ Research Cess ]

[ Abandonement Cess]

Double Deductions

[ Insurance premium for exporters]

x x

Adjusted Income

Adjusted Income c/f

(+)

Balancing Allowance Schedule 2

(-)

Capital Allowance Schedule 2

x x

Statutory Income

(-)

Loss b/f

(-)

ƒ Approved donations

ƒ Gift of artifact, manuscript or painting to the Government

ƒ Gift of money or contribution in kind for the provision of facilities in public

places for the benefit of disabled persons

ƒ Gift of money or the cost or value of medical equipment to any healthcare

facility certified by the Ministry of Health not exceeding RM20,000

ƒ Gift of painting to National / State Art Gallery

CHARGEABLE INCOME

Deductions not allowed

Expenses not being money wholly and exclusively laid out or expanded

for the purpose of producing gross income

Capital expenditure

Payment to unapproved scheme

Rent or cost of repairs not used for the purpose of petroleum operations

Depreciation

Interest, royalty, services, technical advice, rent from which tax is

deductible but has not been deducted and paid to IRB.

Any amount chargeable tax payable under PITA or CITA

Rentals of motor vehicle exceeding RM 50,000

A sum of 50% of expenses incurred in entertainment expenses

Leave passage

Non Allowable Expenses

Unabsorbed losses and capital

allowances

Any unabsorbed losses and capital allowances

can be carried forward indefinitely to offset future

business income as long as there is a succeeding

partnership.

Capital Allowances

Qualifying plant expenditure

Initial

Allowance

Annual

Allowance

Plant

Secondary recovery 40% 10%

Any other case 20% 8%

Fixed, offshore platform - 10%

Environmental protection equipment and

facilities

40% 20%

Computer software and hardware 20% 40%

Building

Secondary recovery 20% 3%

Any other case 10% 3%

Qualifying exploration expenditure

(QEE)

Qualifying exploration expenditure (QEE) incurred during the exploration

and development period is accumulated and carried forward until the first

sale of petroleum (i.e., when commercial production begins). QEE is

allowed as a deduction gradually in the form of the initial allowance and

annual allowances against the gross income for each year of

assessment.

 Initial allowance — 10%

 Annual allowance — the greater of:

(a) 15% of residual expenditure; or

(b)

Output from petroleum operations for the basis period x residual expenditure

Output from petroleum operations for the basis period + total potential future

output of the petroleum operations

Other Taxes – Indirect

 Import Duty - all equipment and materials directly used in

the exploration, development and production of crude oil,

including condensate and gas currently benefits from

import duty exemptions.

 Export Duty - Export duty at the rate of 10% applies to

petroleum crude oil exported from Malaysia.

 Goods & Services Tax (GST) – Crude oil produced for

domestic consumption (downstream) are subject to 6%

GST.

INCENTIVE FOR PETROLEUM SECTOR

The following incentives are given to promote upstream

development and boost the commercialization of hard-to-reach

oil fields:

 Reduced tax rate of 25% from 38% for marginal oil fields.

 Accelerated capital allowances of up to five years for marginal

oil fields.

 Waiver of export duty on oil produced from marginal fields.

 Investment allowance (IA) for capital-intensive project.

 QEE transfer between noncontiguous petroleum agreements.

INCENTIVE FOR PETROLEUM SECTOR

These incentives are given because:

 projects undertaken are in line with the Government's policy

to increase petroleum production capacity in the future;

 incentive is expected to provide long-term impact directly and

positively to the country's economic position;

 provision of incentives to promote and enhance the interests

of oil and gas contractor to carry out exploration and

production activities mainly marginal field projects and

activities which require high capital expenditure;

 project carried out in compliance with the criteria established

and approved by PETRONAS as required by the subsidiary

legislation and guidelines

MAIN CURRENT CHALLENGES IN

PETROLEUM INDUSTRY

 Enhance Oil Recovery – new approach and

technical ability.

 Marginal and Matured Field Development –

production is declining.

 Deepwater – technologies, product and

service delivery.

 High Pressure and High Temperature –

technologies and expertise.

OTHER CHALLENGES IN PETROLEUM

INDUSTRY

 Price volatility – the recent decline in oil

prices gave a negative impact to the revenue.

 Production – The demand and supply issue.

 Sustainability of the petroleum industry – Oil

and gas are depleting resources. Issue of

how to sustain, grow and diversified.

 Alternative reserve – e.g shale oil

THANK YOU