In Summary
The law provides the fiscal regime framework applicable to hydrocarbon operations and aims to:
- regulate the obligation for the tax on the royalty, the profit tax for the hydrocarbon operations, as well as their administration;
- manage the extent to which a hydrocarbon agreement may affect the obligation to impose tax, as well as applicable local and national taxes.
The object of this law are the following entities:
- Legal persons performing authorized hydrocarbon operations;
- Legal persons that perform hydrocarbon operations on land (onshore);
- The above entities that perform directly or indirectly hydrocarbon operations (referred to as "subcontractors"), and meet one of the following criteria:
- the subcontractor performing hydrocarbon operations is considered a "related party" to the contractor according to the definition of the law “On Income Tax”;
- the subcontractor is an operator in relation to hydrocarbon operations and performs activities which are essential for hydrocarbon operations, where the level of activities invoiced by the subcontractor is at least 25% of the total expenses for hydrocarbon operations;
- the main purpose of the agreement concluded with the subcontract is to avoid the application of the tax regime under this law and to benefit from the preferential tax rate under the law “On Income Tax”.
Royalty
- The holder of a hydrocarbon right shall pay a 10% royalty on the market value of the extracted hydrocarbon (petroleum and oil), generally determined as the price at which oil or gas is sold at delivery point;
- In case of related party transactions (i.e. petroleum sold to related parties), the market value shall be determined as per the transfer pricing rules. Hydrocarbon supply contracts with a duration exceeding one year, might be determined through an advance pricing agreement;
- It is to be noted that the royalty shall not apply on the hydrocarbons used for testing, analysis, and examination (unless sold), as well as hydrocarbons burned or released in connection with hydrocarbon operations or used in the same hydrocarbon operation from which they are extracted.
Local Taxes
The law explicitly provides that taxpayers subject to this law are expected to obtain relief for local taxes if that is foreseen in the Production Sharing Contract. This clarification will help to resolve some disputes raised from tax authorities in the past, as the linkage between the local tax law and the PSCs was previously missing (i.e. no local tax law previously foresaw such reliefs, but rather the PSCs).
Profit Tax
The law explicitly defines taxable income, deductible expenses and non-deductible expenses for the purpose of calculating the taxable profit from hydrocarbon operations. The taxable profit of certain hydrocarbon operations is calculated by deducting from the taxable income, the allowable expenses and the losses carried forward, with the condition that the total allowable expenses do not exceed 85% of the taxable income.
- Taxable profits realized from non-petroleum operations will be taxed at normal standard rates applicable under the law “On Income Tax”;
- Taxable profits realized from separate petroleum operations, excluding losses, will be taxed at a 50% rate.
Transfer of Hydrocarbon Rights
- Based on the law, hydrocarbon rights are considered as part of non-hydrocarbon operations.
- The costs for obtaining, maintaining, and improving such rights are considered as non-deductible expenses on hydrocarbon operations, but are capitalized as immovable property and amortized at 5% rate on non-hydrocarbon operations.
- The transfer of the hydrocarbon right, fully or partially, from the entity holding it (the transferor) to the transferee, has tax consequences. From the transfer of the right, the transferor may realize a capital gain on its non-hydrocarbon operations, which is expected to be taxed as ordinary income under Law no. 8438 “On Income Tax”.
- Additionally, the corresponding income, deductible expenses and permitted losses from hydrocarbon operations pertaining to such right, are expected to be transferred to the transferee, who will be liable to tax on the respective taxable profit.
Administration and Impact
The law clarifies the applicable laws for tax administration purposes as well as the extent of its impact. In these regards, this law and its provisions shall be considered as the relevant legal framework for tax purposes, as soon as it enters into force, regardless of the provisions of any PSC signed following such period. For PSCs signed prior to this moment, the fiscal treatment will be done in accordance with the PSC and the respective income law of the time. This is due to the fiscal stability clause provided in the previous PSCs, which in case of unfavorable fiscal changes for the holder of the hydrocarbon right, restricts the applicability of such changes.
Under the provision of the law “Fiscal Regime for the Hydrocarbon Sector” companies in Albania performing hydrocarbon operations are required to calculate their taxable profits related to a certain hydrocarbon operation in accordance with the IFRS.
PwC has a proven track record in helping companies successfully complete the transition to IFRS and publishes industry specific guidance, Financial Reporting in the Oil and Gas Industry, with a new edition published in 2016.
Transactions between a separate hydrocarbon operation and other hydrocarbon operation and/or non-hydrocarbon operations of the same party will be treated as controlled transactions subject to the transfer pricing rules.
At PwC, we have a strong network of dedicated transfer pricing specialists with advanced training in technology, economics, accounting, law and project management, who are ready to work with you. Our industry and tax authority experience and unique capabilities enable us to develop innovative approaches for energy industry companies.
For each certain hydrocarbon operation, the entity must determine the income attributable to that hydrocarbon operation during the tax period, deductible and non-deductible expenses of that operation during the tax period and losses for that operation brought forward from previous tax periods. On the other hand, the entity shall be compliant with the law “On Income Tax” for other non-hydrocarbon operations when calculating the taxable profit.
Given the complex nature of these requirements, our approach to corporate income tax compliance helps companies seeking better tax management across several different transactions. We can support you both locally and globally, wherever you require tax advice. Our energy tax services focus on helping our clients understand local tax regimes, and develop tax strategies for all of the various taxes that come into play, including corporate income tax, personal income tax, indirect taxes (including value added tax), royalties, excise taxes, etc.
The law and its provisions shall be considered as the relevant legal framework for tax purposes, as soon as it enters into force. For agreements signed prior to this moment, the fiscal treatment will be done in accordance with the respective income law of the time.
This is particularly relevant when a company determines the proper accounting and tax treatment differences in taxes under both frameworks. We have specialized tax compliance staff and skilled local territory tax teams providing quality technical support.
