Michael Noonan (Limerick City, Fine Gael) | Oireachtas source

This section amends Part 24 of the Taxes (Consolidation) Act 1997 to introduce a new petroleum production tax or PPT. The tax will apply to petroleum profits from discoveries made under petroleum authorisations granted from June 2014. The PPT is as a result of a Government decision of 17 June 2014 to bring into law new fiscal terms for oil and gas exploration and production. This was recommended in the Wood MacKenzie report published at that time by this Government.

The PPT will replace the profit resource rent tax introduced in the Finance Act 2008 for new petroleum authorisations. The overall objective of the new fiscal terms is to strengthen the taxation provisions to provide for an increased financial return to the State from future discoveries while continuing to attract the high-risk exploration investment needed to prove the potential of the Irish offshore. The petroleum production tax will apply on a field-by-field basis. It will be calculated on a field's net income using a rate that operates on a sliding scale between 0% and 40%. The tax rate is determined by reference to the profit ratio of each field, which is calculated using a formula set out in the legislation.

Additionally, the new fiscal terms provide that in each year of production, where the tax payable under the profit ratio formula would be less than 5% of the annual gross revenues, a minimum tax rate of 5% of gross revenues will be charged. The PPT will be payable in addition to the existing 25% corporation tax rate that applies to the profits from oil and gas exploration and production.

The tax will be payable on an annual basis, with scope for more frequent payments in light of developments in the Irish offshore. Petroleum production tax payments will be deductible for the purposes of calculating the amount of corporation tax due. The introduction of the PPT will increase the maximum marginal tax take on a producing field from 40% to 55%.

The Joint Oireachtas Committee on Communications, Natural Resources and Agriculture report was published on 9 May 2012 and contained a total of 11 recommendations, including that there be a significant increase in the tax rate applying to profits from production of oil and gas. The committee's report was debated in Seanad Éireann on 27 June 2012. The debate opened in Dáil Éireann on 4 May 2013 and concluded on 9 July 2013. During the course of the July Dáil debate on the joint committee report, the then Minister for Communications, Energy and Natural Resources indicated his intention to seek further independent expert advice on the fitness for purpose of Ireland's fiscal terms in advance of the launch of the 2015 Atlantic margin licensing round. Wood Mackenzie was engaged to carry out that assignment. In the course of its work, Wood Mackenzie received the joint committee report and met with a number of interested parties, including members of the Joint Oireachtas Committee on Transport and Communications and members of the former Joint Oireachtas Committee on Communications, Natural Resources and Agriculture, which produced the 2012 report. The consultants also met representatives of the oil industry, trade unions and other participants in the debate on fiscal terms. In addition, they conducted a substantial amount of quantitative analysis to establish the impact of current and possible future fiscal terms on a wide range of hypothetical future oil and gas field economics.

The results from the analysis were compared with those obtained under the fiscal terms of a peer group of countries of a similar profile to Ireland in terms of exploration. The petroleum production tax that is being introduced in this Bill is as a result of the analysis and subsequent recommendations set out in the Wood Mackenzie report. The joint committee report was considered by Wood Mackenzie, as I said, and specific references to that report are included in the final report from the consultants. In particular, the Wood Mackenzie report noted that the joint Oireachtas committee's recommendation to increase the tax rate to 80% for very profitable fields might be a deterrent to incremental investment. It noted, too, that the joint committee's recommendation to increase the existing regime's tax rate would have no impact on the State's share of revenue in the early years of production. The Wood Mackenzie report recommended instead an arrangement whereby the State would receive a minimum annual payment of 5% of the gross revenues of a field once production has commenced. The consultants agreed with the joint committee's recommendation that retrospective changes to fiscal and licensing terms could risk long-term reputational damage. The Deputy will see, therefore, that the joint committee report informed the review by Wood Mackenzie.

The joint committee report recommended increases to the petroleum resource rent tax of 40% for small discoveries, 60% for medium discoveries and 80% for very large discoveries. It is important to recognise that Ireland competes with other countries to attract exploration investment and the fiscal terms cannot be set in isolation from that fact. When compared with successful island gas-producing countries, the level of exploration drilling in the Irish offshore is very low, with only 159 exploration and appraisal wells drilled since exploration began. More than two thirds of those wells were drilled in the 1970s and 1980s. The probability of a commercial discovery on drilling of a well is one in 32 in Ireland, compared with a probability of one in six in the United Kingdom and one in seven in Norway. The joint Oireachtas committee's recommended rate changes would, in the case of very profitable discoveries, have seen a higher rate of tax applying in Ireland than in Norway. It is impractical to expect Ireland to have Norwegian-style tax rates without first having Norwegian levels of commercial discovery.