Working together: Energy sector income tax benchmarking study

Income tax disclosures, presented in annual reports, are an important insight into a company's tax affairs, with the effective income tax rate being the headline rate commonly quoted by chief financial officers when discussing their company's income tax affairs. In this study, PwC presents insights into where energy companies stand compared to their peer group for the exploration & production, integrated oil & gas and energy services segments of the industry. The study encompasses 37 companies located in 17 different countries around the world.

In comparing the 37 energy companies included in this study, PwC found that the average Effective Income Tax Rate (ETR) for the three-year period (2005-2007) was 33.6%, higher than any of the nine sectors PwC has analysed for the same period. Why is the energy ETR so high? One explanation is that the energy companies have been highly profitable over recent years. While other sectors surveyed included companies with losses, none of the energy companies studied incurred losses. Another factor is the "government take" for exploration and production activity in many countries around the world. Many countries simply tax energy companies at higher rates, including imposing special income taxes on profits from E&P activities.

Our survey shows that the ETR of the integrated oil & gas segment is higher than that of the exploration & production and the energy services segments. The companies within the integrated oil & gas segment are very large multinational oil companies, which operate in a number of different countries. Only 39% of the integrated oil & gas companies had more than 50% of their revenue in their home territory, compared to 7)% of the exploration & production companies

The energy sector has the highest ETR of all the other sectors. One factor impacting this higher rate is that no energy companies in the survey were loss making over the 3-year period of our study. Another comparative driver is the fact that “government take” for exploration and production activity within the energy sector is generally much higher than that of other sector’s activities. Many countries simply tax energy companies, and exploration and production activities specifically, at higher rates, impose incremental income taxes on the activities, and/or impose special income taxes on profits.

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