Shell to Sea

[gerrykeegan]

No you asked the question "Am I right in saying that most normal businesses cannot write off all Capital Expenditure against tax later?"  I answered it.

Your second question (and I am fairly sure you already know the answer) My understanding is that Shell will not pay the 25% tax until all extraction costs have been deducted. So Ireland's 25% tax rate is along way off yielding any income.

A company in Ireland will only pay tax on it's taxable profits from any operation based in the State. That's it.

[muppet]

No you asked the question "Am I right in saying that most normal businesses cannot write off all Capital Expenditure against tax later?"  I answered it.

Your second question (and I am fairly sure you already know the answer) My understanding is that Shell will not pay the 25% tax until all extraction costs have been deducted. So Ireland's 25% tax rate is along way off yielding any income.

A company in Ireland will only pay tax on it's taxable profits from any operation based in the State. That's it.

Ok I am being serious, I don't know the answer and I would appreciate someone explain gin it to me.

What is the difference in layman's terms between what Shell can write off in this case of gas extraction, and what any normal business can write off in any other business?

[gerrykeegan]

None is my understanding. All companies pay tax on their taxable profits as they are assessed under our tax laws.

I know you have been around the houses with others but I will give it a go.

Company A. Buys and sells fish. Buys fish for 50 euro sells fish for 100. pays wages 10 euro, Capital allowances on capital expenditure of factory 10 euro, nothing else. pays tax on taxable profit 100-50-10-10.. taxed on 30 euro profit.

Company B (start up company) Buys and sells fish. Buys fish for 90 euro sells fish for 100. pays wages 20 euro. Capital allowances on capital expenditure of factory 10 euro  nothing else. no profit no tax to pay. carries loss forward to next year, can write loss off against any profit next year. capital allowances also carried forward

[muppet]

None is my understanding. All companies pay tax on their taxable profits as they are assessed under our tax laws.

I know you have been around the houses with others but I will give it a go.

Company A. Buys and sells fish. Buys fish for 50 euro sells fish for 100. pays wages 10 euro, Capital allowances on capital expenditure of factory 10 euro, nothing else. pays tax on taxable profit 100-50-10-10.. taxed on 30 euro profit.

Company B (start up company) Buys and sells fish. Buys fish for 90 euro sells fish for 100. pays wages 20 euro. Capital allowances on capital expenditure of factory 10 euro  nothing else. no profit no tax to pay. carries loss forward to next year, can write loss off against any profit next year. capital allowances also carried forward

Ok thanks for that.

But both your cases they have a Capital Allowance of €10 and in Case A there is actually tax paid.

My understanding is that there will be no tax paid until all costs are paid off first. I guess I am really asking is that the norm? I would have assumed that most businesses don't get to pay off all costs, loans etc, up front. But if you tell me they do then fair enough.

Hound posted this on another thread:

In Ireland if you strike oil or gas, you don't pay tax until everything is paid off. That means you take our oil or gas, and sell it, paying no tax, until you have paid off all of your own costs.

Is that true? Would Initial setup costs not be considered CAPEX and not operating expenses? In which case it wouldn't impact P+L at inception - there would just be change in Balance Sheet and a cash outflow. I would imagine that as soon as they start pumping then they have expenses and revenues and tax would be charged on the profits. Are you telling me that companies In Ireland won't pay tax until all infrastructure costs are recovered? That sounds odd.

CiKe, the rules for petroleum companies are different. All their capital expenditure in terms of exploring for offshore oil and gas is allowable in the same way as operating expenses. Bear in mind, this isn't an Irish thing. Irish and UK rules are very similar, and in Norway the deductions are more generous - for every €100k capital expenditure you have, you actually get a tax allowance of €130k.

None of Ireland, UK or Norway charge a royalty for oil/gas extracted. Tax is only charged on profits in all 3 countries (i.e. after all costs incurred are taken into account). Some countries do charge a royalty.

The question is, from a policy standpoint, do we want to attract oil companies to Ireland to invest and explore for oil, or do we want to leave the oil in the ground?

There are numerous reasons why Norway and UK are more attractive to exploration companies (much better record of success, easier planning/regulatory regimes, better infratrcuture thus lower exploration/exploitation costs,  and Norway has the additional advantage that the state effectively underwrites 78% of your costs).

The advantage Ireland currently has is the 25%-40% tax rate compared to UK 62% and Norway's 78%.

But at the moment it hasn't proven successful. In recent licensing rounds, Norway and UK still get far more interest than Ireland, particularly from larger companies.

Like I said I am not an accountant so my understanding is pretty blurred.

[Hound]

We follow international norms in method of calculating taxable profits for petroleum companies. Capital expenditure on exploration activities is treated similarly to operating expenditure.
I believe the logic around it is that offshore capex has no enduring benefit or value beyond the field in which it is placed.
Norway, UK and (I presume) the rest of the OECD all use similar rules in allowing capital expenditure (Norway actually gives a 130% deduction).

[muppet]

We follow international norms in method of calculating taxable profits for petroleum companies. Capital expenditure on exploration activities is treated similarly to operating expenditure.
I believe the logic around it is that offshore capex has no enduring benefit or value beyond the field in which it is placed.
Norway, UK and (I presume) the rest of the OECD all use similar rules in allowing capital expenditure (Norway actually gives a 130% deduction).

And can Shell write off their onshore Capex?




The simplest way to look at this is to ask what is a reasonable discount to give to whoever finds and extracts an oil or gas field.

The answer can be as a percentage, cents in the euro/dollar or whatever. Or even in a range. The problem for me is that I see vague references (and I am also talking about Government officials even recently) to international norms, yet when any international benchmark is pointed to, people like me get told that we can't benchmark against that one. (e.g Norway/UK etc).

But what would Hound and Hardy and anyone else see as a reasonable discount considering everything you wish to consider?

This is a serious question. It might measure the differences between us in a simple non-controversial way.

[gerrykeegan]

All companies are allowed write off all capital expenditure against their profits.

If my company buys a boiler for €1000 we will be allowed a deduction against our profits in order to come to our taxable profits of one eight (12.5% capital allowance) of the cost of the boiler. This happens for eight years until the cost of the asset has been fully written off against tax.

If my company buys an energy efficient approved boiler for €1000 then the we receive a 100% deduction for the capital expenditure in year 1. The asset is written off (for taxes purposes in year 1)

Both companies receive a capital allowance for capital expenditure. The amount is exactly the same, €1000, it just is accelerated in the second option.

If both companies made profits before tax of 10000 per annum each year for eight straight years and the tax rate did not change they would pay exactly the same amount of tax over the total of those eight years.

The same applies to exploration companies. They get their capital allowances upfront.

[muppet]

All companies are allowed write off all capital expenditure against their profits.

If my company buys a boiler for €1000 we will be allowed a deduction against our profits in order to come to our taxable profits of one eight (12.5% capital allowance) of the cost of the boiler. This happens for eight years until the cost of the asset has been fully written off against tax.

If my company buys an energy efficient approved boiler for €1000 then the we receive a 100% deduction for the capital expenditure in year 1. The asset is written off (for taxes purposes in year 1)

Both companies receive a capital allowance for capital expenditure. The amount is exactly the same, €1000, it just is accelerated in the second option.

If both companies made profits before tax of 10000 per annum each year for eight straight years and the tax rate did not change they would pay exactly the same amount of tax over the total of those eight years.

The same applies to exploration companies. They get their capital allowances upfront.

Ok thanks for explaining it to me.

[Hound]

The simplest way to look at this is to ask what is a reasonable discount to give to whoever finds and extracts an oil or gas field.

I think the difference is that you have the outlook of how much can we get off them, whereas for me I want to attract them in.
There's nobody making any money at the moment out of oil and gas in Ireland.

The two best opportunities out there at the moment are Corrib (Shell) and Barryroe (Providence). But both have sunk so much money into them that they'll do well to make a profit out of it.

So I think a tax rate of 25%-40% is fine for now. Be great if for instance Corrib ended up being a success story, that after a couple of years of gas being brought onshore that people on the West coast were of a one mind that actually, this isnt a bad thing, its a very good thing. And that the big players would see that Ireland is a credible location for exploration activities and maybe there is a few bob to be made over there. If we could get 10 or 12 successful Corribs/Barrroes up and running and create a proper industry over here, the country (particularly the west coast) could be transformed. Thousands of jobs on good salaries.

Putting up 50%/60%/70% tax rates or percentage royalties off the top would simply be putting a barrier up against the creation of an oil/gas industry. 

[deiseach]

If my company buys a boiler for €1000 we will be allowed a deduction against our profits in order to come to our taxable profits of one eight (12.5% capital allowance) of the cost of the boiler. This happens for eight years until the cost of the asset has been fully written off against tax.

If my company buys an energy efficient approved boiler for €1000 then the we receive a 100% deduction for the capital expenditure in year 1. The asset is written off (for taxes purposes in year 1)

Both companies receive a capital allowance for capital expenditure. The amount is exactly the same, €1000, it just is accelerated in the second option.

I almost get this, but not quite. Using your example and assuming profits per annum are the same in both cases for the same length of time, what is the cash benefit to the company of having the deduction applied in year one rather than spread across eight?

[muppet]

The simplest way to look at this is to ask what is a reasonable discount to give to whoever finds and extracts an oil or gas field.

I think the difference is that you have the outlook of how much can we get off them, whereas for me I want to attract them in.
There's nobody making any money at the moment out of oil and gas in Ireland.

The two best opportunities out there at the moment are Corrib (Shell) and Barryroe (Providence). But both have sunk so much money into them that they'll do well to make a profit out of it.

So I think a tax rate of 25%-40% is fine for now. Be great if for instance Corrib ended up being a success story, that after a couple of years of gas being brought onshore that people on the West coast were of a one mind that actually, this isnt a bad thing, its a very good thing. And that the big players would see that Ireland is a credible location for exploration activities and maybe there is a few bob to be made over there. If we could get 10 or 12 successful Corribs/Barrroes up and running and create a proper industry over here, the country (particularly the west coast) could be transformed. Thousands of jobs on good salaries.

Putting up 50%/60%/70% tax rates or percentage royalties off the top would simply be putting a barrier up against the creation of an oil/gas industry.

I think this is it in a nutshell (sorry).

I see our resources as being for sale. You and the various writers of National policy see the priority as being getting the big companies in.

If we ignore oil and gas for a second this 'getting the m in' has been National policy in other areas as well. For example it has been the modus operandi of the IFSC. This is not without its major successes obviously, but blindly following the mantra and being friendly to the financial industry led to 'light touch regulation' which led to serious problems.

We see very light touch regulation in our Aviation sector also, 'to get them in'. Alitalia and other Italian airlines register most of their aircraft in Ireland while recently we have seen the rapidly growing Norwegian Shuttle, surely Ryanair's biggest competitor in the next few years, seek to base its operation in Ireland: http://atwonline.com/finance-amp-data/norwegian-air-shuttle-considers-irish-aoc-us-base.

Getting them in is fine, I don't have any ideological objection to it, but it cannot be at the cost of selling out on everything. The oil/gas to me seems to be the worst area for this because, unlike the Financial and Aviation sectors, for once we actually have something tangible to sell.

[Croí na hÉireann]

Accounts show Mayo gas field richer than originally thought


There's more gas off the coast of Co Mayo than originally estimated, according to an offshore sub-sea survey in the Corrib gas field.

Commercial gas is set to flow from the field in the middle of next year after a series of delays.

The partners in the project — Shell, Statoil and Vermilion — are expected to spend an additional €300m on the project this year to bring the total spend to €3.4 bn by year's end.

Now, new accounts filed Canadian-based firm, Vermilion Energy Ireland Ltd — show that the volume of gas at peak production will be 8% more than originally believed.

http://www.irishexaminer.com/breakingnews/business/accounts-show-mayo-gas-field-richer-than-originally-thought-643885.html

Great news. Think of all that extra taxation we're going to accrue off that 8%. 

[Dinny Breen]

Accounts show Mayo gas field richer than originally thought


There's more gas off the coast of Co Mayo than originally estimated, according to an offshore sub-sea survey in the Corrib gas field.

Commercial gas is set to flow from the field in the middle of next year after a series of delays.

The partners in the project — Shell, Statoil and Vermilion — are expected to spend an additional €300m on the project this year to bring the total spend to €3.4 bn by year's end.

Now, new accounts filed Canadian-based firm, Vermilion Energy Ireland Ltd — show that the volume of gas at peak production will be 8% more than originally believed.

http://www.irishexaminer.com/breakingnews/business/accounts-show-mayo-gas-field-richer-than-originally-thought-643885.html

Great news. Think of all that extra taxation we're going to accrue off that 8%. 

Where would the state have found the €3.4 billion invested already?

[Croí na hÉireann]

Accounts show Mayo gas field richer than originally thought


There's more gas off the coast of Co Mayo than originally estimated, according to an offshore sub-sea survey in the Corrib gas field.

Commercial gas is set to flow from the field in the middle of next year after a series of delays.

The partners in the project — Shell, Statoil and Vermilion — are expected to spend an additional €300m on the project this year to bring the total spend to €3.4 bn by year's end.

Now, new accounts filed Canadian-based firm, Vermilion Energy Ireland Ltd — show that the volume of gas at peak production will be 8% more than originally believed.

http://www.irishexaminer.com/breakingnews/business/accounts-show-mayo-gas-field-richer-than-originally-thought-643885.html

Great news. Think of all that extra taxation we're going to accrue off that 8%. 

Where would the state have found the €3.4 billion invested already?

Why do we have to invest €3.4 billion today?

[Dinny Breen]

Accounts show Mayo gas field richer than originally thought


There's more gas off the coast of Co Mayo than originally estimated, according to an offshore sub-sea survey in the Corrib gas field.

Commercial gas is set to flow from the field in the middle of next year after a series of delays.

The partners in the project — Shell, Statoil and Vermilion — are expected to spend an additional €300m on the project this year to bring the total spend to €3.4 bn by year's end.

Now, new accounts filed Canadian-based firm, Vermilion Energy Ireland Ltd — show that the volume of gas at peak production will be 8% more than originally believed.

http://www.irishexaminer.com/breakingnews/business/accounts-show-mayo-gas-field-richer-than-originally-thought-643885.html

Great news. Think of all that extra taxation we're going to accrue off that 8%. 

Where would the state have found the €3.4 billion invested already?

Why do we have to invest €3.4 billion today?

Since you were been sardonic around the extra 8% I assume you think that we should levy for more tax on the gas. But since 3 corporations have invested €3.4 billion based on agreements with the Irish government do we just renege on the exploration and extraction agreements and ignore their investment or do you think we should renegotiate? What do you think the consequences would be if we reneged or changed the terms?