TABLE OF CONTENT (dear could you do it coz i dunno how should we arrange the tittle)
Introduction Background of company
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INTRODUCTION
Petroleum industry is a very huge industry all over the world; it works globally which includes all the manufacturing and marketing about the petroleum products. Moreover, in the industry, it not only includes the largest volume of products are fuel oil and petro, but also other products which use the petroleum as the raw material. While most of these companies is controlled by the national oil company. Below the chart showed the 50 largest oil companies in the world:
Source: http://en.wikipedia.org/wiki/Petroleum_industry Therefore, in Malaysia it is also significant issue to consider about the petroleum industry in terms of sources, transactions, compliance of government regulations and so on. In the government regulation, the popular thing to be taken to consideration should be tax application, because the petroleum has large income tax which leads to large influence in the government income. And the Petroleum Income Tax ACT 1967 reported the petroleum income tax. As a consequence, the proper understanding about the petroleum income tax is necessary, so in this project we have chosen the Petronas as a study company to analysis the 2
income tax in such specialized industry. In addition, it will start with briefly explaining the Petronas company background and operations, then followed by the certain issues under tax applications, finally we will able to figure out the tax impose on such industry. BACKGROUND OF COMPANY
PETRONAS is wholly owned Malaysian Oil and Gas Company which was founded on 17/08/1974. And the company is dealing with the entire Malaysian oil and gas resources with a trust that it can develop and add the value to the resources. Nowadays, the PETRONAS has become on the Fortune Global 500's largest corporations in the world. Furthermore, as stated in wikipedia.org (2009) that PETRONAS has grown to international company which expanded into 35 countries with PETRONAS Group includes 103 wholly owned subsidiaries, 19 partly owned outfits and 57 associated companies at the end of March 2005. And the PETRONAS has vision to become a “Leading Oil and Gas Multinational of Choice” (Pertonas.com.my). And also in its website, it also stated that there are seven business activities that the PERTONAS are doing “(i) the exploration, development and production of crude oil and natural gas in Malaysia and overseas; (ii) the liquefaction, sale and transportation of LNG; (iii) the processing and transmission of natural gas and the sale of natural gas products; (iv) the refining and marketing of petroleum products; (v) the manufacture and sale of petrochemical products; (vi) the trading of crude oil, petroleum products and petrochemical products; and (vii) shipping and logistics relating to LNG, crude oil and petroleum products.” Whatever the company is doing, the main objective is for the well-being and society not only the profit maximization, they consider the economy, society and environment.
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PETROLEUM INCOME TAX V.S. CORPORATE INCOME TAX 1. Chargeable persons
Chargeable person is another different issue between the normal income tax and petroleum income tax. In the petroleum income tax chargeable person has been specified which is defined by Fatt (2012) “ (a) Petroleum Nasional Berhad; (b) Malaysia-Thailand Joint Authority; or (c) any other person carrying on petroleum operations under a petroleum agreement with above two parties.” As PETRONAS is shorted by Petroleum Nasional Berhad which has the petroleum operations will be chargeable person under petroleum income tax. In normal corporate income tax, tax shall be imposed on every chargeable person as corporate body. 2. Operations
The petroleum also has differentiated its operations from other corporate operations. From the Fatt (2012), the operations can be exactly into below points: “(a) searching for and winning or obtaining of petroleum in Malaysia by or on behalf of any person for his own account or on a joint account with any other person by any drilling, mining, extracting or other like operations or process, in the course of a business carried on by that person engaged in such operations, and all operations incidental thereto, and any sale or disposal by or on behalf of that person of petroleum so won or obtained, and includes the transportation within Malaysia by or on behalf of that person of petroleum so won or obtained to any point of sale or delivery or export, (b) any sale or disposal by Petroleum Nasional Berhad within Malaysia of petroleum obtained from outside of Malaysia and includes the transportation within Malaysia by, or on behalf of, Petroleum Malaysia Berhad of such petroleum to any point of sale or delivery within
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Malaysia;” These are exactly what the PETRONAS is doing as its business activities. While in the corporate income tax, not in the specialized industry, operations can be any business. 3. Tax payment system
Petroleum companies are required to make self assessment which effect from YA 2010. And the total tax payment amount can be installed five years. In other words, the company in the current year has to pay two amounts, one is proceeding from previous year’s instalment, the other one is current year instalment portion (Fatt, 2012). However, in normal tax payment system, it has also with self-assessment but starting from 2001, the tax payer has to estimate the total tax payment and make this payment into the monthly basis. (Fatt, 2012). 4. Tax rate
Normally in Malaysia the companies are following “- Company with paid up capital not more than RM2.5 million On first RM500,000 20% Subsequent Balance 25% - Company with paid up capital more than RM2.5 million 25% (taxrate.cc). However, there is a significant difference in the petroleum industry. Because according to the tax structure in petroleum income tax rate is from 35% to 50% with different commence of business. As stated in the PETRONAS annual report 2011 note 30 about the tax computation there is 10% different tax rate between corporation income and petroleum income, we can conclude that the tax rate for petroleum income for PETRONAS is 35%, so they have added back this amount into the tax computation instead of just taking 25% normal rate.
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5. Gross income
Petroleum Income Tax Act 1967 With subject to this Act, the gross income of a company (chargeable person) from a petroleum operation of a basis period for a year of assessment should be under the following conditions:
i)
Proceeds of the sale of natural gas and casing-head petroleum spirit
ii) Proceeds of the sale of crude oil and refined in Malaysia (should be shown to Director General that the crude oil is refined in Malaysia)
iii) Proceeds of the sale of petroleum containing of crude oil delivered in Malaysia
iv) Crude oil being exported at market value
v) Petroleum consisting of crude oil other than on sale being exported at market value
vi) Miscellaneous receipts related and incidental to the petroleum operation such as insurance, indemnity, recoupment, recovery, reimbursement, or otherwise—
a) Where such sum is tax deductible; or
b) Under a contract of indemnity
vii)
Compensation of income loss from petroleum operations
viii) Release of trade debts
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Conversely, corporate income tax has different categories of gross income, such as according to section 22 (1) and (2) of the Acts, it was stated that the gross income of a person from a source of his or her basis period should be:
i)
The gross income received from a source of his or her basis period
ii) Any sum receivable and deemed to have been received for that basis period and this includes:
a)
insurance, indemnity, recoupment, recovery, reimbursement or under a contract of indemnity
b) Compensation for loss of income from that source
For some extent, PETRONAS obtained its source of revenue mostly from the sale of oil and gas, rendering of services, shipping and shipping related services, sale and rental of properties, dividend income as well as interest income (PETRONAS Annual Report, 2011).
6. Tax deduction - Expenses Allowed
6.1 Petroleum expenses allowed In arriving the deduction of revenue expense, the general test of wholly and exclusively incurred is applied which will be deducted against the gross income of operation from petroleum to obtain the adjusted income (Fatt, 2011). It was further explained by Petroleum Income Tax Acts 1967 that the deduction should encompasses all of the outgoings and expenses that are wholly and exclusively incurred by the chargeable person (the company) in the production of gross income which include—
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(a) Interest on the money borrowed which are payable for that particular period and it was employed for the production of gross income or was laid out on assets used or held in the period for the production of income. (b) Rent payable for that particular period which was employed for the repair of premises, plant, machinery, and fixtures to be used in the production of income or other situation, such as for renewal purposes, repairer alteration of any implement, utensil or article so employed. However, it excludes any cost incurred for reconstructing or rebuilding any premises, buildings, structures or works of a permanent nature, any plant or machinery (other than an implement, utensil or article of such class) or any fixtures. (c) Assessment rates payable in respect of any property used for the petroleum operations which are incurred for that period under any law which relate to local authorities. Additionally, it was stated in “Summary of Tax System 2008” by Kementrian Kewangan Malaysia that other business expenses allowed for petroleum are as follows: a) Monies donated to approved institutions and the Government. b) Under the Production Sharing Contract, Contribution to abandonment cess (or removal of installations). (effective from YA 1994) As it is seen in PETRONAS Annual Report 2011, the company incurred expenses such as bad debts written off from trade and other receivables, Contribution to Tabung Amanah Negara, operating lease rental, rental of land and buildings, plant, machinery, equipment and vehicles, financing costs (comprises interest payable on borrowings and profit share margin on Islamic Financing Facilities) which are considered as allowable. It also incurred audit fees, research and development expenditure as well as staffs fees which are not included among
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fees allowed. However, research and development expenditures are qualified for double deduction. Depletion allowances Exploration expenses qualify for depletion allowances. For primary exploration expenditure, the rates for initial allowance are 10% and for secondary recovery activities, 20% for exploration expenditure incurred. In both instances, the annual allowance which is computed on the units of production basis is subject to a minimum of 15% of the residual qualifying exploration expenditure. For some extent, according to Fatt (2011) the annual allowance should be given this way: A minimum of 15% of the residual qualifying exploration expenditure or
x Residual expenditure, whichever is higher.
He also stated that those activities that are considered as qualifying exploration expenditure are such as: i) Acquisition of petroleum deposits ii) Searching, discovering, testing, or winning access to petroleum deposits iii) Construction of workers’ quarter or building iv) General administration for development project before the first sale or disposal of petroleum
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Additionally, PETRONAS incurred exploration expenditure. The company defines exploration expenditure as costs directly associated with an exploration well which includes license acquisition as well as drilling costs (PETRONAS Annual Report, 2011). 6.2 Capital allowances Capital allowances are also granted for qualifying capital expenditure on industrial building, plant and machinery and fixed offshore platforms.
Except for fixed offshore platforms,
which are granted an annual allowance of 10%, the rates for initial and annual allowances vary between the classes of assets mentioned above as well as between those incurred for primary and secondary activities. All petroleum assets are amortised on a straight line basis. Table.1 below elaborates more about the initial allowance as well as annual allowance for petroleum operation:
Table 1. Capital Allowance Initial
Annual
Allowance %
Allowance %
Plant used in primary exploration
20
10
Plant used in secondary exploration
40
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Fixed offshore platforms for drilling, production or other petroleum operations
10
Industrial building: (i) (ii)
Secondary exploration
20
3
Primary exploration
10
3
(Fatt, 2012) 6.3 Corporate expenses allowed 10
Reflecting from petroleum operation, corporate operation also have the same criteria for those expenses which are deductible, such as; the scope of expense shall be referred to ‘outgoings and expenses”, ‘wholly and exclusively’, ‘incurred’ as well as for the production of income from that business source, which are clearly stated in s33(1) of the Act. For instance, these conditions include expenditure which is revenue in nature, interest expense on money borrowed, bad and doubtful debt, etc. Normal corporate income tax does not incur any qualifying exploration expenditure and thereby, it does not qualify for getting any depletion allowances. Furthermore, normal corporate income tax incurred qualifying building expenditure as well as qualifying plant expenditure.
EXEMPTIONS
Petroleum operation (PETRONAS) a) Export duty (Crude Oil)
Export duty is based on the gazetted value of crude oil. Exemptions are given 10% to Petronas. b) Sales tax
To stabilise the prices of petroleum products at the controlled level, partial or full exemption on sales tax are granted under the Automatic Price Mechanism, with the
rates of RM 0.5862 per litre.
c) 100% income tax exemption for 10 years, exemption of withholding tax as well as stamp duty
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It was stated in The Star Online, entitled “Oil & Gas Sector Benefits” (2012) that the government has announced these types of tax incentives to be given to public-private partnership projects for the enhancement of oil and gas industry. These activities are meant to trigger the private operators to develop the O&G industry so that they would involve in more participation. These include financial assistance and the cost of land acquisition.
Normal corporate tax will usually obtain tax exemption at statutory level when the income of companies undertakes Approved Services Projects (ASP). The quantum of tax exemption on statutory income differs between 70% for a period of 5 to 10 years from the date the first income is produced (treasury.gov.my).
DIVIDEND PAYMENT
In petroleum operation, when the dividend is paid out of the profit from the petroleum operation, the dividend will not be taxed when it is given to shareholders. In contrast, for corporate operation, any dividend income received by shareholders, prior to YA 2008 will be taxed at gross and entitled to claim section 110 set-off. PETRONAS, additionally, applies tax exempt final dividend under Section 84 of the Petroleum (Income Tax) Act, 1967 (PETRONAS Annual Report, 2011). The company also pays the dividend in the form of cash payment and set off against certain amount earlier paid by the company on behalf of the shareholder (Khoo, 2012).
CONCUSION
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PETRONAS is one of the major leading oil and gas industry which works successfully in achieving its goal worldwide. In Malaysia, thereby it is essential to consider about the petroleum industry in terms of its compliance with the government regulation, particularly the tax computation as it is one of the biggest income tax which contribute to government income. It was found out that PETRONAS has a good disclosure in terms of elaboration of tax expense. In Malaysia, petroleum industry has its own particular Acts, such as Petroleum Income Tax ACT 1967, which explained why it is a specialized industry. It explains more onto the rulings of how petroleum operations be taxed. For instance, it explains about tax deduction. Moreover, it can be seen then that differences do exist between normal corporate income tax as well as petroleum income tax. This encompasses in the terms of chargeable person, tax rates, tax systems, gross income, amount of tax expense allowed, exemptions as well as the dividend payments. APPENDIX
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(PETRONAS Annual Report, 2011)
REFERENCES 14
Income Tax Exemption. (2012, December 5). Laman Web Rasmi Perbendaharaan Malaysia. Retrieved December 15, 2012, from http://www.treasury.gov.my/index.php? option=com_content&view=article&id=705&Itemid=200&lang=my Fatt, C. K. (2012). Petroleum Income Tax in Malaysia. Advanced Malaysian Taxation (Fourteenth Edition ed., pp. 568-572). Kuala Lumpur: InfoWorld. Khoo, D. (2012, November 29). Malaysia's Petr onas Q3 earnings slump to RM12.4b. Malaysia Business & Finance News, Stock Updates | The Star Online. Retrieved December 5, 2012, from http://biz.thestar.com.my/news/story.asp? file=/2012/11/29/business/20121129180625 Malaysia Corporate Tax. (n.d.). Taxrates. Retrieved December 5, 2012, from www.taxrates.cc/html/malaysia-tax-rates.html Oil & gas sector benefits - Budget 2013 | The Star Online. (2012, September 29). The Star Online | Malaysia, Business, Sports, Lifestyle and Video News. Retrieved December 5, 2012, from http://thestar.com.my/news/story.asp? sec=budget&file=/2012/9/29/budget/1209 Petroleum (Income Tax) (Deduction for Expenditure Incurred for the Provision of an Approved Internship Programme) Rules 2012 | CTIM Malaysian Tax. (2012, October 15). CTIM Malaysian Tax | Malaysia Tax News, Cases, Articles. Retrieved December 5, 2012, from http://malaysiantax.com/legislation/petroleum-income-tax-deduction-
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for-expenditure-incurred-for-the-provision-of-an-approved-internship-programmerules-2012-598.html Petronas Annual Report 2011. (n.d.). PETRONAS . Retrieved December 5, 2012, from http://www.petronas.com.my/investor-relations/Pages/annual-report.aspx Vision, Mission & Shared Values. (n.d.). PETRONAS . Retrieved December 5, 2012, from http://www.petronas.com.my/about-us/Pages/vision-mission.aspx
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