Tax system APPLICABLE TO PETROLEUM Operations

 Tax system APPLICABLE TO PETROLEUM Operations

It is clear from the wording of this letter that this”fixed post-tax relief to the shareholders of ADM enue competitiveness of their oil operations in Abu Dhabi.

independent of the calculation of Abu Dhabi quite and should therefore,  affect the basis of taxation.  This special treatment w later extended to ADPC and the”fixed margin”  gradually in until it reached its present amount of s1.00 per barrel.

Fixing the Price of oil for Tax or Other Purposes The old-style concession agreements stipulated a payment of royalty charges on each ton of oil produced,  regardless of its sal price or the profit realized from it,  indicating that governments were not really interested in the price at which the oil was sold.

Then,  in 1950-1951,  certain oil producing countries in the Middle East(Saudi Arabia,  Iraq and Kuwait)  adopted the profit sharing principle(Abu Dhabi adopted the same principle in 1966)  According to this principle,  the host government’s share moved ed royalty per unit of production or export to 50 percent of the net company profit based on posted prices.  When the  financial arrangement was adopted,  the host countries became directly affected by the posted price(which was a tax reference used for the calculation of the companies’  profits and did n always reflect market realities).

In that period,  until the 1970s,  the posted prices of and companies crude oil were by the alone without any consultation with the host countries.  February 1959,  the oil companies decided,  without Middle he governments concerned,  to the price of Eastern oil by cut about 18 cents per barrel.  In f the spite o companies action they went on 960 by an average of about 9 recognized that the successive unilateral cu catalyst One shall  runnel this reg level.  recommend countries operation In te recommendations  and add 50 pro usually the nur the 50 being t to  succeed Arabia decide production industry.

Tax system

Fixed its it  Bi s a tax profits  Tax system APPLICABLE TO PETROLEUM Operations N Ant DMAllt il prices by the major oil companies in 1959 1960 were the catalysts for the creation of OPEC in September 1960 of the original principal aims of oPEC was to stabilize oil Article 2(B)  of OPEC’s statute states: “The organization hall devise ways and means of ensuring the stabilization of prices in international markets with a view to eliminating harmful and unnecessary fluctuation The first success achieved by oPEC in this regard was the freezing of oil prices at the post-August 1960 level.

In a further attempt to strengthen prices and discourage the granting of large discounts by oil companies,  the OPEC Conference recommended in April 1966 that the governments of member countries should apply posted prices or reference prices for the purpose of determining the tax liabilities of the oil companies operating in their territories In terms of royalties paid by the oil companies,  in 1962 oPEC recommended that the member countries increase the royalty rate and adopt the principle of royalty expending.

According to the 50-  50 profit-sharing formula introduced in 1950-1951,  royalties,  which usually amounted to 12.5 percent of the posted price multiplied by the number of barrels produced,  were considered a credit towards the 50 percent income tax liability of the companies instead of being treated as an expense.

oPEC attempt

Although oPEC failed in its attempts to achieve an increase in the royalty rate of 12.5 percent it succeeded in having royalties expended in 1964 After the outbreak of the October 1973 Arab Israeli War,  the Arabian Gulf oil ministers met in Kuwait on 16 October and decided to fix oil prices themselves,  unilaterally.  Essentially they decided to substitute legislation for negotiation.   They seized the initiative to formulate their own oil policy in pricing and settling production levels.  This established a new principle in the on pricing was to be decided upon by the host countries industry :  oil and not by the oil companies operating therein.

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