Taxation of oil and gas companies in Pakistan is governed by the Income Tax Ordinance, 2001 and the Petroleum Concession Agreement (PCA) signed between the Government of Pakistan and the oil and gas companies. The taxation system is designed to ensure that the government receives a fair share of the revenue generated by the oil and gas companies, while also providing incentives for investment and exploration.

Definitions:

Petroleum Concession Agreement (PCA): It is a legal contract between the government of Pakistan and the oil and gas companies, which outlines the terms and conditions of exploration and production of oil and gas resources in Pakistan.

Exploration and Production (E&P): It refers to the process of searching for and extracting oil and gas resources from the ground.

Royalty: It is a payment made by the oil and gas companies to the government of Pakistan for the right to explore and produce oil and gas resources.

Corporate Income Tax (CIT): It is a tax levied on the profits earned by the oil and gas companies.

Taxation of Oil and Gas Companies:

Royalty: The oil and gas companies are required to pay a royalty to the government of Pakistan for the right to explore and produce oil and gas resources. The royalty rates vary depending on the location and the type of resource being extracted. For example, for crude oil, the royalty rate is 12.5% of the wellhead value, while for natural gas, the royalty rate ranges from 5% to 12.5% depending on the production level.

Corporate Income Tax (CIT): The oil and gas companies are subject to a corporate income tax on their profits earned from the exploration and production of oil and gas resources. The tax rate for upstream activities is 35%, which is higher than the rate for other industries in Pakistan. However, the companies are allowed to deduct their exploration and development expenses from their taxable income, which reduces their tax liability.

Withholding Tax: The oil and gas companies are required to deduct withholding tax from their payments to suppliers and contractors. The withholding tax rates vary depending on the nature of the payment, ranging from 2% to 6%.

Examples:

Oil and Gas Development Company Limited (OGDCL): OGDCL is a Pakistani multinational oil and gas company, which is listed on the Pakistan Stock Exchange. In 2020, the company reported a net profit of PKR 41.3 billion ($252 million) and paid PKR 14.3 billion ($87 million) in corporate income tax.

Pakistan Petroleum Limited (PPL): PPL is another Pakistani multinational oil and gas company, which is listed on the Pakistan Stock Exchange. In 2020, the company reported a net profit of PKR 33.5 billion ($204 million) and paid PKR 11.7 billion ($71 million) in corporate income tax.

Case Studies:

Reko Diq Copper and Gold Mining Project:

The Reko Diq project was a joint venture between the Government of Balochistan and Tethyan Copper Company (TCC), a subsidiary of Barrick Gold Corporation and Antofagasta PLC. The project was expected to generate significant revenue for the government of Balochistan, but it was terminated due to disputes over royalty and taxation issues. The government of Balochistan demanded a higher royalty rate and a larger share of the profits, while TCC argued that the terms of the PCA were already agreed upon and should not be changed.

Kekra-1 Oil Exploration Project:

The Kekra-1 project was a joint venture between the Government of Pakistan and ExxonMobil, ENI, and Oil and Gas Development Company Limited (OGDCL). The project was expected to lead to the discovery of significant oil and gas reserves in the Arabian Sea off the coast of Pakistan. However, after spending millions of dollars on exploration, the project was ultimately abandoned due to the failure to find commercial reserves. The government of Pakistan faced criticism for the tax incentives and concessions offered to the oil and gas companies, which were perceived to be too generous.

Sui Southern Gas Company (SSGC) vs. Pakistan Petroleum Limited (PPL): In 2019, SSGC filed a case against PPL for alleged tax evasion and claimed that PPL had underpaid royalty and gas development surcharge. The case went to the Supreme Court, which ordered PPL to pay PKR 2.6 billion ($16 million) in outstanding royalty and gas development surcharge. The case highlighted the importance of ensuring that the oil and gas companies pay their fair share of taxes and royalties to the government.

In conclusion, the taxation of oil and gas companies in Pakistan is a complex issue, which involves balancing the need to attract investment and incentivize exploration with the need to ensure that the government receives a fair share of the revenue generated by the industry. The PCA and the Income Tax Ordinance provide a framework for regulating the industry, but disputes over royalty and taxation issues can arise, as seen in the Reko Diq project case. It is important for the government to maintain a transparent and fair taxation system, which encourages investment while also ensuring that the oil and gas companies pay their fair share of taxes and royalties.