The modification of the royalties’ system applied to hydrocarbon resources in Romania seems not to be an emergency anymore for the executive, after the legislative amendment has been cut off from the list of priorities for the current parliamentary session. Awaiting the new law on royalties, taxation quietly increases for the oilmen. Winner: the state.

The average effective tax rate on incomes for hydrocarbon producers in Romania increased from 13.9% at the end of 2013, to 15% at the end of 2014, and to 15.7% by mid-2015, while at European level it decreased, from 12.2% at the end of 2013, to 11.7% at the end of last year, according to a Deloitte survey commissioned by the Oil and Gas Employers’ Federation (Federaţia Patronală de Petrol şi Gaze). The lower taxation on upstream operations in Europe is explained, by the authors, as being the result of a declining tax base due to cheaper crude oil, but also of the legislative measures adopted in several European countries to reduce the tax burden on the companies in the field, in view of encouraging investments. Instead, the Romanian government maintained a series of special taxes, such as the 60% tax on additional revenues from gas price liberalization. The average gas price for non-household consumers increased from RON 58.7/MWh in 2013 to RON 85.1/MWh in 2014, and the average price for households consumers rose from RON 47.4/MWh to RON 53.3/MWh. In addition, although oil prices declined in the second half of last year, the formula for the application of fees in Romania uses as reference price the average quotations during the previous three months and, on a declining market, this has increased the royalties share. Why did the executive decide to use these tricks, instead of solving the problem of royalties? One explanation would be that if it eliminates the special taxes and sets new royalty levels, it might end up with a big hole in the budget.

Out of the additional taxes, the authorities have collected an amount similar to the one collected from royalties, virtually leading to a doubling in the level of fees. The government expects to collect this year, after the budget revision, some RON 966.61 million from additional income taxation, by 30% more than initially planned by the state budget for 2015, i.e. RON 743.2 million. Last year, this tax brought to the state budget RON 791.68 million, as compared to RON 243.07 million in 2013. The Romanian state collected last year total oil royalties of RON 1.36 billion (all royalties totalled RON 1.55 billion), by over 13% more than in 2013, mainly due to higher gas prices. On the other hand, our authorities ignored the correlation between the actual well productivity and the effective tax share. Thus, in countries with low productivity, the level of royalties and of similar fees is lower than in countries with high productivity. Having a daily production of less than 40 boe per well, Romania ranges among the countries with low productivity per well, along with countries such as Poland, France, Bulgaria, Lithuania, Turkey, etc. However, while the average effective special tax share for these countries is 7.5%, in Romania it reaches 15.7%.

Examples of the tax share cuts in Europe

  • The UK has adopted measures such as reducing the surcharge and the tax share on oil revenues, while increasing deductions. The effective tax share decreased from 11.3% of the revenues to 6% in 2014.
  • In Italy, the average royalties level and similar taxes decreased from 14.4% in 2013 to 11.7% in 2014. The nominal surcharge level was reduced from 10.5% to 6.5%.
  • In Hungary, the average royalties and similar taxes in observable environments dropped from 25.3% in 2013 to 22.9% in 2014, due to lower royalty levels on oil and gas by 6% in Q4 2014.

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