Similar to concessionary systems in addition normally

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Similar to concessionary systems. In addition, normally royalties are not cost recoverable. Fiscal costs are defined and rules for amor- tization and depreciation are established in the legislation of the country or in the particular PSC. After payment of royalties, the contractor is allowed to recover costs in accordance with contractual provisions (a cost recovery limit may apply). The remainder of the production is split between the host government and the oil company at a stipulated (often negotiated) rate. Corporate taxes may apply or may be paid by the host government or its NOC on behalf of the contractor. Income tax is calculated on taxable income (revenue net of royalties, allowable costs, and government share of profit oil). Tax losses are normally carried forward until full recovery. 13 In most countries, when cost recovery limits exist, the company’s share of profit oil in any given accounting period is not the taxable base 14 . 11. In some cases the royalty is calculated on net production. Some countries use fiscal prices for the purpose of royalty and corporate tax calculation. These prices are defined periodically and are normally linked to international market prices. The majority of the countries refer to arms length sales to third par- ties. Whether or not a country uses fiscal prices, deductions or additions are normally allowed to take into account differences in quality between the reference crude (gas) and the particular crude (gas) as well as transport costs. 12. The exact manner in which costs are capitalized or expensed depends on the tax regime of the country and the manner in which rules for integrated and independent producers vary. The successful- efforts and full-cost methods used in oil and gas accounting are discussed in detail in Gallun et al., 2001. In general terms, if costs are capitalized, they may be expensed through the statutory amortization and depreciation schedule, through abandonment, impairment, or depletion. If they are expensed, they are treated as period expenses and charged against revenue in the current period. The primary difference between the two methods is the timing of the expense against revenue and the manner in which costs are accumulated and amortized. 13. Several countries limit the number of years for tax loss carry forward. 14. In fact, the company may receive a share of profit oil but may not be in a taxable position.
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Given the risky nature of the industry, in both types of legal systems the investor’s abil- ity to share the risk by transferring all or part of its rights to other investors, and the objec- tivity and transparency of the conditions for government approval or denial of such transfer (including any relevant performance guarantee) are an important element of the overall attractiveness of a country’s regime.
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