June 01, 2005 | By Keith Martin in Washington, DC
ARKANSAS has a new law that requires partnerships and limited liability companies doing business in the state to withhold income taxes from distributions to out-of-state partners.

Arkansas is merely the latest state to enact such a law. The governor signed it in May. Withholding is not required if the partnership can get agreements from its out-of-state partners to pay any taxes they owe directly. The agreements must be filed with the Arkansas authorities. Withholding is also not required for certain oil and gas partnerships whose units are publicly traded but that operate under special federal tax rules that allow them to be taxed as partnerships.

THE PHILIPPINES increased the corporate tax rate and scrapped valued added tax exemptions for energy companies. The country acted after budget deficits forced several downgrades of its sovereign credit rating, making borrowing more expensive and sparking rumors that it is in danger of defaulting on its debts.

A new law signed May 24 increases the corporate tax rate from 32% to 35%. President Gloria Arroyo had also asked Congress to increase the rate for value added taxes, but the politics of such a rate increase were too difficult. Value added taxes are like sales taxes that hit home quickly as voters do their shopping. Instead, Congress gave Arroyo standby authority to increase the VAT rate from 10% to 12% in 2006 if more revenues are needed.

Congress scrapped VAT exemptions enjoyed by various industries, including private power companies and oil refiners. At the same time, it eliminated a “no pass-on provision” that would have barred independent power companies from passing through VAT to consumers.

CHINA will end preferential tax rates for foreign companies in 2007.

Foreign companies already operating in China may be able to apply for a grace period as long as five years to ease the transition.

The average domestic company pays taxes today at a 33% rate while the average foreign company is taxed at only a 15% rate. The unified rate has not been announced yet, but there is speculation it could be around 25%. State-run media announced in late May that the government has decided to end preferential treatment for foreign companies at the beginning of 2007. Other details have not been released.

BOLIVIA is bracing itself for lawsuits after it increased government levies on oil and gas produced in the country from 18% to 50% and directed that exploration contracts signed with the government must be renegotiated.

There is speculation that mining projects will be the next target.

The Bolivian president let stand in late May a new law, passed overwhelming by the Bolivian Congress, that would impose a 32% tax on oil and gas at the wellhead on top of an 18% royalty that the government already collects. The law also reinstates YPFB as the national petroleum company with ownership over reserves. The company had been reduced to only a regulatory role after Bolivia privatized the oil and gas sector in 1998. Exploration contracts with the government will have to be renegotiated within a 180-day transition period. Oil and gas companies have said they will sue for breach of contract and illegal confiscation. Any political risk insurance policies the companies possess could affect the claims they make in the lawsuits.

Meanwhile, there have been calls in Congress to impose a 10% royalty on mining. The country is expecting a sharp drop in the amount of foreign investment. Huge street demonstrations could lead to renationalization of hydrocarbons.

ECUADOR is moving to collect $282 million in back taxes from 21 foreign oil companies.

The taxes are from the period 1998 through 2001. Among the companies being investigated are Occidental Petroleum, Repsol and EnCana. The move to collect taxes comes on the heels of an announcement that contracts with the state owned oil company, Petroecuador, must be renegotiated. Petroecuador controls more than 60% of oil output in the country.

VENEZUELA increased taxes on oil projects and is forcing some 22 companies to renegotiate their operating agreements with the government. It is also seeking a total of $2 billion in back taxes from the companies.

The moves are aimed at seizing a greater share of revenues from high oil prices.

In April, President Hugo Chavez increased the corporate tax rate on oil projects from 34% to 50%. In late May, the head of the national tax agency, SENIAT, told a parliamentary investigating committee that 90% of the 22 oil companies with operating agreements in the country have been reporting no income. A majority had agreed to pay back taxes on SENIAT’s terms by the end of May, according to the tax agency.

The government has given the oil companies six months to agree to turn their operations into joint ventures with the government. It would take a 51% stake in each venture.

CHILE imposed a new royalty tax on mining companies.

The Chilean Congress passed the tax by a wide margin on May 18.

It is a tax of as much as 5% on annual income from sales of ore from mines leased from the government. However, some costs of earning the income — like accelerated depreciation of mining equipment— that are deductible for purposes of calculating corporate income taxes would not be deductible against the tax base for the royalty tax.

The tax rate varies depending on annual sales. Companies that produce less than 12 metric tons of ore a year are exempted. The rates move from 0.5% to 4.5% as output increases from 12 to 50 metric tons. The tax rate for companies with more than 50 metric tons in annual output is 5%.

Larger mining companies will see their tax rates increase in Chile from 35% to 38.5% after the new tax is combined with the existing corporate income tax.

PERU will continue to collect new royalties on mining companies after a tribunal held they are constitutional.

The tribunal said in early April that the new law calls for payment of royalties rather than “taxes.” The decision could have implications for US companies with mining operations in Peru, since foreign tax credits can be claimed in the United States only for overseas levies that are “taxes.” What label a Peruvian tribunal chooses is not dispositive in the US.

The royalty rate in this case depends on the annual sales of the company. It is 1% for companies with gross sales of up to $60 million. It is 2% for gross sales between $60 million and $120 million, and 3% above that.

The government said it would continue to honor tax stabilization agreements signed with the government before mid-2004 when the new royalties went into effect. A tax stabilization agreement is a contract between a foreign investor and the government in which the government promises not to change the economics of a project by imposing new taxes, fees or other charges during the term of the agreement. Thus, the royalties only apply to companies that had not signed such agreements before last summer.

ARGENTINA is expected to adopt incentives for new oil and gas drilling.

The government sent Congress a proposal in late May that would allow oil and gas companies to claim faster tax depreciation on assets used for new drilling — both at expansions of existing projects and at completely new projects. The measure would also exempt equipment imported for such drilling from import duties. Companies are also supposed to receive faster refunds of value added taxes paid on such equipment. The measure is expected to pass Congress easily.

There is a tradeoff. Companies will have to enter into some unspecified form of association with the state-run oil company, ENARSA.

Meanwhile, the province of Buenos Aires said in early June that it has secured court orders to seize wages of 41 executives of multinational companies who are delinquent in paying real estate and vehicle taxes. It has also commenced court proceedings against another 83 executives at such companies.

Keith Martin