Asia Pacific Investment Guide

Asia-Pacific Energy, Utilities & Mining Investment Guide
Asia-Pacific
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DISCLAIMER
This publication has been prepared to assist those interested in the Energy, Utilities & Mining (EU&M) market in the
Asia-Pacific region.
The information in this publication is based on current legislation, case law, accounting standards, generally accepted
accounting practice, information produced by governments and government agencies in the Asia-Pacific region, press
articles and energy, utilities and mining statistics collected and collated from several referenced sources.
The information has been updated as far as practical to December 2003. The document should be taken as a guide
only and no specific action should be taken before consulting one of PricewaterhouseCoopers' EU&M specialists
named in this document.
This publication is intended to provide a general overview of the energy, utilities and mining market in the Asia-Pacific
region and is not intended to provide advice. No liability is accepted for any reliance on any statement or representation
where our specific advice is not sought.
ACKNOWLEDGMENT
We would like to thank Sanjeev Gupta, Director - Asia-Pacific Energy, Utilities & Mining Transaction Services Group,
PricewaterhouseCoopers, for his dedication and leadership throughout this project. We would also like to convey our
sincere thanks to all the contributors from various countries within the Asia-Pacific region for their efforts in delivering
valuable information which has greatly supported the preparation of this Energy, Utilities and Mining Investment Guide.
2004 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to the network of member firms
of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.
*connectedthinking is a trademark of PricewaterhouseCoopers.
"PricewaterhouseCoopers" refers to the network of member firms of

PricewaterhouseCoopers International Limited, each of which is a
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FOREWORD
PricewaterhouseCoopers partners and managers who have

expertise in Asia-Pacific's energy, utilities and mining markets
form our Asia-Pacific Energy, Utilities & Mining Transaction
Services Group. The Asia-Pacific Group and two other groups
- the Americas and Europe, the Middle East and Africa (EMEA) form our Global Energy, Utilities & Mining Transaction Services
Group. This specialised group includes professionals with
deep local industry experience and knowledge and provides
services, which are a core part of due diligence, mergers,
acquisitions, divestitures, joint ventures, spin-offs and strategic
alliances. The Global Group works to deliver the benefits of
global knowledge sharing and best practices to our clients. In
this context, a key focus of the Asia-Pacific Group is to provide
expert co-ordinated advice to clients operating in or seeking to
enter Asia-Pacific's energy, utilities and mining market. The
(hereafter also referred as handbook and/or guide) is a product
of this key focus.
Since the onset of the Asian financial crisis in 1997, all markets
of Asia, including the energy, utilities and mining market have
undergone tremendous change. In an attempt to stabilise and
strengthen the markets, substantial reforms have been
undertaken; stricter regulatory and supervisory measures have
been implemented, and accounting standards have been
improved. This handbook recognises that reforms are
continuing and that some of the information will become
outdated as the process proceeds.
PricewaterhouseCoopers
Asia-Pacific Energy, Utilities & Mining

Investment Guide Project
Project Sponsor
Any business intending to invest in Asia-Pacific will need to

carry out further research and obtain updated information on
investment and operational requirements. It should also
consider the social, political and economic diversity of the
country or countries it is intending to invest in, as they can be
quite complex and all encompassing.
To obtain more detailed information, we recommend you to
contact the PricewaterhouseCoopers energy, utilities and
mining specialist partners and managers in the country of your
interest.
Larry Luckey
Larry Luckey
Asia-Pacific EU&M
Transaction Services Leader
Asia-Pacific EU&M
Transaction Services Group
Leader (Partner)
Based in Jakarta, Indonesia
Project Leader
Sanjeev Gupta
Asia-Pacific EU&M
Transaction Services Group
Director
Based in Jakarta, Indonesia
ii
iii
CONTENTS
Asia Pacific
Australia
Brunei
37
China (including Hong Kong)
51
India
79
Indonesia (including East Timor)
121
Malaysia
165
New Zealand
191
Philippines
213
Singapore
245
South Korea
261
Thailand
281
Vietnam
303
Appendices
I.
Statistical Overview Chart (by Country)
II.
A Comparable Summary of Information (by Country) Key Energy, Utilities & Mining Data
III. Other Summary of Information (by Country)

IV. Selective PSC and Mining Terms (by Country)
V.
Energy, Utilities & Mining Transaction Services Directory
VI. PricewaterhouseCoopers Publications (by Country)

VII. Glossary of Terms and Abbreviations
iv
Asia-Pacific
Overview
SOUTH
KOREA
CHINA
HONGKONG
INDIA
THAILAND
VIETNAM
PHILIPPINES
BRUNEI
MALAYSIA
SINGAPORE
INDONESIA
AUSTRALIA
NEW ZEALAND
Asia Pacific represents approximately 25% of the worlds oil and gas consumption, hosts 4.2%
of the worlds oil reserves and 10.25% of global crude oil production and has 54% of the worlds
population. Over the past few years, the regions growth was disrupted following a series of
global and regional events and severe acute respiratory syndrome (SARS) outbreak. However,
the investment and growth sentiments have strengthened significantly in recent past, with the
uncertainties brought about by these events being removed. As a result, in 2003 Asia-Pacific
recorded the strongest increase in primary energy consumption in the world, up 6.3%. This was
primarily driven by the growing Chinese and Indian economies.
Energy security has been one of the most important elements in promoting development in the
Asia-Pacific region. Dependence on oil imports is strongly felt in China, India, Japan, New
Zealand, the Philippines, Hong Kong and Singapore. Demand for oil will remain strong, especially
in the transport sector with an expected increase in private car ownership in the populous but fast
developing economies. At the same time, and in view of increasing demand for fossil fuels,
environmental challenges are becoming an indispensable part of doing business in the region.
Asia-Pacific
In Asia-Pacific, the mining industry remains to be dominated by

multinational corporations. However, the urge to seek alternate
fuel resources (coal) to the relatively expensive oil and gas, and
also to reduce dependence on a particular fuel source, has
resulted in Asian companies beginning to venture out for coal
assets within the region. A recent increase in coal prices has
contributed to regional players increased interest in
accumulating coal properties.
The Asia-Pacific region accounts for 29% of global net
consumption of electricity. The region's characterizations of
energy deficit and promising economic growth mean
opportunities are available for IPPs. Reforms, deregulation and
privatization provide investors with a better climate for profiting
from the regions increasing demand for electricity. A trend of
investing outside their domestic market has developed within a
small number of Asian players. The constraint for growth in their
home markets along with the desire to gain experience in a pool
market appears to be the impetus for this. Australia, China, New
Zealand and Singapore appear to be the primary regions for
investment.
We have provided some brief industry related and other
information in relation to most of the countries within the AsiaPacific region in later sections of this Guide. We shall
endeavour to include more countries in future editions of this
handbook.
Australia
1. Map of the Country & Key Statistics
Please refer to the summary

charts presented under
appendices I-IV for key statistics
on Australia.
2. Commercial Environment
Political and Legal
Three political parties dominate the centre of the Australian political spectrum: the Liberal
Party (LP), nominally representing urban business-related groups; the National Party (NP),
nominally representing rural interests; and the Australian Labour Party (ALP), nominally
representing the trade unions and liberal groups. Although embracing some leftists, the ALP
traditionally has been moderately socialist in its policies and approaches to social issues.
All political groups are tied by tradition to domestic welfare policies, mostly enacted in the
1980s, which have kept Australia in the forefront of societies offering extensive social welfare
programs. Australia's social welfare safety net has been reduced in recent years, however, in
response to budgetary pressures and a changing political outlook. There is strong bipartisan
sentiment on many international issues, including Australia's commitment to its alliance with
the United States.
Australia
Australia
The Liberal Party/National Party coalition came to power in the

March 1996 election, ending 13 years of ALP government and
electing John Howard as Prime Minister. Howard's
conservative coalition has moved quickly to reduce Australia's
government deficit and the influence of organized labour,
placing more emphasis on workplace-based collective
bargaining for wages. The Howard government also has
accelerated the pace of privatisation, beginning with the
government-owned telecommunications corporation. The
Howard government has continued the foreign policy of its
predecessors, based on relations with four key countries: the
United States, Japan, China, and Indonesia.
The legal system has developed from British law. Much of the
law is codified, but English common law remains important in
many areas. There is a system of courts at both the
commonwealth and the state levels.
Various forms of control are placed on the operations of
companies and the securities industry in Australia. These
controls are exercised by the commonwealth (i.e. federal)
government through national companies legislation and the
Australian Securities and Investment Commission (ASIC). In
addition, each state and territory has statutes that regulate how
business are conducted, for example, Partnership Acts, Trustee
Acts and Fair Trading Acts. Commissioners of Business and
Consumer Affairs in each state or territory have responsibility
for overseeing and administering certain of these Acts.
Principal Regulatory/Government
Organisations
The principal government organizations and
regulatory agencies concerned with business
operations are:
Australian Department of Foreign Affairs
and Trade
Australian Securities and Investment
Commission
Australian Taxation Office
Commonwealth Department of the
Treasury, Australia
Department of Finance and Administration
Department of Employment, Workplace
Relations and Small Business
Department of Industry Science and
Resources
Commonwealth Scientific and Industrial
Research Organization
Australian Department of Immigration and
Multicultural Affairs
Agriculture, Fisheries and Forestry
Australia (AFFA)
Australian Bureau of Statistics
Commonwealth Government
State Governments
National Electricity Market Management
Company (NEMMCO)
National Electricity Code Administrator
(NECA)
Reserve Bank of Australia
Australian Competition and Consumer

Commission (*)
AusIndustry (**)
Austrade (***)
Note (*):
The Commission administers the Trade Practices Act 1974
and the Prices Surveillance Act 1983 and has additional
responsibilities under other legislation. The Commission is
the only national agency dealing generally with competition
matters and the only agency with responsibility for
enforcement of the Trade Practices Act and the associated
State/ Territory application legislation.
Note (**):
AusIndustry is the Commonwealth Governments business
unit for information and assistance. Part of AusIndustry is the
Business Licence Information Service, which assists
businesses in obtaining information about all the licences
and permits that are required in order to operate in Australia.
Note (***):
Austrade is the Australian Governments international trade
and investment agency. Austrade helps organizations
throughout the world do business with Australia.
Australia
Australia
Economic Overview
Financial Markets Environment
Please refer to the Statistical Overview Chart (by Country)

under Appendix I for information on Australia.
The Reserve Bank of Australia, Australia's

central bank, is primarily charged with making
monetary policy. Other tasks include : (1)
mantining the stability of the financial system;
(2) promoting a safe and efficient payments
system; (3) issuing currency notes; and (4)
serving as banker to the government. As of
July 2004, Australia had foreign reserves of A$
48.87 billion.
Historically, the Australian economy has consisted of exportoriented agricultural and mining sectors coupled with a
diversified manufacturing-service sector dedicated to domestic
requirements. That pattern is changing slowly. Australia's
developed economy is dominated by its services sector, but it is
the agriculture and mining sectors that account for the bulk of
goods and services exports. The Australian economy and
balance of payments are strongly influenced by world prices for
primary products. GDP growth was about 2.9% during 2003
and inflation was low reaching only 2.5% for the year ended
June 2004.
Australia has immense mineral and energy resources. It is the
world's leading exporter of coal and one of the world's leading
producers and exporters of aluminum, alumina, bauxite, cobalt,
copper, industrial diamonds, gold, iron ore, lead, nickel, silver,
and uranium. In addition, abundant supplies of natural gas,
liquid petroleum gas, and uranium make Australia a net
exporter of energy products.
The region-wide Asian financial crisis, which began in 1997,
had created uncertainty and instability in Australia's economy,
however, the economic climate has stabilized and gradually
recovered.
The Australian dollar is floated freely against all

other currencies in the market and traded at
about US$ 0.69 per A$ 1 in September 2004.
The Australian financial market has evolved in
four significant ways over the past decade:
! The market capitalisation of domestic
equities listed on the Australian Stock
Exchange has grown from approximately
A$176 billion in 1993 to A$770 billion at 31
December 2003.
! The volume of equities trade has risen by
approximately 665% over the same
period.
! The structure of the market has also
changed dramatically. In the 1980s mining
and natural resource companies as well as
manufacturing companies dominated the
market. While these sectors have
continued to grow and are an important
part of the Australian market, there has

also been a significant growth in the
financial and other services sectors, which
include companies such as those involved
in telecommunications. Overall, the
Australian market has diversified
substantially providing investors with a
greater choice of investments and adding
to the overall stability of the market.
There has been a significant growth in the
number of retail investors participating in
the market, such that 50% of the
Australian adult population now owns
shares either directly or indirectly, making
Australia a world leader in terms of share
ownership.
3. Energy, Utilities & Mining

Market
Economic and Industry
Overview
Please refer to A Comparable Summary
of Information (by Country) Key Energy,
Utilities & Mining Data (Appendix II) and
Other Summary of Information (by
Country) (Appendix III) for industry related
key data and information on Australia.
Australia is the world's leading coal
Australia
Australia
exporter and has significant natural gas reserves. Australia's

proven oil and natural gas have substantially increased in recent
years, although there is much exploration yet to be performed.
Currently, infrastructure is being developed to bring more of
Australia's natural gas reserves to market.
Australia's energy consumption profile is dominated by coal,
which fuels most of the country's power generation. Petroleum
also accounts for a large share of energy consumption.
Natural gas use is relatively small, but has been growing rapidly
in recent years. An important issue facing Australia is its growing
dependence on petroleum imports, the result of expanding
consumption in a period of declining production. This problem
has been exacerbated by the country's difficulty in attracting
new foreign investment into its energy sector, something many
Australians have blamed on a restrictive regulatory climate and
the government's failure to provide incentives for new potential
investors.
Australia is one of the few developed countries that are
significant net energy exporters. Since 1986, it has been the
world's largest coal exporter, and it is currently the sixth largest
exporter of LNG. With Asia's steadily rising demand for both
coal and LNG, Australia's prospects for expanding its energy
exports are good. In the near future, however, it can expect to
face greater export competition from China, in coal, and from
Indonesia, in both coal and LNG. In the longer term, the growth
of Australia's coal exports may depend on Asia's response to
global warming concerns. Already, Japan, the largest importer
of Australian coal, is considering imposing a tax on coal imports,
in part to encourage greater consumption of other fuels.
8
Oil
At the end of 2003, Australia's oil reserves
were estimated at 3.5 billion. The bulk of these
reserves are located offshore of the
northwestern and southeastern parts of the
country. The two largest areas holding
petroleum reserves are the Bass Strait off
Southern Australia, with 1.8 billion barrels, and
the Carnarvon Basin off Western Australia, with
1.1 billion barrels.
In recent years, declining petroleum
production coupled with climbing domestic oil
consumption has increased concerns about
the growing insufficiency of the country's fuel
supply. Under pressure to promote
exploration, the government has gradually
responded with issuances of new exploration
permits. Most significant was a March 2003
move by the government to open bidding for
exploration permits in 35 new offshore areas,
22 of which are located in the Northern
Territory and Western Australia, with the
remaining scattered around southern Australia,
including Tasmania and the Ashmore and
Cartier Islands.
Prospects for new petroleum finds in Western
Australia are considered good, following
recent discoveries by Woodside Petroleum
and BHP Billiton in February 2003. Interest in
exploration off Southern Australia is led by

Australian-based Santos, Inc., which was
awarded three new exploration permits in the
region in September 2003. Much of the area
around Southern Australia has not been
explored yet because its adverse weather
conditions and deeper waters have made
potential ventures more costly. Furthermore,
only 4 of 36 wells drilled in Australia's deep
waters since 1992 have actually yielded oil.
In the past, the majority of petroleum
exploration in Australia was carried out by the
larger domestic oil firms, including BHP
Billiton, Woodside Petroleum, and Santos.
However, current exploration ventures have
seen an increase in foreign interests and
greater participation of smaller Australian
companies. Nonetheless, the country's
existing tax laws are regularly criticised as a
major obstacle to the attraction of substantial
foreign investment in exploration. In October
2002, as a precursor to the wider revision of
exploration laws, the government passed
amendments to reduce oil industry compliance
costs. In the same year, the government also
made a four-year commitment of A$30 million
in funding to AGSO-Geoscience Australia, a
national agency, so that it could provide
petroleum and natural gas companies with
seismic and geological data to facilitate
increase in exploration.
Australia
Australia
Australia's oil production had increased gradually since 1980,

peaking in 2000 at 805,000 Bbl/d, 722,000 Bbl/d of which was
crude oil. In 2003, as was expected, production fell
dramatically to 714,800 Bbl/d and since then, has continued to
fall with production estimates for 2004 below 600,000 Bbl/d.
Australia's Bureau of Agriculture and Resource Economics
(ABARE) has estimated that production will fall further to
560,000 Bbl/d by 2006. Declines are primarily due to
decreasing production at the Cooper-Eromanga and Gippsland
basins. The country's other major basins, the Carnarvon and
Bonaparte, have both yielded increasing amounts of oil in
recent years, but have been unable to keep up with the
country's rapidly growing demand.
While Australia's declining production is a major contributor to
the country's growing oil deficit, the role of expanding
petroleum consumption cannot be overlooked. Petroleum
consumption has grown by 3% since 1995, and is expected to
rise in tandem with Australia's economy over the next 20 years.
In 2003, petroleum consumption averaged 881,000 Bbl/d,
resulting in net imports of 166,000 Bbl/d. By comparison, net oil
imports in 2000 averaged only 54,000 Bbl/d. By 2010, the
country is expected to slide from 80% self-sufficiency to 40%.
Besides conventional oil, Australia also has shale oil reserves in
the northeastern state of Queensland. Estimates of
Queenland's shale oil reserves run as high as 30 billion barrels.
However, the primary developer of Queensland's shale oil,
Southern Pacific Petroleum/Central Pacific Minerals
(SPP/CPM), has until recently been unable to capitalise upon
this resource due to protests by Greenpeace activists. Since
1998, Greenpeace has been staging public demonstrations in
10
Queensland and pressuring Australian refiners

to refuse shale oil, on the grounds that it is
highly polluting. In 2001, all four major
Australian refining firms refused to purchase
Queensland's shale oil, despite government
excise rebates, forcing the industry to look to
the government for support in order to stay
afloat. In May 2002, the government granted
temporary support by extending existing
excise rebates, originally designed only for the
domestic sale of shale oil products, to
international markets for a period of 12
months. In July 2002, SPP/CPM succeeded in
securing a long-term contract for the domestic
sale of naphtha, derived from shale oil, to Mobil
Oil Australia.
Refining
Australia has eight major refineries, two each
owned by four companies, with a total crude
oil distillation capacity of 848,250 Bbl/d. Four
of the refineries are located on the country's
eastern coast, three are on the southern coast,
and one is located in Western Australia. By
international standards, Australia's refineries
are relatively small, the three biggest being: BP
Australia's Kwinana refinery, with a capacity of
138,500 Bbl/d of crude oil; ExxonMobil's
Altona refinery with a capacity of 135,000
Bbl/d of crude oil; and Shell's Geelong refinery,
with a capacity of 119,000 Bbl/d. Australia's
fourth biggest refining company is owned by

Caltex.
For several years now, all eight major refineries
have experienced declining gross margins,
mainly due to competition from larger foreign
refineries that benefit from economies of scale.
Other factors hurting the country's refiners
include an oversupply of refining capacity in
Asia and the relatively high cost of transporting
crude oil to Australia. In addition, Australia's
refineries are restrained by the 1970s
government mandate under which they were
constructed, which has left them equipped to
only process light, sweet crude oils, even
though heavier, sour crude might be cheaper.
Adding to this cost burden in the future are new
fuel quality standards that require refiners to
upgrade their facilities by 2006. In April 2003,
ExxonMobil announced its plans to close its
74,000 Bbl/d Adelaide refinery in southern
Australia, citing poor refining margins as
responsible for its decision. Analysts have
forecast additional closures in Australia's
refining sector in the future.
Natural Gas and Pipelines

At the end of 2003, Australia's natural gas
reserves were estimated at 90 trillion cubic feet
(Tcf), making them among the largest in the
Asia Pacific region. The most abundant
11
Australia
Australia
reserves are located offshore of the country's northwestern

coast in the Carnavoran Basin (40 Tcf of proven natural gas), an
area more well known as the Northwest Shelf. Other important
basins, including the Cooper/Eromanga basin in Central
Australia and the Bass/Gippsland basin offshore of southern
Australian, account for about 10 Tcf of reserves.
The status of abundant reserves in the Timor Sea, north of
Australia, has been partially resolved. In May 2002, Australia's
claim to 25 Tcf of reserves in the Browse/Bonaparte Basin of the
Timor Sea was challenged by East Timor. After achieving
independence, East Timor expanded its claim on its maritime
territory, backing away from a previous agreement reached
between Australia and Indonesia.
The resulting border dispute between Australia and East Timor
was addressed in March 2003 with the Timor Gap Agreement,
which established a Joint Development Area (JDA) between the
two countries and set the division of royalties arising from
hydrocarbon production at 90:10 in favour of East Timor. Of the
two major natural gas fields in the Browse/Bonaparte Basin,
only the Bayu Undan, with an estimated 3.4 Tcf of natural gas,
lies wholly within the JDA. In contrast, 80% of the 9.3-Tcf
Greater Sunrise field is located outside of the JDA. Both fields
are currently in the planning stages of development for future
LNG production.
Still, despite agreement on the JDA, Australia and East Timor
have not come to agreement on the exact demarcation of the
maritime border between them, an issue they plan to address in
the near future. The Timor Sea also contains natural gas in the
Evans Shoal, Petrel, and Tern gas fields. Combined, these fields
12
are estimated to contain 4.0 Tcf of natural gas

and are currently operated by Santos.
Recent natural gas exploration in Australia has
resulted in a few important discoveries
including, most notably, ExxonMobil's June
2002 discovery of 20 Tcf of natural gas in the
Jansz field of the Northwest Shelf. In 2001,
new natural gas discoveries were also made in
Southern Australia's Otway Basin, pushing
estimates of that basin's reserves up to 1.6 Tcf.
In the near term, there is the likelihood that
additional natural gas discoveries will be made
inadvertently as a by-product of the recent
surge in petroleum exploration in the country.
Past petroleum exploration in the deep waters
of Southern Australia has primarily resulted in
the discovery of natural gas.
Natural gas production in Australia has
increased rapidly since 1995, from 690 Bcf to
1.17 Tcf in 2003. Production is expected to
grow 3.5% in 2004, despite declining
production capacity in the Cooper/Eromonga
Basin. This growth in production can be
attributed in part to growth in consumption, as
concerns about declining petroleum
production have led to greater substitution of
natural gas for petroleum products. At present,
natural gas plays a relatively small role in
Australia's fuel mix (approximately 18%), but
consumption has grown steadily, from 710 Bcf
in 1995 to 824 Bcf in 2003. Over the next two

decades, Australia's natural gas consumption
is projected to grow twice as fast as
consumption of other energy sources with the
expectation that natural gas will account for
24% of the country's total energy consumption
by 2019-2020. Currently, natural gas, that is
produced in the country for domestic
consumption, comes from both central and
southern Australia as well as the Northwest
Shelf.
A more significant driver of natural gas
production growth is Australian LNG
production for export. In 2002, Australia was
the sixth largest LNG exporter, accounting for
7% of global LNG exports. The country
produced 330 Bcf of LNG in 2001, over 80% of
which was exported. Japan is the primary
destination of Australia's LNG supplies, with
smaller shipments to South Korea and Spain.
The government of Australia has shown its
support for the LNG industry by launching a
new policy framework in 2000, aimed at
facilitating LNG industry growth through
various measures including less-stringent
environmental policies and the relaxation of
tariffs on imported capital equipment.
The Northwest Shelf Venture (NSV), a
consortium of six energy companies, is
currently the only producer and exporter of
13
Australia
14
Australia
Australian LNG. NSV operates three offshore LNG facilities,

relying on natural gas supplies from the 19.3 Tcf of estimated
reserves in the North Rankin and nearby fields of the Northwest
Shelf. NSV began operation in 1989, and since then its
production of LNG grew rapidly until about 1996 when it began
to level off. In 2001, the consortium received approval to
expand its 3-train facility to a 4-train facility, a project that is
scheduled to be completed in mid to late 2004. Meanwhile, with
LNG demand in East Asia growing rapidly and the prospect of
competition from other LNG suppliers on the horizon, NSV has
already considered the construction of a fifth train on which a
decision is to be made during year 2004. Support for a fifth train
may be influenced by NSV's recent success in winning a bid to
supply China's Guandong Terminal beginning in 2005.
Following approval of the Timor Sea

Agreement, ConocoPhillips has proceeded
with plans to construct a liquefaction plant at
Darwin, on Australia's northern coast, that will
source its natural gas supplies from the Bayu
Undan field. ConocoPhillips has a majority
interest (64.46%) in the project which it is
developing with Santos (11.83%), Italy's ENI
(12%), and Japan's Inpex (11.71%). Earlier, in
March 2002, ConocoPhillips has formalised
arrangements to sell 3 million tons of LNG per
year from the Darwin plant to Tokyo Electric
Power Company and Tokyo Gas Company for
17 years beginning in 2006.
While NSV currently dominates Australia's LNG market, there

are three LNG projects under development that may provide
NSV with competition in the future. One project is proposed for
the Northwest Shelf's 12.9-Tcf Gorgon field and is being
developed independently by NSV members ChevronTexaco
(with 57% ownership), Shell (29%) and ExxonMobil (14%). The
project entails the construction of a pipeline to transport natural
gas from the Gorgon field to Australia's Barrow Island, where a
liquefaction plant with annual capacity of 238 Bcf per year is to
be constructed. In September 2003, the state of Western
Australia approved the project after a lengthy delay resulting
from environmental opposition to the liquefaction plant. While
federal approval of the project remained pending,
ChevronTexaco has secured an agreement with an affiliate for
the delivery of 95 Bcf per year from the Gorgon Venture to North
America over a 20-year period, beginning in 2008.
A third LNG project, led by Woodside

Petroleum (33%) in a consortium with
ConocoPhillips (30%), Royal Dutch/Shell
(27%) and Osaka (10%), has been proposed
for the Greater Sunrise natural gas field in the
Timor Sea. At the end of 2002, the consortium
announced its plans to develop the project by
constructing the first floating LNG plant. The
plant's proposed capacity is 238 Bcf per year,
with production slated to begin in 2008.
Given the anticipated increase in importance of

Australia's offshore gas resources, growth in
the country's natural gas industry will depend
on the successful expansion of its pipeline
infrastructure. Australia's existing network is
fragmented and was built to carry gas from the
country's centrally located fields to coastal

urban hubs like Sydney and Melbourne. But
with centrally located fields such as those in
the Cooper/Eromonga Basin in decline, and
offshore projects like the Northwest Shelf,
Otway Basin, and Timor Gap on the horizon, it
has been estimated that large investment in
the country's pipeline infrastructure will be
necessary to bring additional natural gas into
the grid.
However, ongoing tensions between pipeline
companies and regulators may discourage the
entry of new investors. These tensions are
exemplified by Australian Epic Energy's
decision in September 2003 to put its pipeline
assets up for sale after determining that
pipeline tariffs set by Western Australia's
regulator were too low for it to operate
profitably. Other companies, such as
Australia's Pipeline Trust, have halted
construction on proposed pipelines out of
concerns about the regulatory environment.
This has led many Australian and international
investors as well as the Australian Pipeline
Industry Association (APIA), to call for
regulatory reforms that support new pipeline
investment.
Current natural gas pipeline projects reflect
Australia's changing supply base. These
include offshore projects that have been
15
Australia
Australia
Meanwhile, controversy surrounding the viability of a proposal

for Australia's first international natural gas pipeline from Papua
New Guinea (PNG) may diminish in the near future. The 1300mile pipeline has been proposed to deliver gas from
Kutubu/Moran natural gas fields in PNG to the northern part of
Queensland in Australia. For three years, progress on the
pipeline has been paralysed by the lack of commitment from its
potential buyers. In July 2003, the successful closing of a longterm contract with Australian-based Energex provided new
hope for the pipeline, which needs to secure long-term
commitments for half of its throughput before it can proceed.
The main developers of the PNG pipeline are Oil Search Ltd.
(45%), ExxonMobil (39%), and ChevronTexaco (10%).
16
Coal
World Top Five Coal Exporters 2003
250
Millions of Metric Tons
proposed to support the LNG ventures described above. A few

projects are also underway to exploit natural gas resources
offshore of southern Australia, including the 423-mile, Sea Gas
pipeline that will bring natural gas from the Otway Basin,
offshore of Victoria, to Southern Australia's Quarintine power
station in Adelaide. Construction on the Sea Gas project is
nearly finished and expected to be completed by the end of
2004. In addition, near Victoria, in the Bass Strait, construction
is continuing on a 110-mile pipeline to bring gas from the Yolla
gas fields to market.
200
150
100
50
Australia
China
Indonesia
South Africa
China
Source : AME Report 2003
Australia is estimated to contain 82.1 Billion

Metric Tons (Bmt) of coal reserves
concentrated along the country's eastern
seaboard. The Bowen Basin in the state of
Queensland contains the largest reserves, with
approximately 34.3 Bmt. Reserves in the
Sydney-Gunnedah Basin and surrounding
areas of northern New South Wales (NSW)
contain about 29.1 Bmt. Minor reserves are
also located in Southern and Western Australia
as well as Tasmania. Together, Queensland
and NSW account for 95% of Australia's
annual coal production. While both states
produce both coking and thermal coal,
production of coking coal is significantly higher
in Queensland, while NSW leads in thermal

coal production.
Over the last decade, coal production in
Australia has grown by 4% annually.
Four companies dominate Australia's coal
industry: BHP Billiton, Anglo American (UK),
Rio Tinto (Australian-UK), and Xstrata
(Switzerland). The small number of players in
the country's coal sector is the result of series
of consolidations in recent years. Australia
holds an important role in global coal markets
as the fifth largest producer. More importantly,
the country exports 60% of its annual
17
Australia
Australia
production, making it the largest exporter of coal (31% of global

coal exports).
This dominance is clearly present in the market for coking coal,
where Australia was responsible for 52% of exports in 2003.
Australia also leads thermal coal exports, although it accounts
for a smaller share of that market, around 21%. Recently
though, Australia's thermal coal exports began to face new
competition from China, raising the possibility that its share of
that market may shrink in the future. Still, Australian Bureau of
Agriculture and Resource Economics (ABARE) and Australian
Mineral Economics (AME) forecast growth in Australia's thermal
coal exports will be 2.1% and 1.3% in 2004 and 2005
respectively. Coking coal exports are estimated to grow 4.3%
and 3.6% in 2004 and 2005 respectively.
Japan is the destination of over 45% of Australia's coal exports,
while other important export markets include non-Japan Asia
and Europe. Since the end of the 1990's, Australian suppliers
have set the prices for their coal exports directly with Japanese
utilities, the major consumers of Australian coal. As a result, the
annually negotiated price of these contracts has a large effect
on the Australia's coal export earnings.
Electricity
As of January 2003, Australia had electric generating capacity
equal to 42.7 million kilowatts. Approximately 85% of this
capacity was thermal (mostly coal) while 14% was renewable
(mostly hydro). Not surprisingly, coal-fired generating capacity
is primarily located in the eastern part of the country near its
coal reserves, while Western and Southern Australia rely on
18
large amounts of natural gas to fuel their power

plants. During 2003, Australia generated 198.2
Billion Kilowatthours (Bkwh) of electricity and
consumed 184.4 Bkwh. According to the
Electricity Supply Association of Australia
(ESAA), consumption is expected to grow
rapidly during the next few years, rising to 206
Bkwh by 2008. Most of this growth in
consumption will be concentrated in the states
of Queensland, NSW and Victoria.
In 1996, major reforms were instituted in
Australia's electricity industry. Prior to 1996,
electric utilities were owned independently by
states, but under the 1996 changes, many
state-owned utilities were split up and
privatised. Key to these reforms has been the
creation of the National Electricity Market
(NEM), which is a wholesale "pool" operated
by the National Electricity Market Management
Company (NEMMCO), serving the states of
Queensland, New South Wales, Victoria,
Southern Australia, and the Australian Capital
Territory via an interconnected national grid.
The NEM currently does not include the states
of Tasmania, Western Australia, or the
Northern Territories, although Tasmania is
expected to join when construction of an
electricity link to the mainland is completed.
Geographic distance is the main obstacle to
the inclusion of the other two states in the
NEM. As a result, in November 2002, the
government of the state of Western Australia

adopted its own plans for reforming its
electricity sector which include the unbundling
of the state's regulated utilities, Western
Power, and the establishment of a wholesale
power market by 2005.
Consumer reviews of Australia's electricity
reforms have been mixed. Electricity prices
overall fell about 11% in the period 1996-2000,
although the majority of those savings went to
large industrial/commercial customers who
had the option to choose retailers. During 2000
and 2001, the NEM experienced a significant
increase in price volatility arising from unusual
temperature conditions and supply shortages.
Retail competition was introduced to NSW and
Victoria in January 2002. Since these two
states have been combined into a two-state
regional market, reforms have sharply reduced
electricity prices due to overcapacity and
strong competition, although prices have
begun to rise recently as increasing demand
uses up spare capacity. In Southern Australia,
reforms actually have led to higher prices
following the introduction of retail competition
in January 2003. Meanwhile, Queensland has
indefinitely postponed introducing retail
competition, a decision that could be
indicative of the state government's reluctance
to abdicate its control over the electric power
sector.
19
Australia
Australia
On the supply side, the NEM has been successful in

encouraging new investment: between 2000 and 2002, 3,300
MW of new generating capacity was added. Still, rapid growth in
demand for electricity has resulted in shrinking reserve margins
in eastern Australia, a problem that could become acute by
2005 if there is not sufficient investment in new generating
capacity. Presently, the prospects for new foreign investment
are grim, as several UK and US companies with stakes in
Australia's generating assets have recently made plans to exit
the industry. These include El Paso Energy, Dominion Energy,
Scottish Power and PowerGen, which have either already put
their assets up for sale or plan to do so in the near future. While
several companies have cited issues in their home markets as
the main reason for their departure, many Australians believe
that ongoing interconnection problems and other issues arising
from the lack of a national electricity regulator have made
Australia less attractive to investors.
seabed of Australia's continental shelf. The

States oversee mining on the landward side of
the 3 nautical mile territorial sea limit, with the
Commonwealth having responsibility for areas
beyond.
The Petroleum (Submerged Lands) Act 1967
provides for a three-tier system of titles to
offshore areas: an exploration permit which
covers all forms of exploration, including
drilling; a retention lease, which provides tenure
over non-commercial discoveries; and a
production licence, which covers development
and production.
Onshore, exploration permits, retention leases,
and production licences for exploration and
development are issued and administered by
the government of each State or Territory.
4. Regulation and Supervision

Oil and Gas
The oil and gas industry is highly regulated, with the Federal
and State Governments being in all stages of production.
The State Governments and the Commonwealth
government, both of which issue licences, control
petroleum exploration.
The State Governments and the Commonwealth
Government share responsibility for the mining of the
20
Agreements with foreign countries can also

affect oil exploration activity in Australia. For
example, the Timor Gap Treaty between
Australia and Indonesia re-defined national oil
exploration boundaries. One oil-rich area
(known as the Joint Development Zone) was
controlled jointly by the two governments. The
Treaty was re-negotiated after East Timor
gained independence from Indonesia, and the
shared area is now known as the Timor Gap
Joint Development Area.
The industry is also required to negotiate with

Aboriginal groups who have lodged claims to
prospective areas under the Native Title Act.
Regulation in the gas supply industry has
traditionally taken the form of government
ownership. The ongoing privatisation of recent
years has changed this situation, as has the
Council of Australian Government's 1994
resolution to create a fully competitive national
gas grid.
The National Third Party Access Code for
Natural Gas Pipeline Systems was introduced
in late 1997. Essentially, it provides the legal
basis for access by third parties to natural gas
pipelines and distribution systems. In the case
of distribution systems, State-based regulators
deal with access issues, except in the Northern
Territory, where the Australian Competition and
Consumer Commission acts as the regulator.
This is set to change with the introduction of a
single nation-wide energy regulator, Australian
Energy Regulator, operating an independent
authority directly attached to the ACCC.
The freedom to choose a gas supplier (market
contestability) has been gradually introduced in
all States. Large industrial and commercial
consumers of gas (using over 500 PJ per year)
were the first to be able to make their own
supply arrangements. Contestability has since
21
Australia
Australia
Brown Coal
been extended to ever-smaller gas users. In New South Wales

and the Australian Capital Territory, the gas market became fully
contestable on 1 January 2002. Western Australia followed suit
on 1 July 2002, followed by Victoria on 1 October 2002.
Southern Australia has followed the trend.
The brown coal industry is highly regulated,

with state governments in particular
overseeing virtually all aspects of operation.
Mining
State governments determine which land is

open to exploration and mining, and issue
exploration and mining leases.
Black Coal
The black coal industry is highly regulated, with state
governments in particular overseeing virtually all aspects of
operation.
State governments determine which land is open to exploration
and mining, issue exploration and mining leases, and collect
royalties from producers (see the section of this report headed
Taxation).
State governments levy coal rail freight charges which generally
include a substantial profit component.
The Coal Industry Tribunal handles industrial relations issues in
the industry. During 1994, the Coal Industry Tribunal became a
separate division within the Australian Industry Relations
Commission. Before that time, it operated outside the industrial
relations mainstream.
The Native Title Act (commonly known as the Mabo legislation)
has implications for the black coal industry. Native title claims
covering coal-producing areas and coal-loading ports have
been lodged with the Native Title Tribunal.
22
During late 2001, the Victorian Government

offered four large brown coal leases in a tender.
No leases have been offered for public tender
since the 1920s; the state government had
kept the brown coal resource exclusively for
power generation. In mid 2002, exploration
leases were awarded to Loy Yang Power,
Australian Power and Energy Ltd (APEL) and
one other developer. The largest lease was
awarded to APEL, which intended to spend
A$6 billion building a plant to convert brown
coal into clean diesel fuel and electricity. The
other two successful bidders each have A$1
billion plans for new power plants.
The industry is also open to native title claims
under the Native Title Act 1993.
Power and Utilities

Regulation in the electricity generation industry
has traditionally taken the form of government
ownership. This situation is changing due to
privatisation, but regulation remains tight,

reflecting the importance of electricity to the
overall economy.
Electricity generation was the first of the
electricity industries to be introduced to
competition. During the first half of the 1990s,
a framework for the development and
operation of an inter-connected electricity
market in Australia's south east (the National
Electricity Market or NEM) was established.
As this framework was being developed,
competitive regional power pools were
established in both Victoria (1994) and New
South Wales (1996). Queensland and South
Australia both established competitive
wholesale markets during 1998, and at the end
of that year, the NEM finally commenced
operations when the New South Wales and
Victorian power pools were merged. The
Australian Capital Territory is part of the New
South Wales pool and South Australia trades
through Victoria, as it has no direct electricity
link with New South Wales. Queensland was
linked to the NEM during 2000, with the
completion of a transmission line into New
South Wales. The Snowy Mountains
Corporation also participates in NEM.
Tasmania was to join in 2003, upon completion
of the electricity link across Bass Strait (Bass
Link).
23
Australia
Australia
The key design criteria for the NEM were strong competition,
free customer choice across the range of generators, traders
and distributors, non-discriminatory access to electricity
transmission and distribution networks, non-discriminatory
market entry and no discrimination across state or regional
borders. Electricity trading rules, commonly known as pool
rules, were developed and became part of the legally binding
National Electricity Code. The Code became operational in
December 1998 and effectively abolished state-based markets
in the participating regions. The State Governments
participating in the NEM gave legal force to the Code by
enacting a series of State laws. Collectively, they also own the
two corporations responsible for the management of the NEM.
The National Electricity Market Management Company
(NEMMCO) is the market and system operator, and the National
Electricity Code Administrator (NECA) establishes the rules
governing the market.
In order to ensure a competitive wholesale market for electricity,
the electricity generators, which were formerly part of the old
electricity utilities structure, were disaggregated into a number
of separate businesses. Five of these generators operate in
Victoria, and three in each of New South Wales, Queensland,
and South Australia. Other generators also participate in the
wholesale market, including a growing number of cogeneration plants. These plants produce electricity as a byproduct from other manufacturing operations and sell it into the
grid.
The wholesale electricity market is still in a state of transition.
Wholesale electricity prices for customers outside the
competitive market (households and small business in some
24
States) are set by state governments under

arrangements commonly known as 'vesting
contracts'. The entry of these customers into
the competitive market will see trading
conditions alter substantially. Most of the
change will occur at the retail end of the
market, but there will also be implications for
power generation. For example, retail price
caps (as in Victoria) are likely to see power
retailers attempt to pressure generators to
keep their prices down. Concern on the part of
generators that retailers may found in a market
where wholesale prices are volatile, while retail
prices are capped, is likely to have adverse
implications for future investment. Generators
may not be prepared to risk investment if they
fear that power retailers (their largest
customers) may not be able to meet their
power bills.
Requirements in Australian accounting

standards are generally comparable with their
equivalent International Accounting
Standards. Disclosure requirements are
stringent. Accounting standards have the
power of law, and penalties apply for
noncompliance.
5. Financial Reporting
Trends in the Development of

Financial Accounting
Generally Accepted Accounting

Principles
Fundamental accounting conventions
include a requirement to adopt accrual
accounting, the presentation of relevant
and reliable financial information that
reflects the substance rather than the form
of economic events and transactions.
The Australian Accounting Standards Board

(the AASB) is responsible for making
accounting standards. Compliance with
accounting standards is mandatory for those
entities regulated under the Corporations Law
that are required to prepare financial reports.
Other non-corporate entities (e.g. publicsector entities and not-for-profit clubs and
associations) may otherwise be required or
adopt AASB accounting standards or
Australian Accounting Standards issued by the
professional Accounting Bodies.
From 1 January 2005, all entities reporting

under the Corporations Act and reporting
entities which prepare general purpose
financial reports will be required to apply
International Financial Reporting Standards
(IFRS). This will mean a significant change to
Australian financial reporting, as most of
Australia's existing accounting standards differ
25
Australia
Australia
from IFRS and some important areas, including intangibles,

recognition and measurement of financial instruments,
investment property, accounting for post-employment benefits
(defined superannuation and medical benefits) and obligations
associated with the disposal or retirement of long-lived assets,
will be covered by accounting standards for the first time.
same draft for comment by Australian entities,

often with Australian-specific commentary and
questions for consideration. Those IFRS which
are not currently subject to amendment by the
IASB are also being issued as Australian
exposure drafts.
Standard Setting in Australia under IFRS
Pending Standards
Rather than adopting the International Accounting Standard

Board's (IASB's) standards directly, the AASB will issue
Australian equivalents of international standards known as
Australian International Financial Reporting Pronouncements
(AIFRPs). IFRS will be the "foundation" onto which the AASB will
add any details necessary to deal with local requirements, and to
define scope and applicability in the Australian environment. The
standards will apply to both the private and public sectors. In
some cases additional content will be included to cover the notfor-profit sector, and disclosures not covered by IFRS that are
required under existing AASB standards. However, the basic
wording of IFRS will be retained and not be edited unless
absolutely necessary. Any additions made by the AASB will be
clearly identified and made in a manner which preserves the
format and structure of the IFRS.
The table below lists the standards approved

and issued as pending standards by the AASB.
These standards are expected to be issued
during 2004 and will apply to reporting periods
commencing on or after 1 January 2005.
Oil and Gas, Mining and Power and

Utility Companies
Oil and gas, mining and power & utility
companies prepare their accounts in line with
the regulations as stated above.
6. Taxation
Availability of AIFRPs
The standards that will apply from 1 January 2005 will be issued
as a complete set during mid 2004. In the meantime, standards
which are finalised will be made available as pending
standards. These standards are not available for early adoption.
When the IASB issues an exposure draft, the AASB issues the
26
Pending standards on issue at 31

December 2003
Pending
standard no.
Title
AASB 1
First-time Adoption of Australian International

Financial Reporting Pronouncements
AASB 107
Cash Flow Statements
AASB 110
Events after the Balance Sheet Date
AASB 121
The Effects of Changes in Foreign Exchange Rates
AASB 123
Borrowing Costs
AASB 132
Financial Instruments: Disclosure and Presentation
AASB 139
Financial Instruments: Recognition and Measurement
AASB 141
Agriculture
Summary of Different Types of

Taxes
Principal Taxes
Income tax is imposed by the
Commonwealth (federal) government,
which distributes specific proportions to
the state governments and local
government agencies. The legislation that
imposes income tax is known as the
Income Tax Assessment Act 1936. In an
attempt to simplify the legislation the
government rewrote this Act, which is
known as the Income Tax Assessment Act
1997. Its intent does not depart from the
principles established in the 1936 Act. At
present, both acts have the force of law, so
in some cases it may be necessary to
check both Acts before proceeding with a
transaction.
27
Australia
Australia
The Commonwealth also collects revenue through the following

taxes:
1.
2.
3.
4.
5.
6.
7.
Fringe benefits tax imposed on employers on the taxable

value of benefits provided to employees.
Capital gains tax, which is integrated into the income tax
system.
A broad based goods and services tax, referred to as the
GST and similar in structure to the value added taxes in
operation in Europe, which was introduced in July 2000.
Customs duty on goods imported into Australia.
Excise duty on goods such as cigarettes, liquor and
petroleum products.
Superannuation surcharge on superannuation
contributions in respect of high income individuals.
A production levy on crude oil, some condensates and
naturally occurring liquified petroleum gas.
In addition, the Commonwealth imposes a superannuation

guarantee charge on employers that fail to provide required
levels of superannuation contributions for their employees.
State governments and the Australian Capital Territory and
Northern Territory impose a payroll tax on wages and/or
allowances paid to employees. The rate of tax ranges from
4.8% to 6.85% of wages above an annual exemption threshold
ranging from A$515,000 to A$850,000. Payroll tax is
deductible in the computation of taxable income.
The states and territories impose stamp taxes by reference to
value on documents evidencing the transfer of shares and real
property, as well as duty on certain financial transactions such
28
as hiring and leasing. From 1 July 2001 there

is no stamp duty on the transfer of quoted
marketable securities.
There is no death (estate), gift, turnover,

inheritance, or wealth tax in Australia.
Corporate Income Tax

All states (but not the Northern Territory)
impose an annual land tax on the unimproved
value of land subject to varying thresholds and
exemptions. The Australian Capital Territory
imposes a quarterly land tax. The most
important exemption from these land taxes
applies to owner-occupied residences.
Most states imposed a financial institutions
duty on receipts by financial institutions. This
imposition, although levied at a very low rate,
constituted a substantial cost for these
entities, but this has been abolished since 1
July 2001. However, bank account debits tax
still continues, subject to a target date of 1 July
2005 for abolition.
Royalties are payable in certain states on
mining and related activities. Natural resource
income (not constituting royalties) paid to nonresidents are subject to deemed source rules
and the Pay-As-You-Go tax collection
procedures.
Local government councils and other semi
government bodies levy annual taxes based
on the value of land to finance part of the cost
of local services (e.g. collection of garbage).
The Income Tax Assessment Acts impose tax

on the taxable income of a taxpayer. Taxable
income is the excess of gross assessable
income after all allowable deductions.
The general income tax rate for companies in
Australia is 30%. This rate applies to foreign
subsidiaries as well as foreign companies that
operate in Australia by way of a branch.
The assessable income of a resident taxpayer
includes the worldwide proceeds from a
business or trade, dividends, interest, rent,
royalties, and real capital gains from the
disposal of assets acquired after 19
September 1985.
The word income is not defined in the law
and must be understood in its common
meaning. By statutory extension, the profit
from carrying out an undertaking or scheme
entered into with the dominant purpose of
earning profits is also income. By operation of
capital gains tax rules, the excess of taxable
capital gains over capital losses is added into
the computation of assessable income.
Allowable deductions of a resident taxpayer
29
Australia
Australia
include all expenses of a revenue (non capital) nature incurred in

producing assessable income or necessarily incurred in
carrying on a business for that purpose. The law also allows
specific deductions for other expenditures, such as purchases
of trading stock, depreciation, gifts to charities, and
superannuation (pension plan) contributions for the benefit of
employees.
A non-resident of Australia is liable to income tax on income
(other than interest and dividends) and some capital gains
derived from sources in Australia only. The non-resident incurs
withholding tax on interest income from Australian resident
companies. Withholding tax on dividends has been abolished
in respect of dividends qualifying under the imputation system
to the extent that they are franked. There is also no withholding
tax to the extent that the dividends are paid out of certain
foreign-source dividend income and the company has specified
an Foreign Dividend Account (FDA) declaration percentage in
relation to the dividend.
Tax Year and Payments

The tax year for income tax purposes is the year ending on 30
June and income tax returns are usually prepared on the basis
of that year. The Commissioner has power to permit a
substitute accounting period, but permission is not readily
given unless there is a substantial business need for making the
change. However, Australian subsidiaries of an overseas
holding company will in most circumstances be permitted to
adopt a balance date coinciding with that of the parent.
30
Tax Treaties and Foreign Income

Authority to tax foreign companies may be
limited by double taxation treaties. Australia
has double taxation treaties with a number of
countries. Please contact our Partners or
Managers for more information in relation to
such treaty arrangements. Special taxation
requirements apply to treatment of income of
foreign subsidiaries and foreign exchange
gains and losses, capital gains, thin
capitalization rules, controlled foreign
corporations, and passive foreign investment
funds.
Tax Provisions Relevant to Energy,

Utilities & Mining Companies
Tax Framework for Upstream Oil and
Gas Activities
Exploration
Firms engaged in exploration pay 10% Goods
and Services Tax (GST) on services and
products purchased. However, they are able to
claim back this expenditure. The removal of
wholesale sales tax on business inputs and
capital equipment should provide a long-term
benefit to explorers.
Production
Numerous changes have been made to the
structure of taxation on oil and gas production
over the years. An excise and royalty system in

a variety of forms was applied to all oil
production until the introduction of the
Resource Rent Tax in 1987. Currently, excise
and royalty arrangements apply to all onshore
oil production and to production from the
North West Shelf. All other offshore oil
production is covered by the Resource Rent
Tax.
The extent of the crude oil excise varies with
the size and discovery date of the field.
Royalties on crude oil production are payable
to State Governments, and are based on the
well-head value of the oil produced. While
there is no standard rate, most states levy a
royalty equal to 10% of the well-head value of
the oil produced.
The Resource Rent Tax applies to individual
projects at the rate of 40%. Exploration
expenditure for the 5 years prior to obtaining a
production licence can be compounded
forward at the threshold rate (the long term
bond rate plus 5 percentage points) and
deducted from assessable income. Resource
Rent Tax is levied before company tax, and
payments are deductible for company tax
purposes.
Oil producers are not required to charge and
remit GST on exports (exports do not attract
31
Australia
Australia
the tax). Domestic sales do attract GST. All producers are able
to claim input tax credits.
Tax Framework for Downstream Oil and Gas

Activities
Refinery
There are no special taxation arrangements covering the
petroleum refining industry, although petroleum wholesalers do
pay excise. Fuel became subject to GST on 1 July 2000. At the
same time, excise rates on petrol and diesel were cut in an
effort to offset the impact of the GST on pump prices. Similar
reductions were made to the customs duty applicable to
imports of these products. Excise and customs duty was cut
and CPI indexation of the excise was halted.
The 2003-04 federal budget contained measures to apply
excise to currently untaxed fuels such as LPG and ethanol.
However, the excise will not begin to be applied until 1 July
2008. The budget also contained provisions to increase the
excise payable on diesel with sulphur content greater than 50
parts per million by one cent in January 2004.
Petroleum refiners are required to levy GST on domestic sales
and remit it to the federal government. Exports do not attract
the GST. Refiners also pay GST on services and products
purchased. However, they are able to claim back this
expenditure, as it constitutes a business input. The removal of
wholesale sales tax on business inputs and capital equipment
should provide a long-term benefit to petroleum refiners.
Pipeline Transport
No special taxation arrangements apply to the
pipeline transport industry. Operators in the
pipeline transmission industry are required to
collect GST on behalf of the federal
government and remit it. In addition, they must
also pay the tax on services and products
purchased. However, they are able to claim
back this expenditure, as it constitutes a
business input. The removal of wholesale sales
tax on business inputs and capital equipment
should provide some benefits to pipeline
operators over the longer term, as they replace
capital equipment. However, to the extent that
the GST increases gas prices, it is likely to have
an adverse impact on the demand for gas, and
hence the demand for transmission services,
over the medium and longer term.
Gas Supply
gas supply industry. Participants in the
industry have been required to charge their
customers GST and remit the tax to the federal
government since 1 July 2000. Firms are able
to claim credits on GST paid by them to
suppliers of goods and services.
Customs and Taxes (Imports and

Exports)
Import Taxes
Upon importation of goods into Australia, the
following duties and taxes normally apply:
1) Import duty:
The tariff rates depend on the
classification of the goods under the
Australian equivalent of the Harmonized
Commodity Description and Coding
System (HS). This is an 8 digit
classification system with a further 2 digits
for statistical purposes.
2) GST on Imports (Goods and Services Tax):
The general rate of GST is 10% but certain
goods, for example, some foods and
beverages, are GST free (0%).
3) Luxury Car Tax (LCT):
The rates levied on luxury motor vehicles
are a 10% GST to a particular value
threshold and 25% on the value of the
motor vehicle over and above that
threshold. The value of the threshold is
revised annually.
4) Wine Equalization Tax (WET):
The rate is 29% of the taxable value.
This value will vary depending upon the
transaction that is regarded as the
assessable dealing.
The customs value of imported goods for the
purpose of calculating import duties is
32
33
Australia
Australia
determined in accordance with the provisions of the Customs

Act 1901 which is closely aligned to the World Trade
Organization (WTO) principles of customs valuation. The
customs value is determined on an FOB (Free on Board) basis.
The value of a taxable importation for calculating the amount of
GST payable on imported goods is the sum of the customs
value of the goods, the amount paid for international freight and
insurance, any customs duty and wine tax payable in respect of
such goods.
Crude oils are classifiable under HS 27.09 (which covers
Petroleum oils and oils obtained from bituminous minerals,
crude). The import duty rates for crude oil varies generally
depending upon the sulphur content and ranges from 0% to
A$0.40143 per liter.
Refined oil products are potentially classifiable under HS 27.10,
which covers Petroleum oils and oils obtained from bituminous
minerals, other than crude; preparations not elsewhere
specified or included, containing by weight 70% or more of
petroleum oils or of oils obtained from bituminous minerals,
these oils being the basic constituents of the preparations;
waste oils. The general import duty rate ranges from 0% to
A$0.40516 per litre.
Natural gas is classifiable under HS 27.11, which covers
Petroleum gases and other gaseous hydrocarbons. The
import duty rate is 0%.
Export Taxes
Australia does not impose taxes on exports.
34
Tax Framework for Mining Companies

Black Coal
Black coal producers are required to pay
royalties to the relevant state government.
In New South Wales royalties are based on the
volume of production and the method of
mining. Coal mined underground is subject to
a royalty of $1.70 per tonne, while open-cut
coal attracts a royalty of $2.20 per tonne.
In Queensland, royalties are based on the
value of coal production, the method of
mining, the nature of any rail haulage
agreement and whether the coal is to be
exported or used domestically. The basic rate
applying to export coal is 7% of the coal's
value. However, the actual rate applicable may
be as low as 5% for open cut coal and 4% for
underground coal or as high as 19%,
depending on the mine. The royalty payable on
domestic coal is currently 2% of the coal's
value, but this is likely to be step up to 7% in
the recent future. For more information, please
contact our Partners or Managers listed in this
guide.
During April 1999, the Queensland
government announced that it would introduce
a uniform 7% royalty (based on the value of
sales less costs) as of July 2000. This move
benefited mines operated by BHP (now BHP
Billiton), which paid royalties at rates of up to

19%.
Typically, state governments also enter into rail
freight contracts with coal producers. The
freight charges (which are confidential)
generally include a substantial profit
component that state governments use to
subsidies less lucrative rail operations. This is
particularly the case in Queensland.
GST is not levied on exports. Although GST
must be charged on domestic sales, all
producers are able to claim input tax credits.
Brown Coal
brown coal mining industry. The government
business that mined brown coal was exempt
from paying royalties to the Victorian State
Government. However, as assets have been
transferred to their new private sector owners,
royalties have become payable. The royalty
rate for the large brown coal mines that supply
fuel for power generation is 33 cents per
gigajoule of energy contained in the coal
mined.
Firms charge little or no GST in relation to their
brown coal mining operations. This is because
the brown coal does not change ownership,
but is used as a feedstock for those firms'
35
Australia
power generators. Firms levy GST on the power sold and remit
the tax to the federal government. Producers are able to claim
input tax credits for GST paid on their mining and power
generating activities.
Tax Frame Work for Power and Utility Companies

No special taxation arrangements apply to the electricity
generation industry. Participants in the industry are required to
charge their customers GST and remit the tax to the Federal
Government.
In addition, firms are able to claim credits on GST paid by them
to suppliers of goods and services.
36
Brunei

appendices I-IV for key
statistics on Brunei.
Political and Legal
Brunei Darussalam resumed its international responsibilities as a fully independent and
sovereign nation on 1 January 1984 and adopted the Ministerial System of Government.
Brunei Darussalam has a written constitution which contains two basic documents, the
Constitution of Brunei Darussalam and the Succession and Regency Proclamation 1959.
With effect from 1 January 1984, the Constitution was amended in order to render Brunei
Darussalam a fully independent sovereign state.
Since 1990, the Sultan and his government have been promoting Melayu Islam Beraja, or
Malay Muslim Monarchy, a national ideology that affirms the country's cultural and religious
traditions and absolute monarchy, in an effort to strengthen Brunei's national identity.
37
Brunei
Brunei
Judicial power is vested in the Supreme Court and the

Subordinate Courts. The Supreme Court comprises the Court
of Appeal and the High Court while the Subordinate Courts
consist of the Magistrates' Courts. In between there is the
Intermediate Court. Matters related to the Islamic faith are dealt
with by the Kadis' Courts.
Organisations
The principal regulatory agencies concerned with business
operations are:
1.
Ministry of Law
2.
Ministry of Finance
3.
Ministry of Industry and Primary Resources
4.
Petroleum Unit, part of the Prime Minister's Office
5.
Economic Planning Board and Economic Planning Unit
6.
Economic Development Board
7.
State Party (means, His Majesty in Council, the Brunei

Government)
Economic Overview
Please refer to the Statistical Overview Chart
(by Country) under Appendix I for information
on Brunei.
Brunei Darussalam's economy is dependant
on oil and natural gas resources. Brunei
Darussalam is the world's 4th largest and South
East Asia's 3rd largest producer of LNG. The
oil and natural gas industries accounted for
about 89% of all export receipts in 2001 and
the scenario has not changed since.
In view of this heavy dependency, the
government has been endeavoring to diversify
the economy by a series of five year National
Development Plans (NDP).
The 8th NDP (2001 to 2005) is geared to

reviving the economy and calls for an increase
in investment by non-government sources
both domestically and externally.
In 2002, the Brunei Economic Development
Board (BEDB) was established with a view to
accelerating the industrialisation process by
encouraging foreign direct investment. The
BEDB is currently concentrating on two
potential major projects:
the construction of an aluminium smelter

and related facilities.
the establishment of a deepwater

container/transhipment port.
8.
38
Brunei International Financial Centre (BIFC).
The Asian Currency crisis in 1997, the decline

in world oil and gas prices in 1998, and the
collapse of a large domestic private company
have had a considerable adverse effect on the
Brunei Darussalam economy, and this resulted
in a budget deficit for most of the 7th NDP
(1996-2000). However, strong oil and gas
prices since 1999 have resulted in a return to
more healthy budget surpluses. Inflation has
been low in 2003, estimated to be
approximately 0.3% and GDP growth in 2003
was about 3.2%.
Brunei Darussalam has no central bank. The

Ministry of Finance through the Currency
Board, the Financial Institution Unit, and the
Brunei Investment Agency perform most of the
functions of a central bank.
Brunei Darussalam has issued its own
currency since 1967. The Brunei dollar is
pegged to the Singapore dollar under an
interchangeability agreement. Interest rates
are set by the Brunei Darussalam Association
of Banks.
39
Brunei
Brunei
The Brunei International Financial Centre (BIFC) was

established in 2000, and new offshore legislation was
introduced to cater for the establishment in Brunei Darussalam
of International Business Companies and International Banks.
3. Energy, Utilities and Mining Market

Economic and Industry Overview
Please refer to A Comparable Summary of Information (by
Country) Key Energy, Utilities & Mining Data (Appendix II)
and Other Summary of Information (by Country) (Appendix
III) for industry related key data and information on Brunei.
years at the current rate of extraction.
In 2002, two offshore deepwater blocks were

awarded, one each to two consortia
comprising multinational oil comprises.
Exploration activities subsequently
commenced on one block but were later halted
pending resolution of territorial disputes with
Malaysia.
Brunei produced around 366 Billion Cubic Feet

(Bcf) of natural gas in 2003. Domestic
consumption amounted to about 16% of this,
and the balance was exported. More than
80% of gas exports goes to utilities companies
in Japan, and the balance is exported to South
Korea.
Oil production has increased from 182,000

Barrels Per Day (Bpd) in 1999 to 196,000 Bpd
in 2003.
Gas liquefaction is carried out at Brunei LNG

Sdn Bhd's gas liquefaction plant at Lumut.
Natural gas for domestic consumption is
distributed to power stations at Lumut,
Gadong, Berakas and Jerudong, which
provide electricity to the country.
Brunei Darussalam is not a member of OPEC.

Brunei exports nearly 184,000 barrels per day of oil. Brunei
is also a large liquified natural gas producer (third largest in
Asia). Further, its location, close to vital sea lanes through
the South China Sea linking the Indian and Pacific Oceans,
makes Brunei important to world energy markets.
Oil
Brunei has proven crude oil reserve of approximately 1.35
billion barrels. It produced 196,000 Bbl/d crude oil in 2003,
of which 170,000 Bbl/d was mainly low-sulfur crude oil,
plus around 26,000 Bbl/d of natural gas liquids. Domestic
oil consumption has ranged approximately 12,000 Bbl/d
and exports (net) approximately 184,000 Bbl/d.
Brunei has eight offshore fields and two onshore fields. Oil
reserves are estimated to be sufficient to last another 20
40
The main oil producer in Brunei Darussalam is

Brunei Shell Petroleum Company Sdn Bhd, a
joint venture between Royal Dutch Shell and
the government. The other active oil
companies in Brunei Darussalam are Total Fina
Elf E&P Borneo BV and Shell Deepwater
Borneo Limited.
Refining
Brunei has only one refinery, a part of BSP,
having a capacity of about 8,600 Bbl/d of
which around 5,000-6,000 Bbl/d is used for
local consumption. The remainder of Brunei's
crude oil is exported and refined elsewhere.
Brunei was the first in Asia to export Liquefied

Natural Gas (LNG) in 1972. It is currently the
fourth-largest producer of LNG in the world
and the third-largest natural gas producer in
Southeast Asia. Two of Brunei's largest
customers for LNG exports are Japan, which
takes around 85% of Brunei's LNG exports
under a 20-year contract renewed in 1993, and
South Korea, which imports about 11% of
Brunei's exports. The Brunei LNG (BLNG), a
joint venture between Mitsubishi (25%), Shell
(25%), and the Brunei government (50%),
produces Brunei's LNG. The LNG is liquefied
at the company's Lumut plant, which produces
about 330 Bcf of LNG annually. Nearly all of
41
Brunei
Brunei
BLNG sales are on a long-term contract basis; there have been

some rare spot sales to Spain and the United States.
The long-term prospects for natural gas and LNG development
in Brunei are promising. BLNG plans to expand its capacity by
adding another 194 Bcf-per-year train to its existing five trains
by 2008. This plan also includes modernization of the existing
plant, similar to the rejuvenation program completed by Shell
Global Solutions in 1994. Due to the program, the Lumut plant
now operates at 140% of its original design capacity.
Besides exports, Brunei would like to use its natural gas to
develop the domestic petrochemicals and energy-intensive
industries. The government signed a memorandum of
understanding in September 2003 with American aluminum
producer, Alcoa to study the feasibility of constructing a $1.5
billion gas-fired aluminum smelter in Seria. The Brunei
Economic Development Board has reportedly offered
discounted gas to the plant.
Company which supplies bulk energy to the

Electrical Services Department which then
distributes to consumers through the national
grid.
Brunei's power plants operate single natural
gas turbines, with the exception of the Lumut
co-generation facilities and the new Belingus
Power Station. Household customers use 38%
of the electricity in Brunei but represent 63% of
total customers, whereas the government only
constitutes 6% of total customers but uses
29% of the total. The oil and gas sector
accounts for 15% of electricity usage and
commercial customers 19%.

Oil and Gas
Coal
Brunei Darussalam has no commercial coal resources.
Electricity
Brunei Darussalam currently has 7 power stations with a total
installed electric generating capacity (in 2002) of 0.48
Gigawatts (GW) - all natural "gas-fired". The power stations are
owned and operated by the Brunei Government's Electrical
Services Department, except for 3 power stations at Jerudong,
Gadong and Berakas which are operated by the Berakas Power
42
Exploration, prospecting and mining for

petroleum is governed by the Petroleum
Mining Act, Cap 44. Anyone carrying out
these activities in Brunei Darussalam must
have entered into a Petroleum Mining
Agreement with a State Party. State Party
means His Majesty in Council, the Brunei
Government, or the Brunei National
Petroleum Company Sdn Bhd, a
government owned entity set up in 2002.
The natural gas supply industry is regulated by

the Petroleum Unit, Prime Minister's
Department. The Petroleum Unit, Prime
Minister's Department, ensures that natural
gas prices are comparable with world market
prices. Prices are generally negotiated on a
long-term contract basic for supplies to Korea
and Japan, and on spot basis for sales to
Europe and the United States. The prices are
currently driven based on market competition
(i.e. demand and supply forces).
The natural gas pipeline system is regulated by
the Petroleum (Pipe-Lines) Act, Cap. 45. The
delivery of Liquefied Natural Gas from Brunei
to overseas market is handled primarily by
Brunei Tankers Sdn Bhd. The majority of the
natural gas pipelines and distribution systems
are owned by Brunei Liquefied Natural Gas
Sdn Bhd (BLNG). The shareholders of BLNG
are 50% Brunei Government, 25% Royal
Dutch Shell and 25% Mitsubishi Corporation.
Third parties, in general, have no access to
BLNG's natural gas pipelines and distribution
systems, unless specifically granted by BLNG.
There is no state run distribution system.
Mining
Prospecting licenses for minerals are
governed by the Mining Act, Cap 42.
43
Brunei
Brunei
Power and Utilities

Licences to operate a plant for the supply of electrical energy
are governed by the Electricity Act, Cap 71.
6. Taxation
Generally Accepted Accounting Principles

Corporations in Brunei are governed by the Brunei
Companies Act, Cap 39, which is based substantially on
the UK Companies Act of 1929. The Companies Act, Cap
39 prescribes only a few requirements for accounts
disclosures. Brunei has no accounting standards.
However, all companies are required to prepare their
financial statements in accordance with the International
Accounting Standards (IAS). Brunei has adopted
International Accounting Standards only since 2002. Prior
to that, most companies followed generally accepted
accounting principles similar to those in force in either
Singapore or Malaysia.
Oil and Gas, Mining and Power and Utilities

Companies
Oil and gas, mining and power and utility companies, like
companies in other industries, follow generally accepted
accounting principles in accordance with International
Accounting Standards in preparing their accounts. There
are specific reporting requirements in relation to oil and gas
44
companies. These are spelt-out in the

Petroleum Mining Agreement. Please
contact our Partners and Managers for
more details on such requirements.

Taxes
Principal Taxes
The main types of taxation in Brunei
Darussalam are income tax on limited
liability companies, stamp duty and
custom duties. There is no personal
income tax in Brunei Darussalam.
Act, Cap. 39, or any law in force elsewhere

(Companies), are subject to tax. Companies
are taxed on income accrued in, derived from,
or received in Brunei Darussalam.
The various rates of tax are as follows:! 55% for companies engaged in petroleum
operations
! 50% for companies engaged in
liquefaction of gas from natural gas or the
production of any other liquid petroleum or
petroleum product from natural gas
(Liquefaction of Gas)
! 30% for companies involved in activities
other than petroleum operations or
liquefaction of gas.
Corporate taxes are imposed at a flat rate

of 30%, with no state or municipal taxes
on income. Income from petroleum
operations is subject to tax under the
Income Tax (Petroleum) Act, as amended.
A withholding tax of 20% is payable to the

Collector of Income Tax in respect of interest
paid by companies to either non-resident
corporations or non-resident individuals under
a charge or debenture, or in respect of a loan.
There are no other withholding taxes.
Domestic companies are required to

withhold tax at 20% on interest paid to a
nonresident person or corporation. There
are no other withholding taxes.
Dividends that are paid out of income which is

liable for tax assessment under the Brunei
Income Tax Act, Cap. 35 are excluded from the
chargeable income of any company.
Only companies incorporated or

registered under the Brunei Companies
The tax year is the calender year. The
45
Brunei
Brunei
corporation files an income tax return, and it is assessed by the

Collector of Income Tax. The tax assessment is normally issued
in February of each year, relating to the taxable income of the
preceding year. Assessed tax is normally payable within 30 days
after the notice of assessment is served.
Taxation under the Petroleum Mining

Agreement Regime
The gross proceeds for any basis period is the
aggregate of:
Foreign income that is not received in Brunei is free from Brunei

income tax. A company resident in Brunei is taxed on foreign
income when received in Brunei. Double taxation with
Commonwealth countries is avoided by means of unilateral relief
on income arising from those Commonwealth countries that offer
reciprocal relief. The maximum relief cannot exceed one-half the
Brunei rate. Please contact our Partners or Managers for more
information in relation to double taxation, treaty and other similar
arrangements.
(a) the actual proceeds from the sale of all

petroleum sold in that period;
(b) petroleum disposed of or taken by the
Brunei Government by way of royalty; and
(c) all income incidental to and arising from any
one or more of the company's petroleum
operations
Tax Provisions Relevant to Energy, Utilities and

Mining Companies
The chargeable profit for any basis period is the

remainder of the gross proceeds after
deducting:
Tax Framework for Upstream Oil and Gas Activities

Upstream oil and gas activities in Brunei can be conducted by
either locally incorporated companies or Brunei branches of
foreign incorporated entities .
Prior to 23 October 2000 companies engaged in petroleum
operations entered into a Petroleum Mining Agreement with the
Brunei Darussalam Government. Subsequent to 23 October
2000, and with the opening of new concession areas, Production
Sharing Contracts (PSC) were introduced.
46
Interested companies (Contractors) act as

contractors to the Brunei National Petroleum
Company (BNPC) and provide all finance,
experience and technical knowledge.
(a) royalties;
(b) such other outgoings and expenses wholly
and exclusively incurred for the purpose of
petroleum operations as may be allowable
in accordance with the Income Tax
(Petroleum) Act, Cap. 119;
(c) losses incurred previously;
(d) approved charitable contributions (limited
to one sixth of chargeable profits after
deducting (a), (b) and (c) above).
Losses can be carried forward indefinitely, to

be deducted against future chargeable profits.
A company which buys over an interest in
and/or rights to petroleum is obliged to deduct
55% of every dollar paid to the seller in respect
of an annuity, royalty or other recurring
payment relating to a former interest in/and or
rights to petroleum. Such deduction at source
is paid to the Brunei Darussalam Collector of
Income Tax.
Taxation of PSC Operations
A company is subject to tax in respect of the
relevant PSC operations on a ring-fenced
basis, as if (to the extent they are not in fact the
only operations of the company concerned)
the relevant PSC operations were the only
petroleum operations carried on by the
company.
The gross proceeds for any basis period is an
aggregate value of the entire entitlement
(excluding any petroleum allocated to BNPC,
whether royalty petroleum, profit petroleum or
otherwise) in respect of petroleum allocated to
the company for that period in accordance
with the terms of the relevant PSC.
The chargeable profit for any basis period from
the relevant PSC operations is the remainder of
the gross proceeds after deducting:
47
Brunei
Brunei
(a) cost recovery for that period as determined in accordance

with the terms of the relevant PSC
(b) such other outgoings and expenses wholly and exclusively
incurred for the purpose of the relevant PSC, as may be
allowable in accordance with the terms of the relevant PSC
Tax returns may be filed in US Dollars and, if so, any resulting tax
liability is assessed in US Dollars.

Activities
The taxation framework for companies engaged in downstream
oil and gas activities is governed by the Brunei Income Tax Act,
Cap.35.
Statutory Income (other than gross proceeds from petroleum
operations) of any company includes income accrued in, derived
from, or received in Brunei after deducting outgoings and
expenses wholly and exclusively incurred in the production of
income and applicable capital allowance (in place of disallowed
fixed asset depreciation).
Unutilised capital allowances can be carried forward indefinitely
to be deducted against future income.
The assessable income is calculated as statutory income after
deduction of:
(a) any loss incurred during the year of assessment in any trade;
(b) previous years losses incurred in any trade; and
(c) approved charitable contributions (limited to one sixth of
statutory income after deducting (a) and (b) above).
48
Losses can only be carried forward for five years

and there is no requirement for continuity of
ownership of the company.
Chargeable income is assessable income after
deduction of:
(a) Commonwealth tax relief
(b) Double taxation relief
Tax for each year of assessment for companies
engaged in liquefaction of gas is levied at a rate
of 50% on every dollar of chargeable income.
Tax for each year of assessment, for all other
companies, is levied at a rate of 30% on every
dollar of chargeable income.

Exports)
Import Taxes
Upon importation of goods into Brunei Customs
area, the following duties and taxes normally
apply:
Import Duty:
The tariff rates depend on the classification of
the goods under the Harmonized System (HS)
Code System.
!
!
Import VAT (Value Added Tax):

Not Applicable
Sales Tax on Luxury Goods (STLG):
Not Applicable
The value of imported goods, for the purpose of

computing import duties, is determined in
accordance with the World Trade Organization
(WTO) principles of customs valuation and at
CIF (Cost, Insurance and Freight) term.
Crude oils are classifiable under HS 27.09
(which covers Petroleum oils and oils obtained
from bituminous minerals, crude). The import
duty rate for crude oils is 0%.
Refined oil products are potentially classifiable
under HS 27.10, which covers Petroleum oils
and oils obtained from bituminous minerals,
other than crude; preparations not elsewhere
specified or included, containing by weight
70% or more of petroleum oils or of oils
obtained from bituminous minerals, these oils
being the basic constituents of the
preparations; waste oils. The import duty rate
ranges approximately 22 Brunei cents except
for Lubricating grease, which is 11 Brunei cents
per kg.
Natural gas is classifiable under HS 27.11,
which covers Petroleum gases and other
gaseous hydrocarbons. The import duty rate
is 0%.
Export Taxes
Export Taxes are not applicable for crude oil,
refined products and natural gas.
49
Brunei

For companies involved in the undertaking of working a mine, oil
well or other source of mineral deposit of a wasting nature,
qualifying expenditures on the construction of works likely to
have little or no value (Wasting Assets) when the source is no
longer worked are eligible for an initial allowance of 10% of the
expenditures and annual allowances equivalent to the greater of :
(a) 5% of residual expenditure; or
(b) a percentage computed in accordance with the Income Tax
Act, Cap.35
Investment allowances are also available in place of capital
allowances for industrial buildings, machinery or plant and
Wasting Assets under the Income Tax (Development of Mineral
Resources) (Encouragement) Order.
Apart from the above concessions, such companies fall under
the Brunei Income Tax Act, Cap.35 and, for each year of
assessment, are taxed at 30% on every dollar of chargeable
income.
Tax Framework for Power and Utility Companies

The taxation framework for entities engaged in power and utility
projects is substantially identical to that applicable to any entity
incorporated or registered under the Brunei Companies Act, Cap
39.
50

Please refer to summary charts presented under

appendices I-IV for key statistics on China.
Political and Legal
Political Background
China (PRC) is governed by the State Council, which is the executive organ of the National
People's Congress (NPC). The State Council's composition is determined by the NPC and is
led by the Premier, who has a term concurrent with the five-year life of the NPC.
The work of the State Council is presided over by an executive board, with approximately 15
members, composed of the Premier, his deputies (there are currently four vice-premiers),
state councillors and a secretary-general. Below the State Council are the various ministries
and commissions, as well as a number of important State-Owned Enterprises (SOEs).
The NPC passes laws and treaties, nominates the executive, and approves the constitution.
It has 2,989 members, indirectly elected by lower-level people's congresses for five-year
terms. It meets in plenary session for two to three weeks each year, usually in March or April.
Between sessions, many of its powers are vested in a standing committee of around 200
members, which drafts laws and handles NPC business when the legislature is not in
session.
51
The Communist Party of China (CPC) is the key policy-making

body in China. Its main decision-making body is the Central
Committee. The Central Committee normally meets in plenary
session twice a year. In the interim most of its powers are
vested in a politburo, that currently has 24 members. Above the
politburo stands the Politburo Standing Committee, the most
powerful political institution in China, which currently has nine
members.
Membership of the Central Committee and politburo are
decided upon at the CPC's national congress, which is held
every five years, normally in the months preceding the first
session of a new NPC. The general secretary is the party leader,
and has the power to convene politburo meetings. The central
secretariat handles the day-to-day business of the party.
The policies adopted by the CPC are implemented by
government agencies. In the past, the CPC and the government
have been virtually impossible to separate. Recently, efforts
have been initiated to separate the CPC from the government in
terms of policy implementation, with the CPC being made
responsible for policy making and strategy.
military and maritime issues.
Organisations
6.
The principal government organizations
concerned with business operations and their
areas of responsibility are as follows:
1.
2.
3.
Legal
The People's Courts are the judicial organs of the state, and the
judiciary is able to exercise independent power in accordance
with the law. The Supreme Court is the highest in China and is
responsible to the National People's Congress and its Standing
Committee. It supervises the administration of justice by the
local people's courts, which are established at different levels
and are responsible to the organs of state power that created
them. There are also special courts, such as those dealing with
52
5.
4.
Bank of China (BOC). BOC is China's

foreign exchange bank and handles all
international transactions.
Ministry of Finance (MOF). MOF oversees
China's financial activities, monitors
revenues and expenditures, and prepares
annual budgets and fiscal reports.
Ministry of Commerce (MOFCOM).
MOFCOM (formerly the Ministry of Foreign
Trade and Economic Cooperation or
MOFTEC) is responsible for China's
foreign economic relations and foreign
trade and is the authority in charge of the
approval of contracts with foreign
participation.
State Administration for Industry and
Commerce (SAIC). SAIC is authorised to
issue regulations under existing laws and
is responsible for the registration of foreign
investment enterprises and foreign
enterprises and for issuing their business
licenses.
7.
8.
9.
State Administration of Foreign Exchange

(SAFE). SAFE regulates foreign exchange
control and approves all foreign exchange
expenditures and outward remittances.
State Administration of Taxation (SAT).
SAT supervises all of China's taxation
matters and is in charge of regulating and
monitoring the local tax bureaus. It
formulates tax policies and drafts,
enforces, and administers the country's
tax laws.
State-owned Assets Supervision and
Administration Commission (SASAC).
SASAC was established in early 2003 to
manage China's state assets, including
privatisations focused on the reform and
restructuring of state-owned enterprises.
It is also responsible for enhancing the
management and corporate governance
of state-owned assets. It is the main
organisation that implements the strategic
framework for the state economy.
Chinese Society of the Coal Industry. This
is the main governing body of the mining
industry.
State Electricity Regulatory Commission.
This is the main regulatory body to oversee
the power industry.
53
Economic Overview
under Appendix I for information on China.
Although the economy has been characterised by centralised
planning, administration and control, there is a definite move
toward a more mixed economy. During the past decade a
restructuring of the economy and a series of reforms have taken
place. Reforms have taken place in the enterprise management
system, pricing system, foreign trade system, accounting
regulations, land leasing and securities trading.
The privatisation of the state sector, which has been losing
money for many years, is moving forward gradually. Under the
policy of grasp the big, let go of the small, the central
government is restructuring the majority of its 118,000 SOEs,
most of which are small. The central government has
relinquished its rights over these SOEs to the local
governments, which turn these entities into town and village
enterprises and collectively owned enterprises. In addition,
foreign investors are encouraged to purchases equity interests
in the medium-size and small SOEs. As a final signal that the
central government was serious about privatisation it
announced on 20 November 2003 of its intention to sell
interests in 189 leading companies which had previously been
off-limits to investors, each holding leading positions in its own
industry, including companies such as First Auto Works, China
Mobile and Sinopec. As a result of these reforms, entry to the
World Trade Organization, and the emergence of the PRC as the
dominant low cost manufacturing base in the world, the
Chinese economy is currently experiencing rapid growth. The
54
economy grew in the range of 8% to 9% in

2003 and is expected to do the same in 2004
and beyond in the near term, with inflation of
approximately 2.7% for 2004.
Chinese economy has clearly been moving
away from agriculture base towards heavy
industrialization with an expanding services
sector.
Foreign Direct Investment

China was the world's largest recipient of
Foreign Direct Investment (FDI) inflows in 2003
that totalled approximately US$62 billion.
Chinese officials have predicted that FDI will
continue to grow and that China will receive
more than US$100 billion in FDI in each year of
the 11th five-year plan period, being 2006 to
2010.

Banking
China's banking sector is still overwhelmingly
state-owned. Even though in recent years
GDP growth in China has been driven by the
expansion of the private sector, the
overwhelming majority of bank funds continue
to be lent to state-linked firms. As a result
China's state-owned banking system is now
weighed down by non-performing loan ratios
which are officially around 25%, but which
outside estimates suggest could be as high as

50%.
The People's Bank of China functions as
China's central bank and performs the usual
central bank functions of maintaining price
stability, issuing bank notes and serving as a
banker to the Government. It also drafts and
enforces laws and regulations relating to the
banking system and manages the State
Treasury as a fiscal agent. As of June 2004,
China had huge foreign reserves of US$ 470.6
billion.
Renminbi Valuation
The Renminbi was significantly undervalued in
the 1980s and early 1990s, and a parallel
currency, Foreign-Exchange Certificates
(FECs), circulated until 1994 to enable foreigntrade corporations to purchase foreign
exchange at a more reasonable rate. The
currency was unified in 1994 and the Renminbi
(Rmb) pegged at Rmb8.7: US$1.
Since then, the foreign-exchange rate has
been managed. It appreciated from
Rmb8.446: US$1 in January 1995 to
Rmb8.265: US$1 in July 2000 and has
remained at this level throughout 2003 and up
to the date of completing this guide.
There has been significant international
55
pressure for a free float of the Renminbi resulting in speculation

that the currency will be allowed to fluctuate in a wider range,
although a free float is unlikely in the near future.

Market
Stock Exchanges

Overview
China's two official stock exchanges were opened in Shanghai

in December 1990 and in Shenzhen in July 1991. Except for a
few cross-listings, the two exchanges list different companies.
The Shenzhen Exchange tends to list smaller export-oriented
companies, while the Shanghai Exchange tends to list heavy
industrial, state-owned enterprises. All listings must now be
approved by the Securities Commission of the State Council.

of Information (by Country)-Key Energy,
key data and information on China.
Two classes of shares are traded on the stock exchanges:

A shares - only available to Chinese nationals; and
B shares - came into existence in 1991 and were offered
exclusively to foreign investors at first but have been made
available to Chinese nationals since 19 February 2001.
!
!
While both classes of shares are denominated in Renminbi, the

B shares are traded in foreign currencies (U.S. dollars in
Shanghai and Hong Kong dollars in Shenzhen).
China is the world's most populous

country and the second largest energy
consumer (after the United States). It
surpassed Japan as the world's second
largest petroleum consumer in 2003.
China's production and consumption of
coal, which is its dominant fuel, is the
highest in the world. Rising oil demand
and imports have made it a significant
player in world oil markets.
PRC is rich in mineral and energy
resources, although poor transportation
systems and slow development have
delayed their extraction and utilization.
The country is believed to have the world's
largest nickel reserves and lead and zinc
deposits as well as approximately half the
world's antimony reserves. It is one of the
56
richest countries in petroleum, coal, tin,

copper, aluminium and magnesium. Foreign
participation in mineral exploration and
production is developing as the country seeks
to develop these resources. Scope exists for
further significant involvement.
For all the wealth of natural resources that the
PRC possesses, the growth in the overall
economy and the energy demands has created
and exceeded the pace at which natural
resources can be utilized. This has resulted in
China being a substantial importer of mineral
resources at the beginning of 2004.
With the PRC's expectation of growing future
dependence on oil imports and to secure
national oil supply, China has been
strategically acquiring interests in exploration
and production abroad. PRC companies have
acquired oil concessions in Indonesia,
Ecuador, Kazakhstan, Venezuela, Sudan, Iraq,
Iran, Peru and Azerbaijan.
Given the energy demands in the country, a
major focus of the government is to ensure the
environmental impact of this increase demand
is minimised. Although pollution in the PRC is a
major problem, positive steps are being taken
to address the issue. Greater use of natural gas
and hydroelectric power are prime examples of
these efforts.
57
Oil
Main Participants
China's petroleum industry has undergone major changes in
recent years. In 1998, the State Council reshuffled the state
owned oil and gas assets into two companies; China National
Petroleum Corporation (CNPC) and the China Petrochemical
Corporation (Sinopec). This created two vertical-integrated and
regionally-focused firms, CNPC in the north and west, and
Sinopec in the South. CNPC, including PetroChina, primarily
focuses on Exploration and Production (E&P) and Sinopec is
more focused on refining and other downstream activities.
These two companies are the only two oil and gas companies
engaged in onshore crude oil and natural gas exploration and
production, refining and marketing and chemical operations in
the PRC.
CNOOC Limited (CNOOC), formerly known as China National
Offshore Oil Corporation, is engaged in offshore oil and gas
exploration and production and produces approximately 10%
of China's domestic crude production.
Sinochem is one of the largest Chinese import & export
enterprises, which mainly engages in international and
domestic trade of petroleum, fertilizer, rubber, plastics and
chemical products and industrial investment. Recently
Sinochem has expanded further to international E&P and
downstream activities although it has yet to obtain a license for
domestic E&P.
Production and Consumption

PRC has proven crude oil reserve of approximately 18.3 biilion
58
barrels. The PRC's oil production is

approximately 3.5 million Bbl/d compared to
it's total demand of 5.6 Bbl/d. The PRC was
the world's second largest consumer of
petroleum products behind the United States
of America during 2003. PRC's oil demand is
projected by EIA to reach 10.9 million Bbl/d by
2025, with net imports of 7.5 million Bbl/d.
Most of Chinese oil production capacity, close
to 90%, is located onshore. The three main
oilfields in the PRC (Daqing, Liaohe and
Shengli) produce 60% of the crude oil in the
PRC. One field alone, Daqing in the North
Eastern accounts for 1.0 million Bbl/d. To
sustain production in some of these mature
fields, CNPC has made significant investment
into enhanced recovery techniques.
Recent offshore oil exploration interest has
centred on the Bohai Sea area, east of Tianjin,
believed to hold more than 1.5 billion barrels in
reserves, and the Pearl River Mouth area.
China is intending to build a national strategic
petroleum reserve. China announced a policy
in February 2003 to support the creation of a
strategic petroleum reserve, and its officials
have reportedly been studying several options
for the development of storage capacity. In the
meantime, anecdotal evidence has suggested
that China may have built up its petroleum
stocks substantially in 2003 and 2004. Based

upon press reports, work has already began on
four initial storage facilities, which would
provide 30 days of import cover by 2008.
Refining
The PRC's refining capacity is approximately
4.5 million Bbl/d, with major refineries being
Fushun (184,800 Bbl/d), Maoming (170,700
Bbl/d), Qilu (160,700 Bbl/d), Gaoqiao (150,000
Bbl/d), Dalian (142,600 Bbl/d), Yanshan
(190,800 Bbl/d), Jinling (140,600 Bbl/d) and
Zhenlai (160,700 Bbl/d).
As a result of overcapacity, the development of
downstream infrastructure in China has
essentially focused on upgrading existing
refineries and not on building new ones. The
Chinese government shut down more than 100
small refineries in the late 1990s, most of which
made lower quality petroleum products. A
large number of other small refineries owned
by provincial and local governments have been
merged into CNPC and Sinopec.
Another noteworthy aspect of the Chinese
downstream sector is the under-capacity of
adequate refining which is suitable to the
heavier crude oil from the Middle East. The
need for this will grow as demand for Chinese
imports rise in the foreseeable future. Several
59
existing refineries are being upgraded to handle heavier and

sourer grades of crude oil. With the rapid increase in
consumption of petroleum products there has been an
increased interest in constructing new modern greenfield
refineries.

Historically, natural gas has not been a major fuel in China, but
given China's domestic reserves of natural gas of
approximately 53.3 Tcf and the environmental benefits of using
natural gas, China has embarked on a major expansion of its
gas infrastructure. Until the 1990s, natural gas was used largely
as a feedstock for fertilizer plants, with little use for electricity
generation. Natural gas currently accounts for only around 3%
of total energy consumption in China, but consumption is
expected to more than double by 2010. This will involve
increases in both domestic production, and imports in the form
of both direct pipeline flow and Liquefied Natural Gas (LNG).
The country's largest reserves of natural gas are located in
western and north-central China, necessitating a significant
investment in pipeline infrastructure to carry it to eastern cities.
The "West-to-East Pipeline will transport natural gas from
major deposits in the western Xinjiang province to Shanghai,
also picking up additional gas in the Ordos Basin.
Another major gas field is at Sulige in the Ordos Basin in the
Inner Mongolia Autonomous Region, adjacent to the
Changqing oilfield. Unofficial reserve estimates suggest
reserves in the range of 16 to 21 Tcf.
60
Offshore gas projects also are becoming a

significant part of China's gas supply. The
Yacheng 13-1 field, developed in the mid1990s, has been producing gas for Hong Kong
and Hainan Island since 1996. The Chunxiao
gas field in the East China Sea, being developed
by China National Star Petroleum (a subsidiary
of Sinopec), is also expected to become a
significant producer within the next decade.
The company estimates the field's reserves at
more than 1.6 Tcf.
A pipeline between the Ordos Basin and Beijing
was completed in 1997. A second pipeline may
become necessary as demand for natural gas
from Beijing, Tianjin, and nearby Hebei province
exceeds the capacity of the original pipeline.
Some of the natural gas from the Ordos Basin
may be diverted to the West-to-East Pipeline to
help make it economically viable. In any case, if
reserves prove adequate, the pipeline to Beijing
may eventually be extended to other cities in the
northeast.
Also proposed is a pipeline project, estimated to
cost around US$12 billion, to connect the
Russian natural gas grid in Siberia with the grid
in China and possibly in South Korea via a
pipeline from the Kovykta gas fields near
Irkutsk. The planned capacity for the pipeline is
2.9 Billion Cubic Feet Per Day (Bcf/d), from
which about 1.9 Bcf/d would probably go to
China and 1 Bcf/d to South Korea. The main

South Korea gas company, Kogas, formally
joined the feasibility study in November 2000,
and Kogas and CNPC signed letters of intent for
the project in November 2003. The main foreign
backer of the project is BP, which owns a 30%
stake in Rusia Petroleum, the license holder for
the Kovykta gas field. Tensions on the Korean
peninsula have required a bypass for the
section of the pipeline to South Korea under the
sea from the city of Dalian in China to the South
Korean coast near Seoul. This new route also
means that Mongolia will be bypassed.
Gazprom has played a more substantial role in
negotiating the final contract in 2004, and LNG
imports have increasingly been seen by
Chinese and South Korean observers as a
feasible option if no agreement is reached
regarding the Russian natural gas imports.
In addition to these very large projects, other
pipelines being developed to link smaller natural
gas deposits to other consumers are (1) a
pipeline connecting the Sebei natural gas field
in the Qaidam Basin with users in the city of
Lanzhou, and (2) a US$600-million pipeline to
connect the gas deposits in Sichuan province in
the southwest to consumers in Hubei and
Hunan provinces in central China.
One major obstacle for natural gas projects in
China is the fragmented regulatory system.
61
Coal
Even though coal's share of overall Chinese energy
consumption is projected to decrease, coal consumption will
still increase in absolute terms. Several projects exist for the
development of coal-fired power plants in conjunction with
large mines: what are called "coal-by-wire" projects. Other
technological improvements also are being undertaken,
including the small-scale projects for coal gasification, and a
coal slurry pipeline to transport coal to the port of Qingdao. In
this regard, coalbed methane production also is being
developed, with recent American investors including BP,
ChevronTexaco, and Virgin Oil, which were awarded a
concession for exploration in Ningxia province in January 2001.
ChevronTexaco is the largest foreign investor in coalbed
methane and is active in several provinces. The US company
Far East Energy received approval from Chinese authorities in
April 2004 for a farmout agreement with ConocoPhillips, under
which it could conduct exploratory drilling for coalbed methane
in Shaanxi province, in a location near the West-to-East
Pipeline route.
China is becoming more open to foreign investment in the coal
sector compared to the past, especially with regard to the
modernization of existing large-scale mines and the
development of new ones. The China National Coal Import and
Export Corporation is the primary Chinese partner for foreign
investors in the coal sector. Foreign investment has primarily
concentrated on new technologies which have only recently
been introduced in China or which have environmental benefits,
including coal liquefaction, coal bed methane production, and
slurry pipeline transportation projects. China's long-term plan is
62
to aggregate the large state coal mines into

seven corporations by the end of 2005, in a
process similar to the creation of CNPC and
Sinopec out of state assets. Such firms might
then endeavor to attract foreign capital through
international stock offerings.
China is very interested in coal liquefaction
technology and would like to see liquid fuels
based on coal substitute to meet some of its
petroleum demand for transportation. The
Shenhua Group is constructing a coal
liquefaction facility in Inner Mongolia which is
slated to commence operations in 2005.
Despite the high costs, Chinese officials have
shown increasing interest in further
researching ways to improve coal liquefaction
technologies, so as to provide an eventual
domestic source of liquid fuels that is
economically viable.
China is the world's largest producer and
consumer of coal in the world. Coal is also the
PRC's primary energy source making up
approximately 64% of total energy
consumption. In 2003, China produced 1.4
Bmt of coal, over 20% higher than the previous
year. In 2003, the detectable reserves of coal
in China were 114.5 Bmt, accounting for 12%
of world reserves.
China is increasingly seeking export markets
for its coal, as a way of dealing with surplus

production and from 2002 it became the
world's second-largest coal exporter. Japan
and South Korea are the primary markets.
However by 2004, China has become a
substantial importer of coal to meet stronger
demand for energy.
Although coal's share of the overall Chinese
energy consumption market is expected to
decline with increased use of hydro and
nuclear energy and tighter controls over the
environmental impact that coal is having on the
environment in China, the actual consumption
of coal will continue to increase in absolute
terms especially with several major coal fired
power stations planned to meet demand for
electricity.
Electricity
The growth in electricity demand to service the
burgeoning industrial economy is expected to
produce generated power of 1.75 trillion KWh
in 2004 of which 1.45 trillion will be thermal
power and 265 billion KWh will be hydro.
The continuing Yangtze River Three Gorges
Dam project is expected to generate 30 billion
KWh of electricity in 2004, compared to 8.6
billion KWh in 2003 and an annual operating
capacity of 84.7 billion KWh when the project
is complete in 2009.
63
Major capital expenditure is expected in the next five years to

keep pace with the continually increasing demands being
placed on existing infrastructure. Major projects which are ongoing or will be implemented such as the Three Gorges power
transmission system, the national integration of existing power
networks and an East-West power transmission line are
expected to add 25,000 kilometres of AC transmission lines and
over 3,000 kilometres of DC lines.
The main participants in the market are:
!
!
Power grid operators: State Power Grid Corporation and

China South West Power Grid Co., Ltd.
Electricity generation companies: China Huaneng Group,
China Datang Group, China Huadian Group and China
Guodian Group.
A major issue for China's electric power industry is the

distribution of generation among power plants. China has
indicated its plan to create a unified national power grid and to
have a modern power market in which plants sell power to the
grid at market-determined rates. For the time being, traditional
arrangements still remain in place, and state-owned power
plants with government connections generally receive more
attention than independent private plants. Moreover, the
provincial authorities running the local grids have been less
than cooperative in honoring "take-or-pay" contracts terms,
which provide for guaranteed minimum sales amounts, with
some of the private plants. For now, the strong growth in
electricity demand during 2003 and 2004 has mitigated this
problem.
64
Growth in Chinese electricity consumption is

projected at an average of 4.3% per year
through 2025. The largest future growth in
terms of fuel share in the future is expected to
be natural gas, mostly stemming from
environmental concerns in China's rapidly
industrializing coastal provinces, although the
largest increase in absolute terms will probably
be coal. If a truly competitive market for electric
power develops as expected, the Chinese
market may once more become attractive to
foreign investment. Foreign direct investment is
currently allowed only for power generation,
however, loan financing has been obtained for
some power transmission projects.
The Chinese government is in the early stages
of a fundamental long-term restructuring of its
electric power sector, as can be seen from the
National Power Industry Framework Reform
Plan issued by the State Council in April 2002.
As with the reform programs of many other
countries, power generation assets are being
largely separated from transmission and
distribution assets. The State Power
Corporation (SPC) has divested most of its
generation assets and the SPC itself was
divided into 11 regional transmission and
distribution companies at the end of 2002.
Although electricity prices will still be regulated,
there are likely to be major changes in tariffs
and the overall regulatory structure for
electricity pricing. It is still early days, and many

of the details remain to be worked out. A new
electricity law to replace the 1995 law is
expected to enacted some time in 2005.

Introduction
The energy sector in China is governed by
a system of legislation and is subject to
various forms of regulatory supervision
including the NPC, the State Council,
National Reform and Development
Commission (NRDC), the Ministry of Land
and Resources (MLR), the Ministry of
Commerce and various local authorities.
The responsibilities of each main body are
set out below:
!
NPC has the power to enact laws or
!
statutes.
The State Council is the executive
body of the NPC and is the highest
organ of state administration. The
State Council may adopt
administrative measures; enact
administrative rules and regulations
and issue decisions and orders in
accordance with the Chinese
Constitution.
65
NRDC, a functional ministry body under the State Council,

is responsible for execution of the overall nation energy
policies, approvals of significant investments and pricing.
MLR is China's leading agency responsible for the overall
management of land uses in China and is responsible for
approving exploration rights and ownership of land userights.
Ministry of Commerce is responsible for approving trading
licenses for petroleum products.
The central government's commitment to the development of

the energy sector will need to be reflected in strong cooperation amongst the various domestic players and regulatory
bodies to ensure any development plans can be achieved.
The rules and regulations are changing relatively quickly in the
energy sector in the PRC and it is possible that they may
become outdated by the time this guide gets published. Set out
below is a general framework in each sector. Please seek
professional advice for the most recent regulatory changes
relating to each of these sectors.
Oil and Gas

China's oil and gas industry is subject to extensive regulations
by the PRC government with respect to a number of aspects of
exploration, production, transmission and marketing of crude
oil and natural gas as well as production, transportation and
marketing of refined products and chemical products.
Professional local advice should be obtained before entering
into any arrangement given the frequent changes and
complexity of local rules and regulations.
66
A major hurdle for natural gas projects in China

is the lack of a unified regulatory system.
Currently, natural gas prices are governed by
various local regulations. The PRC
government is drafting a new legal framework
for the natural gas sector although the process
has been slow and uncertainties regarding
price regulation and taxation issues dealing
with natural gas sales remain.
Government priorities focus on stabilizing
production in the eastern regions of the
country at current levels, increasing production
in new fields in the West, and developing the
infrastructure required to deliver western oil
and gas to consumers in the East.
Upstream activities are conducted under the
Production Sharing Contract (PSC) regime.
According to "Ordinance of the People's
Republic of China concerning On-shore Oil
Exploration with Foreign Co-operation",
amended by the State Council on 23
September 2001, China National Petroleum
Corporation (the "CNPC Group") and China
Petrochemical Corporation (the "Sinopec
Group") will sign PSCs or other forms of
exploration licenses/contracts on behalf of the
state for onshore oil blocks.
According to "Ordinance of the People's
Republic of China concerning Off-shore Oil

Exploration with Foreign Co-operation",
amended by the State Council on 23
September 2001, China National Offshore Oil
Corporation (the "CNOOC Group") will sign
PSCs or other forms of exploration licenses/
contracts on behalf of the state for offshore
blocks.
Please refer to Appendix IV of this guide for
more details.
Mining
The Chinese Society of the Coal Industry,
formerly the Ministry of the Coal Industry, is the
main governing body of the mining industry in
the PRC with the power to allocate national
coal production and to coordinate the
production activities of central-government
mines (approximately 45% of nationwide
production) and local mines which are either
collectively or privately owned.
In December 2003, the Chinese government
unveiled plans to form 8 to 10 large coal mining
firms capable of each producing more than 50
million tons of coal annually to ensure China's
rising demand is matched by increasing
output. Only four companies are currently
capable of producing 30 million tons or more
annually, accounting for only 14% of the
67
domestic market demand. The significant consolidation in the

sector, as well as boosting efficiency, is also designed to
promote greater health and safety in Chinese mines, which
have historically had a poor safety record.
Power and Utilities

The PRC began to reform its power sector in the early 1990s,
but dramatic changes have come more recently. Electricity was
once the sole preserve of one government ministry. However,
the break-up last year of the State Power Corporation of China,
formerly the Ministry of Electric Power, produced two separate
transmission and distribution systems and four nationwide
IPPs. The State Electricity Regulatory Commission was also
created to oversee the industry.
The regulatory commission supervises the PRC's power
industry and is responsible for making proposals on power
price adjustments and issuing and managing power service
licenses. In addition, the commission is responsible for setting
market rules, regulating the market and resolving disputes.
Principles
The Ministry of Finance is responsible for
formulating, promulgating and
administering accounting regulations and
accounting standards, while the China
Securities Regulatory Commission (CSRC)
issues disclosure requirements for listed
companies. In line with the rapid growth of
the economy, the demand for foreign
investment, the gradual maturity of
China's securities market and the
accession into the WTO have highlighted
the need for a sound, reliable and
transparent accounting system
acceptable to foreign investors. The
accounting regulations and system
designed to cater for tax regulations and
state ownership under the communist
system could no longer meet modern
business management and funding
requirements.
The framework of modern Chinese
accounting did not become clear until
1999. To meet the demands of foreign
investors and an increasing number of
individual and institutional investors in the
securities market, a series of regulations
68
were issued including the Accounting Law

(1999), Regulations on Financial Reporting of
Enterprises (2000) and Accounting System for
Business Enterprises (ASBE) (2001).
ASBE abolished the specific sector accounting
standards and there is now a set of more
uniform accounting regulations governing the
preparation of financial statements by PRC
enterprises and these accounting regulations
are significantly closer to IFRS compared to
fund accounting which was used in the past.
However, there are still a number of important
areas in the PRC regulations that are not in line
with the IFRS; these are summarised below:
!
!
Fair value is generally not recognised

under PRC regulations due to the lack of
open markets and the unavailability of fair
values. In addition, financial assets and
liabilities that are realizable beyond one
year are not discounted to reflect the time
value of money.
Investments designated to be trading or
available-for-sales are not carried at fair
value but at lower of cost or market value.
The accounting for derivative instruments
and hedge accounting are not addressed.
The accounting for special purpose
entities is not addressed.
The accounting for assets that have been
factored is not addressed.
69
!
!
!
!
The PRC regulations provide for the use of deferred

taxation. However, in practice, the use of deferred tax is not
common due to the complexity of implementation.
Expenses incurred during the pre-operational period are
capitalized onto the balance sheet until such time that the
company enters commercial operation. The expenses
capitalised are expensed from the first month of
commercial operation.
Employer accounting for post-retirement benefits other
than defined contribution plans is not addressed.
Common control transactions and the use of predecessor
cost basis are not addressed.
Revaluation of assets is not allowed except at the time of a
transaction, such as an IPO.
Financial statements are required to be prepared in
Chinese.
Although it may appear there are limited material differences

between PRC accounting regulations and IFRS, in practice the
interpretation of the mandatory PRC regulations gives rise to a
number of additional differences that a foreign investor should
be aware of when reviewing financial statements of PRC
companies. These differences include:
! Certain transactions may have been recorded based on
their legal form rather than on their economic substance.
! Uncollectible trade receivables may not be fully provided
against.
! Trade receivables factored to banks with recourse and their
related liabilities may have been improperly recognised in
the balance sheet.
! The net realisable value of inventory may not have been
considered.
70
!
!
Upon incorporation of the company,

certain fixed assets may have been
allowed as a one-time step up in cost
using revalued amounts. These
revaluations may not have been
performed using internationally
acceptable valuation principles.
The depreciation method (including
residual value, estimated useful lives and
depreciation method) of fixed assets may
not reflect the economic substance of the
underlying assets.
Assets collateralised may not have been
properly disclosed.
Related party transactions may not have
been conducted at arm's-length or fully
disclosed. Their pricing policies may not
reflect the economic substance of the
underlying transactions.
Warranties, restructuring and redundancy
costs, contingent liabilities or guarantees
provided to third parties or related parties
may not have been properly provided for or
disclosed.
Other off-balance-sheet items may not
have been properly disclosed.
Oil and Gas Companies

Oil & gas companies prepare their accounts in
accordance with PRC regulations as noted
above.
The only major industry difference is that oil and
gas reserves in general are not purchased and
their original cost consists mainly of the costs of
lease acquisitions and drilling. International oil
companies normally adopt the concept of
grouping all related expenditures into a 'pool'
that may cover a block with many wells. Then,
this pool is depreciated using a unit of
production basis. In PRC, oil & gas companies
capitalise the drilling and development
expenditures on an individual well basis and
use a straight-line method of depreciation.
Mining, Power and Utilities

Companies
Mining, power and utilities companies are
required to prepare their accounts in
accordance with PRC regulations (i.e. including
ASBE).
71
6. Taxation
Summary of Different Types of Taxes
!
!
Land appreciation tax; and

Resources tax.
Taxes on property
Local levies.
Principal Taxes
The PRC Government imposes a range of national taxes
under the main tax law for enterprises with a foreign
involvement, namely the Income Tax Law of the People's
Republic of China for Enterprises with Foreign Investment
and Foreign Enterprises (July 1991).
Tax laws are enforced and administered on a day-to-day
basis by a local tax bureau under the local government and
another state tax bureau under the State Administration of
Taxation in Beijing.
Separate tax systems are applicable to Foreign Investment
Enterprises (FIE) and foreign corporations compared to
taxes levied to domestic enterprises. The main taxes
applicable to enterprises with a foreign involvement are:
!
!
72
Enterprise income tax

Taxes on transactions, comprising:
Value-added tax;
Consumption tax; and
Business tax.
Other taxes, comprising:
Customs duties;
Stamp duty;
Vehicle and vessel usage and license plate tax;
Motor vehicle acquisition tax;
Deed tax;
FIEs and foreign corporations are required to file

their annual income tax returns and annual
financial statements within four months of the
end of the tax year, together with an audit report
issued by a Chinese-registered CPA firm. The
tax year is normally the calendar year.
The PRC government is currently
contemplating tax reform. It is expected that
the reform will unify the two tax regimes, which
are now applicable to FIEs and Domestic
Enterprises respectively. The future unified tax
rate will most likely be in the range of 25%27%. It is not possible to tell whether future FIE
energy projects will be subject to the unified tax
rate or continue to enjoy any existing
preferential tax rates lower than the unified rate.
Also it is uncertain whether grandfathering will
be granted to existing FIE energy projects
enjoying reduced income tax rates after the tax
reform.
Please refer to the publication Doing Business
and Investing in the People's Republic of China,
2002 for general tax advice in relation to
China/PRC. However, given the rapid changes
happening in PRC tax laws, please seek
professional advice for any specific recent

taxation matters relating to the energy sector.

The standard income tax rate is 33% for all FIEs
and foreign enterprises comprising a 30% state
income tax and 3% local tax. Various incentives
are available to reduce the overall tax rate for
enterprises operating in Special Economic
Zones (SEZs) or encouraged industry sectors or
geographical locations. Reduced tax rates
typically range between 15% and 24%. Other
incentives such as tax holidays may also be
available.
FIEs undertaking production/manufacturing
activities are entitled to a 2 plus 3 income tax
holiday, being 2 years exemption from income
tax followed by 3 years' 50% reduction in the
income tax rate, starting from the first profitmaking year, provided that the operation period
is not less than 10 years.
FIEs with their head office based in the PRC are
taxed on their worldwide income. Double
taxation of foreign-source income may be
avoided by way of foreign tax credit or double
taxation treaty arrangements. Unutilised foreign
tax credits can be carried forward for a
maximum of five years.
Dividends payable to a foreign parent company
73
by a FIE are specifically exempt from withholding tax in the PRC.

If this is reinvested for a period of five years or more, a
reinvestment tax refund may be available.
Interest payable, royalties and rentals are subject 10%
withholding tax although this rate can be reduced on interest and
rental payments. Royalties are also subject to 5% business tax.
Capital gains earned by enterprises without a permanent
establishment in the PRC are subject to 10% withholding tax.
Capital gains earned by a foreign investor with a permanent
establishment in China are taxed as ordinary income.

The tax year commences on 1 January and ends on 31
December. Enterprises are required to file their income tax
returns and final accounting statements within four months after
the end of the tax year, together with an audit certificate of a
registered public accountant in China. Information on related
party transactions must be filed with the annual tax return.
Enterprises are required to pay provisional taxes on a quarterly
basis within 15 days after the end of each quarter. Three options
are available to the taxpayer in computing the provisional tax: (1)
actual quarterly profits, (2) one-quarter of the taxable income of
the preceding year, or (3) other formulas approved by the local tax
authorities. The final settlement must be made within five months
after the end of each tax year.

The worldwide income of a foreign investment
enterprise and its branches both within and
outside China is taxable. A foreign tax credit is
allowed for income taxes paid on foreignsource income. For foreign enterprises with an
establishment or a place of business in China,
foreign income effectively connected with the
establishment or place of business is taxable,
with deduction of foreign taxes paid as
expenses.
China has treaty arrangements with a number of
countries. The withholding taxes on dividends,
interests and royalties may be affected by
relevant treaty arrangements. In addition to
these treaty arrangements, a number of such
treaty countries have entered into investment
protection treaties with China. Please contact
our Partners or Managers for more information
in relation to such treaty and other
arrangements.

Gas Activities
The taxation framework for upstream entities is
the same as that for other PRC entities. A
74
summary of the major taxes relevant to

upstream oil & gas is set out below:
Tax Item
Tax Base
Corporate
income tax
Tax Rate
Taxable income
30% plus 3%
Value added tax
Revenue
13% for liquefied natural gas,

natural gas, and 17%
for other items.
Business tax
Revenue from provision

of taxable services
5%
Consumption tax
Sales volume
Subject to applicable rates with

various rebates available.
Resource tax
Aggregate volume sold or

self-consumed
Rmb8 to Rmb30 per ton of

crude oil, and Rmb2 to Rmb15
per thousand cubic feet of
natural gas
Royalty fee
Production volume
Progressive rate of 0% to
12.5% for crude oil and
natural gas
Source: State Administration of Taxation
The normal tax holiday (2 plus 3) is not

available for enterprises engaged in the
exploitation of natural resources such as
petroleum, natural gas, rare metals, and
precious metals. Nevertheless, certain tax
incentives may be available for projects in
central and western regions of China.
Sino-foreign co-operative oil and gas
exploration/exploitation ventures are exempt
from resource tax.
Offshore and onshore gas production is subject
to a royalty, which is imposed and paid in kind.
Pursuant to relevant regulations, royalty rates
75
range from 0% to 3% and 0% to 12.5% for offshore gas and

onshore gas production respectively.
There are limited opportunities for foreign companies to enter into
upstream activities in the PRC due to the sector being restricted
to foreign investment. Only a limited number of enhanced
recovery and offshore joint ventures exist. As such, PSC
arrangements (summarised in the PSC Terms by Country table refer Appendix IV) have limited application. Please seek local
professional advice for any specific PSC taxation matters.

Activities
If the activities of the downstream entity can be regarded as
production then the tax holiday (2 plus 3) may apply. However,
in respect of the downstream entities engaged in trading
exclusively, it would be difficult to build a case for the tax holiday.
Notwithstanding the above, a non-production FIE may be entitled
to a reduced income tax rate of 15% if it is registered and
operates in an SEZ (Shenzhen, Xiamen, Zhuhai, Hainan and
Shantou). In addition to this, a non-production FIE may also
enjoy a reduced rate of 15% for the period from 2001 to 2010 if
the following conditions are met:
The FIE is registered and operates in a central and western

region (e.g. Chongqing, Sichuan, Guizhou, Yunnan, Xizhang,
Shanxi, Gansu, Ningxia, Qinghai, Xinjiang, Neimenggu and
Guangxi); and
The FIE is engaged in an encouraged industry.
In addition to the tax holiday, import customs duty and VAT on

equipment may be exempted for encouraged industries.
76

Exports)
Please refer to the below table for information
on imports and exports related customs and
taxes on various oil and gas products.
Customs and Taxes (Imports and Exports)
Product
Import Tax Export Tax Import VAT
Crude oil (2709)
0%
0%
17%
Refined products
(2710)*
6%
0%
17%
LNG
0%
0%
13%
* Certain products subject to additional 3% or 4% interim

import duty
Note: Duty/VAT is assessed at the CIF level
Tax Framework for Mining

Companies
The taxation framework for entities engaged in
mining is substantially identical to that
applicable to other FIEs operating in the PRC.
The only significant difference is the applicability
of a resource tax, which may be levied on
natural resources, generally on a tonnage or
volume basis, at rates specified by the Ministry
of Finance in consultation with other relevant
ministries of the State Council.
Income Tax Holiday. FIEs undertaking mining

activities located in the western areas of China
and comply with State Industrial Policy may be
eligible for a reduced tax rate of 15%.
Tax Framework for Power and Utility

Companies
power and utility projects is substantially
identical to that applicable to any entity in the
PRC. The only significant difference is that
foreign investors engaging in power and utilities
projects in the PRC are eligible for a reduced
income tax rate of 15% regardless of the
location of the project, whilst other FIEs are
generally subject to different tax rates
depending on their locations.
The PRC classifies power generation as a
"manufacturing activity" and thus FIE power
projects are eligible for the 2 plus 3 Income Tax
Holiday.
FIEs engaged in mining activities which fulfil the

criteria to be classed as a "manufacturing
activity" are entitled to enjoy the 2 plus 3
77
See the box for a glance at Hong Kong
ong Kong does not have significant oil, gas

or mineral deposits and therefore activity in
these sectors is insignificant. However,
Hong Kong is a strong player in the power sector.
Relevant key information are:
!
!
!
Electricity Consumption: 40.3 billion kilowatt

hours (2003)
All of Hong Kong's generation capacity is
thermal, principally coal-fired units.
Off-take arrangements with a nuclear plant in
neighboring Guangdong province, in Southern
China, supplement domestically installed
capacity.
Electricity sold in Hong Kong is increasing at around

2-3% per annum, excluding exports to China that
grew by 38% year on year to 2,175 GWh in 2002.
Whilst this modest growth reflects underlying
increases of up to 7% in the public sector, including
government and transport, this has been offset by a
continuing decline in Hong Kong's manufacturing
base, which now accounts for less than 10% of
total electricity demand.
Hong Kong's electricity market comprises two
privately owned companies which each supply
power into discrete geographical 'supply areas'.
This arrangement is regulated by 15-year contracts
between each power company and the
78
government, each referred as the 'Scheme of

Control' (SoC). These contracts expire in 2008.
The SoC requires the two power companies to meet
Hong Kong's electricity demands at the lowest
reasonable cost. It also permits the companies to
establish tariffs, in conjunction with the government,
to earn a given return on the carrying value of their
property, plant, and equipment. This return is
currently set at between 13.5% and 15% of the
companies' net fixed assets, with the actual rate
dependent upon whether their purchase/
construction was debt or equity financed.
While praised for providing a highly reliable service
through a first class transmission and distribution
system, which supported Hong Kong's rapid
growth in the 1990's, critics argue that the current
regulation is ineffective resulting in excessive
electricity prices. The government is presently
studying alternatives to the SoC post-2008, ranging
from the status quo (perhaps with a reduced rate of
return) to the introduction of competition. The
government has announced its intention to map out
the future for the Hong Kong electricity market by
the end of 2004.
Financial reporting in Hong Kong is largely
consistent with International Reporting Financial
Standards (IFRS), previously known as International
Accounting Standards (IAS).
India

appendices I-IV for key statistics
on India.
Political and Legal
India is the 7th largest nation having an area of 3.3 million square Km. It is the largest
democracy in the world. A federal republic of 28 states and 7 union territories, which are
multi-ethnic and multi-religious in character, exist in the country. The country's parliament
comprises the indirectly-elected Upper House, the Rajya Sabha (Government Assembly),
and the directly elected Lower House, the Lok Sabha (People's Assembly).
The Head of State is the President and the Head of Government is the Prime Minister.
National and State Legislatures are elected for five-year terms. In spite of being a multiparty
democracy the Indian National Congress (INC) and Bhartiya Janta Party (BJP) are the largest
parties that control the political environment in India.
Both the parties have the common objective of achieving accelerated economic growth and
increasing foreign direct investment in India to make it an economic superpower.
79
India
India
While both the parties are pro-reformists and proinvestment, the two differ in their policies on divestment of
government share in public sector undertakings. While the BJP
is in favour of divestment, the INC believes in maintaining
government control over profitable public sector undertakings.
The judiciary system is independent and the legal system is
based on English common law. The Supreme Court is the
highest judicial authority in India. It is followed by the High
Courts, which head the state judicial system. Each state (or
two or more states together) has a High Court.
India has an exhaustive legal framework governing all aspects
of business. Some of the important ones include:
Arbitration & Reconciliation Act, 1996
Law relating to alternate redressal of disputes amongst parties
Central Excise Act 1944
Governs Duty levied on manufacture
Companies Act, 1956
Governs all Corporate Bodies
The Mines and Minerals

(Development and Regulation) Act,
1957 (MMDR) and The Mines Act 1952
Constitute the basic laws governing the mining sector

except the minerals oils
NELP, Auto Fuel Policy, Petroleum

Product Pipeline Policy and APM
Constitute the main policies, among others, governing the

mineral oils, natural gas and the downstream sector
Electricity Act 2003
Regulates generation, transmission, distribution, trading and use of

electricity and generally for taking measures conducive to
development of electricity industry, promoting competition therein,
protecting interests of consumers and supply of electricity to all areas
Environment Protection Act, 1986
Provides framework for seeking environment clearances
Income Tax Act, 1961
Governs direct taxes on income of all persons, both corporate and

non-corporate as well as residents and non residents
Money Laundering Act
Prevents money laundering and provides for confiscation of

property derived from, or involved in, money laundering
Patents Act, Copyright Act,

Trade Marks Act
Protects intellectual property rights
Securitisation and construction of Financial

Assets and Enforcement of Security Interest
Act, 2002
Proposed the set up of a pilot reconstruction company to conduct

auctions of the Non-Performing Assets (NPAs) in the banking sector,
and to develop a market for securitised loans
Organisations
80
The principal regulatory and government

organisations concerned with business
operations are as follows:
Commerce and Industry, acts as a gateway to

industrial investment in India. It provides a
single window clearance for Entrepreneurial
Assistance and facilitates the processing of
investor applications requiring government
approval.
Secretariat for Industrial Assistance (SIA)

The SIA, functioning with the Department of
Industrial Policy and Promotion, Ministry of
Foreign Investment Promotion Board (FIPB)

The FIPB is the main agency for all matters
concerning foreign direct investment as well as
81
India
India
its promotion into the country. The main functions include

clearance of proposals for foreign investment, reviewing
periodically the implementation of the proposals cleared, and
reviewing the general and sectoral policy guidelines, among
others.
Registrar of Companies (RoC)
The RoC plays a crucial role in the governance of the
Companies Act, the main law on regulating companies doing
business in India. RoC is primarily responsible for ensuring
adherence to the filing and registration requirements under the
Indian Companies Act, collecting and making publicly available
information on companies registered within its jurisdiction, and
bringing non compliant companies and officers to court, where
necessary.
Securities and Exchange Board of India (SEBI)
SEBI was established with the prime objective of protecting the
interests of investors in securities, promoting the development
of and regulating the securities market.
concerning administrative reforms and

changes for the effective functioning of the
Income Tax Department.
Ministry of Petroleum and Natural Gas
(MOPNG)
The Ministry of Petroleum & Natural Gas
(MOPNG) is responsible for the entire spectrum
of petroleum activities such as E&P, refining,
marketing, gas distribution and marketing, LNG
and CBM.
Directorate General of Hydrocarbons (DGH)
The DGH functions as an independent
regulatory body for supervising the activities of
companies in the upstream oil and gas sector
in the national interest and to oversee that
oilfield development in the country confirms to
sound engineering practices.
Economic Overview
Central Board of Excise and Customs (CBEC)
CBEC is part of the Department of Revenue under the Ministry
of Finance, Government of India. It is responsible for the
formulation of policy concerning levies and the collection of
customs and central excise duties and the administration of
matters relating thereto.
Central Board of Direct Taxes (CBDT)
The CBDT is a statutory authority functioning under the Central
Board of Revenue Act 1963. It governs matters relating to levies
and the collection of direct taxes and the formulation of policy
82

on India.
India stands as a vibrant and diverse country
whose economy is increasingly integrating with
the world economy. It is the tenth most
industrialized country and has about 300
million strong middle class. The Indian
economy, in recent times, has been the second
fastest growing economy in the world (after

China).
Services already account for 50.8% of GDP,
with industry at 26.6% and agriculture still
significant at 22.6%.
The liberalization of the economy in the last
decade has been key to the rapid economic
growth complemented by a significant turnaround in the telecom, infrastructure,
information technology and energy sectors.
The Government has taken several major
initiatives to liberalization including industrial
decontrol, simplification of investment
procedures, enactment of competition law,
liberalization of trade policy, full commitment
to safeguarding intellectual property rights,
financial sector reforms, liberalization of
exchange regulations, and, above all a liberal,
attractive, and investor friendly regime for
investment. Sweeping sociological changes
have been brought about by rapid
urbanization, expansion of electronic media,
education and increasing domestic and foreign
travel and changing the nature and
composition of expenditure, with growing
emphasis on brands, product quality, features
and convenience.
The Indian economy has posted an average
growth rate of 6% since 1990 and inflation was
83
India
India
averaging about 4.8% during 2003. India is emerging as a hub

for outsourcing and growth in this area is expected to continue
at the level of more than 50%. India's foreign exchange
reserves crossed US $100 billion in January 2004, which is a
record high for the nation. Further, the strengthening of
business fundamentals is being reinforced by upgrades in
corporate credit ratings. The assessment of the international
community, including rating agencies, on India's growth
prospects has turned more positive. FDI has remained in the
range of US$ 3-5 billion per year for the past few years (up to
2003).
The stock markets were booming at the time of

completing this guide and have, in recent
times, crossed the 6,000 mark of the Bombay
Stock Exchange index for the second time in
the last two decades, reflecting the faith of the
domestic and international investor.
The RBI is India's central bank and its basic purpose is to

secure monetary stability and develop India's financial structure
in line with the socio-economic objectives and policies.

Market
The currency unit is the Indian Rupees. The Indian Rupee is

convertible to the US Dollar on the trade account and current
account. It is not freely convertible on the capital account.
However, certain degrees of convertibility have been brought in
recently and for all practical purposes, Rupee is now virtually
convertible on capital account for individuals. As far as
business is concerned, all "flow" transactions are convertible; it
is only the "stock" - the net assets - that are left out.
During recent times the value of Indian Rupee has remained
stable against US Dollar at approximately Rs 45/US$.
One of the most significant developments in the Indian financial
environment has been the progressive softening of interest
84
rates over the last 3 years. As a result, the

Indian economy has been going strong with
relatively low levels of inflation and a rise in
manufacturing activity. The industry continues
to grow and corporate results across the board
are showing increasing profits.

Overview
of Information (by Country) - Key Energy,
key data and information on India.
India, the world's sixth largest energy
consumer, plans major energy
infrastructure investments to keep up with
increasing demand-particularly for electric
power. It is also the world's third-largest

producer of coal and relies on coal for more
than half of its total energy needs.
The Indian oil and gas sector has an
insignificant share of world oil and gas
production. Oil, gas, hydroelectricity, nuclear
power and coal are the five constituents of
primary energy. India is a net importer of
petroleum products. India's dependence on
imports for crude oil has increased over the
years and its reliance on imported petroleum
products has declined because of the addition
of massive refining capacity.
The Indian oil and gas sector is a significant
contributor to the State revenue. The major
component of contribution to the Treasury is in
the form of royalty on crude oil and natural gas.
Other components take the form of corporate
taxes, dividends, excise and customs duty on
the petroleum products that contribute 20% to
the national Treasury.
This sector has historically been a regulated
one dominated by Government undertakings.
With the limited deregulation in March 2002,
there is now a conscious and determined
policy shift from a centrally controlled, public
sector-dominated industry to a competitive
market economy with increasing private sector
participation in important segments of the
85
India
India
industry. However, some very important issues need to be

addressed for streamlining transition to full deregulation.
Oil
Unlike the international oil majors which have integrated
operations along the energy value chain, the Indian oil sector
has companies operating in three distinct sub-segments: Oil &
Gas Exploration and Production (E&P), Oil Refining and
Marketing of Refined Products (R&M) and, distribution of
natural gas. In India, the oil sector is under the purview of the
Ministry of Petroleum and Natural Gas (MoP&NG) which is
entrusted with the responsibility of overseeing exploration and
production of oil and natural gas, refining, distribution,
marketing, import, export and conservation of petroleum
products.
Upstream Exploration & Production

Oil accounts for about 30% of India's total energy
consumption. The majority of India's roughly 5.4 billion barrels
in oil reserves are located in the Mumbai High, Upper Assam,
Cambay, Krishna-Godavari and Cauvery basins. The offshore
Mumbai High field is by far India largest producing field, with
current output of around 260,000 barrels per day (Bbl/d). India's
average oil production level (total liquids) for 2003 was 819,000
Bbl/d, of which 660,000 Bbl/d was crude oil. India had net oil
imports of over 1.4 million Bbl/d in 2003. India imports
approximately 70% of its crude oil requirement.
There are 26 sedimentary basins in India. Until recently, almost
the entire exploration work was carried out by the two national
oil companies Oil and Natural Gas Corporation Limited (ONGC)
86
and Oil India Limited (OIL). So far, oil has been

commercially produced in only seven of the 26
sedimentary basins, and this represents only
23% of the total oil and oil equivalent
suspected to exist. However, the demand for
oil and gas in the country is on the rise. The
Indian Government has offered attractive fiscal
incentives through the National Exploration
and Licensing Policy (NELP), and the award of
contracts in record time under NELP I, II and III
demonstrates the government's seriousness in
involving the private sector in exploration to
enhance India's self sufficiency in oil and gas.
In the absence of any new discovery oil
production had stagnated since the mid 80's,
however the two successive recent oil
discoveries by Cairn Energy Plc in Rajasthan
and gas find by Reliance in the Krishna
Godavari basin in 2002 are promising. The total
in-place volume of the gas find is estimated to
be 7 trillion cubic feet (equivalent to 1.2 billion
barrels or 185 million tonnes of crude oil). This
gas find is of special significance in the wake of
NELP-IV, for which bidding was closed in
September 2003. Totally, 19 companies bid for
22 out of the 24 oil and gas blocks on offer. The
more recent oil discovery in January and
March 2004 by Cairn, are India's largest on
land oil find and are expected to have
preliminary recoverable reserves between 50
and 200 million barrels in one field and 20 and
70 million barrels in the other.
Coal Bed Methane (CBM)

In India, the production of CBM has yet to take
place. Under the current policy, the blocks are
identified by the Ministry of Coal and awarded
by the Ministry of Petroleum and Natural Gas.
To enhance the natural gas availability in the
country, eight coal bed methane (CBM) blocks
have been awarded in the first round under the
National CBM Policy. The incentives available
for CBM exploration include the following:
Freedom to market gas in domestic market

at market determined prices;
No customs duty on imports required for
CBM operations;
CBM operations will enjoy tax holiday, as
per Income-tax Act 1961, currently
available for 7 years from the date of
commencement of commercial production.
Indian upstream companies are adopting

diverse strategies to face deregulation. These
strategies are in the areas of strategic alliance
for undertaking investments in other elements
of the value chain, taking equity in overseas oil
and gas fields, undertaking enhanced oil
recovery projects in the existing fields, bidding
for new blocks (particularly, deep-water blocks)
in India, reducing finding and producing costs
through technological advancements and
exploring unconventional energy sources, such
as coal - bed methane.
87
India
India
Crude Oil Processed

100%
80%
56
49
50
45
61
44
51
50
55
39
36
30
29
54
70
71
60%
40%
20%
0%
19901991
19951996
19961997
19971998
Import
1998
1999
19992000
20002001
20012002
Domestic
Source: Report by ICRA on The Indian Oil and Gas Sector January 2003
Refining
The Indian oil-refining sector has 10 companies with 18
refineries and a combined annual installed capacity of 114.67
Million Metric Tonnes (Mmt) as of 1 April 2002. Marketing of
refined products in India is done mainly by the four Public
Sector Undertakings (PSUs), namely Indian Oil Cooperation
(IOC), Hindustan Petroleum Corporation Limited (HPCL), Bharat
Petroleum Corporation Limited (BPCL) and IBP Company
Limited (IBP). While IOC, HPCL and BPCL have integrated
operations in refining and marketing, IBP is purely a marketing
company and was taken over by IOC in February 2002 following
divestments of the Government of India's (GoI's) stake in the
company. Until recently, the marketing sector was strictly under
GoI control. However, the GoI has now decontrolled this sector.
With effect from 1 April 2002, pricing of all products is linked to
import parity prices. However, some issues are still to be
addressed in the decontrolled regime. One such issue is
88
flexibility in changing prices. Currently, the oil

marketing companies do not have complete
flexibility in changing retail prices of auto fuel.
The prices are reviewed every fortnight and
can be changed only after government
approval.
The Government has approved the proposal to
open up marketing of transportation fuels to
companies that have invested, or plan to
invest, Rs. 20 billion or more in the
hydrocarbon sector specifically, Exploration
and Production (E&P), refining, pipelines or
terminals with effect from 1 April 2002 (refer
section on "Regulatory and Supervision" for
investment guidelines). Four companies
fulfilling the criteria have been granted the
marketing license.

India's natural gas reserves are estimated to
be 30.1 trillion cubic feet (Tcf). Indian
consumption of natural gas has risen faster
than other fuel in recent years. From only 0.6
Trillion Cubic Feet (Tcf) per year in 1995, natural
gas use was nearly 0.9 Tcf in 2002 and is
projected to reach 1.2 Tcf in 2010 and 1.5 Tcf in
2015.
The gas demand in India is approximately one
and a half times the current production levels.
However as per The Indian Hydrocarbon Vision

2025 report the demand for natural gas is
expected to show a sharp rise in future
because of its environmental friendliness and
cost competitiveness. Controls on prices have
resulted in natural gas being competitive
against all industrial fuels except coal.
However, natural gas prices are expected to be
decontrolled in the near future. There is
currently a virtual monopoly in ownership of
the gas distribution infrastructure. Gas
Authority of India Limited (GAIL) alone
accounts for the distribution of more than 90%
of the natural gas produced in India.
The Government of India is considering all
available options to increase the supply of
natural gas in India like offering attractive terms
for private participation in exploration and
production, incentives for coal bed methane
exploration, development of LNG terminals
and efforts towards setting up a pipeline for
gas imports from the Middle East and
Bangladesh. Two LNG terminals are being set
up for import of LNG, one at Dahej by Petronet
LNG with a capacity of 5mmpta and one at
Hazira by Shell with a capacity of 2.5mmpta.
The Dahej terminal was commissioned in the
month of February 2004 and received its first
shipment of LNG of around 138,000 SCM. The
other terminal at Hazira is expected to be
commissioned in December 2004. There were
89
India
India
giant gas discoveries by Reliance in 2002, which are likely to

increase investor confidence in exploring deepwater reserves in
India. The Southeastern region is expected to witness the
establishment of power projects for utilizing the Reliance Gas. It
will also result in the development of a distribution pipeline
network for transporting and distributing the Reliance gas.
There may be a requirement for regulatory intervention to
streamline issues relating to right of way, tariffs and off-take
agreements. However, there is likely to be a significant deficit
even after commercial production starts from the Reliance
fields. This suggests room for other players also.
Gujarat State Petroleum Corporation (GSPC), a Gujarat
Government owned company, has also entered the gas
distribution business and is setting up a Rs. 32 billion 2500 Km
pipeline network for transportation of gas.
and marketing company in India, owns and

operates over 4500 Km of pipelines
concentrated principally in the north west
region.
There is expected to be a significant increase
in the pipeline infrastructure in India in the next
six years with significant part of this increase
being contributed by increase in the gas
pipelines mainly due to the new gas finds in
Andhra Pradesh and the coming up of the LNG
import terminals at Dahej and Hazira in 2004.
The Hydrocarbon Vision 2025 of the
Government of India has suggested a 45%
share of pipelines by 2024-25.
Coal
Among other regional pipelines, Assam Gas Company has a
prominent pipeline network in Northeast India. In addition to its
250 Km pipeline linking Sibsagar with Marsharita in Assam, it
has over 350 Km of branch pipelines in the region. While GAIL
and OIL are in the business of wholesale gas distribution, the
regional gas companies are into the retail distribution of natural
gas.
Pipelines accounted for only 33% of the transportation of
petroleum products in India in 2001. There are 16 product
pipelines in India covering 6802 Kms and having a capacity of
48.85 Mmtpa. At present Indian Oil Corporation, the largest
downstream oil company, owns a major share of crude oil and
product pipelines in India. The gas pipeline infrastructure is
spread over 6269 Km and GAIL, the largest gas transmission
90
India is the third largest coal producer in the

world, after the USA and China, and domestic
supplies satisfy most of the country's coal
demand. Indian coal generally has a high ash
content and low calorific value, so most coking
coal must be imported. India reportedly has
reserves of 84.4 Bmt; of this about 27 % is of
coking coal variety. Major Indian coalfields are
found in eastern and central India. It is
estimated that nearly 85% of India's reserves
are extractable at depths of less than 1200m.
Coal is the dominant energy source in India,
accounting for more than half of the country's
requirements; 70% of India's coal production

is used for power generation, with the
remainder being used by heavy industries and
for public use. The Indian government controls
almost all coal production, which has been
plagued by low productivity, distribution
problems, and loss of markets. Approximately,
all of India's 390 mines are under Coal India
Limited (CIL), which accounts for about 90% of
India's coal production. Current policy allows
private mines only if they are captive
operations, which feed a power plant or a
factory.
Electricity
Although about 80% of the population has
access to electricity, power outages are
common, and the unreliability of electricity
supplies is severe enough to constitute a
constraint on the country's overall economic
development. The government has targeted
capacity increases of 100,000 Megawatts
(MW) over the next ten years. As of January
2002, total installed Indian power generating
capacity was 120,000 MW.
The current power generation in India is much
below the peak demand, and Indian industry is
not assured of the quality of supply. The India
Government's efforts towards increasing the
country's generating capacity by way of
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inviting foreign investors in setting up Independent Power

Producers in the 1990s has not been very successful. Most of
the large projects were stalled by delays in regulatory approvals
and in some cases failure to secure adequate financing. India's
State Electricity Boards (SEBs), which run the power
distribution infrastructure and own most current generating
capacity, are in very poor financial shape due to a high level of
transmission and distribution losses, power theft and sale of
power at subsidized rates (particularly in the agriculture sector).
Since the SEBs were the main purchasers of power from IPPs,
this did not make it attractive for foreign investors. However, the
recent Government-Electricity Act 2003 seeks to bring about a
qualitative transformation in the sector through a new
paradigm. It replaces the existing legislation, i.e. The Electricity
Act 1910, The Electricity Supply Act 1948 and The Electricity
Regulatory Commissions Act 1998. The objectives of the law
are to consolidate the laws relating to generation, transmission
and distribution, trading and use of electricity. The Act, which
provides for privatisation of generation and distribution of
electricity, also allows captive power plants to sell additional
capacity through provisions of open access. It also permits
merchant generating units to provide electricity directly to
industrial consumers, thus IPPs will be provided undiscriminated open access to final consumers.

Oil and Gas
The Indian oil sector is under the purview of
the Ministry of Petroleum and Natural Gas
(MoP&NG). This Ministry is entrusted with
the responsibility of overseeing exploration
and production of oil and natural gas and
refining, distribution, marketing, import,
export and conservation of petroleum
products. The three organizations under
the control of MoP&NG are the Petroleum
Planning and Analysis Cell (PPAC), Oil
Industry Development Board (OIDB) and
the Directorate General of Hydrocarbons.
The Petroleum Planning and Analysis Cell
(PPAC) replaced the Oil Co-ordination
Committee (OCC) which played a pivotal
role in the Indian oil sector by assuming
responsibilities in the areas of determining
the product mix of refineries, allocating
indigenous and imported crude oil to
Indian refineries, administering the pricing
mechanism for controlled petroleum
products, and monitoring the performance
of the oil industry to achieve optimality.
The Union Cabinet has approved the
Petroleum Regulatory Bill, which provides
for the setting up of a Petroleum Refining
and Marketing Regulatory Board for
92
supervising the downstream sector. The

regulator would be set up once the Bill is
passed in parliament. Until such time the
Ministry of Petroleum and Natural Gas is
functioning as the regulator. The regulator is
broadly expected to protect consumer rights by
checking undue profiteering by the oil
companies and ensure product availability in all
parts of the country. The regulator is also
expected to monitor the setting up of the
marketing infrastructure of the oil companies
without encroaching on the retail network of
companies.
The Indian petroleum sector until 1998 was
controlled by the Administered Price
Mechanism (APM), which provided the players
with assured returns on capital employed. The
APM necessitated that the prices of crude
oil/products be fixed in a manner so as to
assure returns (based on net worth/capital
employed) to the exploration and production
companies, refiners and marketing companies.
A self-balancing system, the APM consisted of
a number of pool accounts through which
products like diesel, kerosene and LPG were
cross-subsidized through higher realizations
from other products such as Motor Spirit (MS)
and Aviation Turbine Fuel (ATF). The
Government of India dismantled the APM in a
phased manner, which was spread over fouryear period ending on 31 March 2002.
93
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Ministry of Petroleum
and Natural Gas
PPAC
OIDB
Analyse trends in the

international oil
markets and
domestic prices
Provide financial
and other assistance
for the development
of the oil industry
Administer the
subsidies in LPG sale
Provide freight subsidy
for far flung area
will be settled by the government as and

when such litigation are finally decided.
Directorate General
of Hydrocarbons
Independent regulatory
body for supervision of :
activities of
upstream oil and
gas companies
in the national
interest
oilfield developments
in accordance with
sound engineering
practices.
Major developments post-dismantle of APM

have been the following :
1.
2.
The new arrangement in the hydrocarbon sector can be
summarized below:
! Pricing of all petroleum products except for PDS kerosene
and domestic LPG are market determined with effect from 1
April 2002.
! Subsidies to continue on PDS kerosene and domestic LPG.
These subsidies are to be phased out by 2005-2006.
! Freight subsidy will continue to be provided for supplies of
PDS Kerosene and domestic LPG to far flung areas. The
freight subsidy will be borne by the consolidated fund of
India with effect from 1 April 2002.
! The price of indigenous crude oil of ONGC and OIL is
market determined with effect from 1 April 2002.
! The oil pool account balancing tool used under the APM is
dismantled
! Outstanding balances to be liquidated by issue of oil bonds
to concerned oil companies for 80% of the amount and the
rest after the government audit. The contingent liabilities
under the pending litigations pertaining to the APM period
94
3.
The Oil Coordination Committee was

disbanded and a cell by the name
Petroleum Planning and Analysis Cell has
been created under the Ministry of
Petroleum and Natural Gas to assist the
Ministry.
A regulatory mechanism is in the process
of being set up to oversee the functioning
of the downstream petroleum sector. A
petroleum regulatory board is in the
process of being set up.
Private companies permitted for retail
distribution of transportation fuel, namely,
motor fuel, high speed diesel and aviation
turbine fuel as per the guidelines
prescribed.
Some of the key terms of the guidelines are as

follows:
3.1. Companies investing or proposing to
invest Rs 20 billion in Exploration and
Production (E&P), refining, pipelines or
terminals are authorized to market the
transportation fuels. The Government to its
satisfaction will do the valuation of the
investments for the above purposes.
3.2. In case of future investments, the time

frame for making such investments in the
eligible activities would be counted as ten
years from the date of grant of
authorization for marketing of
transportation fuels for all projects taken up
under this scheme. Within the overall
period of 10 years for making investment of
Rs 20 billion in the eligible activities,
financial closure should be achieved within
five years, and the project/projects be
completed in all respects within ten years.
The previously mentioned period of ten
years includes the period earmarked for
financial closure.
3.3. Investments in the following assets are
considered eligible:
3.3.1. Setting up new grass root
refineries and/or expansion of the
existing refineries along with
facilities like crude oil receipt and
transportation facilities.
3.3.2. Exploration and production of
hydrocarbons including coal bed
methane, and associated facilities
like crude oil/natural gas pipelines,
crude oil, and natural gas
processing plants.
3.3.3. Terminals for crude oil/LNG
3.3.4. Common carrier natural
gas/petroleum products/LPG
pipelines
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3.3.5.
Investment in the above activities for setting up

additional assets for improvement in quality of
product to meet environmentally related norms.
Activities other than those specified above would not be
eligible.
3.4. A company proposing to make the specified level of
investment in the eligible activities will be required to sign an
agreement containing project conditions and milestones
with the government in the Ministry of Petroleum and
Natural Gas (MoP&NG) Regulatory Board.
3.5. The investments made or proposed to be made in the
eligible activities would be in the form of equity, equity like
instruments e.g. convertible debentures (fully or partially), or
debt with recourse to the company.
3.6. Specific provisions for submission of Bank Guarantee
3.7. The authorization to market transportation fuels will not be
transferable without permission of the Government.
3.8. The authorization to market transportation fuels may be
exercised either by the eligible company itself or through its
subsidiary or through its Joint Venture (JV) company with
other eligible company/companies or through its JV
Company with a public sector undertaking already
marketing transportation fuel.
The Mashelkar Committee on Auto Fuel Policy has suggested

the introduction of Bharat Stage II in the entire country with
effect from April 2005 and introduction of Euro III equivalent
emission norms for all categories of vehicles to be introduced in
seven major cities with effect from April 2005 and to be
extended to other parts of the country by 2010. The committee
expects the Indian refiners to spend Rs 170 billion to meet
Petroleum Product Pipeline Policy

In December 2002, the government introduced
the petroleum product pipeline policy, which is
based on the common carrier principle. As per
this policy, all companies interested in laying
product pipelines originating from ports or
pipelines originating from refineries exceeding
300 Km in length, would be required to publish
the proposal inviting other interested
companies to take a capacity in the pipeline.
Any oil company interested in sharing the
capacity of the pipeline will be able to do so on
mutually agreed commercial terms and
conditions. While the pipeline will be owned
and operated by the proposer, it would have to
provide 25% extra capacity to other users. The
pipeline tariff will be subject to the control
orders or the regulations that will be issued by
the Government.
National Exploration and Licensing

Policy (NELP) Investment Packages
Auto Fuel Policy
96
emission norms by 2005 and another Rs 180

billion to meet the 2010 specifications.
The investment package proposed under the

NELP is rated as comparable with the best in
the world in terms of the following:
International pricing of oil for new

discoveries, applicable both to private and
national oil companies.
!
!
Royalty payments to be computed

henceforth on ad-valorem basis, along with
concession on royalty due for exploration
in deep waters.
Freedom for marketing crude oil and gas in
the domestic market.
Duty concessions on import of capital
goods available at par for private as well as
national oil companies.
Cess levied under the Oil Industry
Development Act, 1974 to be abolished for
the new exploration blocks.
It is envisaged that in the medium term
instead of rounds of bidding, there would
be open availability of exploration acreages
all round the year.
Summary of Guidelines for Foreign

Direct Investment (FDI)
Petroleum Sector
FDI is permitted automatically up to 100% in
private refining ventures. However, FDI in public
sector refineries is restricted to 26% subject to
specific approval of the Foreign Investment
Promotion Board.
100% FDI is permitted on the automatic route
in marketing of petroleum products subject to
the existing sectoral policy and regulatory
framework.
100% FDI is permitted on the automatic route
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for petroleum product pipelines subject to and under the

government policy and regulation thereof.
FDI upto 100% is permitted for Natural Gas/LNG Pipelines with
prior Government approval.
The government has offered both offshore and onshore
exploration blocks under the NELP for Indian and private
participants.
FDI up to 100% is permitted on the automatic route in oil
exploration in both small and medium sized fields subject to and
under the policy of the Government on private participation in
exploration of oil and the discovered fields of national oil
companies.
A 100% wholly owned subsidiary is permitted for the purposes
of market study and formulation as well as for investment/
financing.
For actual trading and marketing, a minimum 26% Indian equity
is required over 5 years.
Regulatory Framework for the Gas Industry

The import of natural gas/LNG will call for large investments in
handling terminals and gas transmissions networks. While Gas
Authority of India Limited (GAIL) is expected to play a leading
part in setting up these facilities, participation by private parties
would be encouraged. Besides, the developers of small and
medium sized fields will have to make their own arrangements
for the marketing of gas, import of natural gas through pipeline
and in the form of LNG. There are certain proposals from private
98
sector companies to import LNG at various

locations. In such a scenario, regulation needs
to be introduced in the gas industry in order to
encourage private investment and to effectively
control the functioning of the private parties. To
this end, the Ministry of Petroleum & Natural
Gas is considering putting in place a Regulatory
Framework for the natural gas/LNG industry in
India.
Currently natural gas supply is regulated by
MoP&G, assisted by the Director General of
Hydrocarbons for technical matters. The
Government of India has recently announced a
Draft Policy for development of natural gas
pipelines, which envisages the establishment of
a "regulator", for regulating transmission,
distribution, and gas supply and storage
systems for natural gas/liquefied natural gas
and promoting development of the sector. The
proposed "regulator" will also oversee access
to the gas pipelines on a non-discriminatory
open access basis with level playing field for all
users. Until such proposed regulation
materializes, the MoP&G continues to regulate
this industry, including the pricing, which is
reviewed and revised on a periodic basis.
However, it is expected that in the foreseeable
future, pricing of natural gas would be
completely de-controlled.
GAIL enjoys a near natural monopoly in gas
distribution, except in the States of Gujarat and

Assam, where Gujarat Gas and Oil India Limited
respectively have gas distribution
infrastructure. Accordingly, GAIL usually
determines the pipeline tariffs in consultation
with MoP&G. There are no specific regulations
to control these tariff arrangements at this
stage. Further, no specific regulation exists at
this stage that provides a legal basis for access
by third parties to natural gas pipelines and
distribution systems. However, certain States,
such as Gujarat, have established Gujarat Gas
Regulatory Authority to deal with access
issues. However, note that the Supreme Court
in a landmark judgment has recently ruled that
States have no power to enact laws to regulate
transmission, supply and distribution of natural
gas. The need to seek the correct
interpretation of the law on this issue arose after
the passage of a controversial Act by the
Gujarat Assembly in 2000, providing for
regulating the transmission, supply and
distribution of liquefied gas, produced in the
State. Please contact our Partners and
Managers for recent updates on the regulatory
regime in India.
Special Incentives to Oil and Gas

Sector
Foreign companies awarded blocks under the
NELP and participating in the E&P blocks are
eligible for the following fiscal incentives:
99
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!
!
!
!
!
!
!
!
!
!
!
!
Participation through unincorporated JVs

No customs duty
No signature, discovery or production bonus
7 year corporate tax holiday
Up to 100% cost recovery (biddable)
Low to moderate royalty rates between 5% to 12.5%
Special concessions for deepwater blocks
Securitization of participating interest for raising project
finance permitted
Fiscal stability in contracts
Full repatriation of profits abroad
Liberal set off of losses and carry forward provisions for
income tax purposes
Tax incentives for Site Restoration Fund Scheme.
Mining
!
!
Survey and exploration of all the minerals other than coal,

natural gas, petroleum and atomic minerals;
Mining and metallurgy of non-ferrous metals like aluminium,
copper, zinc, lead, gold and nickel; and
Providing administration for prospecting and mining laws.
The Mines and Minerals (Development and Regulation) Act,

1957 (MMDR) and the Mines Act, 1952 together with the rules
and regulations thereunder constitute the basic laws governing
the mining sector except the mineral oils. The current National
Mineral Policy permits exploration and exploitation of 13
specified minerals. The MMDR Act was amended in 1999 to
100 Asia-Pacific Energy, Utilities & Mining Investment Guide
The Ministry of Mines regulates and promotes the activities of

mining in India and is responsible for:
bring the provisions for grant of mineral

concessions on par with major mineral
producing countries of the world. Some salient
features are:
The concept of reconnaissance operations

as a stage of operations distinct from and
before actual prospecting operations has
been introduced. A specific
reconnaissance permit has been
introduced which permits preliminary
prospecting of a mineral through regional,
aerial, geophysical or geochemical surveys
and geological mapping and includes
drilling of a specified number of boreholes.
Area restrictions on prospecting license,
mining lease, and reconnaissance permits
have been liberalized by making the
restrictions applicable to the state instead
of the country as a whole.
The relevant rules in force under the MMDR Act

are the Mineral Concession Rules, 1960,
outlining the procedures and conditions for
obtaining a prospecting license or a mining
lease, and the Mineral Conservation and
Development Rules 1988 that lay down the
guidelines for ensuring mining on a scientific
basis and without environment degradation. All
the major minerals come under the purview of
the Central Government. Minor minerals are
separately notified and come under the purview
of State Governments who have formulated

Mineral Concession Rules for this purpose.
FDI in Mining
FDI is allowed up to 100% under the automatic
route for activities such as the exploration and
mining of gold and silver (and minerals other
than diamonds and precious stones),
metallurgy and processing.
For the exploration and mining of diamonds
and precious stones, FDI is allowed up to 74%
under the automatic route.
The automatic route is available for setting up a
100% subsidiary in the mining sector, even if
the foreign company has a previous venture or
tie up in mining sector subject to the condition
that the applicant has no existing joint venture
for the same area and/or the particular mineral.
Coal and Lignite

FDI is permitted up to 100% for private Indian
companies which set up or operate power
projects and coal or lignite lines for captive
consumption. A company setting up coal
processing plants is allowed FDI up to 100%
subject to compliance with the condition that it
will not do coal mining and supply the washed
or sized coal to parties supplying raw coal to
coal processing plants instead of selling it in the
open market.
Asia-Pacific Energy, Utilities & Mining Investment Guide 101
India
India
Exploration or mining of coal or lignite for captive consumption

permits FDI up to the limit of 74%.
FDI is permitted up to 50% under the automatic route in all the
above cases subject to the condition that such investment shall
not exceed 49% of the equity of a Public Sector Undertaking.
Power and Utilities

Power is regulated at both the Centre and State level. At the
Centre level, the Ministry of Power has established a "Central
Electricity Regulatory Commission" to regulate tariffs, inter-state
transmission of energy, arbitrate/adjudicate upon disputes and
to assist the Government of India in policy formulation.
Additionally, "Central Electricity Authority" assists the Ministry in
all technical and economic matters. Regulation at the State level
is via the respective State Electricity Board.
The government has passed the Electricity Act 2003, which
seeks to create a liberal framework of development of the power
sector. The Act, inter alia:
!
!
Eliminates the need for a license for the generation of

electricity (except hydro electricity) subject to meeting
technical standards;
Removes captive power plants from the requirements of
licensing and other permissions;
Provides provision of issuing more than one license for
transmission and distribution in the same geographical area;
and
Introduces the concept of power trading as a distinct
activity.
FDI up to 100% is allowed under the automatic

route for generation, transmission and
distribution of electricity other than atomic
plants without any limits on the quantum of
investment.

Principles
The Institute of Chartered Accountants of
India (ICAI) is the governing professional
body, which represents the accountancy
profession at national and international
levels. Regional councils and local
chapters of the ICAI, which are spread all
over India, undertake the task of continuing
professional education.
The audit of a company's accounts is
compulsory under the Companies Act
1956. Companies prepare their financial
statements based on historical cost as per
the provisions of the Companies Act 1956.
These financial statements are required to
be audited by chartered accountant(s) and
an audit report has to be submitted.
The annual reports circulated to the
members every year generally consists of:
!
!
!
!
Director's report
Auditor's report
Balance sheet
Profit and loss account.
A statement of accounting standards is issued

by the Accounting Standards Board of the
ICAI, which prescribes methods of accounting
approved by the ICAI for application to
financial statements. In addition, accounting
standards, generally accepted accounting
principles and guidance notes issued by the
ICAI must be followed.
The Income Act 1961 requires a tax audit to be
carried out by a chartered accountant for
taxpayers with sales from business in excess
of Rupees 1 million in a tax year.
Oil and Gas Sector

In India, the accounting for midstream and
downstream sectors is not different from a
manufacturing or distributing company. The
general accounting principles, which apply to
any other sector, apply to midstream and
downstream sectors.
Guidance Note on Accounting for Oil & Gas
Producing Activities prescribes the set of Rules
for Upstream accounting. As there are no
industry specific accounting standards (only
India
India
some industry exemptions); this guidance note is an effort by

the Institute of Chartered Accountants of India to standardize
the accounting in the Indian Oil and Gas Industry. It is modeled
on FAS 19 and Regulation SX of the SEC (US GAAP).
The guidance note on accounting for Oil & Gas prescribes two
alternative methods of accounting for acquisition, exploration
and development costs, which are:
!
!
Successful Efforts Method (SEM)

Full Cost Method (FCM).
Mining Companies
Under the Indian GAAP, there is no specific guidance for
financial reporting of mining companies. There are no specific
accounting standards prescribed for the same under the Indian
GAAP. Accordingly, there is no consistent treatment followed by
companies in the Industry.
Power and Utility Companies

Under Indian GAAP, there are no specific guidelines/accounting
standards for financial reporting of power and utilities
companies. Accordingly, there is no consistent treatment
followed by companies in the Industry.
6. Taxation
Taxes
Principal Taxes
The Indian tax year runs from 1 April to the
following 31 March. In the case of
corporate entities, the return of income for
a tax year must be filed by the 31 October
following 31 March. The tax rate for
domestic company is 35% plus a
surcharge of 2.5%. In addition, an
education tax of 2% is also levied on
corporate income tax. Thus, the effective
tax rate for domestic companies is
36.59%. For foreign companies, the tax
rate is 40% plus a surcharge of 2.5% & an
education tax of 2%. Thus, the effective
tax rate for foreign companies is 41.82%.
Treaty rates are applied to payments made
to non-residents and foreign companies
that do not have a permanent
establishment or fixed place of business in
India to the extent such treaty rates are
more beneficial.
The Indian tax laws also provide that
dividends declared/distributed/paid by an
Indian company are subject to dividend
distribution tax at 12.5% plus a surcharge.
Dividend income received by the shareholders

of such an Indian company is exempt in their
hands.
The Indian tax laws provide for a presumptive
taxation scheme for non-residents & foreign
companies engaged in the business of
providing services or facilities in connection
with or supplying plant and machinery on hire
to be used in prospecting for or extraction or
production of mineral oil in India. In such a
case, 10% of the receipts are deemed profits
chargeable to tax in India. Consequently, the
effective tax rate of a foreign company works
out to be 4.182% of gross receipts (current tax
rate applicable to foreign companies being
41.82%).
Withholding Tax
The Indian tax laws place an obligation on the
company to withhold taxes at source on
payments made by the said company for
various purposes including:
a) all payments made to non-residents
b) rentals
c) payment to contractors for any work done
d) any payment for professional/technical
services
e) interest
f) dividends
g) salaries.
India
India
The withholding tax rates vary depending on the nature of the

transaction. Treaty rates are applied to payments made to nonresidents that do not have a permanent establishment or fixed
place of business in India.
Wealth Tax
A company that owns specified assets in excess of Rs. 1.5
million is subject to a wealth tax at 1% of the excess. Following
are the assets specified for the purposes of wealth tax:
!
Guest house, residential house or commercial building
!
Motor cars
!
Jewellery, bullion etc.
!
Yachts, boats and aircrafts
!
Land.
Further, any debts owed on the valuation date and incurred in
relation to those assets which are included in the wealth are
eligible for reduction from the aggregate value of assets.
The wealth tax return must be filed along with the corporate tax
return.
Dividend Tax
With effect from financial year 2003-04, dividend income is
exempt in the hands of the shareholders. However, a dividend
distribution tax at 12.5% (plus surcharge of 2.5%) is levied on
companies declaring dividends.
Summary of Different Types of Indirect Taxes in

India
!
!
Customs duty (a tax on import) under Customs Act, 1962.

Excise duty (a tax on manufacture) under Central Excise &
!
!
!
Salt Act, 1944.

Sales tax (a tax on sale of goods) under
local sales tax legislatures.
Sales tax under Central Sales Tax Act,
1956.
Service tax (a tax on provision of services)
under Finance Act, 1994.
Principal Indirect Taxes - an overview

Customs Duties
The Central Government of India levies
customs duties or import duties in terms of the
Customs Act, 1962 (the Act, for short) and
the Customs Tariff Act, 1975. These duties are
imposed on goods imported into India. The
customs duties are levied ad valorem i.e.
duties are computed on the value of the
imported goods. The types of customs duties
applicable are Basic Customs Duty (BCD) and
Additional Customs Duty (ACD). BCD is levied
at the rate specified in customs tariff on CIF
value of the goods and ACD is equivalent to
the excise duty applicable on like goods
manufactured in India. Further, an education
tax of 2% is also levied on the aggregate of
custom duties payable.
Central Excise Duty/Cenvat
Central Value Added Tax (CENVAT), also
known as central excise duty, is levied by the
Central Government on manufacture of
movable and marketable goods in India. The
duty is levied at the rates specified in the

excise tariff. The two types of excise duties
that may be levied are the Basic Excise Duty
(BED) and Special Excise Duty (SED). The rate
of BED is 16% for most of the product
categories. The SED of 16% is levied only on
certain classes of goods like cars, cosmetics,
air conditioners, aerated waters etc. meant for
consumption by the affluent class. Further, an
education tax of 2% is also levied on the
aggregate of excise duties.
Sales Tax
The sale or purchase of movable goods in India
is subject to sales tax. Imports into and
exports out of India do not attract sales tax.
Further, sales tax is also not levied on services.
Sales tax is levied either under the Central
Sales Tax Act, 1956 (CSTA), which regulates
the sale or purchase of goods between two
states (inter state sales) or under the
concerned local sales tax, which regulates the
sale or purchase of goods within a particular
state (intra state sales).
Service Tax
Service tax is applicable to specified services
rendered in India. Further, the tax is levied on
taxable services rendered by the persons
defined in the statute. Service tax is levied at
the rate of 8% of the value of the taxable
services as defined in the statue. However, the
India
India
rate is proposed to be increased to 10% from the date the

Finance Bill (No. 2) 2004 receives the assent of the President of
India. Further, an education tax of 2% is also proposed to be
levied on the amount of service tax payable from the said date.
No special framework exist for foreign companies under
indirect taxes.
Effective tax rates for capital gains can be

summarised as below:
Particulars
Resident
Non Resident
Short Term
Capital Assets
Normal Corporate/
Individual Rates
Normal Corporate/
Individual Rates
Long Term
Capital Assetsbeing listed shares
or securities in
an Indian Co.
20%
(Notes 1 and 2)
10% (Note 2)
Other Long Term

Capital Assets
20%
20%
India follows the fiscal year, i.e. 1 April to 31 March, as the tax
year. The effective corporate tax rates can be broadly
categorized as below:
* Surcharge at 2.5% in case of corporate, where taxable income

exceeds Rs.850,000 per annum.
Domestic Company
Foreign Company
!
!
1.
41.82% (40% plus surcharge of 2.5%

plus 2% education tax)
remittances made outside India without payment of

appropriate withholding taxes;
corporate income tax; and
executive and general administrative expenditure incurred
by the head office outside India in excess of the prescribed
limits.
Returns/accounts for tax purposes must be

prepared as of 31 March. The return must be
filed in the case of companies, by the following
31 October. Self-assesment is necessary in
furnishing the return. Tax is payable in advance
in specified instalments in the financial year
(April to March) immediately preceding the fiscal
year in respect of the income of the accounting
year ending 31 March. Any balance of tax due
on the basis of the return must be paid on a selfassesment basis before filing the return.
36.59% (35% plus surcharge of 2.5%

plus 2% education tax)
Expenditure incurred wholly and exclusively for the purpose of

the business is typically tax-deductible when computing the
taxable income. However, certain expenses are specifically
disallowed or the amount of deduction is restricted. These
expenses, inter alia, include:
2.
Short-term capital asset is one which is

held for a period of less than three years
(one year in case of shares/securities).
The tax payable would be limited to tax at
10% on difference of sale price minus cost
price (without applying indexation).
With a view to boosting capital markets the

Finance Act 2003 has provided an exemption
for long term capital gains arising on the sale of
qualifying shares acquired from the stock
markets or under a public issue of shares listed
on a recognized stock exchange between 1
March 2003 and 1 March 2004 provided the
sale transaction is entered into on a recognized
stock exchange.

A resident company is taxed on its worldwide
income. A nonresident company is taxed only
on income that is received in India or that
accrues or is deemed to accrue in India. Double
taxation of foreign income is avoided through
treaties that generally provide for deduction of
the lower of foreign tax or Indian tax on the
doubly taxed income from tax payable in India
in the case of residents. Similar relief is allowed
unilaterally where no treaties exist.
Undistributed income of a nonresident
subsidiary is not subject to tax.
Please contact our Partners or Managers for
more information in relation to treaty and other
arrangements.
India
India
Tax Provisions Relevant to Energy, Utilities &

Mining Companies
The domestic tax law provides for tax-deductibility of certain
specific expenses incurred by oil Exploration and Production
(E&P) companies when computing their taxable income. These
include:
unrealised or abortive expenses incurred in respect of any

area surrendered prior to commencement of commercial
production;
expenses incurred for drilling or exploration activities or
services (whether incurred before or after commencement of
commercial production). Cost of physical assets used are
also eligible for deduction except for assets on which
depreciation is admissible under the domestic tax law. The
expenses will be eligible for deduction after commencement
of commercial production; and
allowance for the depletion of mineral oil after
commencement of commercial production.
However, these deductions are available only to the extent they

are provided for in the Production Sharing Contracts (PSCs),
signed by the E&P companies with the GoI. Thus, typically, the
specific provisions of the PSC govern the taxability of business
profits of an E&P company. It is relevant to note that the model
PSC for exploration provides that capital expenditure incurred in
respect of exploration and drilling operations is fully taxdeductible.
Tax Holiday
E&P companies are entitled to a 7-year tax
holiday on income earned from commercial
production of mineral oil beginning on or after
1 April 1997.
Taxation Implications on Assignment
A farm-out of participating interest is a
transaction unique to the oil & gas sector.
While farm-outs are a common occurrence in
developed petroleum economies, only limited
farm-out transactions have taken place until
now in India. As Indian tax laws did not
specifically address taxation of farm-out
transactions until recently, most of these early
transactions were structured as pure
reimbursement of exploration expenditure
(with a nil tax impact). However, with the
growing quest to acquire developed blocks,
payment of farm-out premiums has become
quite common in the sector.
The Finance Act 1998 introduced specific
provisions, which seek to deal with assignment
of interest in PSCs effective 1 April 1998.
These provisions discuss the taxability in the
two scenarios i.e. where:
!
the proceeds of the transfer do not exceed

the amount of expenditure incurred
remaining unallowed; and
the proceeds of the transfer exceed the
amount of expenditure incurred remaining

unallowed.
Under both scenarios, the provisions require
that the amount of expenditure incurred
remaining unallowed to be set off against the
capital proceeds of transfer in order to
determine whether the transfer gives rise to a
taxable gain or loss.
Any business loss arising due to consideration
for the assignment of interest being less than
the expenses remaining unallowed is eligible
for carry forward to subsequent years. This
carried forward business loss can be set off
against any business income earned by the
E&P company during eight years subsequent
to the year in which the loss was incurred.
However, the carry forward of business loss is
permitted only if a loss return is filed with the
revenue authorities on or before the due date
and if there is no major corporate restructuring
involving a change in shareholding beyond
49%.
It is important to note that the taxing provisions
appear to be framed, keeping rather simplistic
farm-out transactions in mind, and do not
discuss the implications arising from complex
modes of arriving at the consideration, such as
the carried interest.
India
India
Site Restoration Fund Scheme, 1999

With a view to catering to the need for proper abandonment of
oil wells after their economic life, GoI has introduced the Site
Restoration Fund Scheme, effective 1 April 1998 (Scheme).
Under this Scheme, E&P companies are allowed a deduction in
respect of the amount deposited in a separate bank account,
subject to a maximum of 20% of the profits of the business.
Interest reinvested in accordance with the Scheme also
qualifies for deduction within this limit.
The amount transferred to the reserve account can be utilized
only for site restoration after cessation of commercial
production of oil from a particular well. If any withdrawals are
made from such reserve account and utilized for any purpose
other than site restoration (as certified by the prescribed
authority), the withdrawals are taxable as business profits in the
year of withdrawal.
Minimum Alternate Tax (MAT)
Under the domestic tax law, where the income-tax (computed
as per the provisions of the domestic tax law) is lower than
7.5%1 of book profits (as defined under the domestic tax laws),
the company would be liable to pay 7.5% of book profits, as
MAT. An E&P company would be liable for MAT despite being
eligible for a tax holiday under other provisions of the Act.
Taxation of Mobilisation/Demobilisation Revenues
Mobilisation/demobilisation essentially involves movement of
men, materials and equipment from one operating area to
another. In the past, where these activities involved movement
1
Plus surcharge as applicable
in and out of India, revenue authorities were

taxing these revenues at a deemed profit rate
of 1%, on the principle that only income
attributable to activities undertaken in India
would be taxable.
The above position was also supported by the
Central Board of Direct Tax (CBDT) instruction
No. 1767 dated 1 July 1987, which was
applicable for a period of 3 years up to
assessment year 1989-90.
Please contact our Partners and Managers for
current taxation laws in respect to mobilisation
and demobilisation revenues.
Special Provisions for Non-resident Service
Providers
Non-resident assessees (corporate and noncorporate) engaged in the business of
'providing services or facilities or supplying
plant and machinery on hire used, or to be used
in connection with the prospecting, extraction
or production of mineral oil' are subject to a
deemed basis of taxation. A sum equal to
10% of the gross receipts (without deducting
any expenditure) is deemed to be the income
of the assessee. Therefore, the effective taxrate of taxation for a foreign company, which is
subject to a deemed basis of taxation, as
above, would be 4.1% of its revenues. This
deemed basis of taxation was introduced with
a view to simplifying the complications

involved in the computation of taxable income
of a taxpayer engaged in providing services in
relation to prospecting, extraction or
production of mineral oil. However, an
assessee maintaining books of accounts (as
prescribed under the domestic tax laws) may
claim lower than deemed profits.
Taxation of Technical Services Fees
Technical service fees (as defined under the
domestic tax law) earned by a foreign
company from the GoI or an Indian concern is
not eligible to be taxed at the deemed profit
rate of 10%. Such technical service fees are
liable to tax at the rate of 20% on a gross
receipt basis, subject to specific conditions.
Under the domestic tax law, technical service
fees have been defined as any consideration
for the rendering of any managerial, technical
or consultancy services (including the
provision of services of technical or other
personnel) but does not include consideration
for any construction, assembly, mining, or like
project(s).
The issue whether the activity of prospecting
for or extraction or production of mineral oils
can be termed as 'mining', has been a
contentious matter and was referred to the
Attorney General of India for his opinion.
India
India
The Attorney General opined that such operations are mining

operations and the expressions 'mining project' or 'like project'
would cover rendering of services like carrying out drilling
operations for exploration or exploitation of oil and natural gas.
Relying on the Attorney General's opinion, the CBDT has issued
an internal instruction, Number 1862, clarifying that the
prospecting for or extraction or production of mineral oils
constitute mining operations and are accordingly outside the
purview of the definition of fees for technical services.
Corporate Dividend Tax (CDT)

Under the existing tax regime, a domestic
company declaring, distributing or paying a
dividend is required to pay, in addition to
income tax chargeable in respect of its taxable
income, a dividend distribution tax of 12.5%
plus a surcharge of 2.5% (effectively
12.8125%). The dividend is not subject to tax
in the hands of the shareholder.
Jurisdiction
The territorial jurisdiction for activities relating to prospecting
for, extraction or production of mineral oils extends to the
continental shelf of India and the exclusive economic zone of
India i.e. 200 nautical miles from the appropriate baseline.
The tax jurisdiction for Indian E&P companies depends on the
place where the registered office of the company is located.
For foreign E&P companies, the tax jurisdiction depends on the
place where the project office is located.
Transfer Pricing Legislation

The Indian transfer pricing regime provides
that income arising from an 'international
transaction' between 'associated enterprises'
is computed at the 'arm's-length price' (each
of these terms has been defined). Thus, for
transfer pricing legislation to apply, the trigger
point is entering into an international
transaction with an associated enterprise. In
other words, this legislation has no role to play
in a scenario where the transaction is between
two residents or alternatively, the transaction is
between two independent enterprises.
However, the tax jurisdiction for all foreign

companies/concerns/joint ventures (and their employees)
engaged by the ONGC; their subcontractors and assignees for
the purpose of rendering industrial/commercial works (including
technical or other services, royalty etc), is Dehradun. There is,
however, certain ambiguity concerning the jurisdiction of
companies, executing production-sharing agreements, where
ONGC is a consortium member i.e. where companies have not
been engaged by ONGC (or their sub contractors and
assignees). Since ONGC (or their subcontractors and
assignees) have not engaged these companies, it can be
argued that the notification is not applicable to them.
Towards this objective, a comprehensive study

should be undertaken to ascertain whether the
international transactions undertaken by the
company with associated enterprises are at
arm's length.
Tax Framework for Downstream Oil

and Gas Activities
Tax Holiday
The Indian income-tax regime provides for a
seven-year tax holiday of profits generated by
an undertaking which begins refining of
mineral oil on or after 1 October 1998.
Under the domestic tax laws, where the
income tax (computed as per the provisions of
the domestic tax law) is lower than 7.5%2 of
book profits (as defined under the Act), the
company is liable to pay 7.5% of book profits
as MAT. A company engaged in refining of
mineral oil is liable for MAT in spite of being
eligible for a tax holiday under other provisions
of the Act.
plus a surcharge of 2.5% (effectively
12.8125%). The dividend is not subject to tax
in the hands of the shareholder.
India
India

The Indian transfer pricing regime provides that income arising
from an 'international transaction' between 'associated
enterprises' be computed at the 'arm's-length price' (each of
these terms has been defined). Thus, for transfer pricing
legislation to apply, the trigger point is entering into an
international transaction with an associated enterprise. In other
words, this legislation has no role to play in a scenario where the
transaction is between two residents or alternatively, the
transaction is between two independent enterprises.
Towards this objective, a comprehensive study should be
undertaken to ascertain as to whether the international
transactions undertaken by the company with associated
enterprises are at arm's length.

Import Tax on Crude Oil
Crude oil imported in India is subject to BCD at the rate of 10%.
Imports of crude oil are exempt from the levy of ACD.
Export Tax on Raw Crude Oil
Export of crude oil is not subject to customs duty.
Import Tax on Refined Products
Import duties on refined products range from 5% to 39%.
Export Tax on Refined Products
Export of refined products is not subject to customs duty.
Pipeline Tariffs
Pipeline tariffs are not subject to any special
levy, value added tax and GST.
Import Tax on Gas
Import of Natural Gas is subject to BCD at the
rate of 10%. Imports of Natural Gas are exempt
from the levy of ACD.
Gas Supply (Domestic)
Sales tax on domestic Supply of Liquified
Petroleum Gas ranges from 4% to 20% in
different States.
Export Tax on Gas Supplies
Export of Natural Gas is not subject to customs
duty.

The domestic tax laws provide that an Indian
company or a person resident in India is
eligible for amortisation of expenditure
incurred wholly and exclusively on any
operations relating to prospecting for the
specified minerals or groups of associated
minerals or on the development of a mine or
other natural deposit of any such mineral or
group of associated minerals provided the
expenditure is incurred at any time during the
year of commercial production or in any of the
four years immediately preceding that year.
However, expenditure which is met directly or
indirectly by any other person or authority is

not eligible to be amortised.
The amortised expenditure can be claimed as
a tax deduction in equal instalments over a
period of 10 years. However, any capital
expenditure, such as expenditure on
acquisition of site or expenditure on
acquisition of deposits of any of the specified
minerals or acquisition of any rights in or over
such deposit or expenditure of a capital nature
in respect of any building and machinery on
which depreciation is allowable under the
domestic tax law is not eligible for
amortisation.
The MAT regime provides that where the
the domestic tax law) is lower than 7.5% of
book profits (as defined under the domestic
tax laws), the company is liable to pay 7.5%3 of
book profits as MAT.
3
(2.5% was applicable for FY 2003-04).
India
India
plus a surcharge of 2.5% (effectively 12.8125%). The dividend

is not subject to tax in the hands of the shareholder.
Carry Forward of Tax Losses/Depreciation Pursuant to
Amalgamation
The domestic tax laws provide that in case of amalgamation of
a company (the amalgamating company) engaged in the
business of mining with another company (the amalgamated
company), the tax losses of the amalgamating company will
form part of the losses of amalgamated company and will be
eligible for carry forward for a period of eight years to be set off
against the profits of amalgamated company.

Tax Holiday
The Indian tax regime provides for a tax holiday for an
undertaking which
!
is set up in any part of India for generation or generation
and distribution of power if it begins to generate power on
or before 31 March 2006; and
!
starts transmission or distribution by laying a network of
new transmission or distribution lines before 31 March
2006.
The tax holiday is available for any ten consecutive years out of
a block of 15 years beginning from the year in which the
undertaking commences generation of power or commences
transmission or distribution of power. The tax holiday is
available only if the undertaking fulfils the following conditions:
(i)
it is not formed by splitting up or reconstructing a business

already in existence; and
(ii) it is not formed by the transfer to a new

business of machinery or plant previously
used for any purpose.
The MAT regime provides that where the
the domestic tax law) is lower than 7.5% of
book profits (as defined under the domestic tax
laws), the company is liable to pay 7.5%4 of
book profits, as MAT. A company engaged in
generation or generation and distribution or
transmission or distribution of power will liable
for MAT in spite of being eligible for a tax
holiday under other provisions of the Act.
Carry Forward of Tax Losses/Depreciation
Pursuant to Amalgamation
The domestic tax laws provide that in case of
amalgamation of a company (the
amalgamating company) engaged in the
business of generation or distribution of
electricity or any other form of power, with
another company (the amalgamated
company), the tax losses of the amalgamating
company will form part of the losses of
amalgamated company and will be eligible for
carry forward for a period of eight years to be
set off against the profits of the amalgamated
company.
4
Plus surcharge as applicable.

Surcharge of 2.5% was applicable for FY 2003-04
Investment Income
The Indian tax regime provides for exemption
of income by way of dividends, interest and
long term capital gains derived by certain
categories of investors from investments made
on or after June 01, 1998 by way of shares or
long term finance in a company which is wholly
engaged in the business of generation or
generation or distribution or transmission or
distribution of power. The aforesaid exemption
is subject to the condition that the undertaking
engaged in the business of generation or
generation or distribution or transmission or
distribution of power is approved for this
purpose by the Central Board of Direct Taxes
(CBDT).
company declaring, distributing or paying
dividend is required to pay a dividend
distribution tax of 12.5% plus a surcharge of
2.5% (effectively 12.8125%). The dividend is
not subject to tax in the hands of the
shareholder.
The Indian transfer pricing regime provides
that income arising from an 'international
transaction' between 'associated enterprises'
is computed at the 'arm's-length price' (each
of these terms has been defined). Thus, for
India
transfer pricing legislation to apply, the trigger point is entering

into an international transaction with an associated enterprise.
In other words, this legislation has no role to play in a scenario
where the transaction is between two residents or alternatively,
the transaction is between two independent enterprises.
Towards this objective, a comprehensive study should be
undertaken to ascertain as to whether the international
transactions undertaken by the company with associated
enterprises are at arm's length.
Option to Claim Straight Line Method (SLM) Depreciation
The Indian tax regime provides an option to an undertaking
engaged in generation or generation or distribution of power to
claim tax depreciation using the straight-line method instead of
the aggressive written-down value method.

Please refer to the summary charts presented under

appendices I-IV for key statistics on Indonesia.
Political and Legal
Executive power in Indonesia is vested with the President, who is elected for five-year terms
through a direct presidential election. Presidential affairs are co-ordinated through support
from the members of the People's Consultative Assembly (Majelis Permusyawaratan Rakyat
or MPR), the main legislative body, members of which are elected for five-year terms through
an election process. Appointments and dismissals of cabinet ministers are entirely at the
President's discretion, and authority is channeled from the President's office to that of the
Minister of the Home Affairs and Regional Autonomy and to the governors placed in charge
of the first-degree provinces. The constitution provides for the establishment of the People's
House of Representatives (Dewan Perwakilan Rakyat or DPR) and the Supreme Court at
central, provincial and district levels. Local governments exist in each of the 32 provinces of
Indonesia. Provincial governors are elected by the provincial DPRs.
Under the Election Law 1969, the MPR has 920 members and is
required to meet at five-year intervals. One-half of the members
must simultaneously be members of the DPR, and the other half
are nominated by the government in proportion to the results of
the national elections.
The DPR performs the legislative function in drafting
government legislation and approving presidential budgets and
decrees. It has 460 members, 360 of whom are elected; the
other 100 members are appointed from military and nonmilitary groups.
2000 the MPR issued the following hierarchy:

1.
2.
3.
The constitution has been revised several times, with the latest
one providing for a direct presidential election.
4.
Legal System
Laws
Much of Indonesian law is based on old, general and outdated
Dutch law. Important exceptions include more recent laws
applying to limited liability companies, foreign investment,
specialized industries and taxation. Practical difficulties are
often encountered with law enforcement, and litigation can be a
time-consuming and unpredictable process.
5.
6.
7.
The 1945 Indonesian Constitution

(Undang-Undang Dasar 1945).
Decrees of the People's Consultative
Assembly (Ketetapan MPR).
Government regulations replacing laws
(Peraturan Pemerintah Pengganti UndangUndang/PERPU): such regulations are
promulgated by the president, on the
condition that they must subsequently be
approved by the Parliament (DPR). This
rule was also based on Article 22(1) of the
1945 Indonesian Constitution.
Government regulations (Peraturan
Pemerintah/PP): These regulations are
promulgated by the president to
implement laws and are based on Article
5(2) of the 1945 Indonesian Constitution.
Presidential decrees (Keputusan Presiden/
KEPPRES): Issued by the president to
implement laws and government
regulations.
Ministerial regulations.
Ministerial instructions.
Commercial law is based on the pre-independence Dutch

Commercial Code 1847 (Wetboek van Koophandel), which has
its origins in the middle of the last century. Land law is based on
the Agrarian Law of 1960. Progress has been made in
copyright, patent and trademark law.
Circulars issued by government departments

(e.g. by the Directorate General of Taxation) do
not have the force of law.
Various categories and sources of Indonesian legislation make

it difficult for foreigners to understand Indonesian law. In August
Courts
Indonesia has five court systems, as follows:
1.
2.
3.
4.
5.
General court:
A general court is presided over by three
professional judges and has both civil and
criminal jurisdiction. There are three levels.
The lowest level is the local/district court
(pengadilan negeri); the first appellate level
is the high court (pengadilan tinggi); and
the highest court is the Supreme Court
(mahkamah agung).
Religious court:
Only Moslems may appear in this court. It
handles only particular cases, such as
marriage, divorce and remarriage. It also
issues official religious advice on
inheritance matters (fatwa waris).
Military court:
Only military personnel or civilians who
have dispute with military personnel may
appear in this court. It has only criminal
jurisdiction.
Administrative court:
The state administrative court (pengadilan
tata usaha negara) came into being only
recently. The purpose of this court is to
accommodate the people's rights vis--vis
government officials.
Commercial court:
The commercial court (pengadilan niaga)
was created in 1998 to deal specifically
with petitions for bankruptcy.
The religious and military courts have only two levels, the lower
and appellate levels. There is a right of final appeal to the
Supreme Court. In the 2001 constitutional amendments,
provision was made for the creation of the Constitutional Court
(mahkamah konstitusi).
2.
In 1995, new laws on corporations and capital market were

ratified. As a result of the new laws, capital ownership, mergers,
acquisitions and corporate governance requirements are more
stringently regulated.
3.
Principal Regulatory/Government Organisations

The principal regulatory/government organisations concerned
with business operations are as follows:
1.
Investment Coordinating Board (BKPM):

All new investment (except oil and gas, banks and nonbank
financial institutions) must have the prior approval of BKPM
(Badan Koordinasi Penanaman Modal) or BKPMD (the
regional offices of BKPM). BKPM is a nondepartmental
government agency authorized to negotiate and approve
capital investment on behalf of all ministries, from the
original application to implementation. The BKPMD reports
to the governor in each province under the regional
autonomy regulations. BKPM or BKPMD also monitor
compliance with the approved investment conditions. The
investor deals primarily with BKPM for all approvals,
licenses and permits required to establish or expand
production facilities in Indonesia and to receive fiscal
facilities and other incentives. The investor may, however,
have to deal with other ministries or government
4.
5.
departments depending upon the intended

field of activity.
Ministry of Energy and Mineral Resources,
the Directorate General of Oil and Gas
(MIGAS), the Directorate General of
Geology and Mineral Resources and the
Directorate General of Electricity and
Energy Utilization, which oversees new
investment and operations in the Energy
sector.
Oil and Gas Executive Board (BP Migas):
BP Migas is a new body formed under Law
No. 22/2001 on the Oil and Gas Industry.
BP Migas approves and controls
Production Sharing Contracts (PSC) and
other forms of upstream co-operation
contracts. Prior to the formation of BP
Migas this role was performed by
Pertamina (the state oil company).
Ministry of Energy and Mineral Resources:
Downstream Regulatory Body (BPH Migas)
The Ministry of Energy and Mineral
Resources, through its Downstream
Regulatory Body, BPH Migas, issues
operating licenses to business entities
intending to carry out downstream oil and
gas activities and regulate and control
downstream activities, including the supply
and distribution of oil and gas.
Bank Indonesia
The Bank is responsible for the regulation
6.
7.
and administration of the banking system.

Monetary policy (e.g. money supply, credit
policy, interest rates and currency control)
is undertaken by Bank Indonesia.
Capital Market Executive Agency:
Badan Pengawasan Pasar Modal
(Bapepam) is an agency directly
subordinate and responsible to the Minister
of Finance. Its functions are to evaluate
companies that intend to sell their shares
through the capital market and to control
private stock exchanges.
Ministry of Finance:
The Ministry is responsible for issuing
licenses for banks and nonbank financial
institutions. It also controls their activities.
Economic Overview
on Indonesia.
Indonesia continues to face serious economic
problems. Until mid 1997, the economy had
been growing rapidly for 30 years, with annual
GDP growth of 5-7%. The movement towards
being a modern economy is evidenced by the
significant roles of both industry and services in
the country at 42.6% and 40.2% of GDP
respectively. The Asian economic crisis that
started in 1997 and the subsequent political
turmoil in 1998 reversed this pattern of economic growth and

resulted in Indonesia seeking assistance from the International
Monetary Fund (IMF) in return for significant economic and other
structural reforms. Please be advised that all obligations
(including financial support and others) due to the IMF have been
discharged in the recent past.
Since the economic crisis in 1998, the economic climate has
stabilized and gradually recovered, with GDP growth averaging a
modest 4.1% per year over the past few years. The inflation rate
has averaged 6.8% and interest rates have ranged between 1012% (average).

Market
Overview

Indonesia's financial markets, in particular the banking sector,
have seen massive changes in the past few years as a direct
result of the economic crisis.
The primary objective of the Indonesian central bank, Bank
Indonesia, is to achieve a stable currency, which it accomplishes
through three main "pillars" : monetary policy, regulating the
payment system, and regulating and supervising the national
banking system. As of July 2004, Indonesia's foreign reserves
stood at US$ 34.8 billion.
The currency unit is the Indonesian rupiah. Prior to 1997,
Indonesia adopted a managed floating exchange rate system. In
mid 1997, the Government was forced to allow the rupiah to
float. During 1998, the currency depreciated rapidly and then
plunged to as low as Rp 15,250/US$.
During 1999 - 2002 the rupiah's volatility

continued, however, during 2003 the value
stabilized and strengthened at approximately
Rp 8,500/US$. However, higher oil prices and
a more accommodating pre-election economic
policy reduced its value to over Rp. 9,000/US$
through much of 2004.

key data and information on Indonesia.
Indonesia is an OPEC member but is
currently facing declining oil production.
Indonesia is the world's largest LNG
exporter.
Indonesia's foreign investment
environment, in general, has been losing
its attractiveness due to numerous
problems including the high cost in dealing
with the bureaucratic red tape, political
and legal uncertainties, an unattractive labour

law, and the slow improvement of even
relatively low-technology infrastructure such as
electricity.
Oil
The oil and gas sector has been the main
source of income for the government over the
past three decades. During 2002, the sector
contributed 29% of the government's income
and absorbed about 40% of total investment
spending in the country.
Since the advent of the oil Production Sharing
Contract (PSC) in 1967, more than 200
contracts have been signed between
Pertamina (the government-owned gas and oil
company) and foreign contractors. In 2003
there were approximately 185 current PSCs
and other types of exploration contracts. As of
1 January 2004, Indonesia holds proven oil
reserves of 4.7 billion barrels. In 2003,
Indonesian crude oil production averaged 1.02
million barrels per day (Bbl/d), down from the
2002 average of 1.10 million Bbl/d and
continuing with the decline of the past several
years.
The country's major oil fields are maturing and
production is declining. The government is
concerned that the country will become a
permanent net importer of crude and petroleum products

unless new reserves are found. The government has been
accelerating the signing of new contract areas and announcing
additional contract incentives to encourage greater exploration.
Development of additional refinery capacity for product export,
expansion of LNG facilities and increased domestic gas
utilization are anticipated.
Much of the country's proven reserve base is located onshore.
Central Sumatra is the country's largest oil producing province
and the location of the large Duri and Minas fields.
Other significant oil fields are offshore northwest Java, East
Kalimantan, and the Natuna Sea.
Companies having production from existing fields are
endeavoring to increase recovery rates and to extend the lives
of the fields.
Smaller fields could help boost production numbers if they
become fully operational in 2004 and 2005. For examples
Unocal's West Seno field, under development offshore from
East Kalimantan, which is producing 40,000 Bbl/d and is
expected to produce up to 60,000 Bbl/d when the second
phase of development is completed in early 2005. However,
even with these new fields, Indonesia's oil production is not
expected to rise significantly as a result of the continuing
decline of mature fields and recent low level of exploration and
development expenditures in the sector.
Refining
Indonesia has nine refineries, with a combined
capacity of 992,745 Bbl/d. The largest
refineries are the 348,000 Bbl/d Cilacap in
Central Java, the 240,920 Bbl/d Balikpapan in
Kalimantan, and the 125,000 Bbl/d Balongan,
in Java.

Most of the Country's natural gas reserves are
located near the Arun field in North Sumatra,
offshore East Kalimantan, East Java, South
Sumatra, a number of blocks in Irian Jaya and
the Natuna D-Alpha field, the largest in
Southeast Asia. Substantial gas reserves exist
in Indonesia, however, most of them are
stranded due to lack of development/
infrastructure.
Indonesia has proven natural gas reserves of
90.3 Trillion Cubic Feet (Tcf). In spite of its
sizeable natural gas reserves and its position
as the world's largest exporter of Liquefied
Natural Gas (LNG), Indonesia still relies on oil
to supply about half of its domestic energy
needs. Some 70% of Indonesia's LNG exports
go to Japan, 20% to South Korea, and the
remainder to Taiwan. With Indonesia's oil
production entering the maturity phase, the
country has increasingly looked to its natural
gas resources for power generation, the main

users of which are fertilizer plants,
petrochemical plants, and then power
generators. Unfortunately, Indonesia has an
undeveloped and inadequate domestic natural
gas distribution infrastructure.
Despite its past position as the world's leading
LNG and dry gas exporter, Indonesia faces a
declining share of global LNG markets. Prime
causes are questions about the reliability of
Indonesian supply and reduced investment in
the Indonesian energy sector. Uncertainties
regarding the upholding of contracts, regulatory
transparency, and unfavorable terms for PSCs
have weakened interest in investment.
Consequently, part of Indonesia's LNG exports
on world markets have been replaced by exports
from Oman, Qatar, Russia and Australia. This
sector has also undergone some restructuring
under terms of Indonesia's lending agreements
with the World Bank and the IMF. As part of this,
BP Migas has taken over the supervisory and
management roles previously performed by
Pertamina.
Pertamina's key role in the gas sector, in spite of
weakening in other areas, was reinforced in early
June when BP Migas announced PT Pertamina
Tbk. to be the sole sales agent for LNG sales to
South Korea and Taiwan. As a result of this,
Pertamina will negotiate sales for Total, Unocal,
Vico and BP Indonesia. The current contracts with South Korea

and Taiwan are due to expire in 2007 and 2009 respectively.
reaching 82 BCF and accounting for 5% of gas

export volume.
One project that holds great promise for Indonesia's future in

worldwide LNG markets is BP's Tangguh Project in Papua
province (also known as Irian Jaya), where over 14 Tcf of natural
gas reserves were found onshore and offshore of the Wiriagar
and Berau blocks. The project, which BP expects to be on
stream by 2007, calls for two trains with a combined capacity of
7 million tons per year (Tpa), with expansion possible to 14
million Tpa. Initial planning was stalled when BP lost its bids to
supply Guandong Province and Taiwan in early 2003. However,
in late 2003 and early 2004, BP obtained supply agreements to
supply Fujian, China with 2.6 million Tpa, leading Korean steel
producer POSCO with 1.5 million Tpa, and Sempra Energy with
3.7 million Tpa over 15 years starting in 2007. These supply
agreements made possible the US$ 2.2 billion investment
necessary to develop the fields. Talks are underway for BP's
Tangguh to supply 5 million Tpa to Jiangsu, China starting in
2007.
Despite these changes spurring gas demand,

certain impediments limit domestic gas growth.
The primary obstacles include a limited
transmission and distribution system, financing
limitations, and continued regulatory
uncertainty. Because Indonesia has an
inadequate gas transmission and distribution
network, state-owned gas utility PGN plans
three more transmission projects to meet rising
power sector demands for gas, as follows:
Pipeline exports of natural gas have offset in part the greater

competition in LNG markets. In 2001, Indonesia began
exporting 325 Million Cubic Feet per Day (Mmcf/d) to Singapore
via subsea pipeline from West Natuna under a 22-year contract.
Deliveries of natural gas to Malaysia's Duyong gas platform
began in August 2002, under a 20-year contract for 250
Mmcf/d. Gas sale revenues will likely total US$14.2 billion over
the life of both these contracts. In August 2003, the South
Sumatra-Singapore gas pipeline was completed; it will
eventually supply 350 Mmcf/d over a 20-year contract. Pipeline
gas exports increased nearly 160% between 2001 and 2002,
Projects
Grissik-Jakarta
Kalimantan-Java
East Java-West Java
Length
Km
Capacity
mmscfd
Completion
606
400
2006
1,620
1,500
2008/2010
680
350
2008/2010
In addition to these projects, the GOI may also

build an LNG receiving terminal in West Java,
to process and distribute gas from existing
LNG plants (Bontang), as well as future plants
in Papua (Tangguh) and South Sulawesi
(Donggi). PGN is also investigating the
feasibility of shipping Compressed Natural Gas
(CNG) over short to medium distances.
However, high financing costs, gas pricing and
tariffs, and security concerns make these
projects difficult to realize in the near future or
even unlikely.
ASEAN's Energy ministers signed a

memorandum of understanding on July 5,
2002 to push ahead with a US$7 billion natural
gas pipeline project in a bid to alleviate
concerns over oil supply shortages and to
improve economic development. ASEAN has
identified the need for 4,500 kilometers of
pipeline to complete the project, which might
reach 6,000 kilometers, if the necessary new
Indonesian domestic pipeline is also included.
ASEAN members believe that a regional
natural gas pipeline, as well as an electricity
grid, is the most efficient way for ASEAN
countries to prevent a future energy crisis. The
project's master plan has been completed,
however, a council to oversee the completion
of the gas grid was yet to be formed till the
completion of this guide.
Shell is examining the possibility of building a
Gas-To-Liquids (GTL) plant in Indonesia, which
would be another possible use for Indonesia's
gas resources. The plant, if the project goes
forward, is likely to produce 70,000 Bbl/d of
diesel and other middle distillates using the
Fischer-Tropsch GTL process.
Mining (Including Coal)

New investment in mining activities has
declined significantly in recent years, due to a
number of factors including an uncertain
investor environment, political instability, regional autonomy

and labor issues.
However it is expected that Indonesian mine production will
increase, particularly thermal coal, as existing mines maximize
their operations. The substantial production of coal and tin from
informal mine sources is expected to continue.
Indonesia plans to substantially increase coal production over
the next 5 years, mostly for exports to other countries in East
Asia and India.
Indonesia has 5.3 billion metric tons of recoverable coal
reserves, of which 58.6% is lignite, 26.6% sub-bituminous,
14.4% bituminous, and 0.4% anthracite. Sumatra contains
roughly two-thirds of Indonesia's total coal reserves, with the
balance located in Kalimantan, West Java, and Sulawesi.
According to U.S. Embassy reports, Indonesian coal production
increased 11% from 2002 to 2003 to reach 130.6 million metric
tons, all of which was exported, primarily to Japan and Taiwan,
as well as to South Korea, the Philippines and Hong Kong.
Indonesia plans to double coal production over the next five
years, mostly for export to other countries in East Asia and
India, the new capacity for which will come largely from private
mines.
Electricity
The power demand in Indonesia is currently estimated to be
growing at a rate of 10% per annum, one of the highest growth
rates in Southeast Asia.
Indonesia has been facing decreasing supply

from existing power plants and increasing
demand for domestic needs. The decrease in
supply is due to absence of much needed new
investment in the sector, coupled with delays in
several power projects.
Indonesia has an estimated installed electrical
generating capacity of 25.6 Gigawatts, 87.0%
of which comes from thermal (oil, gas and
coal), 10.5% from hydropower, and 2.5% from
geothermal sources. Prior to the Asian financial
crisis, Indonesia had planned an accelerated
expansion of its power generation, based
primarily on opening up Indonesia's power
market to Independent Power Producers
(IPPs). The crisis led to severe financial strains
on the state-utility company Perusahaan Listrik
Negara (PLN), due to which PLN had difficulties
in paying for all of the power arranged for
through signed contracts with IPPs. PLN has
over US$5 billion in debt, which has grown
markedly in terms of the local currency due to
its fall in value. The Indonesian government has
been unwilling to take over the commercial
debts of PLN.
Indonesia faces a severe electricity supply
crisis. Some observers predict that PLN may
be unable to take on any new customers by
2005; intermittent blackouts are already an
issue across Java. Demand for electrical power
is expected to grow by approximately 10% per

year for the next ten years. The majority of
Indonesia's current electricity generation is
fueled by oil, as a result of which efforts are
underway to move generation to lower-cost
coal and gas-powered facilities. Geothermal
energy and hydropower are also being
examined.
The World Bank also approved a US$141
million loan to Indonesia in October 2003 for
improving the power sector on Java-Bali,
which uses approximately 80% of Indonesia's
power generation capacity. The project
includes support for a corporate and financial
restructuring plan for PLN and technical
assistance for a restructuring program for the
state gas company, Perusahaan Gas Negara
(PGN) which will help supply more natural gas
for electricity generation. The restructuring
plan requires that PLN must restructure two of
its subsidiaries, PT Indonesia Power and PT
Pembangkit Jawa Bali (PJB), both of which
jointly supply about 80% of the power supply
for Java and Bali according to reports.
Also in 2003, the government renegotiated 26
power plant projects with the IPPs, of which
five projects will be taken on by the
government together with PLN and Pertamina.
The U.S. Embassy has indicated that the
government plans to invite private investors to
participate in some electricity generation development projects.

Competition for power generation will be open on the islands of
Batam, Java and Bali by 2007. In 2008, retail competition in the
electricity market will begin under the terms of the nation's new
electricity law, which was approved in September 2002. The law
requires an end to PLN's monopoly on electricity distribution
within five years, after which private companies (foreign and
domestic) will be permitted to sell electricity directly to
consumers. However, all companies will still need to use PLN's
existing transmission network.

!
Oil and Gas

Up until the end of 2001 the oil and gas industry was
managed by the state-owned oil company Pertamina
(Perusahaan Pertambangan Minyak dan Gas Bumi
Negara). Under Law No. 44/1960 and Law No. 8/1971,
Pertamina had sole rights to the refining, distribution and
marketing of petroleum products in Indonesia. Under Law
No. 22/2001 of 23 November 2001 two new bodies were
formed - the Oil and Gas Executive Board (BP Migas) to
control upstream activities and the Oil and Gas Regulating
Board (BPH-Migas) to regulate and supervise the supply
and distribution of fuel oil and natural gas as well as the
supply of natural gas through pipelines.
!
The key highlights of the new law (Law No. 22/2001), and
emerging changes are given below:
The establishment of a new Implementing

Body (called BP-Migas) to replace
Pertamina and control upstream activities.
The transfer of exploration area tendering
powers to the Minister of Energy and
Mineral Resources.
New upstream business activities to be
carried out under the Co-operation
Contracts. These contracts shall be made
between a Business Entity (BE) or
Permanent Establishment (PE) and the
implementing body.
Existing PSCs to remain effective until
contract expiry.
There will be more emphasis on general
tax laws and regulations for upstream
activities (although this is a contentious
area).
The acquisition of land rights for
exploration to be arranged by individual
contractors.
The establishment of a new Regulatory
Body (called BPH-Migas) to replace
Pertamina and control downstream
activities.
Permits for downstream business activities
consist of processing, transportation,
storing and trading. Any BE can be given
more than one type of undertaking permit.
Downstream activities restricted to
Indonesian incorporated companies,
however, foreign shareholdings permitted.
!
!
!
!
A BE which carries out downstream

business activities shall pay taxes, import
duties, regional taxes and retributions and
other obligations in accordance with
prevailing regulations.
The functions of the Regulatory Body will
include ensuring the availability of oil fuel
throughout the country and increasing the
utilisation of gas in Indonesia.
Downstream pricing (ultimately) to be
determined by the market, with exceptions
for specified remote areas.
An emphasis on guaranteeing domestic
fuel supplies and the promotion of natural
gas.
A large number of implementing
regulations to be issued.
A preference given to local labourers and
vendors.
An interface with regional governments
required.
The government has granted its approval
for state oil and gas company Pertamina to
become a limited liability company (which
occurred during 2003; reference:
Government Regulation Number 31/2003
dated 18 June 2003), paving the way for its
privatisation in 2006. The government will
also determine within two years whether
Pertamina must transfer its oil refineries
and natural gas liquefaction plants to the
government.
Under the recently issued downstream regulations, BPH-Migas

will regulate the downstream business of marketing and
transporting gas through pipelines, including the authority to
grant special rights to operate pipelines and to settle disputes
related to such rights.
The Oil and Gas Law of 2001 introduced changes that encourage
domestic gas use. The new law permits direct free market
negotiations of gas sales and transportation contracts between
buyer, seller and the transporter, endorsed by the government. In
the past, Production Sharing Contractors had to sell their gas to
the state-owned petroleum company, Pertamina, which in turn
sold the gas to the final buyer.
However, there are uncertainties attached to the gas sales and
supply/transportation arrangements since no accompanying
upstream or downstream regulations have been issued to clearly
define the rules of the game. The regulatory environment is
changing and it is possible that significant regulatory changes
may be introduced in the recent future, which may make the
above comments outdated. Please seek professional advice or
consult our Partners and Managers for the most recent regulatory
changes.
All foreign oil companies (upstream) operate under a productionsharing contract. As the name implies, these contracts are
based on the sharing of petroleum production between the
foreign contractor-producer and BP Migas (formerly Pertamina).
The contracts grant exclusive exploration rights over specific
areas for a specified term (normally 30 years), but require that
specified percentages of the area be relinquished at intervals
during the exploration period. Terms of production-sharing
contracts for natural gas are similar to the

arrangements for oil.
One of the key features of the PSC regime is
called the Domestic Market Obligation (DMO).
Previously, PSCs included a provision for
contractors to sell 25% of oil production to the
local market at a reduced rate for domestic
consumption (after a defined period from the
date of commercial production). The new oil
and gas law also requires contractors to sell up
to 25% of their share of gas production in to
the domestic market.
It is not clear whether contract extensions will
attract the new gas DMO to the existing PSCs.
It is also unclear what price will be applied to
such gas sales.
Oil and Gas (Migas) Representative

Office
Foreign companies in the oil and gas sector
may set up a representative office in Indonesia.
The representative office is registered under
the Directorate General for Oil and Gas of the
Ministry of Energy and Mineral Resources. Due
to the implementation of the law on regional
autonomy, the authority in issuing the Migas
representative license has been delegated to
the regional government (i.e. the regional office
of the directorate general of oil and gas).
The representative office is permitted to seek

and search for projects, potential business
partners in the oil and gas industry and
business opportunities in Indonesia. Income
generating activities are prohibited.
Applications are usually processed within two
to three months and the license is valid for one
year and is renewable.
Mining
Foreign investment in mining must first be
negotiated through the Ministry of Energy and
Mineral Resources. The Ministry is empowered
to grant survey permits, survey agreements and
contracts of work. Under the current regional
autonomy environment, regional government
also now play a significant role in the
establishment of mining rights. However, the
revision to the mining law to reflect this has not
been finalised. Accordingly, there remains some
confusion at mid-2004 as to how this ultimately
affect the granting of permits and agreements.
Under the Mining Law, the conduct of mineral
exploration, development and production in
Indonesia is regulated by:
! The Kuasa Pertambangan (KP);
! The Contract of Work (CoW); and
! The Coal Contract of Work (CCoW),
previously Coal Co-operation Agreement
(CCA).
A KP may only be owned by Indonesian nationals or Indonesian

owned companies. Foreigners are not permitted to hold KP's,
however, they may contract with a KP holder. A separate KP
must be granted for each of the five stages of operation:
general survey; exploration; exploitation (mining); processing
and refining; and transport and sale. A KP covers a much
smaller area and timeframe than a CoW.
A CoW can only be entered into by an Indonesian company
which may be owned by foreigners. The CoW covers virtually
all minerals except coal, and addresses all stages of operation.
A CCoW can be entered into by an Indonesian company which
may be owned by foreigners, or by an Indonesian wholly owned
company. However, generally there is a requirement to divest a
portion to a national party over a specified period of time.
Power and Utilities

A new Electricity Law has been enacted. In
general terms, the Law outlines a market of
Government-controlled transmission systems,
with an Advisory Agency (also referred to as
the Power Market Watchdog) overseeing a
multi-buyer and multi-seller system.
Perusahaan Listrik Negara (State Electricity
Company/PLN) will lose its monopoly and be
divided into independent power companies
(which would presumably be sold to private
investors) who would then sell power and
capacity to a Government-controlled
distribution system but again, with a free
market at the retail level.
Multiple CoWs
Foreign companies that have invested in several PMA
companies that have each entered a CoW are able to establish
a PMA consulting company that can provide centralized
services to the CoW companies. There is no longer a minimum
investment requirement for these companies.
The regulatory environment is likely to have a significant impact
on the future of the mining sector. Two legislative matters
having a substantial impact on the future of the Indonesian
mining sector are the 1999 forestry law and the proposed new
mining law which is still in a draft form.
The Law is expected to gradually liberalize the

power sector and attract more investment, as
it brings legal certainty to the sector and a
conducive investment climate. However, the
Government will continue to fully control the
power industry in areas considered not yet
viable for open market competition, and for
small users and people living in thinly
populated areas or remote locations.
!
!
!
Power Market Watchdog) within one year

from enactment to replace PLN and
control power activities
Power business classification into seven
categories (Power Generation, Power
Transmission, Power Distribution, Sale of
Power, Power Selling Agent, Power
Market Manager and Power System
Manager)
Government retains control over the
power transmission and distribution
network (for a fee)
Areas open for privatisation are Power
Generation and Power Selling Agent,
i.e. sale of power in high and medium
tension areas
Pricing (ultimately) to be determined by
market forces, with exceptions for remote
areas
Low tension areas (low-income, small and
remote users) remain under full
Government control
Competing areas for Power Generation to
be established within 5 years
Power users shall have consumer
protection rights (claim for damages)
More active role of regional governments
(particularly in issues of licenses).
The highlights of the new electricity

management law, and emerging changes, are
given below:
Geothermal Law
The Government of Indonesia recently enacted

Law No. 22/2003 on Geothermal Energy
Establishment of a new body (called
(effective on 22 October 2003) in an effort to increase interest

and investment in renewable energy resources to prevent future
power shortage. However, there are still several issues that
need to be resolved before considerable private sector
investment occurs.
The stated objectives of the new law are to control the utilization
of geothermal energy, support sustainable development,
provide added value and increase revenue for the state to
support growth of the national economy. Popular opinion is that
previous legislation was not achieving these objectives and that
benefits were accruing to certain parties to the detriment of the
national economy.
The framework of Indonesia's Generally Accepted
Accounting Principles (GAAP) has not yet been established
by the Indonesian Institute of Accountants but common
practice is that the terms Indonesian generally accepted
accounting principles means Indonesian accounting
standards established by the Indonesian Institute of
Accountants in conjunction with the relevant BAPEPAM
regulations for publicly listed companies. If a topic is not
covered by Indonesian GAAP, then reference should be
made to international or United States accounting
standards.

4.
The PSC is the major form of participation by
foreign companies in oil and gas
exploration/exploitation. The contract available
for new investment is for a 30-year term; it can
be extended for another 20 years.
Nature of PSCs
The general concept of the PSC is that the
contractors bear all risks and costs of
exploration until commencement of
commercial production. If production does not
proceed, these costs are unrecovered; if
production does proceed, the contractors
receive a share of production to meet cost
recovery, an investment credit and an equity
interest after tax of 15% of the remaining
production (more for frontier areas and for gas).
5.
6.
The PSC is a legal agreement between the

contractor, usually a foreign oil company, and
BPMigas (the parties) with the following
features:
1.
2.
3.
Management responsibility rests with BPMigas.

Exploration expenses are recoverable only
from commercial production.
The contractor is entitled to cost recovery
for all allowable current costs, including
production costs, amortized exploration
7.
costs and capital expenditures.

The contractor pays a signature bonus at
the time the contract is signed, an
education bonus and a crude oil
production bonus. The crude oil
production bonus is determined on a
cumulative quantity basis. These bonuses
are not cost-recoverable from future
production. However, they are tax
deductible in the calculation of corporate
income tax.
The contractor agrees to a work program
with a minimum amount of exploration
expenditure for a six-to-ten year period.
All equipment, machinery, inventories,
materials and supplies purchased by the
contractor and brought to Indonesia
become the property of BP-Migas when
landed in Indonesia. The contractor has a
right to use and retain the custody and
control of these items during the
performance of the operation. Although
the contractor has access to exploration,
exploitation and geological and
geophysical data, the data remain the
property of BP-Migas.
The entitlement of both parties under the
crude oil allocation is a shared profit from
production less deduction for recovery of
the contractor's operating costs. Each
party must file and pay its tax obligation
separately.
8.
9.
The contractor bears all risks of exploration.

The parties are entitled to First-Tranche Petroleum (FTP) of
15% (for fields in Eastern Indonesia and some in Western
Indonesia pursuant to the 1993 incentive package) or 20%
(for other fields). This is calculated before deduction of
investment credit and cost recovery.
10. The contractor is required to sell and supply a share of its
crude oil production to meet a domestic market obligation
(i.e. local consumption). The quantity and price of the oil to
be sold is stipulated in the agreement.
11. After commercial production, the contractor is entitled to
recover an investment credit amounting to 20% of capital
investment costs incurred in developing crude oil
production facilities.
12. The contractor is required to surrender the contract area on
the basis of a schedule specified in the PSC. This is known
as the exclusion of areas.
3.
In addition to the production-sharing concept, other forms of

participation still existing in the Indonesia oil and gas industry
include the following:
1.
2.
Technical assistance contract:

A form of contract now rarely negotiated, under which a
contractor becomes involved in the operation of producing
fields. Production up to a certain agreed level goes to BPMigas, and production above that is split on the basis of the
same formula as the PSC.
Enhanced oil recovery contract:
A form of contract where Pertamina and the contractor
operate to maintain and increase oil production in certain
fields that have been operated by Pertamina and have
experienced a decrease in production. The

field usually requires considerable use of
applied technology to maintain and
increase production, including secondary
and tertiary recovery.
Other agreements:
These agreements include, for example,
the Inoco Model, where the Indonesian
Nippon Oil Corporation entered into an
agreement with Pertamina to explore and
develop existing Pertamina areas. The
work was financed by loans provided to
Pertamina repayable only if commercial
production was commenced, in return for
40% of annual production for a ten-year
period. Another example is a technical
evaluation agreement, where contractors
have access to exploitation and
exploration data owned by Pertamina in
relation to an area not yet covered by a
PSC. Under this agreement, a contractor
undertakes further seismic and
exploration work.
PSC Financial Agreements

Basic cost-recovery principles are stipulated in
the PSC and usually cover the following:
1.
2.
3.
Current-year capital and noncapital costs

Prior years' unrecovered capital and
noncapital costs
Depreciation rates and methods
4.
5.
6.
7.
8.
9.
Bonus payments
Unrecovered natural gas or crude oil
production
Inventory accounting
Recovery of interest costs on loans at
rates not exceeding prevailing market
rates
Home-office overheads recharged to the
operation
Recovery of premiums on insurance and
receipts from insurance claims.
Other relevant principles are not stated in the

PSC but are developed over time by BP-Migas
(formerly Pertamina) or in part by the Tax Office
regulation.
The PSC contractor obtains an after-tax equity
share of 15% (more for frontier areas and for
gas) after cost recovery and investment
credits. However, a domestic market obligation
must be met out of this equity oil or gas. A
foreign oil company having interests in several
Indonesian PSCs typically earns a return of
less than 15% of the equity oil because there is
no cost recovery or tax deductibility for
unsuccessful PSCs and because of the
domestic market obligation requirement.
Recent PSCs enable the government to share
production before the contractor has fully
recovered its costs, under the so-called first
tranche petroleum arrangements.
In 1995 Pertamina added a new clause to its model PSC in

which site restoration becomes the responsibility of the
operator. PSC contractors must include in their budgets
provisions for clearing, cleaning and restoring the site upon
completion of work. Those funds set aside for abandonment
and site restoration are cost recoverable and tax deductible.
Unused funds will be transferred to BP-Migas.
The PSC outlines the accounting which the contractor must
follow. Under this clause of the contract, operating, non-capital
and capital costs are defined together with the related
accounting method to be used for such costs.
Please refer to the summary table on Indonesia under Appendix
IV for an overview of basic PSC features and accounting
matters in Indonesia. For specific details, we recommend that
you read the PricewaterhouseCoopers publication Oil and Gas
in Indonesia: Investment and Taxation Guide.
It is common for a PSC contractor to keep two set of records:
one set of accounting records under PSC principles in
Indonesia, and one set under the PSC contractors home
office's promulgated GAAP, which may or may not be
maintained in Indonesia.
Although the generally accepted accounting principles in
Indonesia have an accounting standard (PSAK 29) which is
similar to US GAAP SFAS 19: Financial Accounting and
Reporting for Oil and Gas Producing Companies, most
companies do not prepare an Indonesian GAAP statement.
They prepare PSC statements which are adjusted in the
respective parent company's home office.
Oil and gas companies (PMAs) with total

assets of at least IDR 25 billion (technically)
must lodge annual audited financial
statements with the Ministry of Trade and
Industry and Trade.
Mining Companies
Coal Contracts of Work (CCoW) and
Coal Co-operation Agreements (CCA)
Foreign ownership in Indonesian coal mining
was in past conducted through CCAs. Since
November 1997, coal mining has been brought
more in line with general mining through the
CoW structure. There have been two
generations of CCAs and one generation of
CCoW, which is typically referred to as the 3rd
generation CCoW.
Coal Co-operation Agreements
The key difference between the CCA and the
CoW system is that under a CCA, the foreign
mining company acted as a contractor to the
Indonesian state-owned coal mining company,
PT Tambang Batubara Bukit Asam (PTBA).
Legislation has since been decreed and CCAs
amended to transfer the rights and obligations
of PTBA in respect of CCAs to the Indonesian
Government represented by the Minister of
Mines and Energy.
to an 86.5% share of the coal produced from

the area, and the contractor bears all costs of
mine exploration, development and
production. The Indonesian Government
(previously PTBA) retains entitlement to the
remaining 13.5% of production. However, in
many cases, the coal contractor may be
requested to sell all or part of this coal on
behalf of the Government.
Equipment purchased by the coal contractor
becomes the property of the Indonesian
Government (previously PTBA), although the
contractor has exclusive rights to use the
assets and is entitled to claim depreciation.
Foreign shareholders under CCAs are required
to offer shares to Indonesian nationals or
companies so that, after ten years of
operating, foreign ownership in the company is
reduced to a maximum of 49%.
Coal Contracts of Work
The terms and conditions under the current
Coal Contract of Work (CCoW) are more in line
with the 7th generation CoW.
Under the CCoW, the mining company is, in
effect, entitled to 100% of the coal production,
however, a royalty of 13.5% of sales revenue is
paid to the Indonesian Government.
Under the CCA, the coal contractor is entitled

Earlier CoW Generations and CCAs

Many earlier generation contracts, including CCAs, are based on
the taxation and other laws and regulations in place at the time
the agreements were signed. In many circumstances, this means
that the regulations affecting mining companies operating under
such contracts differ from current regulations, which often
creates difficulties in interpreting the agreements as well as
doing business with other companies. Potential investors in
mining properties covered by earlier generation CoWs or CCAs
should seek professional assistance to examine such issues.
Many earlier generation CoWs and CCAs also include
divestment requirements for foreign shareholders.
CCoW and CoW Companies are usually

permitted to maintain their accounts and
records in US dollars under the terms of their
respective contracts. Approval to do so can be
sought from the Director General of Tax.
6. Taxation
Indonesia has a specialised accounting
standard on Accounting for the Mining Industry
- SFAS 33. This standard largely follows
International Accounting Standards, with some
exceptions. Accounting and financial reporting
considerations of mining companies in
Indonesia are set out in the following
PricewaterhouseCoopers publications:
The major differences between CCoW and CoW contracts are as

follows:
1.
2.
Form of royalty:
The CoW determines a royalty to be paid for the ownership
of the mineral that approximates 2% of the sales value of the
mineral. However, the coal agreements are, in essence,
production-sharing contracts where the royalty to gain
ownership of the mineral is a percentage of production
(usually 13.5%, but it has been as high as 20%).
Ownership of assets:
Under the CoW, the PMA company owns the assets, but
because the PMA company in a coal agreement is a
contractor to Batubara, it does not own the assets that are
purchased, which become the property of Batubara.
However, the company has the sole right of use of the
assets.
These companies are required to follow

common standards applicable to generic
(regular) companies.
Financial Reporting in the Mining Industry

for the 21st century; and
Mining in Indonesia: Investment and
Taxation Guide.
A number of the CCoW and CoW provisions

have changed over the various generations. A
comparison of the provisions of the various
generations of CCoW and CoW is provided in
our publication Mining in Indonesia:
Investment and Taxation Guide.

Taxes
Principal Taxes
Taxes are imposed at both the national and
regional levels.
The three basic categories are state
(national) taxes, regional taxes and
customs and excise taxes. Within those
basic tax categories, the principal sources
of government tax revenue are as follows:
1.

2.
Under Indonesian GAAP there are no specific
guidelines/accounting standards for financial
reporting of power and utility companies.
State taxes:
a. Income tax
b. Value-added tax
c. Sales tax on luxury goods
d. Stamp tax
e. Property tax (on land and
buildings)
f. Fiscal exit tax.
Regional taxes:
a. Development tax (PBI)
b. Motor vehicles tax
c. Other minor taxes, including
3.
household tax, foreigners tax, entertainment tax, road

tax, advertisement tax and radio and television tax.
Customs and excise taxes:
a. Export tax
b. Import duty
c. Tobacco, sugar, beer and alcohol and gasoline taxes.
Statute Law
The various tax statutes in Indonesia are as follows:
1.
2.
3.
4.
5.
6.
7.
8.
General tax provisions and procedures (Law No. 6/1983 as

amended several times, including the last amendment by
Law No. 16/2000).
Income tax (Law No. 7/1983 as amended several times,
including the last amendment by Law No. 17/2000).
Value-added tax and sales tax on luxury goods (Law No.
8/1983 as amended several times, including the last
amendment by Law No. 18/2000).
Stamp duty tax (Law No. 13/1985).
Land and buildings tax (Law No. 12/1983 as amended by
Law No. 12/1994).
Tax on the acquisition of rights to land and buildings (Law
No. 21/1997 as amended by Law No. 20/2000).
Tax collection using a distress warrant (Law No. 19/1997 as
amended by Law No. 19/2000).
Tax court (Law No. 14/2002).
These laws and their official elucidations are supplemented by

government regulations, presidential decrees and decrees of
the Minister of Finance. They are supported by various
circulars, rulings and letters issued by the tax authorities, which
provide interpretations of the law and its application to
emerging and specialized issues not fully

addressed in the law itself.
Case Law
Indonesia has no published case law. Rulings
of the former Supreme Tax Court and the new
Tax Court are not readily available.
Anti-avoidance
The Director General of Taxation has authority
to re-determine income and expenses in
related-party transactions (Article 18,
Paragraph 4, Law No. 7/1983). Apart from this,
there is no special anti-avoidance legislation
other than that found in the bilateral tax
treaties.
Form Versus Substance
The tax authorities have practiced substance
over form. It is unclear where the Tax Court
stands on this matter.
Clearance Procedures
Taxpayers can request formal rulings from the
Director General of Taxation, based on a full
disclosure of the details and nature of a
proposed transaction. This is an increasingly
common practice for unusual or major
transactions.
Income Tax
Concepts of Income Taxation
Residents are, by law, taxed on worldwide
income (whether or not remitted to Indonesia).
Credit for overseas tax is available unilaterally.
Income is broadly defined; capital gains are
treated as income. These principles apply
equally to businesses and individuals.
A three-tier rate structure applies to corporate
taxpayers, with a top rate of 30%. For
individual taxpayers, there are four tiers with a
top rate of 35%. An extensive system of
domestic withholding taxes for business and
individuals ensures regular and early collection
of income tax. There are significant penalties
for non-compliance. Tax is by selfassessment.
Classes of Taxpayer
A distinction is made between the following
classes of taxpayers:
1. Resident taxpayers:
Companies, partnerships, cooperatives
and individuals residing in Indonesia and
established in accordance with Indonesian
law.
2. Nonresident taxpayers:
Taxpayers not residing or companies not
established in Indonesia, including those
defined as permanent establishments but
receiving income from Indonesia.
Taxable Income
Income (including capital gains) of a business enterprise is
aggregated for income tax purposes. Deductions are allowed
for costs incurred in earning income. Interest on Indonesian
time deposits is taxed at a fixed preferential rate, which is final.
Taxfree Zones
Indonesia has no zones free of income tax. In some zones,
however, value-added tax, import duties and other taxes are
not levied.
Tax Holidays
There are currently no corporate income tax holidays.
Indonesian income tax is collected mainly through a
comprehensive withholding tax system.
Regional taxes are currently relatively minor taxes such as
development tax and motor vehicle tax, however, this is a
growing taxation area. As for customs and excise taxes, these
include export and import taxes and excise on tobacco, sugar,
beer and alcohol.

The effective corporate tax rate is 30% on all entities (subject to
specific provisions in PSC, CoW and CCoW), whether locally
incorporated or operating through a Permanent Establishment
(PE). PE are also subject to a branch profit tax of 20%, which is
calculated on an after income tax basis (giving an effective
branch tax rate of 44%). For cross-border investors there is an
additional 20% withholding tax due on dividend distributions.
This rate may be lower for treaty countries. Capital gains are
included in assessable income and taxed at

the general corporate tax rate. Residents are
taxed on worldwide source income at the
general corporate tax rate. If the income has
been subject to foreign tax, a tax credit is
generally granted.
Dividends paid between Indonesian resident
companies may be exempt from tax
depending upon the ownership structure, and
activities, of the dividend recipient. As
indicated above, dividends paid to nonresident recipients are subject to withholding
tax of 20% (or lower for treaty countries). The
withheld tax paid represents the final tax
liability. Other cross-border payments, such
as service fees, royalties and interest are also
subject to a 20% withholding (before treaty
relief).
At the time of writing the Guide, a number of
tax reform proposals were before the
Parliament which are expected to bring
changes to be effective 1 January 2005. Please
contact our Partners and Managers for more
information on such tax reform proposals.

The government's fiscal year runs from
1 January to 31 December. Income tax for
individuals is also levied on a calendar-year
basis. Business enterprises may use the year

adopted for financial accounting purposes,
which should be a 12-month period.
Corporate tax instalments may be paid by third
parties in specified situations and by the
company in monthly instalments. Companies
and branches are required to calculate and pay
corporation tax monthly. The monthly payment
is equal to the tax due for the preceding tax
year reduced by the amount of tax withheld by
other parties and the credit for tax paid abroad,
divided by 12.
The monthly payment for the period before the
final tax due in the preceding year is equal to
the previous year's monthly payment. Special
rules apply if the company is entitled to a tax
refund or has received Tax Assessment Letters
from the Tax Office. Indonesia income tax on
certain income is collected by withholding
(collection of income tax by others). These
taxes are considered a prepayment of the
recipient's corporate tax liability.

Foreign branch income of an Indonesian
resident is included in taxable income. If the
income has been subject to foreign tax, a tax
credit is granted. The amount of allowable tax
credit is the lower of actual foreign tax payable
and the amount applicable where Indonesian tax rates are

applied. There are regulations requiring that undistributed
profits of companies controlled 50% or more by Indonesian
residents but incorporated in certain overseas countries be
deemed distributed within seven months after year-end. This
does not apply to offshore companies listed on a recognized
overseas stock exchange.
Indonesia has treaty arrangements with a number of countries.
The withholding taxes on portfolio income, branch profit tax,
dividends, interests and royalties may be affected by relevant
treaty arrangements. Please contact our Partners or Managers
for more information in relation to such treaty arrangements.

Mining Companies
ultimate responsibility to the Government of

Indonesia for the management of the oil and
gas activities. The total oil and/or gas
production is divided between the contractor
and the Government on a pre-tax basis
according to the proportions specified under
the governing PSC. These proportions allow
the contractor to recover its exploration,
development and operating costs. Oil and gas
distributed after cost recovery (i.e. equity
oil/gas) is gross of tax, but should enable the
oil and gas contractors to fund the contractors'
tax obligations and generate an after tax equity
oil entitlement. BP-Migas is responsible for
bearing taxes apart from income tax, although
a contractor may have to pay these upfront
(example, VAT) and seek reimbursement.

Most of the upstream oil and gas activities in Indonesia are
conducted by the foreign incorporated entities. When a foreign
incorporated oil and gas entity enters into a PSC, it forms an
Indonesian branch which, for tax purposes, becomes a
permanent establishment in Indonesia. Interests in each PSC
must be held through separate legal entities. If a foreign
incorporated oil and gas group wants to have interests in more
than one PSC, it must establish different companies to enter
into each PSC contract. This policy is to ensure the so-called
ring-fencing of tax losses for each PSC area.
Foreign incorporated oil and gas companies act as contractors
to BP-Migas (formerly Pertamina) and provide all finance,
experience and technical knowledge. BP-Migas, however, has
Income Tax
The tax rates for PSC entities, together with
withholding tax (or branch profit tax) on the
after tax profit are:
Income Tax: The tax rates for PSC entities,
together with withholding tax (or branch profit tax)
on the after tax profit are:
Deductible Expenditure
The basic rule of thumb for taxation in the
petroleum industry is that cost recovery equals
tax deductibility (i.e. under the uniformity
principle). However, there are a few
exceptions. The main one relates to bonuses
paid to BP-Migas which is generally tax
deductible but not entitled to cost recovery.
On the basis of the uniformity principle, PSC
entities are entitled to some unique tax
treatments. These include:
Old PSCs
(pre-1984) %
Post 1994
PSCs %
1984-1994
PSCs %
Corporate tax
30
35
45
Branch profit tax (withheld

at 20%, on remittance)
14
13
11
44
48
56
Source: PSCs
Please contact our partners and managers for

information in relation to the new concessions.
Taxable Income is liftings valued at the

government-posted price (not actual sales
price). The cost of obtaining, collecting and
maintaining revenues can be deducted from
gross proceeds. However, only costs that are
cost-recoverable under the terms of a PSC are
tax deductible. This practice restricts tax
deductibility of expenses. Please refer below
for details.
!
!
a computation of tax depreciation which is

based upon rates prescribed in the
governing PSCs;
the deductibility of head office charges is
generally capped at 2% of total costs;
interest costs are generally not allowed as
a tax deduction. However, interest costs
may be tax deductible if approved under a
plan of development for which a
financing component is pre-approved by BP-Migas. These

are commonly referred to as interest recovery; and
that bonuses paid by the contractors to BP-Migas can be
deducted from gross proceeds. Bonuses are treated as
non-operating costs under the PSC and therefore are not
cost recoverable. However, Tax Office practice indicates
that certain bonuses are treated as non-deductible.
Please note that at the time of writing the guide, substantial

reforms to the manner in which the taxable income of upstream
petroleum contractors is calculated were underway.
Professional advice should be sought on the status of these
reforms.
Losses
Any unrecovered costs, including pre-production expenditures,
are allowed to be carried forward indefinitely to be recovered
out of future production.
Tax Registration and Group Relief
As indicated above, each PSC must be held by a different
corporate entity. Each entity must obtain a separate tax
registration number called a NPWP (Nomor Pokok Wajib Pajak).
There are no group relief facilities available in Indonesia.
However, within the area covered by the PSC, expenditure on
exploration and other activities in one work area can generally
be offset against taxable income arising from other work areas
in the same PSC.
Withholding Taxes
The withholding tax requirements for the PSC entities engaged
in the oil and gas activities are identical to those set out under
corporate income tax above. An MoF

Decree issued in 1998 may offer some
protection against withholding otherwise due
on head office costs, however, professional
advice should be sought on this matter.
Law (which generally are entitled to the

Masterlist facility) and Co-operation contracts
after this new Law enforcement. As the tax
arrangements in these areas are unclear,
professional advice should be sought.
Value-added Tax
PSC entities are not taxable entities for VAT
purposes since the delivery of oil and/or gas is
not subject to VAT. The VAT charged to PSC
entities by suppliers is therefore not available
for input tax credit. This includes selfassessed VAT due on cross-border services.
The relevant contractors are generally entitled
to a refund for VAT incurred but only from the
Government's share of equity oil from that
PSC.
Transfers of Interests in PSCs

Any capital gains arising from transfers of
interests in PSCs are, technically, subject to
corporate income tax. However, in the past,
these capital gains have not been taxed. The
basis was presumably that, if a capital gain is
recognised for tax purposes, it would require
recognition of an uplift in the cost base of the
acquirer. If the uplift were recognised, this
would have a negative impact on Government
share and/or the Government's income tax
receipts, thereby impacting the underlying
production sharing arrangement.
PSC Companies are no longer VAT collectors

and should now pay the VAT levied on the
invoices to that service provider.
Import Duties
Title to capital goods imported for PSC
purposes passes to BP-Migas on landing in
Indonesia so the nominated importer is, in fact,
BP Migas. Import duties, VAT and income tax
usually payable on imports of equipment may
be exempt using BP-Migas's tax facilities.
However, with the introduction of the new Oil
and Gas Law a distinction is made between
PSC's that existed before the new Oil and Gas
The Director General of Taxation has been

reconsidering its views in relation to tax on
transfers of interests in PSCs since late 2002.
Although, no final policy had emerged as at the
date of completion of this guide, it is likely that
the DGT will seek to access gains. It remains
unclear at the time of writing this guide how
any gains will be calculated and whether the
tax will be levied on the vendor or be levied by
way of a withholding obligation on the
purchaser.

Activities
The taxation framework for entities engaged in the downstream
oil and gas activities is mostly identical to that applicable to an
entity engaged in any other non-upstream business, i.e. the
general tax law. Some tax incentives may be granted for large
projects such as refineries. The incentives relate to extended
loss carry forward periods and tax holidays.
Please refer to our publication Oil and Gas in Indonesia:
Investment and Taxation Guide or seek professional advice for
any specific taxation matters relating to oil and gas activities.

Import Taxes
Upon importation of goods into Indonesia Customs area, the
following duties and taxes normally apply:
1) Import duty:
The tariff rates depend on the classification of the goods
under the Harmonized System (HS) Code System which
starting from 1 January 2004. This system is at 10-digit
level.
2) Import VAT (Value Added Tax):
Single rate of 10%, however, for certain goods, especially
goods resourced direct from the nature with no process,
0% rate is applied, for example: crude petroleum oil.
3) Sales Tax on Luxury Goods (STLG): The rates levied on the
classified Luxury Goods range from 10% to 50% and
depend upon the category such product falls under.
4) Income Tax Article 22:
The rate is 2.5% provided that the importer has an Importer
Identification Number (IIN). IIN can be applied to the
Ministry of Industry and Trade, as 7.5%

tariff rate is applied if the Importer
Identification Number is not obtained.
The value of imported goods, for the purpose
of computing import duties, is determined in
accordance with the World Trade Organization
(WTO) principles of customs valuation and at
CIF (Cost, Insurance and Freight) terms. The
import taxes, such as VAT, STLG, and Income
Tax Article 22, are calculated based on the CIF
value plus import duties.
(which covers Petroleum oils and oils
obtained from bituminous minerals, crude).
The import duty rate for crude oils is 0%, both
under the general rate and under the CEPT rate
(for goods of ASEAN origin).
preparations; waste oils. The general import
duty rate ranges from 0% to 30%, depending
upon the category of products imported. The
CEPT duty rate ranges from 0% to 5%.

gaseous hydrocarbons. The import duty rate
(general and CEPT) is 0%.
Export Taxes

Contracts of Work before 1984
Before 1984 contracts of work usually
contained provisions concerning operations,
income, withholding and other taxes.
Corporate taxes were usually levied at
concessional rates for a specified period,
because the government recognized the highrisk or long-term nature of the investment
involved. Indonesian personal income taxes on
wages paid to foreign personnel were payable
by mining company employees on various
bases. Some were paid at rates comparable to
those in their home countries.
Exemptions from withholding tax were granted
on interest and dividends. In each case, such
tax concessions were agreed on during
negotiation of the project with the government,
and the agreed provisions were incorporated in
the contract of work. One of the results of this
arrangement was that the companies were not
made subject to variations in the tax law during
the term of their projects.

The so-called third-generation contract of work for the mining
industry included a corporate tax on windfall profits. This
windfall tax was calculated at the rate of 60% on excess profit
(i.e. any profit in excess of a 15% rate of return on total funds
invested). Few foreign mining companies accepted this
concept.
Contract of Work after 1983 and before 1995
Article 33 of Law No. 7/1983 specifies that contracts of work
coming into force after 31 December 1983 but before 1 January
1995 are to be taxed in accordance with the provisions of the
1984 law. However, because contracts of work are lex
specialist, their terms and conditions override the general tax
law (lex generalis). Contracts signed after 1983 do not contain
the same terms. Corporate taxes are provided for at maximum
rates for specified periods of the life of the contract of work.
The normal corporate tax rate is 35%, plus a withholding tax of
20% for dividend payments to foreign shareholders.
Pre-production costs and fixed assets are amortizable and
depreciable from commencement of commercial production at
rates fixed in the contract. Losses can be carried forward for
eight years.
Contract of Work after 1994
Taxable profit is calculated in accordance with the provisions
included in the CoW. Where the CoW is silent on a particular
matter, the general Income Tax Law applies. Tax is imposed on
net taxable income which, subject to the provision of CoW, is
defined as income determined in accordance

with sound, consistent and generally
accepted accounting principles in the mining
industry.
Dividends
Dividends paid will be subject to withholding
tax. Rates can be CoW dependent. Based on
the latest generation CoW rates are as follows:
!
!
Founder shareholder:
- 7.5% (for both resident and nonresident shareholders
Non-Resident shareholders:
- 20% (subject to treaty reduction)
Residents 15%
VAT Collector Status

Historically CoW companies were designated
as VAT Collectors by the State Treasury. This
meant that they paid VAT directly to the
Treasury, rather than to their suppliers. With
effect from 1 January 2004 this system was
eliminated for CoW companies (unless
specifically provided for in the CoW). In general
CoW companies now pay VAT directly to the
suppliers (i.e. normal rules apply).
The application of the VAT law to mining
companies is complex and companies are
advised to obtain specialist tax advice in
relation to this. In particular, the ability of
mining companies to claim a VAT credit in

respect of expenditure incurred is a
controversial issue and many companies are in
dispute with the Indonesian Tax Office on this
issue.
Losses
Under general tax CoW losses can be carried
forward for up to five years and are recouped
on a first-in, first-out basis. Tax losses cannot
be carried back. The CoW terms may extend
the period of loss carry forward.
Royalties
Royalties are payable quarterly to the
government based on the actual volume of
sales revenue (FoB) according to details set
out in the CoW. The royalty is tax deductible.
Dead Rent and Land and Building Tax
The company is required to pay dead rent and
land and building tax as set out in the CoW.
Dead rent is an annual charge based on the
number of hectares in the Mining Area. Both
taxes are deductible for income tax.
Please refer to our publication Mining in
Indonesia: Investment and Taxation Guide or
seek professional advice for any specific
taxation matters.

There is no specific tax relief applicable to power and utility
companies other than an exemption from VAT assessment to
customers on electricity sales. Power and utility companies are
treated as common entities. See the Corporate Income Tax
sub-heading above for tax rates and types of taxes imposed in
this sector.
Historically, Geothermal companies were, from a policy and
practical perspective, taxed under a special tax code. On a
very brief basis an all inclusive tax rate of 34% applied. With
the introduction of the new Geothermal Law, there is a
significant degree of uncertainty on how existing geothermal
companies will now be taxed (i.e. whether the special tax
code is grandfathered). New geothermal companies will be
taxed under ordinary tax rules.
See the box for a glance at East Timor
Overview
Political Background
rom a taxation point of view, East Timor fell

under the umbrella of Indonesia's tax regime
from 1975. On 30 August 1999, East Timor
elected to begin a process of transition towards
independence. On 25 October 1999, the United
Nations' Security Council issued Resolution 1272
pursuant to which effective authority for the
administration of East Timor was transferred to the
United Nations' Transitional Administration in East
Timor (UNTAET), headed by the Special
Representative of the Secretary General. This transfer
included all legislative, judicial and executive authority.
On 27 November 1999, UNTAET issued Regulation
1999/1. Regulation 1991/1 provided that all laws
applying in East Timor prior to 25 October 1999 shall
continue to apply, until they are replaced by UNTAET or
subsequently established democratic institutions.
Regulation 1999/1 had application from 25 October
1999.
On 8 March 2000, UNTAET issued regulation 2000/12
entitled a Provisional Tax and Customs' Regime for
East Timor. Regulations 2000/12 was transitional in
nature and levied an excise on the import, domestic
production and export of certain goods. Regulation
2000/12 had applications from 8 March 2000.
On 20 December 2000, UNTAET issued Regulation
2000/18 entitled A Revenue System for East Timor.
Regulation 2000/18 (as amended most recently by the

Revenue System Amendment Act 2002) provides the
basis for the current taxation regime and much of the
information outlined in this booklet (other than for the
area covered by the Timor GAP and Timor Seas
treaties). Particularly in regard to Income Tax,
Regulation 2000/18 largely adopts the Indonesian
Income Tax Law with specified modifications.
Regulation 2000/18, has general application from 1
July 2000, although certain Income Tax amendments
apply from 25 October 1999.
On 30 August 2001, elections for East Timor's first
Constituent Assembly took place. Fretelin won 55 of
the 85 available seats. On 14 April 2002, Elections for
East Timor's first President took place. Xanana
Gusmao was elected with an 85% majority.
On 20 May 2002, President Gusmao was sworn in. Full
administrative authority passed from the UNTAET to
the newly established East Timor Government. On the
same day, a new Timor Seas treaty was agreed
between East Timor and Australia. The treaty was
however subject to ratification.
On 2 April 2003, ratification of the Timor Seas treaty
was completed by the Australian Government.
Notwithstanding this, the general date of operation of
the treaty continues to be 20 May 2002.
Investment Overview
The official currency of East Timor is the US dollar. All
accounting and tax related obligations are determined
in this currency.
Part A Outside ZOCA/JPDA
Modifications to Indonesia's Income Tax Law

include:
In summary, East Timor's Income Tax rules

currently provide for:
i)
ii)
iii)
iv)
v)
a top corporate tax rate of 30%, as applied to

taxable income (although certain income is
final taxed on a withholding basis-see
below);
taxable income calculated according to
normal accounting principles as modified by
certain tax adjustments;
internationally familiar concepts of residency
and source;
an extensive collection of cross-border and
domestic withholding taxes;
with effect from the 2002 tax year, a
minimum level of Income Tax liability equal
to 1% of turnover.
b)
General
Income Tax
General/Transitional
Until recent times East Timor's Income Tax rules
were those applying in Indonesia. From 25 October
1999 Regulation 2000/18 applies. Subject to a
limited number of specific modifications (outlined
below), Regulation 2000/18 adopts the Indonesian
tax rules.
Part B ZOCA/JPDA Rules
i)
an exclusion for wages received or accrued

after 31 December 2000 (note: wages are
thereafter taxed under a separate Wage
Income Tax);
ii)
an exclusion for all income derived between
25 October to 31 December 1999;
iii) an exclusion of US$20,000 in taxable income
for the 2000 tax year;
iv) the removal of the Rp1m fiscal departure
tax with effect from 25 October 1999;
v)
the deeming of the entitlement to tax credits
or refunds that existed as at 25 October 1999,
to be nil on that date;
vi) the deeming of tax losses to be nil as at 31
December 1999;
vii) the cancellation of any concessions or
facilitations which have the effect of reducing
tax liability with effect from 31 December
2000;
viii) the creation of a quarterly corporate tax
installment regime for taxpayers with turnover
of US$1m or less (but see the 1% minimum
tax liability from 2002);
ix) an exclusion from application in the territory
covered by the Timor Gap (now Timor
Seas treaty) arrangements;
x) special arrangements for income earned on
the export of coffee beans after 19 March
2000 (final taxed at 5% of export value until 31
May 2001. Exports after 31 May 2001 are
exempt).
Legislative/Political Background
The Timor Sea area has been known to be rich in
hydrocarbon deposits for many years. Rights in
regard to the exploration and exploitation of these
hydrocarbons have been the subject of contention
between Australia and, depending upon the era,
Indonesia, East Timor or even Portugal, as the case
may be. The contention has largely related to the
delineation of the seabed boundary between
Australia to the South and the relevant state to the
North.
c)
d)
e)
An initial treaty was concluded between Australia
and Indonesia in 1972. However, the legality of this
treaty was challenged at the time, particularly by
Portugal who had issued competing exploration
permits.
In 1989 Australia and Indonesia agreed to jointly
share in exploitation of the disputed geographical
area known as Zone A (i.e. Zone of Cooperation
A or ZOCA). The so-called Timor Gap treaty was
thereby signed on 11 December 1989 and became
operative from 9 February 1991. Essentially, the
Timor Gap treaty provided:
a)
that ZOCA shall fall under the joint control of

both Indonesia and Australia with equal
sharing in the associated petroleum
resources. This control was exercised by a
Joint Authority containing representation
from both countries;
that exploration and exploitation activities in

ZOCA was to be carried out pursuant to
Production Sharing Contracts (PSC)
entered into between the Joint Authority and
the oil company in question;
that ZOCA should be considered to be within
the taxation jurisdictions of both Indonesia
and Australia;
that the business profits or losses of an entity
carrying on business in ZOCA shall be taxable
in both Indonesia and Australia, after being
reduced by 50%. This effectively means that
the respective tax rates of Indonesia and
Australia were halved;
that the remuneration income of an individual
resident in Indonesia or Australia, arising from
activities in ZOCA, shall be taxable only in the
country of residence. Remuneration of third
country nationals was taxable in both
Indonesia and Australia with an entitlement to
a 50% rebate in each country.
With the formal transfer of administration of East

Timor to the UNTAET on 25 October 1999 an
exchange of notes took place between the
UNTAET and Australia on 10 February 2000. Under
the notes, the UNTAET assumed all rights and
obligations under the Timor Gap treaty on behalf of
East Timor, but only until the date of East Timor's
full independence.
On 20 May 2002, full administrative authority for
East Timor passed from the UNTAET to the new
East Timor Government. On the same day,
representatives of the Governments of East Timor
and Australia entered into the Timor Seas Treaty (as

a successor to the Timor Gap treaty). Ratification
on this treaty was completed by both Governments
on 2 April 2003. However, the Timor Seas Treaty is
effectively operative from 20 May 2002 onwards
and provides as follows:
a)
b)
c)
d)
e)
f)
that the Joint Petroleum Development Area

or (JPDA), formally known as ZOCA, falls
under the joint control and management of
East Timor and Australia. For the first three
years, this should be exercised by a
designated authority;
that the JPDA includes all of the reserves
constituting the Bayu-Undan field. However,
the JPDA covers only 20.1% of the reserves
making up the Greater Sunrise field;
that petroleum activities, covering
exploration, development, processing,
transportation and marketing of
hydrocarbons, are to be carried out pursuant
to a contract between the designated
authority and the oil company in question;
that the JPDA is considered to be within the
taxation jurisdiction of both East Timor and
Australia;
that the business profits or losses of an entity
carrying on business in the JPDA are reduced
by the reduction percentage. For East Timor
the reduction percentage is 10% while for
Australia it is 90%. This effectively means that
the tax rates in East Timor and Australia are at
90% and 10% of their normal levels;
that the remuneration income of an individual
resident in East Timor or Australia arising from
activities in the JPDA is taxable in both East

Timor and Australia, subject to the 10%
reduction percentage.
Note :
For more details in East Timor, please refer to our
publication East Timor Tax Book 2003. Please
contact our Partners or Managers for more
information in relation to East Timor.
Malaysia
Please refer to the summary charts presented under

appendices I-IV for key statistics on Malaysia.
Political and Legal
Malaysia has a parliament consisting of a Senate and a House of Representatives. The
Senate, which is the smaller of the two legislative bodies, has 69 members. It also has
considerably less power than the House of Representatives, which consists of 180 members
each representing one constituency.
Elections to the lower house are held every five years. A general election was recently held on
the 21 March 2004. The current ruling party, the National Front (Barisan Nasional), is a
coalition of parties, which includes the United Malays National Organisation (UMNO),
Malaysian Chinese Association (MCA) and the Malaysian Indian Congress (MIC), was reelected. It is headed by the UMNO President who is traditionally also the Prime Minister of
Malaysia.
Malaysia consists of three Federal Territories namely Kuala Lumpur, Labuan and Putrajaya
and 13 states. Federal Territories are governed by the legislation under the Federal
Government. Each state of Malaysia has its own constitution and legislative body led by the
Chief Minister called the Menteri Besar or Ketua Menteri. Their functions and tenure as state
leaders are similar to that of the Prime Minister. Their appointment will depend on the results
of the general and state elections and subject to the Prime Minister's approval.
Malaysia
Malaysia
The Malaysian legal system is based on the British legal system

and the principles of common law. Much of the law is codified
and legislated. In each of the 13 Malaysian states, the court
system consists of the Magistrates Court, Sessions Court and
High Court. The final court of appeal is the Supreme Court.
Organisations
The principal government organisations and regulatory bodies
concerned with business operations are :
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Economic Planning Unit (EPU)

Ministry of Energy, Communications and Multimedia
(MECM)
Ministry of International Trade and Industry (MITI)
Ministry of Domestic Trade and Consumer Affairs (MDTCA)
Ministry of Natural Resources and Environment
Malaysian Energy Commission (EC)
Labuan Offshore Financial Centre (LOFC)
Bank Negara Malaysia (Central Bank of Malaysia).
Economic Overview
under Appendix I for information on Malaysia.
Malaysia's economy has been growing on the back of strong
private domestic consumption and private investment growth
aside from moderate global economic growth. Malaysia
achieved a GDP growth rate of 4.4% in 2003. The economy is
expected to further improve with growth forecast for the coming
years to be between 5.5% and 6.0% and

inflation at about the same level.
Malaysia's GDP was estimated at RM397.48
billion (in current prices) in 2003. Private
consumption and investments account for
over half (53%) of GDP.
In terms of the magnitude of the various
economic activities, the service and
manufacturing sectors respectively contribute
57% and 30% of total GDP. Other major
economic activities include the agriculture and
mining sectors.
Supported by strong economic growth,
Malaysia enjoys a low unemployment rate.
Notwithstanding increasing domestic demand
and high employment figure, Malaysia's
inflation rate has remained subdued due to
excess capacity in some sectors. The
Consumer Price Index (CPI) in 2004 is
expected to be contained below 2.0%.

The Malaysian financial market is serviced by
three types of banking institutions, namely:
commercial banks, finance companies and
merchant banks. As at 31 December 2003, the
banking system had assets totaling RM815.7
billion.
The central bank, Bank Negara Malaysia,

works to (1) issue and secure the currency; (2)
act as the Government's banker and financial
advisor; (3) promote monetary stability; and (4)
influence the credit situation, where necessary.
The estimated foreign reserves of Malaysia
during the 4th quarter of 2004 were
approximately US$54.4 billion.
In terms of services provided, commercial
banks undertake a whole array of banking
services and they account for more than three
quarters of the banking system assets. The
scope of finance companies' services is more
limited, in that, they do not provide cheque
accounts, trade financing and foreign
exchange services. Merchant banks,
meanwhile, provide investment banking type
services like corporate advisory and securities
underwriting.
Corporates also have the option of raising
funds through the Private Debt Securities
(PDS) or bond market as an alternative to
banks. The issuance of PDS has become
increasingly popular as it provides a cheaper
form of financing. New issuance of PDS in
2003, for instance, grew by 41% to RM51.0
billion.
Complementing Malaysia's domestic financial
market is the Labuan Offshore Financial
Malaysia
Malaysia
Centre (LOFC). LOFC provides a wide array of offshore financial

services from banking to issuing and trading of debts and
securities.
The Malaysian ringgit is currently pegged to the US dollar at
RM3.80 to the dollar. The peg has been in place since
September 1998 as part of the exchange control measures
taken by the Government to stabilise the exchange rate and
curb speculative dealings on the ringgit during the 1997 Asian
financial crisis.
3. Energy, Utilities and Mining Market

Country) - Key Energy, Utilities & Mining Data (Appendix II)
III) for industry-related key data and information on
Malaysia.
Malaysia has 75 trillion cubic feet of natural gas reserves
and exports almost 300,000 barrels per day (net)
(representing 40% of its crude oil production of 765,000
Bbl/d). Malaysia contains proven oil reserves of 3.0 billion
barrels, down from 4.3 billion barrels in 1996.
In Liquefied Natural Gas (LNG), it's the third largest LNG
exporter in the world exporting 15 million tonnes annually,
after Indonesia and Algeria. Over half of Malaysia's LNG
exports are destined for Japan.
Ownership of Malaysia's oil and gas resources

rests with Petroliam Nasional Berhad
(PETRONAS), the national oil company, which
is wholly-owned by the Malaysian
Government. PETRONAS carries out
exploration, development and production
activities in Malaysia through Production
Sharing Contracts (PSC). PETRONAS has to
date signed more than 60 PSCs with a number
of international petroleum companies like
Shell, ExxonMobil and Murphy Oil.
PETRONAS, a Fortune 500 company and
Southeast Asia's largest oil firm, with
operations in 30 countries, was ranked 21st
among the world's top 100 oil companies by
Petroleum Intelligence Weekly. In 2003, the
PETRONAS group raked in RM81.43 billion in
turnover and a profit before tax of RM26.87
billion.
Although the oil and gas sector contributes
less to the GDP than the services and
manufacturing sectors, it is the largest
taxpayer. The sector contributes about
RM15.4 billion or 18% of the Federal
Government's revenue a year in the form of
taxes and dividends and this amount is
expected to reach RM23 billion in 2007. In
terms of economic contribution, the oil and gas
sector is estimated to generate 6.9% to the
country's GDP in 2004.
The oil and gas sector also overtook the

Electronics and Electrical Sector (E&E) as the
largest recipient of Foreign Direct Investment
(FDI) in 2002 where it has attracted more than
RM14 billion in FDIs compared with RM12.2
billion for E&E.
Prospects for the sector continue to be
buoyant spurred by new deepwater oil
discoveries and offerings of new oil and gas
exploration sites. Over the next five years,
major oil companies are projected to spend
between RM38 billion and RM50 billion on
upstream activities. PETRONAS alone is
stated to commit half of the investment
amount with an annual oil exploration and
production budget of RM6 billion.
Oil
Malaysia currently produces about 765,000
barrels of oil per day (Bbl/d) through 47
producing oil fields and has the capacity to
process 516,000 Bbl/d though its six oil
refineries. Malaysia also has the 27th largest
crude-oil reserve in the world with about 3.0
billion barrels of crude oil as at January 2004,
which is expected to last another 18 years.
Oil exploration and production activities mainly
take place in the offshore continental shelf of
the states of Sabah and Sarawak in East
Malaysia
Malaysia
Malaysia, and offshore Terengganu in the east coast of

Peninsular Malaysia. A total of 123 oil fields have been
discovered over the offshore continental shelf.
Malaysia has approximately 500,000 square kilometres of
acreage available for oil and gas exploration of which 205,500
square kilometres are covered by PSCs. PETRONAS has
recently opened oil and gas exploration to deeper offshore
areas, with water depths of 200 metres or more. A total of 12
deepwater exploration contracts have been awarded by
PETRONAS as at September 2003, with another 14 oil and gas
deepwater exploration sites possibly being offered to potential
investors in the future.
Thanks to conservation efforts and ongoing transformation
from oil-fired power plants to natural gas, oil demand in
Malaysia has remained fairly stable. The country could become
a net importer of oil by 2010, unless significant new oil deposits
are found.
crude. More than half of the country's oil

production comes from the Tapis field. Esso
Production Malaysia Inc. (EPMI), an affiliate of
ExxonMobil Corporation, is the largest crude
oil producer in Peninsular Malaysia,
comprising almost half of Malaysia's crude oil
production. EPMI operates seven fields near
the peninsula, and one-third of its production
comes from the Seligi field.
Refining
Malaysia has six refineries, with a total
processing capacity of 516,000 Bbl/d. The
three largest are the Shell Port Dickson refinery
at 155,000 Bbl/d and the Petronas Melaka-I
and Melaka-II refineries, each with a capacity
of 95,000 Bbl/d.

Falling oil reserves have spurred the state oil and gas company,
Petronas, to expand Malaysia's exploration and production
strategy beyond its borders. In line with this, Petronas has
invested in oil exploration and production projects in countries
such as Syria, Turkmenistan, Iran, Pakistan, China, Vietnam,
Burma, Algeria, Libya, Tunisia, Sudan, and Angola, and as a
result almost a third of Petronas' revenue comes from overseas
operations. Most of the exported oil goes to Japan, Singapore,
South Korea, and Thailand.
Most of Malaysia's oil production is offshore, largely Peninsular
Malaysia, and its fields contain low sulfur and high quality
Malaysia produces about five billion cubic feet

of gas per day through 14 producing gas fields.
It is currently the third largest Liquefied Natural
Gas (LNG) exporter in the world, accounting
for 13% or 15 million tones of global exports
annually. With the recent completion of the
third LNG plant, MLNG3, in Bintulu (Sarawak),
Malaysia will have a total LNG production
capacity of about 23 million tonnes per annum.
Malaysia has the 13th largest gas reserve in the
world, with about 75 trillion standard cubic feet

of gas reserves as at 2003, which is expected
to last another 35 years.
Similar to oil, gas exploration and production
activities mainly take place in offshore coasts
of Sabah, Sarawak and Terengganu. A total of
218 gas fields have been discovered over
these offshore sites.
The Malaysia-Thailand Joint Development
Area (JDA) represents one of the most active
areas for gas exploration and development in
Malaysia. This area, which is located in the
lower part of the Gulf of Thailand, is managed
by the Malaysia-Thailand Joint Authority
(MTJA). The MTJA was established by the two
governments for joint exploration of the oncedisputed JDA, comprising blocks A-18 and B17 to C-19. Petronas and Amerada Hess share
equal ownership of and are developing block
A-18. The Petroleum Authority of Thailand
(PTT) and Petronas share equal interests in the
remaining blocks. Through an agreement
made in November 1999, PTT and Petronas
plan to develop a gas pipeline from the JDA to
a processing plant in Songkla, Thailand, and a
pipeline linking the Thai and Malaysian gas
grids. Initial production will only be for
Malaysia, however, it is subsequently planned
that Malaysia and Thailand will each offload
half of the gas produced at a later date. The
Malaysia
Malaysia
project created controversy and some opposition in Thailand,

particularly from local residents in Songkla along the pipeline
route. The Thai government announced its final decision in May
2002 to begin construction on the project later in the year with a
somewhat modified pipeline route to avoid certain populated
areas. The first deliveries of natural gas to Malaysia are slated to
commence in the middle of 2005.
Although Malaysia exports 150 million cubic feet per day
(Mmcf/d) to Singapore via pipeline, it also imports gas from
Indonesia, as Petronas has signed an agreement with the
Indonesian state oil and gas company Pertamina to import gas
from the Conoco West Natuna field in offshore Indonesian
waters. The reason behind this strategy is to develop Malaysia
into a hub for the coordination and integration of Southeast
Asian natural gas. Deliveries from the pipeline commenced in
mid-2003. There also have been preliminary discussions of a
project to connect the gas deposits off Sarawak with the
Philippines.
Coal
The coal sector in Malaysia is insignificant. Malaysia has only
3.6 million metric tons (MT) of recoverable reserves of coal.
Malaysia's coal production is about 362,880 MT and its coal
consumption is about 2.8 million MT. Malaysia sources its coal
imports from Australia, India and Indonesia.
Electricity
Electricity Industry Overview
undertaken by three power companies,

namely: Tenaga Nasional Berhad (TNB) serving
Peninsula Malaysia, and Sabah Electricity Sdn
Bhd (SESB) and Sarawak Electricity Supply
Corporation (SESCo) serving East Malaysia.
TNB supplies/transmits the bulk of Malaysia's
power, supplying 91% of the country's power
demand.
Peak demand for electricity registered steady

growth since 2001 in line with economic
recovery post the Asian Financial crisis. Peak
demand grew at a rate of 5.8% per annum over
the past three years reaching 12,637 MW in
2003. The Energy Commission expects annual
electricity demand to grow between 5% and
7% over the next 10 years.
Malaysia is considering reforms to its power

sector to make it more competitive and lower
costs. Complementing the integrated power
companies are the various Independent Power
Producers (IPPs), which generate and sell
electricity in bulk to the integrated utilities.
There are currently 11 IPPs in Malaysia, six in
Peninsular Malaysia and five in Sabah.
Malaysia is not expected to find any difficulty in

meeting its future energy needs. In 2003 the
country's electricity reserve margin stood at
46.9%, well above the Energy Commission's
set electricity reserve margin of 30%.
Generation Capacity & Reserves

Malaysia had a total electricity generation
capacity of 14 Gigawatts (GW), of which 73%
is gas-based, 16.5% is coal-based and 7% is
hydro-based. The bulk of it was produced by
TNB and the IPPs. TNB has a generation
capacity of about 8,800 Megawatts (MW),
accounting for 58% of Malaysia's total power
generation capacity. The 11 IPPs have a
combined generation capacity of 4,753 MW,
accounting for 30% of the country's power
generation capacity whilst the remaining 12%
is by others.
The generation and transmission of electricity in Malaysia is

The Malaysian government's strategy is to

reduce its burdensome reliance on natural gas
for use in electric power generation. As such,
the Malaysian government expects to invest or
attract investment of US$9.7 billion in the
electric utility sector through 2010, a large
portion of which will be for coal-fired plants,
the aim being to increase electricity generation
from coal to 30% by 2006.
The largest thermal project under development
in Malaysia is the 2,100-MW coal-fired Tanjung
Bin project in Johor province. Sumitomo was
awarded a $1.5 billion contract in early 2003 by
SKS Power, a Malaysian IPP, for the
construction of three 700-MW generating units
at the site, with the first unit scheduled to begin
Malaysia
Malaysia
commercial operation in August 2006.

Malaysia also plans to build a 1,400-MW coal-fired plant at
Jemah in Negri Sembilan province, but the tendering process
for this project, which was to be held this year, has been
postponed.
Electricity Tariffs
The Minister of Energy, Communications and Multimedia
regulates the electricity tariffs charged by utilities to final
consumers in Peninsular Malaysia. In Sarawak, electricity tariffs
charged by Sarawak Electricity Corporation (SESCo) are
subject to the Sarawak Electricity Supply Ordinance 1992.
The tariff structures in Peninsular Malaysia, Sabah and Sarawak
differ due to the differences in the cost of electricity supply in
the two regions. The average tariff in Peninsula Malaysia and
Sabah and Sarawak is 23.5 sen/kWh and 27.1 sen/kWh
respectively.
On 10 March 2003, the Ministry announced that electricity
tariffs would remain stable for the next three years. The last tariff
increase was an average 5.8% and was granted in 1997.
Oil & Gas

The Ministry of Energy, Communications
and Multimedia is in charge of the
formulation of policy, licensing and price
setting for the energy sector, but the
executive responsibility for the oil industry,
and ultimately PETRONAS, lies with the
Economic Planning Unit (EPU) which is
directly under the Prime Minister's Office.
The Malaysian Petroleum Development
Act of 1974 gave PETRONAS exclusive
rights of ownership, exploration and
production of the country's hydrocarbon
resources. As a state-owned enterprise,
PETRONAS comes under the direct
purview of the Prime Minister and is
responsible for the planning, investment
and regulation of all up-stream activities.
PETRONAS carries out exploration,
development and production activities in
Malaysia through Production Sharing
Contracts (PSC) with a number of
international oil and gas companies and
with its wholly-owned subsidiary, Petronas
Carigali Sdn Bhd.
Under the PSC, the contractor is obliged
to provide the financing and bear the risk of

exploration, development and production
activities in exchange for a share of the total
production. Recent PSCs are based on a
Revenue Over Cost concept (the R/C PSC)
allowing contractors to accelerate their cost
recovery if they perform within certain cost
targets. The PSC also gives the contractor a
higher share of production when the
contractor's profitability is low and it increases
PETRONAS' share of production when the
contractor's profitability improves.
In the Government's 2004 Budget, there was
an announcement on the formation of a
second national oil consortium, which will
undertake the development of marginal fields
for oil exploration, production and refining. The
objective of the second company is that it will
complement PETRONAS, while creating a new
breed of oil and gas players.
The Ministry of International Trade and Industry
(MITI) as well as the Ministry of Domestic Trade
and Consumer Affairs (MDTCA), through the
Petroleum Regulations of 1974 regulate all
downstream activities. MITI is responsible for
the issuance of licences for the processing and
refining of petroleum and the manufacture of
petrochemical products, whilst MDTCA issues
licences for the marketing and distribution of
petroleum products.
Malaysia
Malaysia
While crude oil and gas prices are determined by market forces,
MDTCA regulates product prices in Malaysia. However,
PETRONAS provides fixed pricing for various customer on a
case-by-case basis. In fact, PETRONAS "indirectly" controls
the price of gas because it is the monopoly buyer. The biggest
supplier is ExxonMobil. Please note that, the price of gas to the
power industry (current level) is set at RM 6.40/Mmbtu, a level
that is as much as a 50% discount to the prevailing international
gas prices. The chief mechanism for product prices is the
Automatic Pricing Mechanism (APM) which is based on costs,
taxes and ex-refinery production prices in Singapore. Price
fluctuations are smoothed by varying the degree of tax.
Gas distribution to retail users is regulated by the Malaysian
Energy Commission, under the Gas Supply Act. The pipeline
tariffs are not fixed - and these are negotiated on a case-bycase basis. These are on a "willing buyer and willing seller"
basis.
There is no regulation that provides a legal basis for access by
third parties to natural gas pipelines and distribution systems.
Only the customers are given access to the distribution system
under the gas purchase contract with PETRONAS.
There is currently no state-owned distribution system.
PETRONAS has to pay the States an access fees in the form of
royalties for use of distribution systems in those relevant States.
Mining
regulated by the Ministry of Natural Resources

and Environment. Please contact our partners
and managers for seeking information in
relation to the regulatory framework of the
Mining sector.
Power & Utilities

The Minister of Energy, Communications and
Multimedia regulates the power industry in
pursuance of the Electricity Supply Act 1990
(the Supply Act). The Supply Act empowers
the Minister to appoint the Ministry's Director
General to ensure there is continuous and
optimum supply of electricity at reasonable
prices, promoting competition in the industry
and ensuring the financial viability of licensees.
With the enactment of the Energy Commission
Act in 2000, a new independent regulatory
body, the Energy Commission (EC), was
established in 2001. The main functions of the
new regulatory body are to advise the Minister
and Government, regulate matters relating to
the electricity supply industry, promote the use
of renewable energy, promote and safeguard
competition, and enhance research and
development. The EC also undertakes longterm systems and dispatch planning.
The Mining sector, including coal, is not significant. Please refer

to Appendix II and III for key statistics on coal. This sector is
Principles
On 1 July 1997, the Malaysian Accounting
Standards Board (MASB) and the
Financial Reporting Foundation (FRF) were
established under the Financial Reporting
Act 1997 (FRA). MASB is the sole authority
to set accounting standards in Malaysia.
Its primary responsibilities are to improve
the quality of external financial reporting in
the country and to contribute directly to
the international development of financial
reporting. The FRF, on the other hand,
advises MASB on financial reporting
matters, oversees its operations as well as
provides and approves funding for its
activities.
The FRA states that all financial
statements prepared pursuant to any law
administered by the Securities
Commission (SC), the Central Bank and
the Registrar of Companies have to
comply with MASB's approved
accounting standards. As such, MASB
standards have the force of law. The
regulators have their own task force to
ensure that the quality of financial
statements in the country is up to mark.
Malaysia
Malaysia
At the point of inception of MASB, the Board adopted the exact

accounting standards issued by Malaysian Institute of
Accountants (MIA) and the Malaysian Institute of Certified
Public Accountants (MICPA) as approved accounting standards
to give a head start to the new financial reporting regime in
Malaysia. It is, however, incumbent on the MASB to carry out
its own due process so as to satisfy itself that the standards are
appropriate and reflect the input of its constituency. Hence, six
years later, MASB has replaced most of these early standards
by issuing 33 accounting standards of its own.
The accounting standards issued by the MASB are consistent
with the accounting standards adopted or issued by the
International Accounting Standards Board. There are no
accounting standards specific to the Oil & Gas, Mining and
Power & Utilities companies.
prepared in accordance with the applicable

approved accounting standards in Malaysia.
Most PSC operators in Malaysia are also multinational companies with overseas reporting to
their holding companies under United States
GAAP or United Kingdom GAAP. SFAS 19:
Financial Accounting and Reporting for Oil and
Gas Producing Companies under US GAAP
and Statement of Recommended Practice 2:
Accounting for Oil and Gas Exploration and
Development Activities under UK GAAP are
examples of specific financial reporting
standards applicable to such companies. Due
to the differences in GAAP, it is common for the
multi-national companies to maintain separate
books for local reporting and overseas
reporting purposes.
6. Taxation
Taxes
Principal Taxes
Taxes on Corporate Income
Income Tax: Income tax for resident and
nonresident companies is imposed on
income accruing in or derived from
Malaysia at a flat rate of 28%. Please see
below for more details.
Petroleum Income Tax: A petroleum
income tax is imposed at a rate of 38% on
profits from petroleum operations in
Malaysia. No other taxes are imposed on
income from petroleum operations.
Mining Companies
Oil and gas companies operating in the upstream industry will
be bound by the clauses of the PSCs which will normally
include the basis of accounting to be followed by these
companies. The PSC will define the costs that are allowed to be
recovered from the PSC segregating costs into operating and
capital expenditure and requires quarterly statement of
production and expenditure to be prepared by the operator of
the PSC. Generally, the PSC statement will be prepared on a
cash basis. This statement will need to be audited by an auditor
and submitted to PETRONAS within 60 days after the quarter
end.
The financial statements of the PSC operator, however, will be
Under MASB GAAP there are no specific

reporting of Mining Companies.

Under MASB GAAP there are no specific
reporting of power and utility companies.
These companies are required to follow
common standards applicable to generic
(regular) companies.
Other Taxes
Real Property Gains Tax: A real property
gains tax is imposed at graduated rates
from 5 to 30% on gains from disposals of
real property (which includes the disposal
of shares in a real property company)
situated in Malaysia.
Sales Tax: Unless otherwise exempted, a
single-stage ad valorem tax at rates from 5
to 25% is imposed on all goods imported
into or manufactured in Malaysia.
Malaysia
Malaysia
Service Tax: A 5% service tax is imposed on the value of

taxable services sold or provided by taxable persons. A list of
taxable persons and taxable goods is found in the Service
Tax Regulation of 1975.
Windfall Profit Levy: From 1 January 1999, a levy is imposed
on crude palm oil and crude palm kernel oil at a maximum of
RM50 per ton where the price exceeds RM2,000 per ton.
Value-added Tax: The government has announced its intention
to integrate and restructure the existing sales and service taxes
into a consolidated tax to be called the sales and service tax,
similar to VAT in nature.
Contract Levy: The Construction Industry Development Board
(CIDB) imposes a levy of 0.25% on contracts having a contract
value of over RM500,000 for all registered contractors.
Withholding Tax: Corporations paying certain types of income
are required to withhold tax. Further details will be found later in
this guide.

Corporations and Shareholders
Malaysia operates an imputation system of corporate taxation
whereby resident companies are subject to income tax at a flat
rate of 28% on their net profits, whether or not distributed,
except for companies with paid up capital of RM2.5 million or
less, which are subject to tax in two tiers at the following rates:
Chargeable income
RM
Rate %
On the first
500,000
20
In excess of
500,000
28
Shareholders (resident and non-resident) are

deemed to have paid income tax at 28% on
dividends received from resident companies
through the mechanism of the tax credit
system.
Tax Credit System
Dividends paid by companies resident in
Malaysia are deemed to be derived from
Malaysia. The company is entitled to deduct
tax at the corporate income tax rate (28%) when
paying dividends and is then required to
account to the tax authorities for the tax
deducted or deemed to be deducted. Liability
is regarded as having been satisfied to the
extent that the company has paid tax on its
profits. Where the tax deducted or deemed to
be deducted from the dividends exceeds the
tax paid by the company in the basis period for
the year of assessment, the excess becomes a
debt due to the tax authorities, and an amount
equivalent to the excess is payable as a debt
due to the government.
Tax paid includes payments of tax made in the
basis period and tax deducted at source from
dividends received by the company. Refunds of
overpayment of tax as well as certain available

reliefs have to be deducted.
Tax Credits - Shareholders
All shareholders (resident or non-resident,
corporate or individual) are entitled to the tax
credit attached to the dividends received from
Malaysian companies. Where the Malaysian tax
liability of a shareholder for a year of
assessment is less than the tax credit on the
dividends received, the tax credit balance is
refunded by the tax authorities.
Withholding Taxes
Certain income received by a non-resident
company that is not attributable to a business
carried on by that non-resident in Malaysia is
subject to tax at the following rates, unless a
double taxation agreement provides otherwise.
Interest
Royalties
Technical and management fees *
Rental of movable properties
%
15
10
10
10
* With effect from 21 September 2002, payments for service

performed offshore are not subject to withholding tax.
Payments made to a non-resident contractor

for services under contract carried out in
Malaysia are subject to deduction of tax at the
rate of 13%. The deduction comprises 10% on
account of the non-resident contractor's tax
liability and 3% on account of the employees'
tax liability. This deduction of tax at source
Malaysia
Malaysia
does not represent a final tax, which is determined upon the filing
of the tax returns. Any excess of credit over the actual tax liability
will be refunded to the non-resident contractor.
Losses
Business losses as adjusted for tax purposes can be utilised
against income from all sources liable to income tax in the same
basis period. Any excess business losses not utilised may be
carried forward for setoff against future income from all business
sources. Available tax losses can be carried forward indefinitely,
notwithstanding a change in ownership or business activity of the
company. There is no provision for loss carry-back or group loss
relief (except in very limited circumstances applicable to
companies in the agricultural sector). Tax losses cannot be offset
by the grouping of profitable and unprofitable affiliates.
Capital Allowance
Under the Malaysian tax legislation, the depreciation provided in
the accounts in respect of capital expenditure is not allowed as a
deduction for tax purposes. However, capital allowances are
given in respect of qualifying capital expenditure as follows:
(a) Initial allowance of 20% and annual allowances from 10% to
20% on qualifying capital expenditure on plant and
machinery.
(b) Initial allowance of 10% and an annual allowance of 3% on
qualifying building expenditure on an industrial building.
(c) Accelerated capital allowance for certain qualifying industrial
buildings at an annual allowance of 6% - 10% and qualifying
plant and machinery at an initial allowance of 20% - 60%
and annual allowance of 20% - 60%.

Corporations may adopt their accounting year
as their tax year for the purposes of filing their
corporate tax returns. Returns are to be lodged
six months after the closing of the books. For
assessments from 2002 onwards, returns are
to be lodged seven months after the closing of
the books.
Tax must be paid within 30 days of the
deadline for the submission of a return. The
deadline is six months (seven months for 2002
assessments and onwards) from the date on
which the books are closed.
Companies are required to provide estimates
of their tax payable for a year not later than 30
days before the beginning of the company's
financial/tax year. Revised estimates can be
lodged in the sixth and ninth months of the
same year.
These estimates form the basis of the monthly
instalments that companies are required to
pay, starting with the second month of the
company's financial/tax year.

A Malaysian tax-resident corporation and a
unit trust are not taxed on their foreign-source
income, regardless of whether such income is

received in Malaysia. However, income from
the businesses of banking, insurance and air or
sea transport is assessable on a global basis.
Relief from double taxation is available by
means of a bilateral credit if there is a tax treaty,
or unilateral relief where there is no tax treaty.
The relief is restricted to the lower of Malaysian
tax payable or foreign tax paid if there is a
treaty, or to one-half of the foreign tax paid if
there is no treaty.
Undistributed income of foreign subsidiaries is
not taxable.
Malaysia has treaty arrangements with a
number of countries and the withholding taxes
on dividends, interests, royalties and certain
rentals may be affected by relevant treaty
arrangements. Please contact our Partners or
Managers for more information in relation to
such treaty arrangements.

Utilities and Mining Companies
Gas Activities
Petroleum operations are conducted within the
framework of the production sharing
agreements which are entered into between
PETRONAS and the petroleum companies.
Malaysia
Malaysia
Under the agreement, a royalty of 10% of all petroleum

produced goes to the Government (5% to the Federal
Government and 5% to the State Government) while the
remaining production is divided between PETRONAS and the
petroleum companies in accordance to an agreed formula.
Companies carrying on petroleum operations in Malaysia are
taxed under the Petroleum Income Tax Act 1967. Petroleum
operations do not include the transportation of petroleum
outside Malaysia; the process of refining or liquefying of
petroleum; dealings in petroleum products; or services
involving the supply of rigs, derricks, ocean tankers or barges.
Taxable person include PETRONAS (the government-owned
national petroleum corporation); Malaysia Thailand Joint
Authority (MTJA); and any company, partnership, body of
persons, or corporate sole (corporate body) carrying on
petroleum operations under a petroleum agreement. A person
that carries on petroleum operations under more than one
petroleum agreement is regarded as a separate taxable person
with respect to each of those agreements. A partnership
includes joint ventures, syndicates, etc., where the parties have
agreed to combine their rights, powers, property, skill, or labour
for the purpose of carrying on petroleum operations and
sharing production or profits.
In 1990, Malaysia and Thailand signed an agreement relating to
the establishment of the MTJA for the development of the
resources of the seabed in the defined area of the continental
shelf of the two countries in the Gulf of Thailand. MTJA was
created upon the subsequent enactment of the MTJA Act 1990.
Income derived from petroleum operations carried out in the
joint development area falls within the ambit of

the Petroleum Income Tax Act 1967.
Income Tax
Resident oil companies pay tax at the rate of
28% on all non-petroleum income. The nonpetroleum income of a petroleum company is
taxed according to the general corporate
income tax rules as highlighted earlier.
Petroleum Income Tax
Petroleum income tax is levied at the rate of
38% on the chargeable income of the taxable
person. Income derived from petroleum
operations in the Malaysia-Thailand joint
development area is subject to petroleum
income tax as follows:
%
For the first eight years of production
For the next seven years of production
10
For subsequent years of production
20
Dividends paid out of petroleum income are

not subject to any further taxes.
Deductions allowable against taxable income
include the following items:
1. Depletion of exploration expenditure
incurred;
2. Intangible drilling costs;
3. Depreciation of machinery and equipment
4.
5.
used in petroleum operations;

Contributions for abandonment tax; and
Interest expense incurred post-production
by any partner(s) to the PSC. A claim could
be made for relief but strong evidence and
adequate documentation are required to
substantiate the claim.
Non-deductible Expenditure
Expenditure specifically not allowable include
the following:
1. Capital withdrawn or any sum employed
or intended to be employed as capital;
2. Disbursement or expenses not wholly and
exclusively incurred for the purpose of
producing gross income; and
3. Contributions to unapproved schemes.
Depletion
Exploration expenditure incurred in the
petroleum industry for a secondary recovery
qualifies for an initial allowance of 20%. The
initial allowance is 10% for other cases. The
annual allowance is computed on the greater
of either 15% on the residue of qualifying
exploration expenditure or a prescribed
fraction (based on output).
Capital allowances are provided at the
following rates:
Malaysia
Malaysia
Capital allowance
Initial allowance
Qualifying plant
expenditure
Qualifying building
expenditure
Annual allowance
Qualifying plant
expenditure
Qualifying building
expenditure
Fixed offshore
platforms
Primary recovery
Secondary recovery
20%
40%
10%
20%
8%
10%
2%
2%
10%
Losses
Any unrecovered costs, including pre-production expenditures,
are allowed to be carried forward indefinitely to be recovered
out of future production.
Each PSC is regarded as a separate chargeable person, that is,
it is effectively ring-fenced and any losses or capital allowances
cannot be jointly utilised by two or more PSCs. However, where
a partnership carries on petroleum operations under two or
more PSCs and the areas are contiguous, then those areas
would be treated as one PSC and relief is available via the
pooling and utilisation of costs.
Withholding Taxes
The withholding tax requirements for the PSC entities engaged
in the oil and gas activities are identical to those set out under
corporate income tax above.
Value-added Tax
There are no value-added taxes in Malaysia.
Import Duties
Import duties are levied on goods that are
subject to import duties and imported into
Malaysia. Import duties are generally levied on
ad valorem basis but may also be imposed on
a specific basis. The ad valorem rates of import
duties range from 2% to 200%. The value of
goods for the purpose of computing import
duties is determined in accordance with the
World Trade Organisation (WTO) principles of
customs valuation.
Export Duties
All exports of petroleum oils or crude will
attract export duty calculated at 10% of the
value of the goods exported. However, the
actual amount payable is subject to a complex
mechanism for determining the amount
payable as cost oil and royalty are not
subject to the 10% export duty.

and Gas Activities
the downstream oil and gas activities is
identical to that applicable to an entity
engaged in any other non-upstream business,
i.e. the general tax law under Corporate
Income Tax.
The downstream sector e.g. refinery and

petrochemical plants are mostly located in
specific industrial zones for example Eastern
Corridor of Peninsular Malaysia and East
Malaysia where more attractive tax incentives
are available under the Promotion of
Investment Act 1986.

Exports)
Import Duty and Other Indirect Taxes on
Crude Petroleum Oils, Refined Petroleum
Products and Natural Gas
Import Duty
Import duty is levied on goods that are subject
to import duty and imported into the country.
Import duty is generally levied on an ad
valorem basis but may also be imposed on a
specific basis.
Crude petroleum oils are classifiable under
Harmonized System (HS) tariff heading 27.09.
Both the import duty rate and CEPT rate (for
goods of ASEAN origin) for crude petroleum
oils are 0%.
Refined petroleum products are potentially
classifiable under HS tariff heading 27.10,
Petroleum oils and oils obtained from
bituminous minerals, other than crude;
preparations not elsewhere specified or
included, containing by weight 70% or more of
Malaysia
Malaysia

waste oils. The rate of import duty and CEPT rates ranges from
0% to 5% depending on the specific description of the product.
manufactured goods for the levying of sales

tax purposes is also based on the World Trade
Organization (WTO) principles of customs
valuation.
mining activities is similar to that applicable to

an entity engaged in any downstream
business, i.e. the general tax law under
Corporate Income Tax.
Natural gases are classifiable under HS tariff heading 27.11,

import duty and CEPT rate are 0%.
Export Duty
Export duty of 10% is applicable to crude
petroleum oils. The export duty is calculated
based on the customs value per barrel of crude
oil that is gazetted by the Treasury on a biweekly basis. Exemption from export duty can
be obtained from the Minister of Finance
(Treasury), who will determine the percentage
of exemption on a quarterly basis. Basically the
exemption from export duty is on cost oil and
royalty so that export duty is payable on profit
oil only.
Assets used in the operations of mining would

be of no or little value when the mining
operations are completed. Hence, an incentive
by way of mining allowances is given on
qualifying expenditure incurred on working the
mine. Qualifying expenditure includes cost of:
The import value for the purposes of computing import duty is

determined in accordance with the World Trade Organization
(WTO) principles of customs valuation and is at CIF (Cost,
Insurance and Freight) terms.
Sales Tax
Sales tax is a single-stage tax imposed on certain locally
manufactured goods and similar goods imported. Sales tax is
a consumption tax and under the system, the onus is on the
manufacturers to levy, charge and collect the tax from their
customers. In the case of imported goods, sales tax is
collected from the importer at the time the goods are released
from customs control.
Crude petroleum oils do not attract any sales tax. The rates of
sales tax applicable to refined petroleum products varies, some
are based on specific basis, whilst others are based on ad
valorem basis. As for natural gases, only liquefied natural gas is
subject to sales tax at a rate of RM0.0100 per kg.
Sales value for imported goods is calculated based on the CIF
value as determined for customs duty purposes plus any import
duties and excise duties payable. The valuation of locally
!
!
!
!
!
Export duty is not applicable to refined

petroleum products and natural gases.
Excise Duty
Excise duty is not applicable to crude
petroleum oils, refined petroleum products and
natural gases.
Site;
Mineral rights;
Prospecting searching, testing, winning;
Construction work which will be of little or
no value when mining is completed;
Administration and development incurred
before actual production.

Companies

the power supply industry is identical to that
applicable to an entity engaged in any other
non-upstream business, i.e. the general tax
law under Corporate Income Tax.
Mining operations include all methods and

processes by which minerals or mineral
deposits are obtained. The mining industry is
currently a sunset industry in Malaysia. The
taxation framework for entities engaged in the
The power market is regulated and the

transmission and distribution are under the
monopoly of TNB in Peninsular Malaysia and
SESB and SESCo in East Malaysia.
Malaysia
Some tax incentives may be granted for large projects, e.g.

Independent Power Producers, Small Renewable Energy
projects (e.g. biomass) as Approved Service Projects. The main
tax incentives are income tax exemption or investment
allowance. The type of tax incentives and the quantum
available are based on the type and number of criteria the
project satisfies.
New Zealand
Please refer to the summary charts

presented under appendices I-IV for key
statistics on New Zealand.
Political and Legal
Parliament consists of the House of Representatives, comprising 120 members, of whom six
represent Maori electorates. General elections are held every three years and the minimum
voting age is 18 years.
The government is selected under a Mixed Member Proportional (MMP) system, a form of
proportional representation based on the German model, where each party's share of the
seats in Parliament reflects its share of the votes cast.
Historically, the two significant political parties have been Labour and National. Under MMP,
however, smaller political parties play a greater role in government. Labour currently governs
New Zealand
New Zealand
through a coalition agreement with the United Future Party, with

support from the Alliance Party on confidence votes and mutually
agreed policies. Local or provincial authorities administer local
community services except for police, education, fire, and social
welfare services, which are under the control of the central
government.
The legal system has developed from British law. Much of the
law is codified, but English common law remains important in
many areas. The court system extends from District Courts
through the High Court and Court of Appeal in New Zealand (NZ),
with some cases progressing to the Privy Council in London.
The public receives protection under the Bill of Rights and may
obtain certain information on request under the Official
Information Act.

The principal regulatory and government organisations
concerned with business operation are :
!
Ministry of Economic Development
!
Ministry of Foreign Affairs and Trade
!
Ministry of Internal Affairs
!
Ministry of Justice
!
Ministry of Agriculture and Fisheries
!
Inland Revenue Department
!
Customs Department
!
New Zealand Immigration Service
!
Overseas Investment Commission
!
Reserve Bank of New Zealand
!
Tradenz (New Zealand Trade Development Board)
!
New Zealand Stock Exchange.
Economic Overview
on New Zealand.
The economy is based on a private enterprise
system. The government generally confines its
commercial activities to those that are seen to
have a "public good " element. In the early
1990s the government privatised its interests
in a variety of industries; more recent asset
sales include interests in energy and airports.
New Zealand has progressive consumer
legislation embodied in the Commerce Act
1986, the Fair Trading Act 1986 and the
Consumer Guarantees Act 1993.
The Reserve Bank of New Zealand (RBNZ) has
overall responsibility for keeping inflation low
and stable. The RBNZ must maintain inflation
within a certain band as negotiated with
government in the Policy Targets Agreement
which is currently between 1% and 3% on
average over the medium term. GDP growth
over the past 6 years has averaged 3% per
annum and in 2003 it was 2.7%. Of this, a lion's
share of 67.7% currently comes from services,
with industry at 27.6% and agriculture at 4.7%.
Inflation of 2.7% is expected for 2004.
Official economic projections point to a steady

growth outlook and stable economic
conditions.

The banking system comprises a central bank
(the RBNZ) and 18 licensed banks, many with
on-line branches throughout NZ. The country
is generally considered to have a modern and
effective real-time banking system.
The three main objectives of the Reserve Bank
of New Zealand, the New Zealand control
bank, are (1) to operate monetary policy to
achieve stable prices; (2) to promote and
maintain a sound financial system; and (3) to
satisfy public currency needs. New Zealand's
foreign reserves as of July 2004 were
approximately NZ$2.3 billion.
Exchange control policy covering overseas
investment, borrowings, receipts, and
payments is administered by the Reserve Bank
in overseeing the deregulated financial market.
Since November 1984, overseas companies
have had unrestricted access to the NZ capital
market.
The NZ dollar floats freely and is readily
convertible into other currencies. It reached a
2004 high of US$ 0.679 per NZ$ 1.
New Zealand
New Zealand
3. Energy, Utilities & Mining Market

Country)-Key Energy, Utilities & Mining Data (Appendix II)
III) for industry related key data and information on New
Zealand.
New Zealand is rich in natural resources and is self-sufficient
in all but one of the primary energy sources, oil. NZ is
ranked 14th most attractive petroleum investment
destination out of 120 countries according to a 2002
international survey by IHS Energy Group. Despite NZ's
attractiveness as an investment destination and its potential
reserves, investment to date has not reflected these positive
factors. The greatest barrier to investment in NZ is its small
market size, geographic isolation and the relatively high
exploration cost in this part of the world.
There is a comprehensive and well-established regulatory
regime in place for exploration. No substantial incentives
are offered for exploration and development of mining or
petroleum mining activities, however some encouragement
is provided by special tax regimes.
New Zealanders have historically enjoyed one of the lowest
prices for electricity in the world as a result of the reliance on
hydro generation and the abundant natural gas reserves.
Oil
As of 1 January 2004, New Zealand had proven
oil reserves of 0.07 billion barrels. In 2003, New
Zealand's crude production averaged 24,000
Bbl/d and its consumption averaged 133,600
Bbl/d.
NZ has 11 producing fields, all located in the
Taranaki region together with the country's only
crude oil storage facility, Omata Tank Farm. The
largest field Maui, started producing oil in 1979
and currently accounts for over 78%
of NZ oil production (although this field is rapidly
depleting).
75% of the crude oil, condensate and naphtha
produced in NZ is exported, mainly to Australia,
Japan and Singapore. The remaining product is
used by NZ's sole refinery at Marsden Point in
the upper North Island, owned by the NZRC.

As of 1 January 2004, New Zealand had proven
natural gas reserve of 3.5 Trillion Cubic Feet
(Tcf). In 2003, New Zealand's natural gas
production and consumption averaged 349.9
Billion Cubic Feet (Bcf).
Gas is sourced from 11 fields, all located in the
Taranaki region. Production is dominated by
the Maui and Kapuni fields which account for

over 86% of total gas production. NZ is self
sufficient in gas which is mostly used for
electricity generation (41%) and producing
methanol (39%) while the remaining 20% is
used in other industrial processes and by direct
reticulation to small customers.
NZ is rich in gas reserves, however most of the
exploration and all of the production have been
limited to the Taranaki region due to the lack of
sufficient infrastructure in other areas. The key
concerns facing the gas industry are the
depletion of the Maui gas field between 20072009 and lack of planning by the industry for
this event. In addition there is the impact of the
carbon taxes to be introduced in 2008.
Coal
NZ has 7.8 billion metric tonnes (MT) of
recoverable coal in 42 coalfields. Lignite
accounts for 80% of this, while the remaining
20% is made up of sub-bituminous or
bituminous coal. NZ's coal resources are
concentrated in the Waikato, West Coast,
Otago and Southland regions.
The largest producer of coal is Solid Energy
Limited (Solid Energy) which owns 10 mines
throughout the country accounting for
approximately 80% of NZ's production.
New Zealand
New Zealand
The biggest consumer of coal is New Zealand Steel Limited.

Domestic consumption is concentrated in the South Island due
to the lack of natural gas supply in this area.
Just over half of the coal produced in NZ is exported to Japan,
China, South Africa, Australia, Chile, Europe and India.
Exploration is currently limited as the industry focuses on
maximising production within their existing mining license areas.
The largest issue facing the coal industry at present is the
proposed introduction of carbon taxes by the NZ government in
2008 and the impact this will have on domestic demand.
Electricity
Electricity generation totaled over 40,000 GW in the year 2003.
Hydro accounted for 62% of production, with the balance
generated from gas, coal, geothermal and co-generation sources
and a small but increasing amount of wind generation. Electricity
production is dominated by three state-owned generators
(Mighty River Power, Genesis Power and Meridian Energy) and
one privately owned generator (Contact Energy). Together these
four generators meet 81% of the country's electricity demand.
The transmission network is owned and operated by Transpower,
a state-owned company. Electricity distribution has been split,
for regulatory reasons, into distribution and energy retailing
businesses.
The industry is currently dealing with security of supply issues,
maximising investment decisions based on fuel availability, cost
and government policies and objectives.

Oil and Gas
Both the oil and gas industries have been
deregulated. The oil industry underwent
deregulation in the late 1980s with the
removal of price controls, government
involvement in the operation of the industry
and removal of restrictions on imported
refined products. The gas sector was
deregulated alongside the electricity sector
in 1993 with the removal of gas franchise
areas together with price controls.
The key industry specific pieces of
legislation governing the oil and gas
exploration and production industry are:
! The Crown Minerals Act 1991 (CMA)
which sets the broad legislative policy
for prospecting, exploration and mining
of Crown owned minerals in NZ.
! The Minerals Programme for Petroleum
which establishes the policies,
procedures and provisions to be
applied under the CMA, including
permitting and royalty regimes;
! The Crown Minerals (Petroleum Fees)
Regulations 1993 which outline the
fees that are payable for matters
specified under the CMA for petroleum.
Large gas pipeline businesses are required to

disclose certain operating and financial
information on an annual basis under the Gas
(Information Disclosure) Regulations 1997. The
gas pipeline sector is currently undergoing
further reform as the government reviews the
need for additional control within the sector. In
response, the industry is developing its own
self-governance regime to meet government
policies and objectives. If the industry solution
is not successful, responsibility for control will
fall on the newly created Electricity
Commission (EC).
Regulations in relation to the gas supply and
transportation (pipelines) industry in New
Zealand has historically been light handed, i.e.
an information disclosure regime promulgated
by the Ministry of Economic Development,
backed by the threat of heavy handed
regulation. The Commerce Commission is
currently undertaking a Gas Control inquiry to
determine whether gas distribution and
transmission companies should be subject to
more formal price control regulation. Their
preliminary findings have indicated that price
control should be implemented, although a full
consultation process has yet to be undertaken.
Gas supply is currently based on market
forces. Distribution and transmission prices
are not currently formally regulated, but are
currently subject to a price control inquiry (as
New Zealand
New Zealand
covered above). Further, there are currently no state-owned

natural gas transmission or distribution systems.
Mining
The mining of minerals and coal is governed by the CMA and
the Crown Minerals (Minerals and Coal) Regulations 1999
(CMR). The CMR sets out the requirements and procedures for
explorers and miners to apply for and make changes to a
permit, make royalty returns and payments and lodge cores
and samples with the Crown. It also details their reporting
obligations to the crown on prospecting and exploration.
Power and Utilities

The electricity and utility sector is currently undergoing
significant structural reform with increased powers given to the
Commerce Commission (CC), the implementation of a new
regulatory regime for Electricity Line Businesses (ELBs) and
establishment of the EC.
The CC is the body that is responsible for investigating and
prosecuting non-competitive behaviour within all sectors of the
economy. Following a ministerial enquiry into the electricity
sector, it was recommended that additional powers be given to
the CC in relation to ELBs. These include:
!
!
!
Price regulation of ELBs;

Determining the methodology to be used in valuing line
assets and undertaking a recalculation of asset values; and
Administering an information disclosure regime for ELBs.
As a result of the ministerial inquiry into the

electricity sector, the CC with input from the
industry began developing a new regulatory
regime for ELBs. The new regime consists of a
price and a quality threshold which becomes
effective from 1 April 2004. The price
threshold requires ELBs to follow a
predetermined price path on an annual basis
(essentially an CP-X regime). The quality
threshold requires ELBs to demonstrate that
there has been no material deterioration in
service and that their consumers have been
satisfied with the price-quality trade-off
experienced over each five year assessment
period.
The EC's key tasks are to use reasonable
endeavors to ensure security of supply,
establish a decision making process and
transmission pricing methodology for
investment in the transmission grid, and
improve demand side participation in the
wholesale market and consumer protection
measures.
The key pieces of legislation that govern this
sector are:
! the Electricity Industry Reform Act 1998
which requires electricity supply
businesses to be separated from ELBs;
! the Electricity (Information Disclosure)
Regulations 1999 which requires large
ELBs to disclose certain financial and

operating information on an annual basis;
and
the Electricity and Gas Industries Bill
introduced in October 2003 which made
provisions for the establishment of the EC
and the extension of the CC's role in the
electricity sector.
Principles
Fundamental accounting conventions
include a requirement to adopt accrual
accounting, the presentation of relevant
and reliable financial information that
reflects the substance rather than the form
of economic events and transactions.
Requirements in New Zealand accounting
standards are generally comparable with
their equivalent International Accounting
Standards. Disclosure requirements are
stringent. Accounting standards have the
power of law, and penalties apply for
noncompliance.
The Accounting Standards Review Board
(ASRB) reviews and approves the financial
reporting standards.
New Zealand
New Zealand
Compliance with accounting standards is mandatory for those

entities regulated under the Corporations Law that are required
to prepare financial reports. Other non-corporate entities (e.g.
public-sector entities and not-for-profit clubs and associations)
may otherwise be required or adopt New Zealand Accounting
Standards issued by the professional Accounting Bodies.
If a topic is not covered by New Zealand Accounting Standards,
then reference is made to international or Australian or United
States Accounting Standards.
Oil and Gas, Mining and Power and Utility

Companies
Oil and gas, mining and power and utility companies prepare
their accounts in-line with the regulation as stated above. There
are no specific guidelines/accounting standards for financial
reporting of oil and gas, mining and power and utility
companies.
6. Taxation
Summary of Different Types of Taxes
Principal Taxes
The direct tax on income is the principal tax levied and
contributes approximately 61% of government revenue.
The government also collects approximately 39% of its
revenue from indirect taxes such as Goods and Services
Tax (GST), which is a value-added tax levied on all taxable
supplies of goods and services in New Zealand, including
imported goods. Exempt supplies include

financial services, and zero-rated supplies
include exported goods and services.
Other taxes include the following:
1. Excise tax levied on alcoholic beverages,
tobacco products and certain fuels.
2. Customs duty on certain goods imported
into New Zealand, including tariffs where
goods imported compete with certain
goods manufactured locally.
3. Fringe benefit tax levied on employers on
the value of most non-cash benefits
provided to their employees, including
cars available for private use and loans at
below commercial interest rates.
4. Accident rehabilitation compensation and
insurance premiums levied on employers
(based on annual payroll), employees
(from 1 April 1992) and self-employed
persons on the basis of taxable income.
5. Stamp duty has been abolished for
instruments executed after 20 May 1999.
If the duty is still payable it is limited to
conveyances and leases of commercial
land, buildings and improvements, and
conveyances of shares in a company with
a right to occupy a flat or office.
6. Gift duty is imposed on individuals and
corporations upon disposal of property
valued at more than NZ$27,000 for any
12-month period other than for adequate
consideration (i.e. fair-market value).

Estate duty has been abolished for estates
of person's deceased on or after 17
December 1992.
7. An employer is required to deduct and pay
a withholding tax on its contributions to an
employee superannuation plan.
8. Resident withholding tax is imposed on
New Zealand-source interest and dividend
income derived by residents.
9. There is a foreign dividend withholding tax
on foreign-source dividends.
10. Nonresident withholding tax is imposed on
New Zealand-source interest, dividends
and royalties paid to nonresidents.
In addition, smaller amounts of government
revenue are collected from a variety of license
fees and levies charged on various personal
activities and commercial operations. Local
municipal authorities finance local services
through a system of annual rates (real estate
taxes) levied on the value of land and in some
cases land improvements, including buildings.
There is no assets tax, land tax (abolished
March 1992), wealth tax, or capital gains tax,
although gains from the purchase and sale of
land and buildings or personal property that
were acquired for the purpose of resale, as part
of dealing operation or as part of a profitmaking undertaking or scheme are subject to
New Zealand
New Zealand
income tax. Gains and losses on financial transactions,

including the imputed time value of money, are taxable to
residents and nonresidents trading through a fixed
establishment under the accrual rules.
Tax reform has been a key feature of the government's broad
program of economic reform. It has sought to introduce a
greater degree of equity into the tax system while at the same
time making the system more certain and simple. It would be
fair to say that the second goal has not been achieved and that
the reforms, particularly the international tax regime, are
extremely complex and wide-ranging in their application.

All companies, whether resident or non-resident, are taxed at
the same income tax rate of 33%. Income tax is imposed on
the worldwide income (subject to certain exemptions) of all New
Zealand resident companies. Income tax is also imposed on
New Zealand sourced income of non-residents, although the
liability may be reduced by the provisions of an applicable
double tax agreement.
A company will be a resident of New Zealand if:
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It is incorporated in New Zealand; or

It has its head office in New Zealand; or
It has its centre of management in New Zealand; or
Control of the company by its directors is exercised in New
Zealand, whether or not decision-making by directors is
confined to New Zealand.
Dividends
Dividend income generally forms part of gross
income. Dividend income derived from a New
Zealand resident company by another New
Zealand resident company is subject to tax in
the hands of the recipient, except where paid
between 100% commonly owned companies.
However, for the exemption to apply both
companies must share a common balance date
or be able to justify having different balance
dates. Non-resident withholding tax is imposed
on the gross amount of dividends derived from
New Zealand and paid or credited to companies
and individuals not resident in New Zealand. A
NRWT rate of 30% applies to dividends paid to
non-residents, and this amount is often reduced
under New Zealand's double tax agreements.
New Zealand has a foreign investor tax credit
regime which, provided various criteria are
satisfied, has the effect of capping the total New
Zealand tax (i.e. both income tax and NRWT) at
33%.
interest deduction in New Zealand where, and

to the extent that, the New Zealand entities in
the group are thinly capitalised (i.e. excessively
debt funded). An apportionment of deductible
interest is required where an entity's debt
percentage (calculated as total New Zealand
group debt/total New Zealand group assets)
exceeds both:
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75%; and
110% of the worldwide group's debt
percentage.
Use of the debt-to-asset percentage differs

from most thin capitalisation models, which
monitor an entity's debt-to-equity ratio. All
interest (both related and unrelated party) is
subject to apportionment.
Transfer Pricing
The transfer pricing rules are based on OECD
principles and require taxpayers to value all
cross-border transactions for tax purposes on
an arm's-length basis.
Thin Capitalisation
Thin capitalisation rules apply to New Zealand
taxpayers controlled by non-residents,
including branches of non-residents. The aim of
the legislation is to ensure that New Zealand
entities do not deduct a disproportionately high
amount of the worldwide group's interest
expense. This is achieved by denying an
The transfer pricing rules apply to arrangements

for the acquisition or supply of goods, services,
money, intangible property and anything else
(other than non-fixed rate shares), where the
supplier and acquirer are associated persons.
Similar rules apply to the apportionment of
branch profits.
New Zealand
New Zealand
Royalties
The payment of a royalty is included in the gross income of the
recipient. The definition in the Income Tax Act 1994 is wide and
includes not only what are normally regarded as royalty
payments but also payments for the supply of know-how.
Goods and Services Tax (GST)

GST is a consumption tax imposed on the supply of goods and
services in New Zealand and on goods imported into New
Zealand (in addition to any customs duty). The GST rate is
12.5%, although some supplies are taxed at zero percent and
certain specified supplies are exempt from tax.
The tax is generally borne by the final consumer. Goods and
services are taxed at each transaction stage, with a credit being
given to registered persons for GST previously paid on goods or
services. Normally GST will have no impact on business profits,
except for additional administration and compliance costs and
cash flow effects.

Tax returns based on the fiscal year ending 31 March, although
other fiscal year-ends are possible if permission is obtained. The
system is one of self-assessment, under which the corporation
files an income tax return each year. For those not linked to a tax
agent, returns must be filed by 7 July for March balance dates,
or by the 7th day of the 4th month following a substituted balance
date. Those linked to a tax agent with a substituted balance
date have extensions of time for filing their tax returns.
Tax is paid in installments. Provisional tax paid on account of the
current year's liability is payable in advance in

three installments in the 4th, 8th, and 12th months
of the taxpayer's income year. Terminal tax is
generally payable on 7 April or on the 7th day of
the 13th month of the income year following
balance date, provided taxpayers are linked to
a tax agent. Where provisional tax paid is less
than the amount of income tax deemed due on
that installment date, interest is imposed. If
provisional tax is overpaid, interest is payable
to the taxpayer. Such interest incurred is
deductible for tax purposes by business
taxpayers, and interest earned on overpaid
provisional tax is gross income for tax
purposes.

A New Zealand corporation is taxed on foreign
branch income as earned. Double taxation with
respect to all types of taxable income,
including interest, rents and royalties, is
avoided by foreign tax credits. Foreign
dividends received are exempt from income
tax but are subject to the foreign dividend
withholding payment.
New Zealand residents are taxed on deemed
income derived from an interest in a
nonresident company, foreign investment fund,
or foreign trust. New Zealand tax is imposed on
residents with income interests of 10% or more
in certain Controlled Foreign Corporations

(CFCs) on the notional share of income
attributable to their interest in the CFC. The
regime applies to all types of income but does
not apply to CFCs resident in grey list
countries, except where the CFC derives
exempt income from carrying on a business
outside its country of residence. Grey list
countries are Australia, Canada, Germany,
Japan, Norway, the United Kingdom and the
United States.
The Conduit Tax Relief (CTR) regime provides
relief for nonresident investors who invest in
non-New Zealand companies through a New
Zealand subsidiary (the conduit company).
The regime is complex, but effectively defers
New Zealand tax on the nonresident
shareholder's share of the New Zealand
Company's conduit income that is not
distributed by the New Zealand Company.
NRWT (generally at 15%) is imposed on
dividend income distributed by the New
Zealand Company to the nonresident
shareholder.
Double Tax Agreements (DTAs) are in force
between New Zealand and the following
countries:
New Zealand
New Zealand
Australia
India
Philippines *
Belgium
Indonesia
Russia *
Canada
Ireland
Singapore
China
Italy
South Africa *
Denmark
Japan *
Sweden
Fiji
Korea
Switzerland
Finland
Malaysia
Taiwan
France
Netherlands
Thailand
Germany
Norway
United Kingdom
Exploration Expenditure
Exploration expenditure is deductible as
incurred. In principle it is the expenditure on a
licence area up until it is appropriate to
commence commercial production.
Exploration expenditure includes:
United States of America
The Philippine and Japanese DTAs are being updated and work is continuing on negotiating
DTAs with Spain, Chile and United Arab Emirates. The Russian DTA has been signed and
given legislative effect in New Zealand but are yet to be ratified by Russia. The South
African DTA has been ratified by South Africa and is yet to be ratified by New Zealand.
The withholding taxes on dividends, interests and royalties may

be affected by relevant treaty arrangements. Please contact our
Partners or Managers for more information in relation to such
treaty arrangements.

Mining Companies
The taxation of upstream oil and gas companies is in
accordance with the comments above but modified for
expenditure incurred specifically in respect of the exploration
and production of oil and gas.
The petroleum mining regime also treats offshore and onshore
activities differently as well as distinguishing the treatment of
development and exploration expenditure. Each term is
defined in the New Zealand legislation and is summarised
below.
exploratory well expenditure planning,

drilling, testing, completing and
abandoning an exploratory well;
prospecting expenditure identifying land
with deposits, including geophysical
prospecting and surveys;
expenditure incurred in acquiring a
prospecting licence or prospecting permit
or an exploration permit.
Development Expenditure
Development expenditure is defined as
expenditure other than exploration expenditure
to the extent that it is directly attributable to the
permit area and is for the purpose of planning,
constructing or acquiring petroleum mining
assets.
Development expenditure is a deferred tax
deduction to be deducted over seven years
with the timing of the deductions being
determined by whether the activity is an
offshore or onshore development. Offshore
development expenditure deductions begin in
the year the expenditure is incurred whereas
onshore development expenditure deductions

begin from the latter of the year in which the
expenditure was incurred, or the first year of
commercial production.
Residual Expenditure
Residual expenditure is expenditure which is
not specifically included under the definitions
of exploration and development expenditure.
These are expenses which are ordinarily
deductible under the Income Tax Act 1994
such as interest, rents etc. The expenditure is
deductible when incurred over the period to
which the expenditure relates.
Sale of Assets
Where any petroleum assets are disposed of to
non-related parties the proceeds are treated as
taxable income with a deduction for the
remaining tax base of the relevant assets.
There are restrictions where assets are sold to
associated parties (generally where there is
greater than 50% commonality of ownership)
to preclude advantages being received from
the step down of asset bases.
Sale of Shares
From December 2001, proceeds from the sale
of shares in a controlled petroleum mining
company are not taxable, and no deduction is
available for the cost of these shares.
New Zealand
New Zealand
A controlled petroleum mining company is defined as a

company in which:
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90% or more in value of its outstanding shares are held,

directly or indirectly, by or for five or fewer persons; and
the market value of any petroleum permit, including permit
specific assets, held by the company is at least 75% of the
value of its assets less its liabilities as set forth in the
company's audited financial statements or accounts
prepared in accordance with generally accepted
accounting practice.
The difference in the tax treatment applying to the sale of assets

and the sale of shares in the petroleum mining industry is
unusual and can result in significant benefit for a vendor or
purchaser.
Clawback of Exploratory Well Expenditure
Certain expenditure incurred in respect of an exploratory well
which is subsequently used for commercial production is
required to be included as taxable income in the year which the
well is first used for commercial production. The taxable
amount is the amount deducted by the petroleum miner or by
any other holder of an earlier interest in that well.
The amount included as taxable income is then treated as
development expenditure which can be claimed as a tax
deduction on a straight line basis over 7 income years.

and Gas Activities
Unlike upstream oil and gas, there is no
specific tax regime for downstream oil and gas
activities and the tax treatment is mostly
identical to that applicable to an entity engaged
in any other non-upstream business, i.e. the
general tax law as outlined above.

Exports)
Import Duty
Goods imported into New Zealand are subject
to Import duty at the rates specified in the
Working Tariff Document of New Zealand. The
Document is based on the World Trade
Organization (WTO) Harmonized System of
tariff classifications. The duty rates vary
depending on the nature of the goods and their
country of origin. Imported goods are valued
for WTO duty purposes in line with the model
valuation code e.g. transaction value (subject
to some adjustments) is the principle valuation
methodology.
Crude oil is classified under tariff heading 27.09
and can be imported free of duty. Refined oil
products are classified under tariff heading
27.10. Some goods can be imported free of
duty and others can only be entered free of
duty if they are imported for manufacture in a
licensed manufacturing area. If not imported
for manufacture in a licensed manufacturing

area, duty will likely be applicable at a rate per
liter and an additional duty per gram of lead.
Fuels that are not imported for manufacture in a
licensed manufacturing area will also attract
excise duty at a rate per liter. There are also a
few products, which attract rates of duty
between 5% and 7% and other specific rates
of duty per liter. Natural gas is classified under
tariff heading 27.11 and can be imported free of
duty. However excise duty at a specified rate
per gigajoule is applicable.
Goods and Services Tax (GST)
Goods imported into New Zealand also attract
GST upon importation. GST is charged at a
rate of 12.5%. This applies across the board to
all imported goods and is payable by the
importer. The value of the goods for GST
purposes is calculated based on CIF value plus
import duties.
Export Duty
New Zealand does not have an export duty
regime.

The various aspects of mineral mining activities
are dealt with under a complex series of
provisions. These provisions apply when the
company's sole or principal source of income
is from the mining of any specified mineral, or
New Zealand
New Zealand
when the sole or principal activity of the company is prospecting

for any specified mineral.
A specified mineral is defined to include any of the following
minerals:
1)
2)
Alumina minerals (such as bauxite, gibbsite, diaspore, and

corundum), aluminous refractory clays and fireclays
containing in either case over 30% alumina in the fired
state, andalusite, antimony, asbestos, barite, bentonite
(other than bentonite mined in the county of Malvern),
bituminous shale, chromite, copper, diatomite, dolomite,
feldspar, fluorite, gold, halloysite, kaolin, kyanite, lead,
magnesite, manganese, mercury, mica, molybdenite,
nickel, perlite, phosphate, platinum group, pyrite, silica in
lump form used only in the production of silicon carbide,
silicon metal, or ferro silicon, silica in sand form used only in
the production of silicon carbide, sillimanite, silver, sodium
chloride, sulphur, talc, tin, titanium, titanomagnetite,
tungsten, uranium, wollastonite, zeolite, zinc, or zircon:
Any other mineral which
i) In the opinion of the Minister is or will be of importance
(1) In the industrial development of New Zealand; or
(2) As a means of reducing the quantity of industrial
minerals or industrial rock required to be imported
into New Zealand; or
(3) As an item of export from New Zealand; and
(ii) Is declared by the Minister by notice in the Gazette to
be a specified mineral for the purposes of this
definition.
Resident Mining Company

Mining companies are required to separate and
record gross income/loss into mining and nonmining activities. A net loss in either class is
able to be deducted from the income derived
from the other class, subject to the qualification
that any mining loss deducted from the nonmining income should be reduced by one-third.
For example, every NZ$100 of mining loss is
worth only NZ$66.66 when making the
deduction from non-mining income.
any appropriation is made. To take

advantage of this deduction the company
must apply the appropriation for either of
these purposes within the next two income
years and the appropriation of income must
be made by the company within two months
of the end of the particular income year. The
amount of any deduction claimed for
appropriated expenditure must be returned
as an item of gross income in the following
income year.
Resident Mining Company - Deduction for

Development and Exploration Expenditure
A deduction is allowed for any exploration or
development expenditure (irrespective of
whether or not it is paid for the acquisition of an
asset). That amount is treated as expenditure
incurred in deriving gross income from mining
for the purposes of the offset rules referred to
above. Accordingly, any excess costs over
gross income derived from mining may be
partially deducted from other non-mining gross
income.
Resident Mining Company - Transfer of

Mining Assets
Taxable income may include, in certain
circumstances, proceeds received from the
transfer of mining assets including rights and
information. When the mining asset is sold to
an associated person, it is deemed to have
been sold for market value.
Resident Mining Company - Deduction for

Appropriated Expenditure
A mining company may claim a deduction for
income appropriated for application as
exploration expenditure or development
expenditure. The amount so appropriated is
limited to the company's net income before
Deduction for Loan Amounts Written Off

A New Zealand company which holds shares
in another New Zealand company engaged
in exploring, searching or mining specified
minerals in New Zealand may claim a
deduction for amounts written off in respect
of loans made to that other company for
funding its mining activities. The deduction
allowed is in respect of the principal (but not
interest) written off and is subject to certain
limitations.
New Zealand
Sale of Mining Shares and Mining Assets by Companies

Where mining shares have been acquired by a mining company
with the intention of resale or the mining company is a dealer in
shares, the assessment of any amounts derived on resale may
be deferred, provided certain conditions are met. This
deferment applies where the share profits are used for mining
purposes. The mining company has six years from the income
year in which the shares were sold to reinvest the profits for
mining purposes.

There is no specific taxation framework for power and utility and
the tax treatment is mostly identical to that applicable to an
entity engaged in any other non-upstream business, i.e. the
general tax law as outlined above.
Philippines
Please refer to the summary charts

presented under appendices I-IV for
key statistics on Philippines.
Political and Legal
Under the 1987 Constitution, the Philippines was declared a democratic republican state
whose system of government is the presidential form patterned after the American model.
There are 21 departments in the executive branch, more than 200 congressmen and 24
senatorial seats in the legislative branch, and 15 justices in the Supreme Court (judicial
branch). As provided for in the Election Code, the president and vice-president are elected
directly by the voters and they serve a 6-year term, without re-election. For other elected
positions in the legislative branch of government, they are directly elected by the voters and
serve 3-year terms for congressmen with re-election for two more terms and 6-year terms for
senators, with re-election for another six-year term. The local government officials have a
three-year term with re-election for two more terms.
Philippines
Philippines
The Philippine law is a consolidation of Anglo-American, Roman,

Spanish laws and indigenous customs and traditions of Filipinos.
The 1987 Constitution is the fundamental law of the land. Other
sources of Philippine Law are the Civil Code, Penal Code,
National Internal Revenue Code, Labour Code and Code of
Commerce. Judicial decisions and pronouncements, letters of
instruction, administrative rules and regulations as well as orders
issued by the three branches of the government constitute part
of the law of the land.
The principal regulatory and government organisations

concerned with business operations are:
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Securities and Exchange Commission (SEC), responsible for

the registration, licensing, regulation and supervision of all
corporations and partnership organized in the Philippines,
including foreign corporations licensed to engage in
business or establish branch offices in the Philippines. The
Philippine SEC is a member of the International Organization
of Securities Commissions (IOSCO);
Department of Energy (DoE), responsible for ensuring a
stable, secure and affordable supply of energy, awarding
and administering service contracts and geophysical survey
and exploration contracts;
Department of Environment & Natural Resources (DENR),
responsible for conservation, management, development,
and proper use of the country's natural resources, including
its minerals;
Board of Investments and Philippines Economic Zone
Authority (BOI and PEZA), responsible for the registration
and approval of fiscal incentives and tax

benefits to qualified projects under the
government Investment Priority Plan (InPP).
The InPP is a list of preferred areas of
economic activity being promoted by the
government and for which tax incentives
may be granted;
Intellectual Property Office (IPO),
responsible for the registration of
technology transfer agreements; and
Bureau of Internal Revenue (BIR),
responsible for collection of national taxes.
Bangko Sentral ng Pilipines, the central
bank.
Bureau of Mines, responsible for the
supervision and regulation of the mining
sector.
National Power Corporation (NPC),
responsible for providing power generation
and its associated power delivery systems
in area that are not connected with the
transmission system.
National Electrification Administration
(NEA), prepares electric cooperatives in
operating and competing under the
deregulated electricity market.
The Power Sector Assets and Liabilities
Management Corporation (PSALM), take
ownership of all existing NPC generation
assets, liabilities, InPP contracts, real
estate and all other disposable assets.
Economic Overview
on the Philippines.
The Philippine economy has shown enough
strength to sustain its growth, notwithstanding
economic and political hurdles. In 2003, GDP
adjusted for inflation rose 3.7%. Growth last
year was marginally higher than in 2002. GDP
is expected to grow between 4.9 and 5.8% in
2004 while the average annual growth in
energy is expected to be 5% from 2004 to
2007 and 5.8% from 2008 to 2012. Currently
services make-up 53.2% of GDP, industry
31.9% and agriculture 14.9%. Inflation has
been moderate at about 5%.
In absolute levels, total energy demand will
increase from 268.2 Million Barrels of Fuel-Oil
Equivalent (MMBFOE) to 433.3 MMBFOE in
2012. In 2003, the Philippines imported
135.45 MMBFOE of energy (oil 112.5
MMBFOE and coal 22.9 MMBFOE) or 54.5%
of total energy consumption. Under the
government's energy plan, it projects attaining
an average energy self-sufficiency level of
50.0%.
The volatility of the peso-dollar exchange rate
has significant effect on energy costs in the
Philippines
Philippines
country because imported oil and coal account for about

135.45 MMBFOE or 54.5% of the power mix supply.
In 2003, energy demand for power use was about 40.9% while
for non-power application it was about 59.0%.

Banko Sentral ng Pilipines, the Philippines central bank, is
responsible for maintaining price stability and promoting
balanced and sustainable growth through sound monetary
policy and supervision of the financial institutions over which it
has authority. The Philippines' net foreign reserve as of March
2004 stood at about US$13.8 billion.
The continued increase in bank resources, relatively high capital
adequacy ratio and the improvement in asset quality reflected
the banking system's resilience.
The Philippine financial system has continued to show further
progress since beginning of 2003. Nothing spectacular to be
sure, but remarkable enough given that every single gain had to
be painstakingly coaxed from a domestic economy struggling
valiantly to stay afloat in the face of major international and
domestic disturbances.
But mitigating the negatives, skillful economic

management kept inflation firmly under
control, interest rates at relative lows, and
exchange rate volatility within manageable
bounds. These positives proved sufficiently
conducive to nurturing steady consumer
demand and re-starting investment activity.
This was fertile enough ground, particularly for
the banking industry, which reported moderate
asset growth, further deposit expansion,
improved capitalization and higher profitability.
The currency unit is the Philippine peso. The
government has maintained the stability of the
peso, despite global and domestic turbulence
and uncertainty, declining in value by a mere
3.2% (from PhP53.36 in late January 2001 to
PhP54.2 per US$ 1 in January 2004), a fraction
of the currency's 23.6% depreciation during
the past administration (from PhP42.03 in July
1998 to PhP55.01 in early January 2001).
Negative events that loomed large included the outbreak of war

in Iraq and its global fallout as well as the regional crisis sparked
by the SARS epidemic. On the domestic front, seemingly
incessant political hubbub repeatedly interrupted economic
momentum. More fundamentally, an alarmingly large fiscal
deficit presented a basic source of potential instability.

Market
Overview
Please refer to A Comparable Summary of
Information (by Country) - Key Energy,
key data and information on the Philippines.
The Philippines is a growing consumer of
energy, particularly electric power, and a
potential market for foreign energy firms. It
has potential to become a significant
producer of natural gas.
Oil
The Philippines has entered into multi-client
or non-exclusive seismic survey
agreements with multinational geophysical
companies. The results of the surveys are
expected to increase the geological and
geophysical data over the Philippine
sedimentary basins. There are 16
sedimentary basins identified by the
government agency nationwide that are
estimated to contain about 178 million
barrels of oil reserve.
Philippines
Philippines
Given the critical and extensive role of oil in the Philippine

economy, its demand outlook will constantly grow to meet
increasing energy requirements. The Philippine production of oil is
negligible, around 23,500 Bbl/d. Demand for oil for power use and
non-power application will continue to be sourced principally from
importation. The majority of oil demand is for transportation
sector.
The Philippines consumed 342,000 Bbl/d on average in 2003,
resulting in net oil imports of 318,500 Bbl/d.
The dependence on imported oil makes the Philippine economy
vulnerable to sudden spikes in world oil prices. Oil consumption is
expected to increase by over 5% annually over the next several
years as economic growth increases demand in most sectors. Oil
demand for power generation, however, is expected is declining
sharply, as many aging oil-fired electric power plants are shut
down or converted to burn natural gas.
Despite small proven oil reserves, the Philippines has enjoyed a
recent wave of optimism amongst domestic and foreign drillers. In
October 2001, exploration underneath the Malampaya gas field
revealed an estimated 85 million barrels of oil condensate. Shell
Philippines Exploration (SPEX) has committed about $2 billion to
the upstream components of the combined oil/natural gas project
and currently operates the joint venture with partners Texaco
Philippines and the Philippines National Oil Company. Production
currently is around 25,000 Bbl/d. In addition, six new offshore
exploration projects have commenced in the Malampaya basin,
led by Nido Petroleum, Philippines National Oil Company
Exploration Corp., Trans-Asia Oil, Unocal Corp., and Philodril.
Also, Trans-Asia has conducted exploratory drilling at the San
Isidro well in the East Visayan Basin. The

Philippine government issued a solicitation for
bids in early August 2003 under a new licensing
system, the First Petroleum Public Contract
Round (PCR-1), covering 46 additional
exploration blocks. The closing date was
2 March 2004. PCR-1 replaces the old system of
negotiations with individual companies.
Refining
The Philippines' downstream oil industry is
dominated by three companies: Petron; Pilipinas
Shell (Royal Dutch/Shell's Philippine subsidiary);
and Caltex (Philippines). Petron is the
Philippines' largest oil refining and marketing
company. The company was a wholly owned
subsidiary of the state-owned Philippine
National Oil Company (PNOC) until 1994.
Currently, the Philippine government and Saudi
Aramco each own 40% of the company, with the
remaining 20% held by portfolio and institutional
investors, making it the only publicly listed firm
amongst the three oil majors. Petron's Limay
Bataan refinery has a crude processing capacity
of 180,000 Bbl/d. Petron's market share as of
mid-2003 is around 39%. Caltex (Philippines), a
subsidiary of ChevronTexaco, operates a
86,500-Bbl/d refinery, two import terminals, and
more than 1,000 retail gasoline stations
throughout the Philippines. Pilipinas Shell has a
153,000-Bbl/d refinery, one of the largest foreign
investments in the Philippines, and operates

some 1,000 Shell gasoline stations. Overall,
Philippine refineries run at around 80% of
capacity, and there is not a great deal of demand
for new refinery construction.
Oil market deregulation, beginning in 1998,
continues to have a significant effect on the
industry. Since deregulation started, 62 new
firms, including TotalfinaElf, Flying V, SeaOil
(Philippines), Eastern Petroleum, Trans-Asia
Energy and Unioil Petroleum Philippines Inc.,
have invested heavily and built several hundred
new retail stations. While the three original
companies still dominate the market, these firms
have captured a steadily growing share of the
petroleum products market, rising from around
10% in 2000 to 17% by mid-2003. These new
entrants have organized the "New Players
Petroleum Association of the Philippines"
(NPPAP), and have been credited with putting
significant downward pressure on retail fuel
prices in the country. Currently, the Philippines
enjoys the lowest fuel prices of any non oilexporting Asian country. However, price swings
associated with deregulation and higher world
oil prices have angered many Filipinos. Despite
recurring public calls for price controls, the
government has remained committed to
deregulation . In December 1999, the Supreme
Court upheld the constitutionality of the
country's deregulation program.
Philippines
Philippines

The Philippines has identified 16 petroleum sedimentary basins
located in the different parts of the country that have a total of
25 trillion cubic feet of potential reserves. The proven natural
gas reserves are located in Northwest Palawan Shelf and
Mindoro-Cuyo Platform. The Malampaya gas field is estimated
to contain 3 trillion cubic feet of natural gas. At present,
production from Malampaya is primarily used for Sta. Rita, San
Lorenzo and Ilijan gas-fired power plants with total installed
capacity of 2,700 MG. In 2003, gas-fired power plants
contributed about 15% of electricity generated.
To meet the increasing demand for oil, the government is
promoting the geophysical survey and exploration of new and
frontier areas. Currently, the DoE administers 9 geophysical
survey and exploration contracts and 7 service contracts.
Also, the government has identified pipeline networks to serve
as the backbone of the country's transport and delivery of
natural gas.
A US$100 million expansion pipeline from Batangas to Metro
Manila ("Bat-Man") has been considered by numerous
investors including PNOC, Shell, Brunei's Mashor Group, First
Gas, and Sumitomo. This pipeline would supply gas to
additional power plants as well as the industrial and commercial
sectors. Negotiations on the financial aspects of the project are
ongoing, and construction is expected to begin in 2004, with
the pipeline commencing operation in 2006.
Exploration continues in other parts of the country, but no major
discoveries have been reported. Three small

natural gas fields were closed down in 2001.
Fields in the Tukankuden and the Cotabato
Basin were shut down due to security
problems, while another field in Victoria, Tarlac,
was closed because the natural gas
discovered was too saturated with water for
commercial production.
receive added attention as a potential source

of natural gas supplies. PNOC has been
considering the construction of an LNG
regasification terminal in Bataan, which would
serve the Manila area. A letter of intent has
been signed for natural gas imports into the
Philippines from BP's Tangguh LNG project in
Indonesia.
The Philippine government is developing a

policy framework for the emerging natural gas
industry that foresees the government's role as
that of a facilitator while attempting to ensure
competition. Domestic development is to be
encouraged, but competition from imported
gas also is to be allowed. Gas supply to
wholesale markets will have market-set prices,
while prices for captive markets and small
consumers will be regulated.
Coal
However, progress has been slow in enacting

legislation on the Natural Gas Industry during
the 12th Congress. To resolve the quandary of
having an existing industry without regulations,
the DoE has enacted "Interim Rules and
Regulations Governing the Transmission,
Distribution and Supply of Natural Gas"
(Department Circular No. 2002-08-005)
(Interim Rules) effective 27 August 2002.
Please contact our Partners and Managers for
more information on these Interim Rules.
Liquefied Natural Gas (LNG) has begun to
The principal products from Philippine mines

are coal, chromite, copper, nickel and gold.
However, production levels of metals and
minerals are small. In 2003, coal production
was only 1.4 million MT. The majority of coal
used for power generation is imported from
neighboring countries, such as Indonesia and
China. In 2003, coal fired power plants
contributed about 23% of the total electricity
generated.
Geothermal
The Philippines remains the second largest
geothermal producer in the world next to the
United States. In 2003, it had installed
capacity of 1,931 MW, contributing 23% to the
power mix. The government continues to
increase the capacity for this energy source
translating to a more significant contribution to
its self-reliance in power generation.
Philippines
Philippines
The government likewise promotes investment in geothermal

energy to preserve the environment. Out of the total estimated
geothermal potential resource of about 2,600 MW, a total of 800
MW of geothermal power plants will be commissioned within
the next ten years.
Among the projects that are included in

Investment Priority Plan (InPP) are those
related to the exploration and development of
natural gas and geothermal.
exploration, as any revenues to the contractor

will be funded only from the proceeds from
production. Upon commercial production, the
contractor is entitled to a service fee
amounting to 40% of net proceeds.
Hydropower
The remaining 60% is paid to the government

as royalty payments. Among the incentives
offered under the SC system are the following:
The hydropower sector contributed an annual average of 6.8

TWh of electricity to the country's power mix or about 9%. In
2001, installed hydropower capacity stood at 2,518 MW.
The total untapped hydropower resource potential is estimated
at 13,097 MW, of which more than 85.0% represents large
hydros.
Electricity
In 2003, the total installed generating capacity was 13,402 MW
and demand for power use was about 109.82 MMBFOE or
about 40.9% of total energy demand. Based on the Philippine
Energy Plan for the period 2003-2012, the energy demand for
power use is estimated to increase at an annual average rate of
5.0% from 109.82 MMBOFE in 2003 to 198.13 MMBOFE in
2012. In 2003, the self-sufficiency level for energy demand
stood at 45.4%. The government's target is to maintain at least
a 50.0% self-sufficiency level.
The Philippines is increasing its self-sufficiency level by
intensifying the development and use of indigenous energy
resources and diversifying energy sources and fuels in order to
achieve a stable and secure energy supply for the country.
Oil and Gas

The DoE (previously Petroleum Board or
Office of Energy Affairs) is the government
agency primarily responsible for the
promotion of exploration and
development of the country's oil, gas and
renewable energy potential. It is also the
agency responsible for the establishment
of the Philippine Natural Gas Industry.
Petroleum exploration activities are
generally undertaken under Service
Contracts (SC) negotiated with the DoE
based on the framework set out in
Presidential Decree No. 87 issued in 1972.
Under these contracts, the petroleum
contractor is typically required to provide
all necessary services and technology,
requisite financing and exploration work
obligations, while the government
oversees the management of the contract.
The contractor bears the financial risk of
Cost reimbursement of up to 70% gross

production with a carry forward of unrecovered cost for the first five years of
production;
Filipino Participation Incentives Allowance
(FPIA) which grants up to an additional
7.5% of the gross proceeds for service
contracts with minimum Filipino company
participation of 15%; and
Exemption from all taxes and duties for
imported materials and equipment for
petroleum operations.
Under the DoE's 3-year window of opportunity,

local and foreign investors who participate in
the search for indigenous petroleum resources
are offered fiscal incentives such as the
transfer of contracted obligations from outside
the Corridor and cross-cost recovery options.
Also, natural gas infrastructure projects are
included in the InPP. Investors are entitled to an
Philippines
Philippines
income tax holiday of up to six years provided that the project is

new and caters to shipping vessels and land transport or a
combination of both.
The downstream oil industry is under full deregulation by virtue

of Republic Act (R.A.) No. 8479, the Downstream Oil Industry
Deregulation Act of 1998, effective 10 February 1998. The Act
provides, among others, for a uniform 3% tariff duty on imports
of crude oil and refined petroleum products, no minimum
inventory level requirements, safeguards against cartelisation
and predatory pricing, and a requirement for oil refineries to list
and offer 10% of their shares of stock to the public through the
Stock Exchange within three years from the effectiveness of the
law.
In addition to the various laws affecting the industries
mentioned above, R.A. No. 8749 - Philippine Clean Air Act of
1999 and its IRR was enacted on 25 November 2000. It
promotes a clean and healthy environment for everyone and for
the sustainable development of the country. The DENR, the
Department of Transportation and Communication (DOTC), the
Department of Trade and Industry (DTI), the DoE and other
agencies will implement the Air Quality Management and
Control program of the government as stipulated in the Act.
Such provisions should be complied with within 44 months (or
July 2004) from the effective date, subject to approval by the
DENR.
In line with the DoE's programs to attract more private
investors, it submitted the following bills for enactment by the
legislative branch of the government:
House Bill No. 5845, the Downstream

Natural Gas Industry Development Act of
2003 seeks to promote the role of natural
gas as a socially acceptable, environmentfriendly, and economically efficient energy
source. The bill empowers the DoE to
have overall responsibility and supervision
over the development of the Downstream
Natural Gas Industry and regulation of the
construction and operation of natural gas
pipelines and related facilities for the
transmission, distribution, and supply of
natural gas. It also designates the ERC to
have the sole regulatory responsibility for
establishing the rates and related terms
and conditions of service for the
transmission, distribution, and supply of
natural gas. The bill will also divide the
Downstream Natural Gas Industry into
three sectors, namely: transmission,
distribution, and supply.
House Bill No. 5771, the Renewable
Energy Act of 2003 seeks to promote the
use of power facilities utilizing nonconventional sources of energy such as
wind, solar, ocean, biomass and hybrid
systems for power generation. Likewise, it
will provide private sector participants the
much needed support to promote their
commercialisation. The proposed bill will
include incentives for private sector
participants in new and renewable energy
projects such as unregulated tariff, income

tax holiday, tax and duty-free importation
of capital equipment, value added tax
exemption, tax credit on locally sourced
equipment and a real estate exemption,
among others.
House Bill No. 5813 is an act that seeks to
establish the monitoring and supervisory
framework for the Liquefied Petroleum
Gas (LPG) industry, providing additional
powers to the DoE, and defining and
penalizing certain prohibited acts involving
LPG.
HB 5845 (new number HB01533) and HB

5771 (new number HB01068) were passed by
the House of Representatives, however, these
were not acted on by the Philippine Senate. HB
5813 was not passed by the last Congress and
was junked. The President, and the DoE, to the
Legislative Executive Development Advisory
Council (LEDAC) as priority economic
measures to the Thirteenth Congress, has
resubmitted all these bills, along with the
Alternative Fuels Utilization Bill. Please
consult our Partners and Managers for status
of these bills as it may change subsequent to
release of this investment guide.
DoE regulates the natural gas industry and the
natural gas pipelines system in terms of issuing
permits, and Energy Regulatory Commission
Philippines
Philippines
(ERC) in terms of pricing/tariff setting. Prices in franchised gas

supply systems are regulated by the ERC, while products or
services in competitive markets are deregulated.The pipeline
tariffs are normally applied for by the pipeline operator and
approved by the ERC. In the absence of formal legislation, the
Interim Rules apply to both natural gas supply and pipelines
system. There is a franchising requirement in order to be able to
set up a natural gas transmission and distribution system.
Legislative franchises are limited to Filipinos and Filipino
corporations. Gas transmission and distribution systems are
obligated to give third party access under Rule 11 of the Interim
Rules.The Department of Energy deals with access issues as
per the Annexure 2 of the Interim Rules.
Mining
The Bureau of Mines is the government agency responsible for
the supervision and regulation of the mining sector.
The regulatory framework for the mining industry is embodied in
RA No. 7942, otherwise known as the Philippine Mining Act of
1995 (PMA or Act), and its implementing rules and regulations
(IRR). One of the salient features of the Act is that it permits
100% foreign-owned corporations to undertake exploration
and/or other mining activities, relating to gold, copper, nickel,
chromate, lead, zinc and other minerals through a Financial or
Technical Assistance Agreement (FTAA) with the government.
Projects covered by FTAAs and other mining activities are
registrable with the BOI under the InPP.
Recently, the Supreme Court nullified several parts of the PMA
declaring them unconstitutional. The Supreme Court
effectively nullified all existing FTAAs, mineral

production sharing agreements, exploration
permits, and other mining agreements signed
under the PMA. Moreover, it criticized the
provision that gives foreigners the right to 100
percent ownership of mineral lands for 25
years, subject only to a minimum investment of
Php50 million. The government expressed its
intention to appeal the decision.
On 16 January 2004, President Gloria
Macapagal-Arroyo issued Executive Order 270
or the National Policy Agenda. It aimed to
revitalize mining activities in the Philippines.
The local mining industry anticipated that this
would strengthen implementation of the
disputed PMA. The DENR is firming up its
appeal to the Supreme Court.
The DENR is also involved in the mining sector
and it is the lead agency responsible for
implementing the following laws that may
affect mining activities in the Philippines:
R.A. No. 7586 or the National Integrated

Protected Area System Act (NIPAS) was
passed in 1992 providing for the
establishment and management of a
national integrated protected areas
system. The categories of protected
areas include: nature reserves, natural
parks, natural monuments, wildlife
sanctuaries, protected landscapes and

seascapes, resource reserves, natural
biotic areas and other categories
established by law, convention or
international agreements of which the
Philippines is a signatory.
R. A. No. 8371 or the Indigenous Peoples'
Rights Act of 1997 was enacted on 22
October 1997. It prohibits the sale of
ancestral lands by a member of an
Indigenous Cultural Community (ICC) to a
non-member. Similarly, the Act seeks to
preserve and protect the traditions,
culture, institutions and rights of
Indigenous People (IP) and ICCs within the
framework of national unity and
development. The Act gives ICCs and IPs
the priority rights in the harvesting,
extraction, development or exploitation of
any natural resources within their domain.
A non-member of the ICCs/IPs may be
allowed to take part in the development
and utilization of the natural resources for
a period of no more than twenty-five (25)
years, renewable for no more than twentyfive years, provided that a formal and
written agreement is entered into with the
ICCs/IPs concerned or that the operation
has been approved by the community. All
extractions are to be used to facilitate the
development and improvement of the
ancestral domains.
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Philippines
Power and Utilities

The regulatory framework for the Philippine power sector is
found in the Electric Power Industry Reform Act of 2001
(EPIRA or Act) that was signed into law on 8 June 2001. The
EPIRA began the process of liberalizing the Philippine power
industry and established the segregation of the power industry
into four functional sectors: generation, transmission,
distribution and supply. Among the relevant provisions of the
Act are as follows:
!
!
The DoE will supervise the restructuring of the electricity

industry;
The National Power Corporation (NPC) will perform the
missionary electrification function through small power and
utility group and will be responsible for providing power
generation and its associated power delivery systems in
areas that are not connected to the transmission system;
The National Electrification Administration (NEA) will
prepare electric cooperatives in operating and competing
under the deregulated electricity market within five years,
especially in an environment of open access and retail
wheeling and retail competition;
The Energy Regulatory Commission (ERC) will promote
competition, encourage market development, ensure
customer choice, and penalize abuse of market power in
the electric industry;
The Power Sector Assets and Liabilities Management
Corporation (PSALM) will take ownership of all existing
NPC generation assets, liabilities, IPP contracts, real estate
and all other disposable assets. All outstanding obligations
of NPC arising from loans, issuances of bonds, securities,
!
!
and other instruments of indebtedness will

be transferred to and assumed by PSALM.
It will be responsible for the sale and
privatisation of NPC's assets and
Independent Power Producer (IPP)
contracts and the liquidation of NPC debts
and stranded contract costs;
Generation of electric power is to be
competitive and open to all qualified
generation companies. The generation of
electricity will not be considered a public
utility operation and no person engaged in
it will be required to secure a national
franchise;
The transmission of electric power will be
effected for the public interest and will be a
regulated common electricity carrier
business;
The distribution of electricity to end-users
will be a regulated common carrier
business, requiring a national franchise;
The DoE will establish a Wholesale
Electricity Spot Market;
All electric power industry participants
must structurally and functionally
unbundle their business activities, namely:
generation, transmission, distribution and
supply; and
Cross-subsidies within the grid, between
grids, and/or classes of customers will be
phased out in a period not exceeding three
(3) years from the establishment by the
ERC of a universal charge to be collected

from the end-users.
It requires a public listing of not less than
15% of the common shares of generation
and distribution companies within five
years from the effective date of the EPIRA.
It provides cross-ownership restrictions
between transmission and generation
companies and between transmission and
distribution companies, and a cap that no
distribution utility is allowed to source
bilateral supply contracts of more that
50% of its total demand from an
associated firm engaged in generation
except for contracts entered into prior to
the effective date of the Act.
For generation companies, there is a cap
on the concentration of ownership to only
30% of the installed capacity of the grid
and/or 25% of the national installed
generating capacity.
Philippines
Philippines
Most of the Generally Accepted Accounting Principles
(GAAP) in the Philippines are already based on International
Accounting Standards (IAS)/International Financial
Reporting Standards (IFRS). By January 2005, the country
expects to fully adopt and be fully compliant with the
accounting standards and pronouncements of the
International Accounting Standards Board (IASB). The
"Accounting Standards Council" of the Phillippines is the
standard-setting body in the Phillippines.
regulatory agencies that require the

submission of the financial statements of
concerned companies are also mentioned
below.
Oil and Gas

Upstream Oil Industry
Local oil and gas exploration and production
companies in the Philippines refer to and use
the following U.S. GAAP in their financial
accounting and reporting:
!
The Philippine SEC, being a member of the IOSCO,
complies with the agreement with other IOSCO members to
adopt IAS/IFRS in order to ensure high quality, transparent
financial reporting with full disclosure as a means to
promoting credibility and efficiency in the capital markets.
The Philippines does not yet have any accounting
standards nor has it formally adopted any US GAAP or
IAS/IFRS on financial accounting and reporting for these
industries: mining and extractive, oil and gas, and power
and utilities. The companies in these industries use
prevailing market practices and regulatory provisions, and
refer to U.S. GAAP in accounting for and reporting on
specific accounts unique to the respective industry as
discussed below.
Aside from the statutory filing of financial statements
submitted with the Philippine SEC and the BIR, other
FAS 19 - Financial Accounting and

Reporting by Oil and Gas Producing
Companies; and
FAS 69 - Disclosures about Oil and Gas
Producing Activities.
Highlighted below are the local industry

practices:
Gas, condensate and oil reserved

revenues are recognized based on the
transfer of ownership in accordance with
the sales agreement made between
contracting parties of a specific project.
Deferred income is recognized based on
specific provisions of the project
agreement and will eventually be treated
as revenue upon fulfilment of the
requirements under the agreement.
Exploration and development costs are

accounted for using the successful efforts
method. Under this method, exploration
costs, other than the cost of exploratory
wells, are charged to expense as incurred.
Exploratory well costs are initially
capitalized until the existence of proved
reserves has been determined. If an
exploratory well is deemed to have no
reserves, the associated costs are charged
to expense. All development costs,
including development dry hole costs, are
capitalized.
Wells, platforms and other facilities in
progress are recorded on the basis of
estimated value of major equipment and
material items. These include development
costs that comprise all costs incurred in
bringing a field to commercial production.
Once a field achieves commercial
production, development cost is
transferred to production assets.
Depletion, depreciation and amortization
of wells, platforms and other facilities in
progress are computed using the units of
production method based upon estimates
of proved reserves.
Oil and gas exploration and production

companies are required by the DoE to submit
annual audited financial statements and certain
other requirements.
Philippines
Philippines
Downstream Oil Industry

Downstream oil companies use existing GAAP in their financial
accounting and reporting and they are required by the DoE to
submit annual audited financial statements and certain other
requirements.
Mining Companies
Mining companies apply prevailing market practices in
accounting for the following:
Income from sale of metals is recognized upon shipment or

transfer of ownership to the buyer and in accordance with
pricing and other terms of the covering agreements.
Inventory of concentrates and coal is stated at the lower of
cost or net realizable value; costs are determined using the
weighted average method.
Depletion is calculated using the units-of-production
method based on ore extraction over the estimated volume
of ore reserves as certified by a company's geologist.
Mine exploration and development costs are deferred as
incurred. When exploration work results are positive, the
exploration and development costs are capitalized and
carried as mine exploration and development costs, until
the start of commercial production when such costs are
transferred to the property, plant and equipment account.
These costs are written off whenever the results of
exploration are determined to be negative.
For other accounts covered by existing GAAP, such practices

are followed.
Under Section 270 of the IRR of RA No. 7942,

every contractor, permittee, permit holder or
holder of a Mineral Processing Permit or its
operator is required to submit various reports
pertaining to: monthly reports on production,
sales and inventory of metallic and nonminerals and employment; an integrated
annual report; quarterly energy consumption
and drilling report, annual mineral reserve
inventory and other related reports.
The following publications/law are also referred
to/used by certain mining companies in their
financial reporting:
Financial Reporting in the Mining Industry

for the 21st Century (Published by PwC and
issued in 1999)
Asia-Pacific Mining Regulations
(Published by PwC and issued in
November 1999)
R.A. No. 8371 Indigenous Peoples' Rights
Act.

Among utility companies, revenues from the
sale of electricity and the delivery of water are
recognized as income during the period in
which actual capacity is generated and
delivered, net of any adjustments, as agreed
upon between the parties.
6. Taxation
Taxes
Principal Taxes
The Philippine government imposes three
types of taxes: national internal revenue
taxes, local taxes, and customs duties.
Income tax, value added tax, documentary
stamp tax, and excise tax are examples of
the national internal revenue taxes. Local
taxes include local business tax, local
transfer tax, real property tax and
community tax.
Customs duties include import duties and
export duties. However, except for the
export of logs, export duties on all export
products were abolished by Executive
Order No. 26 dated 1 July 1986. In addition
to import duties, national internal revenue
taxes such as value-added tax or excise
tax may also be imposed on certain
imported products.

Domestic corporations and branches of
foreign corporations are subject to 32%
tax on most capital gains and on income
from active business, while their passive
income is typically subject to varying fixed
Philippines
Philippines
rates of tax. Capital gains from the sale of non-listed shares of

stock are subject to 5% and 10% tax, royalties and interest on
domestic loans are subject to 20% tax, and interest from a
Foreign Currency Deposit Unit (FCDU) is taxed at 7.5%. Sales of
shares in traded companies are subject to a tax of 0.5% on the
selling price, while the exchange or disposition of any land or
buildings not used in business is subject to 6% tax on the higher
of the selling price or fair market value of the property. Tax on
passive income is collected generally through withholding at
source.
Domestic corporations and branches of foreign corporations
are subject to a Minimum Corporate Income Tax (MCIT) of 2%
of gross income (sales less direct costs) from their fourth year of
business operation. Domestic corporations may also be
subject to 10% Improperly Accumulated Earnings Tax (IAET) if
accumulated beyond the reasonable need of the business.
Dividends paid by a domestic corporation to a foreign
corporation are subject to 32% tax, although this is reduced to
15% if the home country exempts the dividend from tax or
grants a credit of at least 17% for income tax paid by the
Philippine corporation. Branch profit remittances are generally
subject to 15% tax. The tax rates on dividends and branch
profit remittances may be reduced under a relevant treaty.
Foreign corporations not engaged in trade or business in the
Philippines are generally subject to 32% tax on their gross
income from Philippine sources. Exceptions to this rule include
interest on foreign-denominated loans (20%), equipment rental
(7.5%) and capital gains from the sale of non-listed shares of
stock (5% on the first P100,000 and 10% thereafter). Again,
these rates may be reduced under a relevant

treaty.
The rate of local business tax is determined
independently by each local government unit,
subject to constraints imposed by the Local
Government Code of 1991. In most cases, the
rate of local business tax will not exceed
0.75% of gross receipts. In addition, local ad
valorem taxes may be imposed on both the
ownership (generally up to 3% of the assessed
value) and transfer (0.5% of the consideration
or fair market value) of real property.
The Philippines has a number of incentives
available for foreign investors. Regional
operating headquarters pay a 10% tax on their
taxable income. Entities registered for
incentives with the Board of Investments (BOI)
are typically entitled to income tax holidays of
between four to eight years, while entities
locating in a special economic zone are
typically subject to a 5% tax on gross income
(sales less direct costs) in lieu of all other
Philippine national and local taxes. Incentives
are also available under various other energy
laws. BOI incentives may be available to new
investors in the energy, utilities and mining
sectors.

Corporations should file their returns and
compute their income on the basis of an
accounting period of 12 months. This
accounting period may be either a calendar year
or a fiscal year. With prior approval of the
Commissioner of Internal Revenue, corporations
may change their accounting period from
calendar year to fiscal year or vice versa.
Corporate taxpayers file self-assessing returns.
Electronic filing and payment of taxes are
available under the Electronic Filing and
Payment System (EFPS) of the BIR.
Every corporation files cumulative quarterly
income tax returns for the first three quarters and
pays the tax due thereon within 60 days after
each quarter. A final adjustment return covering
the total net taxable income of the preceding
taxable year must be filed on the fifteenth day of
the fourth month following the close of the
taxable year. The balance of the tax due after
deducting the quarterly payments must be paid,
while the excess may be claimed as refund or
tax credit. Excess estimated quarterly income
tax paid might be carried over and credited
against estimated quarterly income tax liabilities
for succeeding taxable years. Once the option to
carry over has been made, such option is
irrevocable for that taxable period, and no cash
refund or Tax Credit Certificate (TCC) is allowed.
Philippines
Philippines

In general, nonresident corporations are taxed on gross income
received from sources within the Philippines at 32%, except for
reinsurance premiums, which are exempt, and on interest on
foreign loans, taxed at 20%. Dividends from domestic
corporations are subject to a final withholding tax at the rate of
15% if the country in which the corporation is domiciled does
not impose income tax on such dividends or allows a tax
deemed paid credit of 17%. If the recipient is a resident of a
country with which the Philippines has a tax treaty, the treaty
rate applies if lower. Otherwise, the normal corporate rates
apply.
Philippines has treaty arrangements with a number of countries
and the withholding taxes on dividends, interests and royalties
may be affected by relevant treaty arrangements. Please
contact our Partners or Managers for more information in
relation to such treaty arrangements.
Tax Provision Relevant to Energy, Utility &

Mining Companies
Petroleum exploration activities are generally undertaken under
service contracts negotiated with the DoE (previously
Petroleum Board or Office of Energy Affairs), based on the
framework set out in Presidential Decree No. 87 issued in 1972.
Under these contracts, the petroleum contractor is typically
required to provide all necessary services and technology,
requisite financing and exploration work obligations, while the
Government oversees the management of the contract.
The contractor bears the financial risk of

exploration, as any revenues to the contractor
will be funded only from the proceeds from
production. Once production occurs, up to
70% of the production is used to reimburse the
contractor for development and operating
costs/expenses. Development and operating
costs/expenses are defined to include
intangible exploration costs, tangible
exploration costs such as capital expenditures
and other recoverable capital assets
depreciated for a period of five years under the
straight-line or double-declining balance
method of depreciation at the option of the
contractor, and two-thirds (2/3) of any interest
paid on Government-approved financing
relating to development and production
operations (but not on loans or indebtedness
incurred to finance exploration operations). If
Philippine interests have a minimum
participating interest of 15% in the contract
area, an additional 7.5% for Filipino
Participation Incentive Allowance (FPIA) may
be paid to the contractor. Up to 40% of the
residual after deducting the cost recoveries
and FPIA is then paid to the contractor as its
service fee.
Petroleum service contractors are exempt from
all taxes except income tax. In most cases,
however, the 32% income tax payable by the
contractor will be paid from the Government's
60% share of residual revenues. A typical

revenue and income tax computation is:
Company: ABC CO., INC.
$100.00 MM
Gross Proceeds from Crude Oil

Less: Allowable Deductions
FPIA
Cost Recovery at 70%
- $ 7.5
- $ 70.00
$ 77.50MM
Net Proceeds
$ 22.50MM
Less: Contractor's Fee 40%
Share Due the Government- 60%
$ 13.50MM
Less: Income Tax Payable to BIR (32%)
4.24MM
Net Share to DOE
9.26MM
9.00MM
Note: The 32% corporate income tax payable of $4.24 MM above is arrived at by
grossing up the $9.00MM share of the contractor to $13.24 MM and then
deducting from the grossed-up amount the said $9.00MM share.
There is no provision in the law for crossrecoveries. Petroleum service contractors can
recover costs only from the proceeds from
production in the contract area where the
expenses were incurred.
Subcontractors of service contractors
engaged in petroleum operations are subject to
8% final withholding tax in lieu of any and all
taxes, national and local. Employees of
petroleum service contractors and
subcontractors are subject to 15% final
withholding tax on their salaries, wages,
annuities, compensation, and other
emoluments such as honoraria and
allowances, except income which is subject to
fringe benefits tax. These rates were
Philippines
Philippines
established under Presidential Decree No. 1354, issued in 1978,

and remain in force, even though not formally adopted in the
National Internal Revenue Code of 1997.
The importation of capital equipment, machinery and other
implements that may be used by the service contractor in its
petroleum exploration and operation is not subject to customs
duties or value-added tax.

Activities
Downstream oil companies are subject to ordinary income
taxation and other national internal revenue taxes. However,
BOI incentives, which provide income tax holidays for between
three and eight years, may be available for new DOE-approved
investments in refining, storage, marketing and distribution of
petroleum products.
Excise tax is imposed on refined and manufactured mineral oils
and motor fuels when they are brought into existence as such.
The excise tax on petroleum products is specific, not ad
valorem, the highest rate being P5.35 per litre of volume
capacity for leaded premium gasoline.
The sale of lubricating oil, processed gas, grease, wax,
petrolatum is subject to 10% VAT. The sale of other petroleum
products that are not subject to excise tax is also subject to
10% VAT. The sale of other petroleum products subject to
excise tax is VAT exempt.
Petroleum products are exempt from local business tax or fees.

Exports)
Import Duty Rates on Petroleum
(which covers Petroleum oils and oils obtained
from bituminous minerals, crude).
The import duty rate for crude oils is at 3% for
both the Most Favoured Nation (MFN) and the
ASEAN Common Effective Preferential Tariff
(CEPT) rates. Executive Order 336 series of
2004 was issued last 23 July, raising the said
rates from 3% to 5%. However, such an
increase will only be effected if prices go below
a predetermined value in the monthly average of
Dubai crude (US$1 drop on a calendar basis) or
Singapore's weekly diesel average (decrease of
US$100/barrel based on seven trading days
starting August 2004). Note that the
abovementioned trigger pricing process is still
under discussion and has not yet been
implemented as of the date of completing this
guide.
specified or included, containing by weight 70%
or more of petroleum oils or of oils obtained from
bituminous minerals, these oils being the basic
constituents of the preparations; waste oils.
The average import duty rate is at 3% for both

MFN and CEPT, although the aforementioned
conditions (i.e. trigger pricing) would also
apply as the said products are included in the
product coverage of EO 336.
gaseous hydrocarbons. The MFN duty rate
levied on such importations range from 3%7% while CEPT rates are either 0% or 3%.
Upon importation of goods into the Philippines
the following duties and taxes are applicable :
1)
Import duty - the tariff rates depend on the

classification of the goods under the
ASEAN Harmonized Tariff Nomenclature
(AHTN) which is based on the HS 2002
Amendments.
2)
Import VAT (Value Added Tax) - A uniform

rate of 10% (based on a product's landed
cost i.e. including duties) is charged per
transaction. However for certain goods,
section 109 of the National Internal
Revenue Code Sale exempts from VAT
importations of coal and natural gas, in
whatever form or state, and petroleum
products (except lubricating oil,
processed gas, grease, wax and
petrolatum) subject to excise tax. Also, the
Philippines
Philippines
sale or importation of raw materials to be used by the buyer

or importer himself in the manufacture of petroleum
products subject to excise tax, except lubricating oil,
processed gas, grease, wax and petrolatum; are also
exempt from VAT.
3)
Excise taxes - Different rates apply to a variety of products

as follows (Per Section 148 of the National Internal
Revenue Code):
(a) Lubricating oils and greases, including but not limited
to, base stock for lube oils and greases, high vacuum
distillates, aromatic extracts, and other similar
preparations, and additives for lubricating oils and
greases, whether such additives are petroleum based
or not, per liter and kilogram respectively, of volume
capacity or weight, four pesos and fifty centavos
(P4.50): provided, however, that the excise taxes paid
on the purchased feedstock (bunker) used in the
manufacture of excisable articles and forming part
thereof shall be credited against the excise tax due
therefrom: provided, further, that lubricating oils and
greases produced from base stocks and additives on
which the excise tax has already been paid shall no
longer be subject to excise tax: provided, finally, that
locally produced or imported oils previously taxed as
such but are subsequently reprocessed, re-refined or
recycled shall likewise be subject to the tax imposed
under this Section;
(b) Processed gas, per liter of volume capacity, five
centavos (P0.05);
(c) Waxes and petrolatum, per kilogram, three

pesos and fifty centavos (P3.50);
(d) On denatured alcohol to be used for motive
power, per liter of volume capacity, five
centavos (P0.05): provided, that unless
otherwise provided by special laws, if the
denatured alcohol is mixed with gasoline,
the excise tax on which has already been
paid, only the alcohol content shall be
subject to the tax herein prescribed. For
purposes of this Subsection, the removal
of denatured alcohol of not less than one
hundred eighty degrees (180o ) proof
(ninety percent (90%) absolute alcohol)
shall be deemed to have been removed for
motive power, unless shown otherwise;
(e) Naphtha, regular gasoline and other similar
products of distillation, per liter of volume
capacity, four pesos and eighty centavos
(P4.80): provided, however, that naphtha,
when used as a raw material in the
production of petrochemical products or
as replacement fuel for natural-gas-firedcombined cycle power plant, in lieu of
locally-extracted natural gas during the
non-availability thereof, subject to the rules
and regulations to be promulgated by the
Secretary of Energy, in consultation with
the Secretary of Finance, per liter of volume
capacity, zero (P0.00): provided, further,
that the by-product including fuel oil, diesel

fuel, kerosene, pyrolysis gasoline, liquefied
petroleum gases and similar oils having
more or less the same generating power,
which are produced in the processing of
naphtha into petrochemical products shall
be subject to the applicable excise tax
specified in this Section, except when such
by-products are transferred to any of the
local oil refineries through sale, barter or
exchange, for the purpose of further
processing or blending into finished
products which are subject to excise tax
under this Section;
(f)
Leaded premium gasoline, per liter of

volume capacity, five pesos and thirty-five
centavos (P5.35); unleaded premium
gasoline, per liter of volume capacity, four
pesos and thirty-five centavos (P4.35);
(g) Aviation turbo jet fuel, per liter of volume

capacity, three pesos and sixty-seven
centavos (P3.67);
(h) Kerosene, per liter of volume capacity, sixty
centavos (0.60): provided, that kerosene,
when used as aviation fuel, shall be subject
to the same tax on aviation turbo jet fuel
under the preceding paragraph (g), such
tax to be assessed on the user thereof;
Philippines
Philippines
(i)
Diesel fuel oil, an on similar fuel oils having more or less the
same generating power, per liter of volume capacity, one
peso and sixty-three centavos (P1.63);
losses, tax-accelerated depreciation, and the

deductibility of exploration and development
expenditures.
(j)
Liquefied petroleum gas, per liter, zero (P0.00): provided,

that liquefied petroleum gas used for motive power shall be
taxed at the equivalent rate as the excise tax on diesel fuel
oil;
Excise Tax
Excise taxes are imposed on minerals, mineral
products and quarry resources, and are
required to be paid by the operator, lessee or
owner of the mining claim. The excise rates
are:
(k) Asphalts, per kilogram, fifty-six centavos (P0.56); and

(l)
Bunker fuel oil, and on similar fuel oils having more or less
the same generating power, per liter of volume capacity,
thirty centavos (P0.30).
The import value for the purpose of computing import duties is

determined in accordance with the World Trade Organization
(WTO) Customs Valuation Agreement (Transaction Value
method) and in terms of CIF (Cost, Insurance and Freight).
Coal and coke
P10.00 per metric ton
All non-metallic minerals and

quarry resources
2% of the actual market value of

the gross output thereof at
the time of removal
Copper, gold and chromite
2%
Indigenous petroleum
3% of the fair international

market price for the transfer of
the petroleum in its original
state to a first taxable transferee
Local GovernmentTaxes
The Local Government Code of 1991 allows a
local government unit to collect a tax of up to
10% of the fair market value of ordinary stones,
sand, gravel, earth and other quarry resources
extracted from public lands or from the beds of
seas, lakes, rivers, streams, creeks and other
public waters within its jurisdiction.
Other Fees
The Philippine Mining Act of 1995 (Republic Act
No. 7942) also authorizes the imposition of a
quarry fee on the holder of an exploration permit,
semi-annual mine waste and tailings fees, and
for the negotiation of royalty fees in return for
either the consent of the indigenous cultural
community to undertake mining on their
ancestral land or the consent to mine areas
covered by small-scale mining contracts.
Source: National Internal Revenue Code
Export Taxes
Export Taxes are not applicable for crude oil, refined products
and natural gas.

Income Tax
BOI incentives, which provide income tax holidays for between
three and eight years, will generally be available to mining
companies. Once the tax holiday expires, mining companies
are subject to normal income taxation, although the Philippine
Mining Act of 1995 does provide some additional
concessionary rules for the carrying forward of net operating
Value-added Tax and Customs Duties

The local sale of mineral products is generally
subject to 10% VAT. However, the sale of gold
to the Bangko Sentral ng Pilipinas (The Central
Bank) is subject to 0% VAT, as are export sales
of mineral products paid for in acceptable
foreign currency.
In addition to excise tax, the importation of
mineral products is subject to customs duties
and VAT.

Companies
Power Companies
The regulatory framework for the Philippine
power sector is found in the Electric Power
Industry Reform Act of 2001 (EPIRA). The
EPIRA began the process of liberalising the
Philippine power industry and established the
segregation of the power industry into four
functional sectors: generation, transmission,
distribution and supply. One of the guiding
principles behind the EPIRA was to reduce
Philippines
electricity rates. To that end, the sale of electric power through all
stages until it reaches the final end-user is subject to zero percent
(0%) VAT.
The transmission and distribution of electricity are regulated as
natural monopolies and are subject to Constitutional restrictions
on foreign ownership since they are considered public utilities.
The essential feature of a public utility is that it is open to the
indefinite public, which may enjoy it by right and not only by
permission. Public utility companies require a legislative franchise
from Congress, and are limited to 40% foreign equity. Typically, a
public utility is required to pay a franchise tax of 2% of gross
receipts to the national government and normally up to 0.75% of
gross receipts to its local government, in lieu of all other local and
national taxes.
The generation and supply sectors are intended to be
competitive, allowing ready access to new market participants.
No special tax rules have been introduced for generation and
supply, however, so normal national internal revenue taxes, local
taxes, and customs duties will apply. BOI incentives will normally
be available to new investors.
Utility Companies
As for power companies, utility companies that are public utilities
require a legislative franchise from Congress. Public utilities will
typically pay a franchise tax of 2% of gross receipts to the
national government and up to 0.75% of gross receipts to its local
government, in lieu of all other local and national taxes. Nonpublic utilities, by contrast, are subject to normal national internal
revenue taxes, local taxes, and customs duties. It is possible,
however, that BOI incentives will be available to new investors.
Singapore

statistics on Singapore.
Political and Legal
Singapore is a parliamentary republic whose legislature comprises the Singapore Parliament
(Parliament) and the President of Singapore (President). The leader of the political party that
secures the majority of seats in Parliament is asked by the President to assume the position of
Prime Minister (PM). The President, based on advice from the PM, will also select other
ministers from elected Members of Parliament (MPs) to form the Cabinet. The Cabinet is
responsible for all government policies and affairs of state and is collectively accountable to
Parliament. Political authority in Singapore rests with the PM and the Cabinet.
The Constitution of the Republic of Singapore (Constitution) provides for three types of MPs:
Non-Constituency MPs (NCMP), Nominated MPs (NMP) and elected MPs. A maximum of
three NCMPs from opposition political parties and nine NMPs can be appointed to ensure that
views from opposing parties and the community at large are represented in Parliament.
Singapore
Singapore
NMPs have no connections with any political parties and are

appointed by the President based on recommendations by a
Special Select Committee of Parliament. Elected MPs occupy
the majority of seats in Parliament and are voted in by the people
of Singapore at general elections, which are held at least once
every five years. The present Tenth Parliament has 94 MPs
consisting of 84 elected MPs, one NCMP and nine NMPs.
Under the Constitution, judicial power is vested in the Supreme
Court of Singapore, which consists of the High Court and Court
of Appeal. The High Court has jurisdiction to try all offences
committed in Singapore and may also try offences committed
outside Singapore in certain circumstances. The Court of Appeal
hears appeals against the decisions of High Court judges in both
civil and criminal matters and is the nation's final court of appeal.

The principal regulatory and government regulatory concerned
with business operations are:
1.
2.
3.
4.
The Economic Development Board - plans and executes

strategies to sustain Singapore as a compelling global hub
for business and investment.
The Energy Market Authority of Singapore (EMA) - regulates
the energy and gas industries in Singapore.
The Monetary Authority of Singapore - Singapore's de-facto
central bank and financial sector regulator
International Enterprise Singapore (formerly known as the
Singapore Trade Development Board) makes Singapore a
base for foreign businesses to expand into the region in
partnership with Singaporean companies.
Economic Overview
on Singapore.
Since its independence on 9 August 1965, the
Singapore Government has adopted a probusiness, pro-foreign investment, exportoriented economic policy framework. This,
combined with state-directed investments in
strategic government-owned corporations,
has successfully resulted in rapid growth and
development of the country, as evidenced by
real growth averaging 8% from 1960 to 1999.
Singapore managed a successful recovery
from the 1997 Asian Financial Crisis with a
growth rate of 9.4% in 2000 but its GDP fell by
2.4% the following year due to a worldwide
electronics slump and the economic slowdown
in Japan, the United States and the European
Union. The economy rebounded in 2003 and
registered growth of 1.1%. Inflation of only
0.5% is expected in 2004 which is likely to
stabilize economic growth. At present,
services sector dominate the economy at
66.7% of GDP, followed by industry sector at
33.3%.
In order to maintain Singapore's
competitiveness, the government has adopted
measures to lower the cost of doing business
in Singapore, such as tax cuts and wage and

rent reductions. It is actively promoting higher
value-added activities in the manufacturing
and services sectors and opening the financial
services, telecommunications, power
generation and retailing sectors to foreign
entities to increase competition. In addition,
the government has concluded free trade
agreements with key trading partners like
Japan, Australia, United States and European
Free Trade Association.

Singapore's development as an international
financial centre began in the late 1960s. Over
the years, it has attracted many reputable
international financial institutions to set up their
operations in Singapore. Today, financial
services account for about 11% of Singapore's
GDP.
The primary mission of the Monetary Authority
of Singapore is to promote non-inflationary
economic growth by way of (1) conducting
monetary policy and issuing currency; (2)
supervising the banking and related industries;
and (3) building a sound organization of
excellence. As of the end of 2003, Singapore's
foreign reserves were approximately US$96.3
billion.
Singapore
Singapore
Following the Asian Financial Crisis in 1997, Singapore

undertook a comprehensive review of its financial sector. The
review included market liberalisation and putting in place
strategies to develop specific industries within the financial
services sector. Six years on, the financial market has
undergone significant changes:
!
!
!
!
Singapore has 3 local banks currently compared to 5

previously due to mergers.
The debt market has deepened and broadened. Total
corporate debt issuance has grown by almost 4 times from
S$23b in 1995 to S$89b at the end of 2002
The Singapore Government Securities market has tripled in
size, and daily turnover has grown by 10 times since the
mid-90s
Fund management grew from S$86b in 1995 to S$344b in
2002
Significant momentum is also gathering in the wealth
management industry.
The currency unit is Singapore Dollar. The Singapore Dollar is

floated freely against all other currencies in the market. During
recent times the value of the Singapore Dollar has remained
stable against US Dollar at approximately S$ 1.7/US$.

Market
Overview
key data and information on Singapore.
Singapore is important to the world energy
markets as it is the world's third largest oil
refining and trading centre and the price
determination centre for the Asia-Pacific
region. International oil trading companies
and major players in the industry such as
BP, Caltex, Chevron Texaco, ExxonMobil,
and Shell have also made Singapore their
choice location.
Oil and Refining

Singapore is one of the major petroleum
refining centres of Asia, with total crude oil
refining capacity of nearly 1.3 million
barrels per day. After the Asian economic
crisis of 1997, it lost significant business
due to declining demand in the region and
the expansion of several refineries in its
traditional export markets, such as India and

Malaysia. In response to such competitive
pressures, refinery operators in Singapore
have embarked on restructuring and costcutting measures. The overall outlook for
Singapore's refiners is still uncertain due to the
on-going development of significant capacity
elsewhere in Asia.

Singapore imports its natural gas from
Malaysia and Indonesia (Sumatra and Natuna)
and uses this resource mainly for power
generation and as a feedstock for
petrochemical production. The trial use of
natural gas as a fuel for motor vehicles and
buses has started on a very small scale.
Singapore has begun a diversification strategy
so as to reduce its dependence on a single
source for gas imports. The Singaporean gas
consortium, SembGas, (which consists of
SembCorp Engineering, Tuas Power, EDB
International, and Belgium's Tractebel) signed
an agreement in January 1999 to purchase
West Natuna gas from the Indonesian state
energy company Pertamina. Indonesian gas is
delivered to Singapore via pipelines from two
separate fields. West Natuna has supplied 325
Mmcfd since January 2001 as part of a 22-year
deal, while ConocoPhillips, in Sumatra, is
Singapore
Singapore
expected to supply 350 Mmcfd by 2005. Another 100 Mmcfd of

natural gas is expected to be delivered in 2006 via pipeline from
ConocoPhillips to Singapore's Power company.
At the end of 2002, natural gas supplied through pipelines
generated 43.5% of Singapore's electricity. Gas use is
expected to grow to 60% of total fuels used for electricity
generation in the country by 2006.
In addition to natural gas imports from Malaysia and the two
pipelines from Indonesia, Singapore is discussing a plan to
build a Lliquefied Natural Gas (LNG) import terminal, which
would free itself from complete dependence on neighboring
states for its gas supply. In fact, the Singapore government
announced in September 1999 that it had set aside land at Tuas
View for the project. However, little progress has been made on
the project. The obvious benefits from energy independence for
Singapore would, however, be offset by the higher costs for
LNG compared to piped natural gas. The receiving terminal for
LNG deliveries alone is estimated to cost almost US$1 billion.
Singapore may function as a regional natural gas hub for
Southeast Asia in future due to its ideal geographical location.
The idea of a regional gas grid for members of the Association
of Southeast Asian Nations has been under discussion for
several years and international links already exist or are under
construction between Burma and Thailand, between Malaysia
and Thailand, and between Indonesia and Singapore.
Coal
Singapore has no commercial coal resources.
Electricity
Oil and Gas
Singapore has been restructuring and

privatising its electric power sector to transform
it into a competitive market. The wholesale
electricity market commenced operation with
effect from 1 January 2003. There are four main
generation companies in Singapore. There are
three state-owned companies (Senoko Power
Ltd, Power Seraya Ltd and Tuas Power Ltd) and
one privately held company (Sembcorp Cogen
Pte Ltd). Transmission of electricity is done via
assets held by state-owned SP Power Assets
Ltd (with effect from 3 November 2003).
The Gas Act, which was passed by the

Parliament in March 2001, provides for a
competitive market framework for the gas
sector and the safety, technical and economic
regulation of the transportation and retail of gas.
It ensures that suppliers will have open and
non-discriminatory access to the network and
includes competition provisions almost
identical to those in the Electricity Act, as
outlined under Power and Utilities below.

The Energy Market Authority (EMA) was
established on 1 April 2001 as a regulatory
body for the electricity generation and
distribution sector and the gas importation
and distribution sector. This was part of the
implementation of a new competitive
framework aimed at restructuring,
deregulating and liberalising the two
sectors and subjecting them to full
competition over time. Included in the
framework were several legislations,
namely the Electricity Act, Energy Market
Authority of Singapore Act, the Gas Act
and the Public Utilities Act.
The Gas Act effectively ends Singapore

Power's monopoly in the retailing of gas
although its subsidiary, PowerGas, will continue
to be the monopoly owner of the gas
distribution network.
A license from EMA is required for the
conveyance or retailing of gas, and the carrying
on of any gas-related activities.
Power and Utilities

The Electricity Act, which was passed by the
Parliament in March 2001, provides for a
competitive market framework for the electricity
industry and the safety, technical and economic
regulation of the generation, transmission,
supply and use of electricity.
Singapore
Singapore
The Electricity Act, which is administered by the EMA, includes

the following provisions:
Licenses any persons engaged in the generation,

transmission, retailing, import or export of electricity,
providing market support services or trading in or operating
any wholesale electricity market unless otherwise
exempted by EMA;
Establishes duties of licensees and may also empower
them to perform certain actions, such as utility work and
inspection of facilities;
Allows EMA to fix/control prices for services to be charged
by transmission licensee, market support services licensee
and wholesale electricity market licensee such that these
licensees cannot make excessive rates of returns;
Empowers EMA to issue or approve codes of practice and
other standards of performance for the regulation of the
electricity industry, and requires every electricity licensee to
comply with any codes or practice issued or approved;
Authorises EMA to make regulations for whatever purpose
considered necessary for carrying out the provisions of the
Electricity Act, and also to prescribe penalties for offences.
The Electricity Act has the effect of eliminating restrictions on

foreign ownership of electricity generating or retail companies.
It will fully come into operation upon complete liberalisation of
the electricity industry.
Principles
The Council on Corporate Disclosure and
Governance (CCDG) was established on
16 August 2002 to prescribe accounting
standards for Singapore-incorporated
companies. The accounting standards
prescribed by CCDG are known as
Financial Reporting Standards (FRS),
which are closely modeled after the
International Accounting Standards and
International Financial Reporting
Standards issued by the International
Accounting Standards Board. FRS apply
to all general-purpose financial
statements, which is to provide
information about the financial position,
performance and cash flows of an entity.
Companies are required to comply with
FRS in preparing their financial statements
covering periods beginning on or after 1
January 2003.

There are no specific accounting
standards prescribed for oil and gas
companies.

There are no specific accounting standards
prescribed for power and utility companies.
6. Taxation
Taxes
Principal Taxes
The principal tax in Singapore is income
tax. Other taxes include property tax,
stamp duties, goods and services tax,
customs and excise duties and
miscellaneous indirect taxes. There is no
capital gains tax.

The basis of taxation in Singapore is a
territorial one. Tax is imposed on income
derived in Singapore and on certain types
of foreign income received in Singapore.
Certain foreign-sourced dividend, foreign
branch profits or foreign-sourced service
income received in Singapore on or after 1
June 2003 will be tax exempt. The
qualifying conditions are that the headline
tax rate of the foreign jurisdiction from
which the income is received is at least
15% and the specified foreign income has
Singapore
Singapore
been subject to tax in the foreign jurisdiction from which they

were received. The recipient must also be resident in
Singapore, which means that the exemption will not apply to
foreign companies operating through branches in Singapore.
Whilst the current prevailing corporate tax rate is 22%, it is
possible that the effective tax rate will be lower given the array
of tax incentives available. See below on tax incentives.
Prior to 1 January 2003, Singapore adopted an imputation
system of taxation under which Singapore tax paid at the
normal prevailing corporate rate by resident companies was
imputed to dividends other than dividends paid from taxexempt income or income taxed at concessionary rates.
Where the company had insufficient tax credits to frank a
dividend, the shortfall was payable to the tax authorities as an
advance payment of tax. Dividends paid out of income exempt
from tax or taxed at concessionary rates are tax exempt.
From 1 January 2003, the imputation system was replaced by a
one-tier system under which profits are taxed at the corporate
level only. Dividends are therefore exempt from further tax when
paid out to shareholders. Five-year transitional provisions will
allow franking credits accumulated up to 31 December 2003 to
be passed on to shareholders.
Group Relief
A Singapore-incorporated company is allowed to transfer its
current year tax losses, capital allowances and donations to
another Singapore-incorporated company within the same
group.
Tax Losses
Trading losses can be carried forward
indefinitely to offset future business losses,
subject to the satisfaction of the 50%
continuity of ownership test. If the test is not
satisfied then the Minister of Finance has the
discretion to allow the losses to be carried
forward for offset against income from the
same trade. Losses cannot be carried back.
Surplus capital allowances may also be carried
forward and offset against future income from
the same trade or business.

The tax year is referred to as the year of
assessment and coincides with the calendar
year. Tax is based on income earned in the
preceding calendar year. Tax on trade or
business income is based on the income
earned in the preceding accounting year.
The corporation files a return of income, and
the tax is assessed by the Comptroller of
Income Tax. There is no fixed date for the issue
of assessments. Assessed tax is payable
within one month after the service of the notice
of assessment, whether or not a notice of
objection to the assessment has been lodged
with the tax authorities. Application maybe
made to the Comptroller to pay estimated tax
liabilities on a monthly basis. However, the
Comptroller is under no obligation to grant

such an application.

Payments to nonresidents, including foreign
affiliates, are deductible, provided they are fair
and reasonable, are revenue in nature, and can
be seen to be relevant to earning the payer's
income. Unless a lower treaty rate applies,
interest, royalties and rental of movable
property are subject to withholding tax at 15%.
The tax so withheld represents a final tax, and
the reduced rate of 15% applies only to
nonresidents who are not carrying on any
business in Singapore or who have no
permanent establishment in Singapore.
Technical assistance and management fees
are taxed at the prevailing corporate rate.
However, this is not a final tax. Royalties,
interest, rental of movable property, technical
assistance, and management fees can be
exempt from withholding tax in certain
situations, usually under fiscal incentives.
Singapore has treaty arrangements with a
number of countries, which may impact the
withholding taxes on dividends, interests and
royalties under relevant treaty arrangements.
more information in relation to such treaty
arrangements.
Singapore
Singapore

Mining Companies
and for Mining Companies
There are no upstream oil and gas or mining activities in
Singapore although there are a number of companies that
provide service and support functions for activities carried on
outside Singapore. The taxation framework for these
companies is mostly identical to that applicable to an entity
carrying on any other business in Singapore, i.e. the general tax
law.
Tax Framework for Downstream Oil, Gas and

Petrochemical Activities and Power and Utility
Companies
In general the taxation framework for downstream,
petrochemical, power and utility companies is the same as that
applying to other businesses in Singapore. However,
companies can access some very favorable tax incentives
covering for example trading, shipping, headquarters activities,
R&D and capital investment. The main incentives are listed
below.
Tax Incentives
There are many tax incentives available to companies operating
in Singapore. Those that are most relevant to oil, gas,
petrochemical, power and utility companies are listed below:
Global Trader Programme - 5% or 10% tax rate on qualifying
income depending on a company's turnover, manpower and
spending. The incentive runs for 5 years with provision for
extension. Applies to companies carrying on

the business of international trading in
commodities, including petroleum, petroleum
products and petrochemicals.
number of criteria that must be met including

business spending, manpower (skills and
remuneration as well as headcount) and
business activities.
Approved International Shipping Enterprise tax exemption on qualifying shipping income.

Incentive runs for 10 years with provision for
extension. Applies to Singapore-resident
international shipping companies with
substantial operations and business spending
in Singapore of at least US$4 million per
annum.
International Headquarters Award - gives

0%, 5% or 10% tax rate on incremental
qualifying income running for a period of 5 to
20 years. This is available to companies that
commit to substantially exceed the minimum
criteria for the RHQ award.
Offshore Shipping - tax exemption on

qualifying shipping income indefinitely. Applies
to companies owning or operating a Singapore
registered vessel in international traffic.
Freight Uplift - indefinite tax exemption on
freight income from uplift in Singapore.
Regional Headquarters Award (RHQ) generally a 15% tax rate on incremental
income derived from a regional headquarters
operation in Singapore. The incentive runs for 3
years and covers both service and business
income relating to the headquarters operation.
It is aimed at established companies that are
undertaking a substantial level of headquarters
activities in Singapore. Incremental income is
measured from an agreed base. There are a
Investment Allowance - tax exemption on

income equal to an approved percentage (not
to exceed 100%) of the capital expenditure
incurred on plant and equipment, factory
buildings or the acquisition of know-how or
patent rights are available to companies
involved in approved qualifying activities
including manufacturing.
Development and Expansion Incentive tax rate as low as 5% on qualifying profits for
up to 10 years. Applies to the manufacturing or
increased manufacturing of products that
would be of economic benefit to Singapore.
R&D - deductions available for qualifying R&D
expenditure with double deductions for
approved R&D expenditure (with approvals
administered by the EDB).
Singapore
Singapore
Special Allowances
Depreciation Allowances
Depreciation is not an allowable expense for tax purposes.
However certain types of fixed assets qualify for capital
allowances in lieu of depreciation. Computers, prescribed
automation equipment, robots and office/factory generators
qualify for one-year write-offs. Other plant and equipment
(excluding certain motor vehicles) may be written off over three
years. Alternatively a 20% initial allowance can be claimed with
the balance written off on a straight-line basis over the next 6 to
16 years depending on the category of plant and equipment.
Industrial Building Allowances
Capital allowances are available on qualifying buildings with a
25% initial allowance and a 3% annual allowance.
Approved Intellectual Property Rights
Deductions available on a straight-line basis over five years.
Other Taxes
Goods and Services Tax/Value Added Tax
A goods and services tax (GST) is levied at 5% on almost all
goods and services supplied in Singapore and on goods
imported into Singapore. GST is a VAT-type multistage tax with
the burden mainly falling on the end consumer. A GST
registered taxpayer is entitled to offset input GST incurred on
purchases of taxable goods and services against GST charged
to customers on taxable revenues. The net GST is periodically
remitted to the tax authorities. Export-related revenues are zerorated.
Capital Transactions Tax

There is no tax on capital gains but it is often
not easy to assess whether a gain is capital or
revenue in nature.
Property Tax
Property tax is levied at a standard rate of 10%
on the annual gross rental value of immovable
property. For wholly owner-occupied
residential properties, a concessionary rate of
4% applies.
Stamp Duties
Stamp duties are imposed on certain
documents. The stamp duty rate varies
according to the nature of the document and
the values referred to in it. Currently, transfer of
real estate will attract rates of up to 3% of the
value of the property and a 0.2% rate applies to
the transfer of shares.
tax treaty. Some payments are exempt from

tax and some are not subject to withholding tax
by concession, or by ministerial remission.
A Goods and Services Tax (GST) is payable on
imports of all products, including crude oil,
refined oil products and natural gas. GST at a
rate of 5% is assessed on the customs value of
the goods Like VAT, GST is an input-output tax
which can be recoverable.
There is no customs duty or excise duty on the
importation of crude oil.
Motor fuel is not subject to customs duty on
import but is subject to excise duty in line with
the following table:
HS code
27101111
Withholding Taxes
There are no withholding taxes on dividends or
remittances of branch profits to an overseas
head office. Certain payments such as interest
and royalties made to non-residents generally
attract withholding tax of 15% while technical
assistance fees, management fees, directors'
fees and rental of movable assets attract
withholding tax of 22%. The withholding tax
may be reduced to a lower rate or nil under a
Product
Motor fuel, premium leaded
Excise Duty Rate

$7.10 per deca-litre (dcl)
27101112
Motor fuel, premium unleaded
$4.40 per dcl
27101113
Motor fuel, regular leaded
$6.30 per dcl
27101114
Motor fuel, regular unleaded
$3.70 per dcl
27101115
Other Motor fuel, leaded
$6.80 per dcl
27101116
Other Motor fuel, unleaded
$4.10 per dcl
Note: Apart from the above, no other refined oil products are subject
to customs duty or excise duty on import.
Import GST is payable on the value of the

goods plus any applicable duties payable.
Thus, for the importation of motor fuels referred
Singapore
to above, the GST payable is 5% of CIF plus excise duty

payable.
There is no customs duty or excise duty on the importation of
natural gas, nor is there any duty payable on the export of crude
oil, refined oil products or natural gas.
South Korea
Please refer to the

summary charts presented
under appendices I-IV for
key statistics on South
Korea.
Political and Legal
Korea has a presidential system combined with a parliamentary cabinet system. The Korean
government consists of three branches : the legislature, the executive and the administration
of justice.
As a legislative body, the National Assembly has 273 members, of which 227 are regional
members and 46 are proportional representation members. The Presidents tenure of office is
five years and the members of the National Assembly hold office for four years. Besides
legislation, the National Assembly monitors the government authorization and debates and
settles the national budget. The executive branch is composed of the president, the prime
minister, the state ministers and the minister of each department.
South Korea
South Korea
Important matters are decided through a cabinet conference.

The administration of justice is independent from the legislative
and executive branches and the chief justice and justice of the
Supreme Court are appointed by the president under the
agreement of the National Assembly.

The principal regulatory agencies concerned with business
operations are:
1.
2.
3.
4.
5.
The Ministry of Finance and Economy

The Bank of Korea (the Central Bank)
The Ministry of Commerce, Industry and Energy
The Financial Supervisory Service
The Financial Supervisory Commission.
Economic Overview
under Appendix I for information on South Korea.
The economy had been growing rapidly until 1996, which is the
year that Korea became a member of OECD. In 1997, however,
the continued bankruptcy of big companies led to economic
crisis and the government sought assistance from the
International Monetary Fund (IMF).
importantly, the South Korean government has

begun to break the hold of the chaebols (large,
multi-industry conglomerates) over the
financial sector. The lack of an "arms-length"
business relationship between borrowers and
lenders had led to many South Korean financial
institutions having a very large ratio of nonperforming loans. While there is no intention of
forcing the chaebols to divest their financial
subsidiaries, the government has increased
regulation to prevent chaebols from arbitrarily
channeling money into other subsidiaries.
Chaebols also have been pressed to spin off
their non-core businesses and to rationalize
their corporate structures. To stimulate
domestic demand, the South Korean
government under President Kim Dae-jung
enacted a package of tax cuts directed at
lower and middle-income workers.
As a result of the governments effort, the
economy has regained stability and has been
gradually recovering. The growth rate of GDP
has been around 2.5% whilst inflation has
been around 3.5%. Most of South Korea GDP
comes from services (54.3%) with industry a
close second (41.8%). Inflation for 2004 is
estimated to be a moderate 3.5%.

Koreas financial markets have seen massive
changes in the past few years as a direct result
of the economic crisis.
The Korean central bank, The Bank of Korea,
has the primary purpose of ensuring price
stability, which it implements through
monetary policy and performing traditional
functions such as issuing currency and serving
as banker to the Government. South Korea's
foreign reserves stood at US$170.5 billion as
of August 2004.
The currency unit is the Korean Won. Korea
has adopted a price stabilization target system
and free-floating exchange rate system as part
of its basic monetary policy since the
economic crisis in 1997.
The exchange rate at 31 December 2003 was
1,191.7 Won/US$ and as at end of September
2004 it was 1,146 Won/US$.
In the wake of the Asian financial crisis of 1997-98, South Korea

began an economic reform program designed to address some
of the conditions which made its economy vulnerable. Most
South Korea
South Korea
3. Energy, Utilities & Mining Market

Country) - Key Energy, Utilities & Mining Data (Appendix II)
III) for industry related key data and information on South
Korea.
The Republic of Korea (South Korea) is the world's fifth
largest oil importer, and the second largest importer of
Liquified Natural Gas (LNG).
The South Korean government has plans to privatise
several large State-Owned Enterprises (SOEs), including
the power generation assets of the state electricity utilities,
Korean Electric Power Corporation (KEPCO), and the
natural gas monopoly Korea Gas Company (KOGAS). The
privatisation program has moved at a slower pace than
originally planned, due in part to strong opposition from
labour unions to some of the privatisations and delays in
passing and implementing legislation. Both privatisations
are now officially scheduled for 2004.
Oil
The oil industry has been deregulated and opened since
1997, with the introduction of market functions and
competitive systems. Oil prices were self-regulated, oil
exports and imports were liberalized and the market was
fully opened to foreigners. Competition among market
participants has intensified with the increasing

number of importers and the slow increase in
the rate of oil consumption.
South Korea has no domestic oil reserves and
thus imports all of its crude oil. Although
declining as a percentage of the total share, oil
still makes up the largest share of South
Korea's total energy consumption. In 2003, the
country consumed around 2.1 million barrels a
day (Bbl/d) of oil, down from a high of nearly
2.3 million Bbl/d in 1997, and petroleum
accounted for 55% of South Korea's primary
energy consumption. South Korea is the
seventh largest oil consumer and the fifth
largest net oil importer in the world.
Due to South Korea's total reliance on oil
imports, it has prioritized the securing and
diversifying of its oil supplies. In the short-term,
South Korea's approach has been to develop a
strategic petroleum reserve, roughly equivalent
to a 90-day supply, which is managed by the
state-owned Korea National Oil Corporation
(KNOC). The "import cover" period was
expanded from 60 days in early 2001, partly in
order to meet the requirements for entry into
the IEA. This reserve functions as a safety net
against supply disruptions. In the long term,
KNOC is engaged in seeking equity stakes in
oil and gas exploration around the world, and
currently has 18 overseas exploration and
production projects in 13 countries. This

includes four producing fields in Yemen,
Argentina, Peru, and the North Sea, and four
fields under development in Yemen,
Venezuela, Libya, and Vietnam. The South
Korean government expects KNOC to provide
10% of the country's oil needs by 2010.
Refining
The country's economic crisis of 1997-1998
had a profound affect on the South Korean
refining industry, particularly as it had already
been overburdened by overcapacity prior to
the downturn in demand. In September 1998,
South Korea's four downstream oil companies
raised the retail price of gasoline and diesel oil
following a government tax increase. Due to
financial pressure, the South Korean
government decided in October 1998 to fully
deregulate the refining industry. This had been
brought forward from a January 1999 deadline
in order to attract much needed foreign
investment. Foreign funds have proved critical
in maintaining cash flows and preserving the
creditworthiness of the refining industry.
This has resulted in several corporate
consolidations and sell-offs. Despite the
consolidation in South Korea's refining sector,
it has yet to fully recover from the effects of the
Asian financial crisis and the shock of the 1998
South Korea
South Korea
deregulation. Profit margins have remained very weak.

The refining industry is mainly dominated by five companies. SK
takes up 29.3% of the total domestic market, LG Caltex Oil
24.1%, S-Oil 10.3%, Hyundai Oilbank 9.9%, and Incheon Oil
Refinery 6%. Other companies, including importers, make up
the remaining 20.3%. Of the five major oil refining companies,
three of them are foreign invested firms. Caltex owns 50% of LG
Caltex Oil, Aramco owns 35% of S-Oil, and IPIC owns 50% of
Hyundai Oilbank.
The domestic oil refining capacity is more than enough to meet
demand. In 2001, domestic oil refining companies produced
905 million barrels of oil products, which was 122% as much as
domestic demand, which at that stage was 744 million barrels.
While there are plenty of refining facilities, the rate of oil demand
has been declining due to an increasing preference for cleaner
energy such as LNG.

As of 2001, Korea is the world's second largest LNG importer
and the third largest LPG importer. The global trade volume of
LNG is 104.35 million tons, of which Japan takes up 54.07
million tons, Korea 15.94 million tons and France 7.63 million
tons. The total global trade volume of LPG is 45.2 million tons,
of which Japan takes up 14.5 million tons, China 4.7 million tons
and Korea 4.2 million tons. Among gas prices, LPG is the
highest, followed by LNG and PNG respectively. Due to the
currently slow increases in demand for LNG, the global LNG
market has changed from a suppliers market to a buyers
market. The practice of securing demand before developing
gas fields is changing and international LNG

prices are dropping by 5-15%.
Most of South Korea's LNG is currently
obtained from Qatar, Indonesia, Malaysia, and
Oman, with a smaller amounts from Brunei and
elsewhere. Qatar, at present the largest
exporter of LNG to South Korea, began
supplying South Korea in August 1999 under a
contract with Qatar's new Ras Laffan LNG
(RasGas) venture. South Korean natural gas
demand is divided almost evenly between the
electricity and the residential heating sectors.
Since natural gas has not been domestically
produced before, only distribution functions
such as importing and selling are carried out.
However, an annual volume of 430 thousand
tons of natural gas is expected to be produced
domestically from December 2003 from the
East Sea gas reserve. Wholesale trade of LNG
is monopolized by KOGAS and the retail trade
of LNG is locally monopolized by 26 private
city gas companies. In the case of LPG, 59%
(4.85 million tons) of the total domestic supply
of 8.22 million tons was imported in 2001. The
LPG importers are SK Gas and LG-Caltex Gas.
The five main oil refining companies all
produce LPG. Distribution is carried out
through the three stages of refining and
importing companies, gas stations, and stores.
Gas demand is growing rapidly due to

environmental regulations and increasing
national income. Gas demand has increased by
an average of 8.9% annually from 1996 to 2001.
LNG demand for household and industry has
mainly increased, while LNG demand for power
generation has slowed down. LPG demand for
household and industry has decreased, while
LPG demand for automobiles has skyrocketed.
The number of LPG vehicles has increased from
350,000 in 1996 to 1.43 million in 2001.
Accordingly, gas comprises a larger share of the
total energy consumption, increasing from
11.6% in 1996 to 14.8% in 2001.
Kogas is planning to push ahead with projects
for the expansion of LNG receiving terminals.
South Korea is increasing capacity at its existing
terminals at Pyongtaek and Inchon. Also,
Mitsubishi Corporation of Japan and Pohang
Iron and Steel Corporation signed a letter of
intent in October 1998 to build an LNG receiving
terminal in South Korea at Kwangyang,
construction of which started in June 2002 and
is expected to be completed in early to mid
2005.
As part the South Korean government intention
to privatise Kogas, an initial public offering of
33% of Kogas equity was carried out in
December 1999. However, questions about the
structure of the companies which would result if
South Korea
South Korea
Kogas were broken up for privatization and opposition from labor

unions representing Kogas employees brought the process to a
standstill. Legislation necessary to put the process in motion has
not yet been passed by the South Korean legislature. Uncertainty
over the future structure of the industry has led to delays in Kogas
concluding agreements for new LNG supplies, in spite of the fact
that additional volumes of LNG beyond current contracts are
expected to be needed in the near future. In the short term, the
increased demand can likely be satisfied with additional spotmarket purchases.
In addition to LNG imports, South Korea began producing a small
amount of domestic natural gas in November 2003. In particular,
KNOC's US$320 million Donghae-1 project is developing a
natural gas deposit offshore of Ulchin in southeastern South
Korea which is estimated to contain 240 Bcf of reserves.
Nonetheless, Donghae-1 is a relatively minor development, and
will satisfy only about 2% of South Korea's natural gas demand.
On other fronts, South Korea also is exploring the possibility, as
early as 2008, of a natural gas pipeline from the Kovykta natural
gas deposit in the Irkutsk region of Eastern Siberia, which would
supply China as well as South Korea about 1 Bcf/d to South
Korea and a larger volume to China. The two Koreas agreed in
September 2001 to conduct a joint feasibility study of the pipeline
project, and this was approved by the companies backing the
project in November 2003. The pipeline route is scheduled for
final approval in the near future, with the conclusion of financing
arrangements and the commencement of construction set for
2005. It now appears that the route will include an undersea
section between China and South Korea in order to bypass North
Korea.
Coal
The government has been promoting
rationalization policies for the coal industry,
such as closing down mines and reducing
production, since 1989. After ten years, the coal
industry has been downsized to one-sixth of its
original volume. Compared to other countries,
the speed of rationalization of the Korean coal
industry is relatively rapid.
Anthracite demand for briquets is continuously
declining, while demand for KEPCO power
generation is increasing. As a result, anthracite
for power generation accounts for 67% of total
demand.
As of 2003, domestic production of coal totaled
3.8 MT and 10 mines were in operation. Each
year, the government announces the official
prices of coal and briquets and the difference
between production costs and selling prices is
covered by the government. The demand for
coal has also changed from demand for
briquets taking up 90% of total demand in 1988
to demand for power generation accounting for
67% in 2001. Coal demand for power
generation is being maintained at 2.3 - 2.5 MT
and losses in power generation production
costs due to using anthracite in power
generation is compensated by funds for
electricity infrastructure. Funds for supporting
production are gradually decreasing, while

budget allocations for supporting restructuring,
such as the closure of mines and developing
mining areas are increasing.
Electricity
Due to economic growth and higher quality of
life nationwide, electricity consumption is
skyrocketing. Since 1990, energy demand
increased by an annual 7.5%, while electricity
demand increased by an annual 9.8%.
Electricity demand temporarily decreased by
3.6%, during the economic crisis in 1998. In
2000, electricity consumption per capita was
5,523 KWh which is expected to continue to
increase. In order to maintain stable supply and
demand of electricity, the government will
strengthen demand management and expand
facilities. Korea's capacity for electricity is the
12th largest globally.
Compared with other OECD countries,
electricity prices for household and general use
are high, while prices for industrial use are low.
On average, however, prices in Korea are lower
than other OECD countries. By expanding
electricity facilities and strengthening
maintenance and repairs, the quality of
electricity is maintained at the same level as in
advanced countries from power cuts and
maintenance rate frequency perspective.
South Korea
South Korea

Oil
The object of the Oil Business Law is to secure the proper
quality of oil products as well as to stabilize oil demand and
supply and oil prices, contributing to national economic
development and the improvement of national life.
The key parts of the Oil Business Law are given below:
! The Minister of Commerce, Industry and Energy
formulates a 5-year plan for oil demand and supply
every year in order to forecast national oil demand and
supply. The plan includes oil demand, oil production,
export and import, and the capacity of oil refinery
facilities.
! Registration with the Minister of Commerce, Industry
and Energy is required in order to start an oil refinery
business or oil import and export business.
! To start an oil sales business, the person or entity must
either register or report to a mayor or a provincial
governor. But in order to sell oil by-products, it must
register with the Minister of Commerce, Industry and
Energy.
! For the purpose of stabilizing oil demand and supply
and oil price, the Minister of Commerce, Industry and
Energy sets up oil saving goals and an oil saving plan.
The oil saving plan includes matters related to oil
saving goals, the types and volumes of oil to be saved,
and oil saving facilities.
! The Minister of Commerce, Industry and Energy can
levy dues on oil refinery businesses, oil importers, oil
exporters, or oil sellers. Also, the Minister

of Commerce, Industry and Energy can
levy dues on oil refinery businesses, oil
importers, or exporters who make excess
profits from sharp fluctuations in
international oil prices.
The Minister of Commerce, Industry and
Energy can set quality standards for
securing proper quality of oil products.
Gas
The objects of the City Gas Law are as follows:
Sound development of the city gas
business
! Protection of city gas users profits
! Regulation of the maintenance and safety
of gas supply facilities and gas use
facilities.
The key parts of the City Gas Law are given

below:
! For starting a gas wholesale business,
permits granted by the Minister of
Commerce, Industry and Energy are
required.
! In order to construct or change gas supply
facilities larger than the standard set by
the Minister of Commerce, Industry and
Energy, approval is required.
! General city gas suppliers are required to
prepare a five-year gas supply plan with
the agreement of the city gas wholesaler

and submit it by November annually.
Every year the provincial governors are
required to submit a five-year gas demand
plan to the Minister of Commerce, Industry
and Energy by December of the year.
City gas suppliers lay down gas supply
provisions such as gas rates and regarding
approval from the Minister of Commerce,
Industry and Energy.
City gas suppliers are required to submit
safety provisions related to gas supply
facilities and gas use facilities before
starting the business.
As mentioned above, the natural gas supply

industry is regulated. In relation to the
wholesale market, it is regulated by the
Ministry of Commerce, Industry and Energy,
whereas in respect of the retail markets by the
local provincial governments. Kogas has a
virtual monopoly in LNG imports, wholesale
and its transportation.
The natural gas pipeline system is also
regulated. However, there is no defined legal
basis for third party access to wholesale or
retail pipelines. The access is negotiated on a
case-by-case basis. Similarly, transportation
and distribution tariffs are generally
determined using a cost of service approach
and on a case-by-case basis.
South Korea
South Korea
The prices of natural gas are generally determined based on

average purchase (import) price and associated transportation
and distribution tariffs, again on a case-by-case basis.
Mining
The object of the Mining Law is establishment of the basic
mining rules for rational development of mineral resources.
The key parts of the Mining Law are given below:
! Only the government can hold mining rights to oil. The
Minister of Commerce, Industry and Energy is required to
register oil mining rights for the operation of oil.
! The period of owning mining rights cannot exceed 25
years.
! Mining rights are granted by the Minister of Commerce,
Industry and Energy.
! A mining-right owner is required to submit mining reports to
the Minister of Commerce, Industry and Energy.
Coal
The objects of the Coal Business Law are as follows:
Sound development of the coal business
Demand and supply stabilization of coal and coals
processed products
! Harmonious distribution of coal and coal processed
products
! Coal mine region promotion.
!
!
The key parts of the Coal Business Law are

given below:
! The Minister of Commerce, Industry and
Energy is required to build a long-term plan
for rational development of coal and coal
processed products, demand and supply
stabilization, and coal mine region
development. The plan includes, amongst
other requirements, a long-term forecast of
coal demand and supply, basic policy,
rational development of coal, coal mine
protection, and a coal mine region
promotion programme.
! In order to start a coal-processing
business, a person or entity is required to
register with the mayor, the county
governor or the district leader.
! Establishment of a Coal Industry
Rationalization Group for coal industry
development.
! Depending on coal reserves, production
volumes, and quality of coal, the Minister of
Commerce, Industry and Energy can
announce standards relating to providing
support payments for covering overall
expenses related to the closure of mines.
! In case a provincial governor concludes the
regional economy has deteriorated due to
the closure of mines and demand for coal,
he can request the Minister of Commerce,
Industry and Energy to designate the region
as a coal-mining promotion zone.
Power and Utilities

The object of the Electricity Business Law is
the establishment of a basic electricity
business system and the promotion of a
competitive electricity business as it brings
more protections for electricity users.
Below are the main points of the Electricity
Business Law :
! To start an electricity business, a person or
an entity requires a permit from the
Minister of Commerce, Industry and
Energy. Also, the Minister of Commerce,
Industry and Energy is allowed to award
permits only after the deliberation of an
electricity committee.
! The electricity seller should itemize
invoices sent to an electricity user.
! In order to stabilize power demand and
supply, the Minister of Commerce,
Industry and Energy sets up a basic power
demand and supply plan and announces
it.
! Establishing a Korean Power Exchange for
the operation of the power market and the
power system.
! The Korea Power Exchange lays down the
rules of operation of the power market and
power system, which includes power
exchange methods, power exchange
settlement and payment, information on
South Korea
South Korea
the opening of power exchanges, operational procedures,

and methods of power systems.
Establishing a Power Industry Support Fund for securing
the funds needed for the continuous development and
promotion of the power industry.
The establishment of an electricity committee that consists
of no more than nine members, including the chairman of
the committee.
Special Accounting Law on Energy

and Resource Sector Businesses

The Korean Accounting Standards Board ("KASB") has
published a series of Statements of Korean Financial
Accounting Standards ("SKFAS"), which will gradually
replace the existing financial accounting standards
established by the Korean Financial and Supervisory
Board. SKFAS No. 1 became effective on 30 March 2001
and SKFAS No. 2 through No. 9 became effective on
1 January 2003.
The new SKFAS are similar to International Accounting
Standards (IAS). There are specific accounting standards in
relation to Energy, Utilities and Mining companies under the
new SKFAS. These are published by the Ministry of
Commerce, Industry and Energy. Please contact our
Partners and Managers for more information in relation to
accounting standards that are applicable to the Energy,
Utilities and Mining businesses and/or companies.
There are also some specific special

accounting laws and regulations in South
Korea that are applicable for the Energy,
Utilities and Mining businesses and/or
companies. Please refer to the below
paragraphs under this section for a brief
explanation on these. If you need more
information, please contact our Partners and
Managers.
This law regulates items regarding fund raising

and funds employment for the effective
promotion of energy and resource businesses.
As a way of fund raising, the law explains the
dues and additional charges on energy
industries and those related to resources. This
law also describes the balance of supply and
demand of energy and stabilization of energy
prices.
recording for trial testing and the calculation of

costs.
City Gas Business Accounting

Regulation
This regulation explains items that are not
described by Generally Accepted Accounting
Principles or need to be applied differently due
to the characteristics of the city gas business.
Besides the relevance of financial data, this
regulation is intended to calculate exact supply
expenses of city gas by producing appropriate
cost data.
It includes the titles of accounts related to gas,
accounting methods, revenue recognition
methods, ways of allocating assets and costs
for city gas businesses and other incidental
businesses.
6. Taxation
Electricity Business Accounting
Regulation
This regulation provides for electricity business
accounting policies in accordance with the
Electricity Business Law. It explains the
separation of accounting units according to
business division or business function
(hydroelectric power, generation, transmission,
distribution etc.). It also describes the account
titles of major fixed assets and the details of

Taxes
Principal Taxes
The Korean tax system has undergone a
number of revisions in recent years. Tax
reforms have been instituted almost every
year. At present, the principal taxes
affecting business enterprises in Korea
South Korea
South Korea
include the corporation tax, the individual income tax, the

value-added tax, customs duties, and the inhabitant and
education tax surcharges levied on the corporation tax, income
tax, and certain other taxes.
Tax collections constitute the Korean government's largest
source of revenue. Of these, the taxes on goods and services
produce the most revenue, followed by the taxes on income.
Set forth below is an outline of national and local taxes:
National taxes (levied by the central government):

Direct taxes: individual income tax, corporation tax,
inheritance and gift tax, asset revaluation tax, excess
profits tax.
Indirect taxes: value added tax, special excise tax,
liquor tax, telephone tax, stamp tax, securities
transaction tax, customs duties, transportation tax,
education tax, special tax for rural development.
Local taxes (levied by local governments):

City and country taxes
Ordinary taxes: inhabitant tax, property tax,
automobile tax, farmland tax, tobacco consumption
tax, butchery tax
Earmarked taxes: city planning tax, workshop tax
Provincial taxes
Ordinary taxes: acquisition tax, registration tax, license
tax, horse race and parimutuel tax
Earmarked taxes: community facility tax, regional
development tax.

Corporate income tax is based on the
Corporation Tax Law. Companies that are
subject to corporation tax in Korea can be
classified into two types: domestic or foreign
and for-profit or non-profit. For taxation
purposes, a company with its head or main
office in Korea is deemed a domestic company
and is liable to tax on its worldwide income. A
company must register its head or main office
in Korea for being incorporated in Korea. Any
company which has its head or main office in
Korea is considered a domestic company.
Non-domestic companies are considered
foreign companies. The tax liabilities of foreign
companies in Korea are limited to Koreansourced income.
The income of a domestic corporation during
each business year is the amount remaining
after deducting the gross amount of expenses
and losses incurred from the gross amount of
revenues and gains during each business year.
To derive tax base, deficits, if any, carried over
from the previous five years should be
deducted from this income. Other deductibles
specified in the law may apply.
The corporation tax rates were reduced from
34% to 32% in 1994, to 30% in 1995 and then
to 28% in 1996. For corporations with income
of less than 100 million won, the tax rate on
profits has been 16% since 1996 which is also

applied for non-profit organizations. Currently,
for corporations with income of more than 100
million won, the tax rate on profits is 27% and
for corporations with income of less than 100
million won, the tax rate on profits is 15%.

Corporations must compute their income in
each business year (any twelve-month period
selected by the corporation). Returns must be
filed within three months after the close of the
accounting period. Interim returns may also be
filed. Pre-payments of tax is required in
respect of taxable income for the first-sixmonth period and this should be paid within
eight-months of the beginning of the period.

Domestic corporations are taxed on worldwide
income, whereas foreign corporations are
taxed in Korea on Korean-source income. A
Korean corporation is taxed on its foreignsource income as earned at normal
corporation tax rates. Double taxation is
avoided by means of foreign tax credits. The
foreign tax credits can be carried forward for
five years. South Korea has treaty
arrangements with a number of countries and
the withholding taxes on dividends, interests
South Korea
South Korea
and royalties may be affected by relevant treaty arrangements.

Please contact our Partners or Managers for more information
in relation to such treaty arrangements.
2) Import VAT (Value Added Tax)

Single rate of 10% applies. 10% rate also
applies to the crude petroleum oil.

Mining Companies

(which covers "Petroleum oils and oils obtained
from bituminous minerals, crude"). The import
duty rate for crude oils is 5% under the general
rate. However, Quota Tariff Rate is applicable
until 31 December 2004, under which a 0%
rate is applicable for import of goods for
manufacturing Naphtha and 3% is applicable
for other imports.
Currently, there are no special tax laws related to energy, utilities

and mining companies. However, there are transportation taxes
and special excise taxes applicable as energy-related taxes.
Transportation Tax: The purpose is securing the funds needed
for the expansion of transportation facilities. It is levied on
gasoline, light oil, or similar substitution oil in proportion to sales
volume.
Special Excise Tax: It is levied on heavy oil, propane gas,
butane gas, and natural gas, and other similar products, in
proportion to volume. Briquet and anthracite are exempted
from value-added tax.

Import Taxes
Upon importation of goods into South Korea, the following
duties and taxes normally apply:
1) Import Duty
The tariff rates depend on the classification of the goods
under the Harmonized System (HS) Code System, which
started from 1 January 2004. This system is at 10-digit
level.

gaseous hydrocarbon. The general import duty
rate is 5%. However, Quota Tariff Rate is
applicable for some specific items until 31
December 2004. Hence, 1.5% is applicable
for Propane and Butane.
Quota Information:
Quota Tariff Rate is applicable for the imported
goods when it is necessary to facilitate the
import of specific goods with the aim of
ensuring the smooth supply and demand of
goods.

preparations; waste oil. The general import
duty rate ranges from 5% to 8% depending
upon the category of products imported.
However, Quota Tariff Rate is applicable for
some specific items until 31 December 2004. A
7% rate is applicable for some imported
goods, and 0% is applicable for Naphtha and
NGL. Additionally, Special Excise
(Consumption) Tax is applied to some refined
oil products and items.
South Korea
Thailand
Please refer to the

summary charts
presented under
statistics on Thailand.
Political and Legal
Thailand has been a democratic constitutional monarchy since 1932, where King Bhumibol
Adulyadej is the Head of State. The King exercises sovereignty through the Parliament, the
executive branch and the judicial branch. The Parliament (Thai National Assembly) consists
of the House of Representatives and the Senate. The House of Representatives consists of
500 members, of whom 400 Members of Parliament (MPs) are elected on a single-member
constituency basis from among the 76 provinces and the remaining 100 MPs are nominated
on a pro-rata basis among the political parties winning seats. The Senate comprises 200
members, who also are directly elected on a constituency basis.
Thailand
Thailand
According to the 1997 Constitution, the Prime Minister must be

a member of the House of Representatives and is elected by
the Parliament for royal approval. The cabinet is appointed by
the Prime Minister who leads the executive branch.
The Thai Constitution provides for an independent judicial
system and established by legislation as courts of first instance,
a Court of Appeals, and the Supreme Court. Judges are
appointed by the King following recommendation from the
Judicial Commission. The Thai courts are similar in form and
procedure to the Napoleonic Codes in that there are no juries.
The decisions of the Supreme Court are authoritative but do not
establish binding principles of law. In addition, there are special
courts such as the Central Labour Court, the Central Intellectual
Property Court, and the International Trade Court, the
Administrative Court and the Constitutional Court.
Mr.Thaksin Shiniawatra is the current Prime Minister and the
head of the Thai Rak Thai Party, which dominates the House of
Representatives with 248 MPs out of the total 500 members of
HR. The Thaksin Shinawatra administration took office in
February 2001, following the general election on 6 January
2001. The urgent policies under the Thaksin administration
include debt suspension for farmers, the village revolving fund,
the People's Bank, a bank for SMEs, the Thai Asset
Management Corporation, privatisation of state enterprises, a
universal health care plan, drug suppression and anticorruption.
Organisations
Key principal regulatory and government
agencies5 concerned with business operations
are:
1. The Board of Investment (BOI) - provides a
wide range of financial and non-financial
incentives and guarantees investment
projects.
2. The Ministry of Commerce - business
establishment procedures and operating
licenses.
3. The Ministry of Finance - corporate taxes
(via the Revenue Department).
4. The Ministry of Energy - a new ministry
created on 1 October 2002 responsible for
all matters concerning oil and gas, mining
and utilities businesses.
5. The Ministry of Industry - operating
licenses, standard setting and monitoring.
6. The Industrial Estate Authority - factory
establishment, investment zones.
7. The Securities and Exchange Commission
- capital market regulator.
8. Bank of Thailand - governs exchange
controls via the Exchange Control Act of
1942.
Economic Overview
(by Country) in Appendix I for information on
Thailand.
Prior to the economic crisis of 1997, the Thai
GDP had hovered at around 8% to 9% per
annum since the early 90's. During the economy
crisis of 1997, the country suffered from a credit
crunch due to a lack of liquidity, which was
further exacerbated by the worldwide economic
slowdown. Thailand floated its currency, the
Thai Baht, and applied for a US$ 17 billion
rescue package from the International Monetary
Fund (IMF) to help resolve the economic crisis.
Under the IMF austerity package (e.g. minimum
foreign reserves for three months import cover,
the tightening of monetary policy to control
inflation and cut fiscal spending, the balancing of
the budget, an increase in the VAT rate from 7%
to 10%, a reduction in the current account deficit
from 5% in 1997 to 3% in 1998, maintaining the
GDP growth rate, inflation targets, and state
enterprise spending reduction) new measures
and political reforms were introduced (e.g. the
new Bankruptcy Act). Industry and services
sectors currently share the bulk of GDP at 43.7%
and 47.1% respectively. Current inflation (i.e. in
2004) is maintained low at less than 2%.
The current structure of ministries is available at www.thaigov.net.
Thailand
Thailand
At present, Thailand trades with many countries, its principal

partners being Japan, the United States, the European Union, and
ASEAN countries. Thailand imports used industrial machinery,
electronic circuit boards, airplanes, passenger cars and trucks,
medical science apparatus, crop seeds, chemicals, and crude oil.
Its exports are computer parts, ready-made clothes, sugar, rice,
rubber, tyre products, frozen foods, and canned foods.
Recent key economic statistics have indicated signs of economic
recovery. According to the latest Bank of Thailand forecast, the
GDP growth rate for 2003 is 6.4% and expected to be 5.5% 6.5% in 20046.

Market
Other Summary of Information (by Country)
(Appendix III) for industry related key data
and information on Thailand.
Thailand is a significant net oil importer.
Energy consumption is growing rapidly as a
result of strong economic growth.

The Bank of Thailand is responsible for (1) formulating monetary
policy; (2) supervising financial institutions; (3) acting as the
Government's banker; (4) acting as banker to financial institutions
and managing foreign reserves; and (5) issuing currency notes.
Thailand's foreign reserves totaled US$ 4.5 billion as of the end of
August 2004.
The Thai Bath is floated freely against all currencies in the market.
As of August 2004 the exchange rate of the Thai Baht to the US
Dollar was approximately 41.47 THB/US$, strengthened from
2002 when it was at approximately 42.24 THB/US$. The improved
investor confidence in the Baht is due to Moody's upgrading of
the Thai sovereign credit rating in 2003.
Thailand is an importer of energy (primarily

crude oil from the Middle East and the Far
East, natural gas from Myanmar, and hydroelectricity from the Laos DPR) as indigenous
energy sources are inadequate for the
country's energy requirements. Pre-1980s,
over 80% of Thailand's energy consumption
comprised petroleum. As part of the Royal
Thai Government's energy conservation
and risk management policy, the petroleum
consumption fuel mix has been falling
steadily and accounted for 46% of the total
energy consumption in 2002.
Natural gas consumption is rising and accounted

for 37% in 2002. Natural gas and coal are used
primarily for electricity generation whilst
petroleum products are for transportation,
commercial and industrial usage.
In 2002, energy consumption in Thailand was
approximately 50 million tons of oil equivalent
totaling US$207 billion or 14% of the GDP. Total
consumption in 2002 increased by 6.6% from
2001 as a result of the improving economy. Given
the economic growth rate of 5% per annum, it is
expected that energy consumption will increase
from US$ 20 billion to US$ 54 billion by 2017 8.
The Royal Thai Government is trying to focus its
energy strategies on the efficient use of energy,
acceleration of domestic renewable energy
source development to replace the use of fossil
fuels, and efficient energy management to extend
the supply availability of energy reserves. A
number of industry reform initiatives have been
issued and are being implemented. The
Government is now focusing on the
establishment of an energy regulator,
corporatisation and privatisation of the
generating, transmission and distribution
businesses of state-owned enterprises and an
industry realignment to increase market efficiency.
7
The current statistics is available at www.thaigov.net.
At the exchange rate: 40 THB/US$

Workshop on Energy Strategy for Competitiveness, Ministry of Energy, 28 August 2003.
Thailand
Thailand
Oil
Thailand has 583 million barrels of proven oil reserves. Oil
production in 2003 was 193,162 Bbl/d, an increase of about
18,000 Bbl/d from the previous year. This increase was a result of
three new oil fields (i.e. Maliwan, Sangkajai and Yala) which
commenced operation in 2002. Thailand E&P activities are
primarily located offshore in the Gulf of Thailand and mainly
represent natural gas and condensate. The indigenous crude
supply is small and found mainly onshore.
Oil consumption in 2003 was 821,000 Bbl/d, up from 785,000
Bbl/d in 2001. Preliminary figures indicate that consumption has
continued to grow rapidly in 2003, despite the Thai government's
moves to increase taxes on petroleum products.
The oil industry in Thailand is dominated by PTT, formerly the
Petroleum Authority of Thailand. PTT Exploration and Production
(PTTEP) is the main upstream subsidiary of PTT. Thai Oil, the
country's largest refiner, is also controlled by PTT. The company
underwent a partial privatization in November 2001, and 32% of
its equity was sold on the Bangkok Stock Exchange. The Thai
government still owns a 68% stake in PTT, and does not plan to
sell its controlling interest in the foreseeable future.
Despite financial problems in the industry, there have been a
number of significant recent Thai oil discoveries, particularly
offshore in the Gulf of Thailand. As a result of small new finds, the
country's modest proven oil reserves rose from 516 million barrels
in January 2002 to 583 million barrels by the end of the year. Seven
new onshore and offshore exploration blocks were awarded in May
2003 as an outcome of the most recent licensing round.
ChevronTexaco and China's CNPC were two of

the companies who received exploration rights.
not yet been blended into gasoline in measurable

commercial quantities.
Refining
PTT is the market leader in retail petrol stations.

Its upstream operation is run by PTT Exploration
and Production (PTTEP), which is a listed
company on the Stock Exchange of Thailand.
Thailand has a combined refining capacity of

703,100 Bbl/d coming from three main refineries:
Shell Co. Of Thailand Ltd. (275,000 Bbl/d) located
in Rayong, Thai Oil Co. Ltd., in Sriracha (192,850
Bbl/d), and Esso Standard Thailand Ltd. (173,500
Bbl/d) and a smaller refinery located in Sriracha.
There has been some discussion by the Thai
government about turning the country into a
regional processing and transportation hub for
the oil industry. One proposal is to amend
existing regulations to create a bondedprocessing zone for export-oriented refineries,
most likely to supply cities in south-central China,
which are closer to Thai ports than to the Pacific
coast of China. Another idea is to construct a
pipeline across the isthmus of Kra, which would
allow oil shipments from the Persian Gulf to East
Asia to bypass the congested Strait of Malacca.
Thailand also plans to promote ethanol as a way
of reducing its future consumption of petroleum
and imports of gasoline additive Methyl Tertiary
Butyl Ether (MTBE). The Thai government
approved a package of tax incentives in
December 2000 to encourage more production
of ethanol for fuel use, but as of 2003, it still had
PTT is the current retail market leader with a 30%

market share in terms of sales volume. PTT also
has the largest market penetration in terms of
petrol stations. Pre-1990s, Shell and Esso were
the retail market leaders with the largest market
shares. Conoco (trading under the Jet brand) was
a new entry in 1993 and has built up its market
share from zero to approximately 2.5% over the
past ten years. PTT and Conoco gained market
share from Shell and Esso in the 1990s. Further
market segmentation is illustrated below.
Analysis of Retail Market Share
Fy00
Fy01
10 mts
YTD02
PTT
33.5%
29.9%
29.7%
Shell
13.4%
14.6%
15.0%
Esso
13.4%
13.1%
12.8%
Caltex
9.2%
9.1%
8.9%
Bangchak
7.7%
7.9%
8.0%
TPI
3.4%
4.7%
5.7%
Conoco
1.9%
2.3%
2.5%
Thaioil
0.4%
0.4%
0.5%
Other
17.0%
17.9%
17.0%
Total
100.0%
100.0%
100.0%
Note: Market share comprises of LPG, Mogas,

middle distilate, fuel oil and bitumen.
Source: Ministry of Commerce filing
Thailand
Thailand

Thailand contains about 13.3 Trillion Cubic Feet (Tcf) of proven
natural gas reserves, of which it produced (and consumed) 845
Billion Cubic Feet (Bcf) in 2003, up sharply from the 2000 figure
of 705 Bcf.
Natural gas is mainly used as fuel for electricity generation and
accounted for 86% of total demand. Total natural gas
consumption in 2002 was 2,603 MMSCFD which increased by
8.6% from 2001. The high growth rate in demand for natural
gas was due to the increasing demand in the electricity
generation. Natural gas production in 2002 was 1,984
MMSCFD (mainly from Gulf of Thailand fields), an increase of
4.5% compared to 2001. The excess demand was met by
imports from Myanmar's Yanada and Yetakun fields. PTTEP (a
subsidiary of PTT Plc.) is the dominant supplier, with
approximately 21% of the total market share in 2002.
The US$1 billion, 416-mile Thai-Burmese natural gas pipeline,
running from Burma's Yadana gas field in the Andaman Sea to
an Electricity Generating Authority of Thailand (EGAT) power
plant in Ratchaburi province, was completed in mid-1999. A
new connecting line also has been built connecting Ratchaburi
with the Bangkok area, which allows for other uses for imported
Burmese gas in addition to the Ratchaburi power plant.
Joint Development Area

One of Thailand's most active areas for gas exploration is the
Malaysian-Thailand Joint Development Area (JDA) in the lower
part of the Gulf of Thailand, which is governed by the MalaysiaThailand Joint Authority (MTJA). The JDA covers blocks A-18
and B-17 to C-19. A 50:50 partnership

between Petronas Carigali and Triton Energy
Ltd. (now a subsidiary of Amerada Hess) is
developing the Cakerwala field in block A-18
containing estimated reserves of 2 Tcf, while
PTTEP and Petronas Carigali also share equal
interests in the remaining blocks. An
agreement was signed in October 1999 for the
sale of gas from the block to PTT and Petronas
for use in Thailand and Burma. PTT has
agreed to purchase 390 Mmcf/d of gas over 10
years from the Cakerawala field beginning in
2006, the first JDA field to come onstream.
Until then, natural gas will only be delivered to
Malaysia.
As the project has moved forward, it has
become controversial in Thailand. The pipeline
is to come a shore in Songkla province in
Thailand with an overland link to Malaysia.
Strong opposition to the project developed in
2000 among residents of Songkla, who have
voiced concerns about the environmental
impact of the project. The Thai government
decided to proceed with construction of the
pipeline in May 2002 via a slightly different
route in order to avoid local population centres.
Construction began in mid 2003, and the
project is expected to commence commercial
operation in mid 2005.
Coal
Total coal consumption in 2002 was 19.6 Mmt, a
decrease of 1.7% from 2001. Coal is mainly
used for power generation by the Electricity
Generating Authority of Thailand (EGAT),
which accounted for 77% of total coal
consumption. The remaining 23% was used by
other industrial manufacturers. Coal production
capacity matches demand where 78% of coal
production is from the EGAT coal mine. (Mae
Moh lignite mine). The remaining coal comes
from independent producers, such as Banpu pcl
and Lanna Resources pcl. It should be noted
that industrial manufacturers have driven the
recent demand growth for coal consumption.
Electricity
Thailand had 21 Gigawatts (GW) of power
generation capacity as at January 2003, from
which it produced approximately 98 Billion
Kilowatt-Hours (BKwh) of electricity.
EGAT is a state-owned enterprise responsible
for electricity generation and transmission in
Thailand. EGAT owns 15,000 MW of generating
capacity and also purchases electricity from
other private sector entities. (i.e. IPPs and SPPs)
and from neighboring countries. Private
ownerships account for the remaining
generating capacity.
Thailand
Thailand
Most of the bulk electricity energy is sold and transmitted via

EGAT's transmission network to the distribution network of the
Metropolitan Electricity Authority (MEA), covering Bangkok and
the adjacent suburbs, and the Provincial Electricity Authority
(PEA) covering the rest of the country. There is a small volume
of direct energy sales to industrial customers by EGAT. Gross
electricity generation in 2003 was 111,254 gigawatt hours.
Approximately 55% of the total came from EGAT's power
plants. The fuel mix is mainly natural gas (71%), coal, hydro and
other fuel sources.
The Ministry of Energy (MOE) was established

on 1 October 2002 to coordinate the Thailand
energy policy, industry standards, rules and
regulations as well as to supervise and control
the related energy operations9. Previously,
control and ownership of various state
enterprises was divided among the Finance
Ministry, the Ministry of Industry, the Ministry of
Interior and Office of the Prime Minister. After
the creation of the MOE, mining ownership
became centralized, which should lead to a
more coordinated and consistent policy.

Oil and Gas and Mining
As in other countries, the energy sector in Thailand is
heavily regulated by the Government. The Royal Thai
Government has been implementing major industry reform
since 2002 and is in the process of establishing an
independent energy regulator(s); although details have not
yet been announced to the public.
The Department of Mineral Fuels (DMF) of the

MOE regulates the extractive industry (oil, gas,
coal and minerals), with responsibilities
including:
!
The National Energy Policy Committee (NEPC) has the
responsibility of approving major policies, plans and
projects in the energy sector and defining the roles of the
Government agencies involved in this sector. NEPC
assumes responsibility, through successive administrative
decisions, for regulating the investments of existing SOEs
such as EGAT, PTT, PEA and MEA and has secured
administrative regulatory powers over the above SOEs in
relation to the retail electricity tariff.
!
!
managing and monitoring petroleum

concession awards, exploration,
production, storage, transportation, and
selling;
collecting petroleum royalty payments and
any other benefits;
co-ordinating with concessionaires,
operators and government agencies to
ensure that concessionaires and operators
are working in accordance with Thai law
Source: www.energy.go.th
!
!
!
and regulations;
coal and oil shale exploration and
evaluation;
mineral fuel research and development;
and
collaborating in developing petroleum
fields in joint development areas and
overlapping areas with other countries in
the region.
Although the Royal Thai Government aims to

liberalise the oil and gas industry, there has
been sporadic intervention. The retail petrol
industry has been liberalised for many years;
however, retail petrol price ceilings were
introduced during the Iraq war in the first half of
2003.
The retail oil and gas industry is liberalised and
is open to foreign participation. LPG is still
under government price control, although
subsidies are being phased out. However, the
deadline for the liberalisation plan has not yet
been agreed.
The natural gas supply industry is currently
regulated by the Ministry of Energy Department of Mineral Fuel who has the
authority to grant exploration and production
concessions under the Production Sharing
Contracts (PSCs) which includes the standard
terms and conditions such as period of the
Thailand
Thailand
concession, investment requirements, taxes etc. The term of the

concession normally requires the concession holder to sell all
natural gas/oil to PTT Public Company Limited (formerly known
as Petroleum Authority of Thailand which was privatized on 6
December 2001). However, there is no regulation concerning the
natural gas pricing which is negotiated separately between PTT
and a seller; although most contracts' pricing formulae are linked
to averages of published crude oil prices, foreign exchange
rates, and other variables such as inflation and interest rates.
There is a consortium of oil companies, called

Thai Petroleum Pipeline Co. Ltd., which owns
an oil distribution pipeline (about 250 km), but
this has not been profitable as the actual
utilization has been much lower than expected.
As there is inadequate demand, the Thai
Petroleum Pipeline is likely to remain
underutilized even in the recent future.
transmission network, whilst MEA and PEA will

continue to operate their distribution networks.
As part of the privatisation plan, a new
independent energy regulator to oversee the
electricity industry, including establishing a new
electricity tariff structure has been proposed but
not yet identified. It is unclear when this new
regulator is expected to be appointed.
Electricity
PTT has developed Thailand's natural gas pipeline system,
which is not "regulated" by any independent regulator, although
there is a requirement in relation to the usual permits and
environment assessments as part of building and/or
constructing the underlying pipelines. There is no regulator on
the gas pipeline tariff, which is a commercial arrangement
between PTT and users. The natural gas transportation tariff is
usually negotiated separately between the transporter and the
users (which are mostly electricity generating plants) which
includes the usual terms such as a fixed portion to compensate
PTT for its return on investment, usually linked to interest rates,
and a variable portion which is linked to volume, calorific value
and other elements.
There is no legal basis or regulation to grant third party access to
the natural gas pipelines. Please note that PTT natural gas
pipeline has been operating at its full capacity in the recent past,
and therefore, PTT did not have any surplus capacity to lease
these to any third party. PTT is currently in process of building a
new gas pipeline in the Gulf of Thailand to overcome the existing
pipelines' excess load. There is no gas distribution system in
Thailand.
The Energy Policy and Planning Office (EPPO),

a department within the Ministry of Energy
(MOE or MoEN), performs the role of regulator
for the energy sector. The main responsibilities
of EPPO include proposing Thailand's energy
development plans and policies; defining
measures relating to energy conservation;
providing preventive measures for fuel oil
shortage; and monitoring actual performance
with policies.
The Strategies for Development of Thailand's
Energy Sector and the Power Sector Efficiency
Improvement, developed by the MoEN, is in the
stakeholder review process. It is likely that the
Enhanced Single Buyer (ESB) Model will be
implemented. Under this model, EGAT will
retain its generation assets, whereas new
capacity will be allocated through competitive
bidding process, overseen by an independent
regulator (not yet appointed). EGAT will retain its
The Cabinet passed a resolution on

9 September 2003 which killed the proposed
power pool system in Thailand. The
Government expects to privatise EGAT, MEA
and PEA in the near future.
Principles
The Board of Supervision of Auditing
Practice (BSAP) is both the regulatory
body and the qualifying body of the
accountancy profession in Thailand. BSAP
formally endorses the Thai Accounting
Standard (TAS) under the recommendation
from the Institute of Certified Accountants
and Auditors of Thailand (ICAAT) and BSAP
awards Certified Public Accountant (CPA)
licenses.
Thailand
Thailand
Thai Generally Accepted Accounting Principles (Thai GAAP)

are similar to the International Accounting Standards (IAS),
although there are minor differences. The key legislation is the
Accounting Act B.E. 2543, being those Thai Accounting
Standards as issued by BSAP and approved under law by the
Board of Supervision of Auditing Practice, appointed by the
Minister of Commerce under the Auditor Act B.E. 2505. In
addition, listed companies must comply with all of the Thai
GAAP and financial reporting requirements of the Thailand
Securities and Exchange Commission.

Although there are no separate oil and gas accounting
standards under Thai GAAP, most upstream oil and gas
companies use tax basis for their external financial reporting
purposes whist using US GAAP for internal reporting purposes.
An understanding of the Petroleum Income Tax Act (PITA) is
very important in reading upstream companies financial
statements as it applies to both the financial reporting and
taxation. A summary of the PITA may be found on the following
pages of the guide.
Mining Companies
There are no separate mining industry accounting conventions
in Thailand.

There are no separate power and utility industry accounting
conventions in Thailand.
6. Taxation
Taxes
Principal Taxes
The Royal Thai Government has three
separate tax administrative bodies. The
Revenue Department of the Ministry of
Finance administers corporate income
tax, individual income tax, Value Added
Tax (VAT), and Withholding Tax (WHT).
The customs and excise tax falls under the
Ministry of Finance and thirdly other taxes,
such as the regional and local taxes (e.g.
municipal tax, property tax, stamp duty,
special business tax, signage tax, vehicle
tax and other miscellaneous taxes).

Generally speaking, the Revenue
Department operates a self-assessment
system where the corporate income tax
rate of 30% on net profit is levied on
worldwide income; although Small, and
Medium Enterprises (SMEs) are subject to
a lower corporate income tax rate of 20%
to 25% for the first three million Baht of net
income. An SME is defined as a company
with paid up share capital of less than Baht
5 million.
The Revenue Department has the right to audit

a company's books and accounts at anytime
within a two-year period from the tax return
dates. There is no group tax basis.
An individual company pays corporate income
tax separately, as there is no group tax relief.
Corporate income tax losses may be carried
forward for five years and there is no carry
back of tax losses. There is no separate capital
gains tax and a capital gain is treated as part of
corporate income. Tax deduction is permitted
for depreciation and certain business
expenses. A provision is not tax deductible.
Unrealised and realised foreign exchange
gains and losses are both tax deductible.
Witholding Tax
Withholding Tax (WHT) is a corporate tax
prepayment system where rates vary
depending on the type of services rendered
e.g.:
!
!
!
!
3% to 5 % for hire of work or lease

10% for dividend payments
10% to 15% for interest payments
Other exemptions may be available (e.g. a
double taxation treaty or zero rated WHT
for certain types of payments).
VAT
VAT is a consumption tax levied on the ultimate
consumers. The current VAT as of December
Thailand
Thailand
2003 was 7%. VAT filings are required on a monthly basis and
VAT refunds may be claimed as either a tax credit or as a cash
refund from the Revenue Department within a limited period
(e.g. 3 years). A special VAT waiver may be obtained on certain
import machinery.

The tax year for a company is its accounting period, which must
be a period of 12 months, except where the first accounting
period after incorporation or after prior approval from the
Revenue and Commercial Registration Departments has been
received for a change in the closing date.
Withholding tax returns (except for sales of immovable
property) must be filed within seven days of the end of the
month in which income is paid. The withheld tax can then be
used as a credit against any corporate income tax payable to
the payee.
Corporate income tax is paid semi-annually. A half-year return
must be filed within two months after the end of the first six
months of an accounting period. Based on the actual net profit
for the first six months. the tax to be paid is calculated at onehalf of the estimated profits for the full accounting period, the
exception being listed companies, banks, certain other financial
institutions, and other designated companies. The annual tax
return is filed within 150 days of the end of an accounting
period; the tax due being payable at that time. Credit is given for
the amount of tax paid at the half year.

Only Thailand-incorporated companies are
taxed on worldwide income. A foreignincorporated company is taxed on profits
arising from or in consequence of business
carried on in Thailand. A foreign company not
carrying on business in Thailand is subject to a
withholding tax on certain types of assessable
income (e.g. interest, dividends, royalties,
rentals and service fees) paid from or in
Thailand.
The Revenue Code does not describe how
foreign income received by a Thailandincorporated company is taxed, but it is
believed that the Revenue Department regards
foreign branch income as taxable when earned
and foreign dividend income as taxable when
received. Double taxation is relieved by way of
a credit against the tax chargeable in Thailand.
Thailand has double tax treaties with many
countries (including the United Kingdom, the
United States and Japan) which provide tax
benefits such as reduction in the withholding
taxes on remittance of dividends, interests and
royalties from the basic withholding tax rates of
approximately 15% to the reduced rates of
10% or in a rare instance even 0%.

information in relation to treaty or similar
arrangements.
Tax Provision Relevant to Energy,

Gas Activities
Petroleum Income Tax Act (PITA)
Companies that hold concessions for the
exploration, production and export of
petroleum, specifically crude oil and natural
gas, under the Petroleum Acts of 1971, 1973,
1979 and 1989 are subject to the Petroleum
Income Tax Acts of 1971, 1973 and 1989
(PITA). The 1989 legislation applies only to
those concessions awarded subsequent to 15
August 1989 or to concessions awarded prior
to that date for which approval has been
granted by the Minister of Industry for the
concessionaire to be treated under the 1989
legislation. Concessionaires are exempt from
taxes under the Revenue Code to the extent
that their business activities relate to the
exploration, production and export of
petroleum. The rate of income tax on net
profits is 50%. No further tax is payable on
dividends payable to shareholders or on the
distribution of profits to the head office of a
branch.
Thailand
Thailand
In computing the net profits, revenue includes the gross income

from the sale or disposal of petroleum, the value of petroleum
delivered as payment of royalty in kind, gross income arising
from a transfer of any property or rights or any other income
arising in connection with the petroleum business.
Most deductions permitted under the Revenue Code are also
permitted, except for interest expense. Royalties (other than in
respect of export sales) are not allowed as a deduction in the
pre-1989 Acts, but are allowed as a credit against the
petroleum income tax payable. All necessary and ordinary
costs incurred prior to the commencement of production are
treated as capital expenditure and can be amortised with not
less than ten years from the date of commencement of
production. After production has commenced the tangible
costs of exploration must be capitalised and intangible costs
either capitalised or expensed at the discretion of the
concessionaire. Bonuses provided for in the conditions
stipulated for the awarding of a concession, including signature
bonuses, are considered to be capital expenditure and can be
amortised over not less than ten years.
The first accounting period of a concessionaire begins on the
day that the first sale or disposal of petroleum that is subject to
royalty is made. However, where there is a transfer of any rights
in a concession prior to that date, the date of such transfer is
treated as an accounting period in itself. A concessionaire
whose activities are limited to only exploration is not required to
file a tax return.
The 1989 Petroleum Income Tax Act requires that
concessionaires filing tax returns also file a half-year tax return
within two months from the last day of the first

six months of an accounting period with tax
paid based on one-half of the estimated profits
for the full year. The tax so paid is treated as a
credit in the computation of the annual income
tax liability. A surcharge of 20% of underpaid
tax may be imposed if, without good reason,
the estimated profit is lower than the actual net
profit by more than 25%.
Tax losses may be carried forward for ten
accounting periods.
In the 1989 Petroleum Act royalties payable to
the government are based on a sliding scale of
rates ranging from 5% to 15% (a flat rate of
12.5% under earlier legislation) depending on
production volume and there is a form of
windfall profit tax known as Special
Remunerary Benefits (SRB). This is
designed to pass to the government a share of
additional profits arising from substantial
increases in the price of petroleum,
exceptionally high discoveries and/or very lowcost discoveries. SRB is calculated on a
block-by-block basis and is only payable after
all costs for the current and prior years have
been recovered. Payment is based on a
complex formula which takes into account the
revenue in a particular year, a geological
stability factor and the number of metres
drilled.

and Gas Activities
Downstream taxes comprise excise tax,
municipal tax, oil levy funds and conservation
funds, which vary depending on each product
type. VAT of 7% is charged on the retail petrol
price. The retail oil industry is deregulated.
However the excise tax structure is such that
diesel fuel has the lowest tax rate, as the
government deemed diesel fuel as being
critical for transportation usage. At the petrol
station, diesel is 2 Baht per litre cheaper than
unleaded 95 gasoline.
The wholesale price includes taxes and
amounts to approximately 40% of the retail
price.
Subsidies
The Oil Levy Fund collects taxes from other
petroleum products and currently uses these
to stabilise the LPG product price. The LPG
sector is being liberalised by the Thai
government and the aim is to phase out the
subsidy by early 2005.

Exports)
Import Taxes
Upon importation of goods into Thailand
Customs area, the following duties and taxes
normally apply:
Thailand
Thailand
Import Duty : The tariff rates depend on the classification of the

goods under the Harmonized System (HS) Code System at 6/7
digit-level for goods deemed to enter under general rate (or
MFN rate) of duty and at 8 digit-level for goods deemed to enter
under CEPT rate of duty.
Ad Valorem Formula : CIF x Rate of Duty = Duty payable
Specific Formula
: Unit x Rate = Duty payable
Crude oils are classifiable under HS 27.09 (which covers

Petroleum oils and oils obtained from bituminous minerals,
crude). Goods classified under HS 27.09 are exempted from
duty, both under the MFN rate and under the CEPT rate (for
goods of ASEAN origin).
waste oils.
Range of duty rate applicable to HS 27.10 are provided
hereunder:

gaseous hydrocarbons. Range of duty rate
applicable to HS 27.11 are provided
hereunder:
Specific
Rate
Ad valorem
MFN
CEPT
Unit
Bath
Not applied
KG
0.001
Exempted
Not applied
Not applied
Note: For goods subject to both ad-valorem

and specific rates of duty, only the rate, which
renders higher amount of duty, is normally
applied.
Excise Tax: The rates levied on the classified
goods range from 0% 36% depending upon
the products.
Specific Formula: Excise tax = Volume x

Excise Tax Rate
Interior Tax: Interior tax is equal to 10% of
excise payable.
Import VAT (Value Added Tax): Single rate at
7%
Export Taxes

There is no separate tax framework for mining
companies.
Tax Frame Work for Power and Utility

Companies
There is no separate tax framework for power
and utility companies.
Ad Valorem Formula:
Excise tax =
[CIF value+ Customs duty + other special fees and taxes (if any)] X excise tax rate1
(1.1 X excise tax rate)
Specific
Rate
Ad valorem
MFN
CEPT
Unit
Bath
Exempted - 20%
Liter/kg
0.01-0.57
Exempted - 5%
Not applied
Not applied
Thailand
Vietnam
VIETNAM
Please refer to the summary charts presented

under appendices I-IV for key statistics on
Vietnam.
2. Political Environment
Political and Legal
Vietnam is a socialist country operating under the leadership of the Communist Party. A
nation-wide Congress of the Vietnam Communist Party is held every five years when the
country's orientation and strategies are examined and its chief policies on solutions for
socio-economic development are adopted.
National Assembly
The National Assembly is the highest law making body in the country. It comprises of
delegates who are elected for a five-year term from various strata and different ethnic groups
from all around the country. The National Assembly is both the supreme state authority and
the unique legislative body and has the power to promulgate and amend the constitution and
laws. The National Assembly meets twice a year.
Vietnam
Vietnam
The Standing Committee of the National Assembly is the

permanent sitting body of the National Assembly. Its principal
functions are the interpretation of the constitution, laws and
ordinances, the control of their implementation and the
supervision of the activity of the Supreme People's Court and
the Supreme People's Procuracy.
The President of Vietnam

The president, as the head of state, is elected by the National
Assembly. The president has the right to proclaim laws and
ordinances passed by the National Assembly and the Standing
Committee respectively. The president is the commander-inchief of the armed forces and chairman of the Council of
Defence and Security. In foreign affairs, the president has the
authority to appoint ambassadors and to sign international
agreements and treaties.
The president appoints and dismisses the prime minister and
the members of the Government, subject to the approval of the
National Assembly. Furthermore, the president has the right to
nominate key officials such as the chief justice of the People's
Supreme Court and the Supreme Procuracy, subject to the
National Assembly's approval.
The Government
The Government is the highest executive organ of the State.
The prime minister is the leader of the Government. The prime
minister is responsible for the day-to-day operations of the
Government. The Vietnamese Government has 20 ministries
and 6 ministerial-level bodies.
The People's Councils and the

People's Committees
Vietnam has 64 provinces and cities directly
under the central authorities. Provinces are
subdivided into districts, provincial cities and
municipalities. Districts are further divided into
communes and townships. Cities directly
under the central authorities are made up of
districts. Urban districts are divided into
precincts, and rural districts are made up of
communes.
People's Councils of various administrative
levels are elected by the population of the
locality. People's Councils are responsible for
the supervision of the implementation of the
laws, policies and tasks at the local level, and
for taking decisions on local socio-economic
development programs and budgets.
People's Committees of various levels are the
executive arm of the People's Councils. They
are also local administrative authorities and
report to the People's Councils of the same
level. Chairmen, Vice Chairmen and members
of the People's Committees are elected by the
People's Councils.
The People's Courts and People's

Prosecutors
The constitution establishes a three level
judicial system comprising district courts,
provincial courts and the Supreme People's

Court. In addition, there is a system of people's
organs of control acting as a procuracy or
public prosecutor to oversee the observance
of laws by judicial bodies and to exercise the
power of public prosecution.
Organisations
The principal regulatory and government
organisations concerned with business
operations are:
1. The Ministry of Planning and Investment :
The central licensing body for foreign
investment projects, including energy,
utilities and mining.
2. The Ministry of Industry : This has
substantial influence on the operations of:
Vietnam Oil and Gas Corporation
(PetroVietnam) - the Government's
authorised regulator of the oil and gas
industry;
Vietnam National Coal Corporation
(Vinacoal) which controls all aspects
of exploration for the mining,
production, supply and export of coal;
and
Electricity of Vietnam (EVN)
responsible for all generation,
transmission, supply and distribution
of electricity.
Vietnam
Vietnam
3.
4.
5.
Ministry of Natural Resources and Environment - which

oversees new investment and operations in the mining
industry.
The State Bank of Vietnam.
The Ministry of Finance.
Economic Overview
under Appendix I for information on Vietnam.
Vietnam has been carrying out economic reforms since 1986
under the Doi Moi (Renovation) policy, focusing on marketoriented economic management. This included: (i) restructuring
and building a multi-sector economy; (ii) financial, monetary and
administrative reform; and (iii) the development of external
economic relations.
One of the most important aspects of economic reform in
Vietnam has been the encouragement of domestic and foreign
private investment. The Enterprise Law (which replaced the
Company Law and the Law on Private Enterprises) has had a
significant impact on the development of the private sector in
Vietnam. The Law on Foreign Investment was promulgated in
1987 and amended in 1990, 1996 and 2000. The Law is now
considered to be among the most liberal investment laws in the
region. These laws were drafted following the policy set out in
the 1992 Constitution (as amended on 25 December 2001),
which treats all economic sectors equally regardless of the
various types of ownership.
Since 1986 Vietnam has recorded important achievements in
socio-economic fields. During the period of

1991-1995, Gross Domestic Product (GDP)
grew by 8.2% per annum on average. Despite
adverse impacts caused by the regional
financial crisis, GDP growth returned to 7% in
2002 and was 7.2% in 2003. The moderate
inflation of about 3.1% in 2004 (estimate) will
assist in stabilizing economic growth. GDP
(2003) has more than doubled since 1991.
Agriculture still plays a measurable rate at
22.3% of GDP. The remainder is shared
between industry (36.6%) and services (41.1%).
FDI in Vietnam totaled approximately US$
1.654 billion in 2003.

The State Bank of Vietnam remains the most
heavily government-controlled central bank in
the Asia-Pacific region. It performs the standard
set of central bank functions plus non-standard
ones. It works as a representative for Vietnam's
Government at the international monetary,
credit institutions and banks meetings. It signs
up agreements on currency, credit, settlement
with foreign countries and international
organisations directly or under authorisation by
the Government. Vietnam's foreign reserves as
of early July 2004 were estimated at
approximately US$ 5.5 billion. However a lack
of transparency about the exact figures of
foreign reserves led to termination by IMF of its
US$ 400 million loan facility.

The currency unit is the Vietnamese Dong
(VND). The Government manages the exchange
rate, usually allowing a steady devaluation. In
2001-2002, the Dong depreciated at an annual
rate of 3.8% against the dollar. In 2003, this
rate declined to around 1% per annum and at
the end of 2003, the Dong was trading at
around VND15,500/US$.
Strictly speaking, banks are free to set their own
interest rates for lending in both Dong and
foreign currencies following the interest rate
liberalization introduced in June 2003.
However, in practice, numerous formal and
informal controls exist, which limit banks'
freedom. Despite ongoing efforts to strengthen
the banking sector, it is likely to be some years
before domestic banks play a full part in
financing development.

Market
Overview
Vietnam
Vietnam
Other Summary of Information (by Country) (Appendix III) for

industry-related key data and information on Vietnam.
Vietnam has potential to become a regional oil and natural gas
supplier. Ongoing exploration has led to several oil and gas
discoveries in recent years.
Vietnam is a relatively small player in the regional and world
energy markets. However, it has significant potential energy
demand as the economy develops. The oil and gas sector is
making a major contribution to the level of exports and
government revenues, as more oil and gas fields have come on
stream over the last 5 to 7 years.
Oil
Vietnam has 600 million barrels of proven oil reserves with further
discoveries likely. Crude oil production averaged 352,507 barrels
per day (Bbl/d) in 2003. The country has six operating oil fields,
of which Bach Ho, Rang Dong, Hang Ngoc, and Dai Hung are
the largest. Most oil exploration and production activities occur
offshore in the Cuu Long and Nam Con Son Basin. Vietnam
currently has no operating oil refineries, therefore a large portion
of its oil production is exported. Export markets include Japan
(the largest importer), Singapore, the United States and South
Korea. Vietnam's net oil exports were 150,507 Bbl/d in 2003.
Vietnam has nine onshore and offshore basins, with discoveries
of oil and gas being made in four of them: the Song Hong Basin,
the Cuu Long Basin, the Nam Con Son Basin and the Malay-Tho
Cu Basin.
The Vietnamese government controls both the

upstream (exploration and production) and
downstream (transport and refining) oil and
natural gas industries. For upstream activities,
Vietnam Oil and Gas Corporation
(PetroVietnam), a government-owned company,
is the only entity authorized to conduct
petroleum operations. All petroleum exploration
and production by foreign investors must be
carried out in cooperation with PetroVietnam.
For downstream activities, several governmentowned companies, such as Petrolimex and
Petec under the Ministry of Trade, PetroVietnam
Trading Company (Petechim) under
PetroVietnam, SaigonPetro under Ho Chi Minh
City People's Committee, and Vinapco under
Vietnam Airlines, have been licensed to import
petroleum products. Petrolimex is the largest
importer of petroleum products.
PetroVietnam intends to attract more foreign
investment as well as use its own resources to
increase proven reserves and sustain its annual
production.
Refining
Vietnam is currently in the process of building its
first major refinery, the $1.3 billion Dung Quat
Refinery. Located in Quang Ngai province on
Long Son Island, close to the Nam Con Son oil
basin in the South China Sea, it will have a
capacity of about 140,000 Bbl/d. The project

began as a joint venture between PetroVietnam
and the Russian firm Zarubezhneft.
Construction has commenced, and the facility
was expected to be finished by late 2002.
However, delays have moved the completion
date back to end 2004, and it may not be fully
operational until 2007 (four years behind its
original schedule). In December 2002,
Zarubezhneft announced its withdrawal from
the oil refinery construction project but had
agreed to perform some construction work as a
subcontractor.
A second refinery project, Ngai Son, is under
consideration for Thanh Hoa province.
Mitsubishi and JGC Corporation signed a
memorandum of understanding with
PetroVietnam in October 2001 covering a
feasibility study for the project. A cooperation
agreement for the feasibility study was signed
by Mitsubishi and ABB Lummus Global (an
American technical consulting firm) in January
2003.
PetroVietnam's storage and transportation
division, Petrolimex, is planning to build a major
new oil storage facility in central Khanh Hoa
province. The depot will have a total storage
capacity of 3.68 million barrels, easily the largest
in the country and equivalent to approximately
three weeks of total national oil consumption.
Vietnam
Vietnam
Petrolimex plans to complete the facility by the beginning of

2006.

Most of the Country's natural gas reserves are located off the
southern coast of Vietnam. Significant development of projects
that will use natural gas as a feedstock has been occurring. For
example, in the Nam Con Son Basin, the Lan Tay-Lan Do fields
with recoverable gas reserves of 58 Billion Cubic Metres (BCM)
started producing at the end of 2002 and are expected to
produce 2.7 BCM per year. Recoverable gas reserves in the
Malay-Tho Chu Basin are about 125 BCM, with one major
pipeline scheduled for completion in 2006/07.
Vietnam's natural gas production and consumption are
increasing, with further increases expected as additional fields
come on-stream. The target set by PetroVietnam for natural gas
production is 202 billion cubic feet for 2004. The Cuu Long basin
is the largest Vietnamese natural gas production area, and is a
source of associated natural gas from oil production. An existing
62-mile pipeline from the Bach Ho field is operating at near peak
capacity. The Ruby and Rang Dong oil fields are located near the
pipeline and have considerable amounts of associated natural
gas. Following the installation of a new platform in the Rang Dong
oil field, associated natural gas from the field, which was
previously flared offshore, will now be transported onshore for
use. It is planned that the estimated 60 Million Cubic Feet Per
Day (Mmcf/d) will be consumed in power plants in southern
Vietnam. Furthermore, the new platform will increase the
exploration capacity of Rang Dong from 30,000 Bbl/d to almost
70,000 Bbl/d.
In December 2002, a South Korean consortium

headed by Korea National Oil Corporation
(KNOC) signed an agreement to install facilities
to be used to pump and supply up to 130
Mmcf/d of natural gas to Vietnam. The natural
gas, located in the Rong Doi and Rong Doi Tay
fields on Block 11-2 of the Nam Con Son
Basin, will be purchased by PetroVietnam for
23 years.
The facilities are expected to be completed in
2005, at which time sales will begin.
PetroVietnam is in turn expected to sell the
natural gas to Electricity of Vietnam (EVN). It is
estimated that the area, which includes the
Flying Dragon field, could hold up to 1.2 Tcf of
natural gas.
A new natural gas discovery was made in
February 2003 at the Tien Hai field in northern
Vietnam. It.is believed to be capable of
producing at 1.76 Mmcf/d, making it one of the
largest discoveries in the north of the country.
Tien Hai is located in the Red River delta, one
of the oldest production areas in Vietnam.
However, Vietnam's large foreign-funded gasto-power projects are all currently located off
the southern coast of the country.
In September 2002, it was announced that a
new 3,100-mile natural gas pipeline, which will
be Asia's longest, will pass through Vietnam.
The pipeline, which will be built through the

Asia-Pacific Economic Cooperation (APEC)
forum's Partnership for Equitable Growth
(PEG), will connect an Indonesian natural gas
field with Vietnam, Malaysia, Thailand and
China. Construction costs are estimated at $8
billion, with 30% of the funding expected to
come from the oil and gas industries of the five
nations. The remainder is expected to be
provided by international organizations and
other countries.
In the Cuu Long operating area, a new
discovery of gas and high-quality condensate
has been made at the Su Tu Trang (White Lion)
field. The field is being developed in a joint
venture partnership with ConocoPhillips, the
Korean National Oil Corporation (KNOC) and
SK Corp. Preliminary estimates indicate that
the field holds 6 Tcf of wet gas reserves.
In 1992, BP, Conoco, and ONGC (India) formed
a joint venture with PetroVietnam to develop
natural gas resources in the Nam Con Son
basin, in the Lan Tay and Lan Do fields.
Conoco purchased its stake from Norway's
Statoil, which sold off its Vietnamese assets in
October 2001. The fields contain an estimated
2.4 Tcf of natural gas. Now BP and
PetroVietnam are working together to develop
the deposit, and BP hopes to bring first gas on
stream no later than 2006.
Vietnam
Vietnam
In May 2004, PetroVietnam and Thailand's state-owned oil and

gas conglomerate (PTT) signed a memorandum of
understanding on conducting a feasibility study to build a
natural gas pipeline network in southern Vietnam. Twelve
industrial zones covering 2,500 hectares in Ho Chi Minh City are
encompassed in the study, which is scheduled to be
completed by the end of 2005, with any investment to build the
pipeline to start in 2006.
In the Nam Con Son Basin, a 230-mile pipeline, which cost an
estimated US$565 million to construct, was completed in June
2002. It now connects the Lan Tay and Lan Do fields to the
Vietnamese mainland at Vung Tau. The natural gas delivery
began in November 2002. At 247 Billion Cubic Feet (Bcf) per
year, pipeline capacity currently exceeds production from the
fields, although the extra capacity will eventually transport gas
from the nearby Hai Tach, Moc Tinh and Rong Doi fields, as well
as from probable future gas finds in the area.
The Malay basin is another potentially hydrocarbon-rich area.
TotalFinaElf and Unocal have both found natural gas in
exploratory drilling in the area. Additionally, Talisman Energy
has found natural gas at the Cai Nuoc field in block 46. The
discovery is close to block PM-3-CAA, which straddles the
maritime border with Malaysia, and is expected to contain
between 70 and 100 Bcf of recoverable gas reserves. The PM-3
block has the capacity for 270 Mmcf/d of gas. The region is
near the Mekong Delta, which is sparsely populated. Although
companies are considering constructing a natural gas pipeline
to the Delta, demand in the region might not be able to support
the construction. A feasibility study for a pipeline to bring
natural gas ashore from the PM3 Block, shared by Vietnam and
Malaysia, was commissioned in July 2001. In

September 2001, Vietnam's prime minister
approved study, paving the way to build the
US$230 million project in southernmost Ca
Mau province. The pipeline will stretch for
about 180 miles under the sea from the PM3
Block to the mouth of the Doc River in Tran Van
Thoi district, then 27 miles over land to the Ca
Mau industrial zone. It is designed to have an
annual capacity of approximately 70 Bcf and
will be put into operation during the first
quarter of 2005. Gas from the pipeline will be
used to supply a 720-MW power plant and a
nitrogenous fertilizer plant.
149.6 Million Metric Tonnes (Mmt), the majority

of which is anthracite. Production has
increased dramatically since the mid-1990s. In
2003, Vietnam produced just over 13.1 Mmt.
These increases have resulted in an increase in
exports (primarily to Japan) and an increase in
coal stockpiles. In 2003, Vietnam exported a
record 4.8 Mmt of coal. Exports made up one
third of the coal industry's sales for the year.
China has become a large importer of
Vietnamese coal, importing two million tons in
2002. The other large export markets for
Vietnam's coal sector include Japan, Thailand,
the European Union, Mexico, and Brazil.
The Phu My power-generating complex is

supplied by natural gas from the Nam Con Son
basin. The basin's reserves are estimated at
nearly 2.1 Tcf of gas. Gas from the basin came
on stream in late 2002, and in February 2004,
the operators of the Nam Con Son project - a
consortium of Britain's BP, India's ONGC
Videsh and ConocoPhilips from the US, along
with PetroVietnam - announced that it had
brought onshore 35 Bcf of gas since it
commenced operations. Gas is brought
onshore via the US$565 million, 218-mile Nam
Con Son pipeline.
The Vietnamese government is promoting the

construction of coal-fired power plants.
Vinacoal plans to build as many as seven new
power plants over the next decade with a total
capacity of 2,170 Megawatts (MW). One 100MW plant at Na Duong is under construction
and scheduled to come online in 2004, and six
more are under consideration. Vietnam's coal
consumption is expected to increase as it
becomes a larger electricity producer, with
coal-fired power plants eventually accounting
for 25% of the country's total electricity
production. The Vietnamese government
estimates that it will need to use 9.2 Mmt of
coal per year by 2010 to meet increasing
domestic demand, which it projects will be as
high as 20,000 MW by then. Vietnam
Coal
Vietnam contains coal reserves estimated at
Vietnam
Vietnam
previously had focused much more on hydropower, and the

shift to coal marks an important change in Vietnam's energy
sector.

Oil and Gas
All organisations/individuals carrying out
petroleum operations (i.e. exploration,
development and production of oil and gas,
and support activities) in Vietnam must sign
a petroleum contract with PetroVietnam.
In March 2003 a large coal bed was discovered in the Red River
Delta region of northern Vietnam. It is estimated that the new
bed contains 1.64 billion tons of coal. The Vietnam Coal
Corporation, Vinacoal, plans to use the new reserve for thermal
power plants. Vinacoal has asked the Japanese New Energy
and Industrial Technology Development Organization (NeDo) to
conduct further studies regarding exploration and exploitation
of coal in the region.
Vietnam has three forms of Petroleum

Contract (PCs):
Electricity
Vietnam's power sector currently has a regional character

because of the geographical distribution of resources and the
country's long and narrow shape. Hydropower and coal-fired
power dominate in the north, while in the south there is more
hydropower. The south also relies on diesel-fired generation
and increasingly it will rely on gas from the offshore gas fields of
Bach Ho and Nam Con Son. In the center, there is hydropower
and diesel-fired capacity.
According to figures from Electricity of Vietnam (EVN), the

total installed capacity for Vietnam by the end of 2002 was
8,880 MW of which 8,270 MW was from EVN's own power
plants and 610 MW from other plants. According to the
Government's master plan, in 2002, EVN and other plants
generated 36 billion KWh. The demand is expected to grow to
between 48 and 53 billion KWh by the end of 2005 and to
between 88 and 93 billion KWh by the end of 2010.
Production Sharing Contracts (PSCs)used up until the mid/late 1990s;

Joint Operation Contracts (JOCs)currently the preferred format; and
Joint Venture Contracts (JVC).
A PSC is a form of business cooperation

contract that is licensed under the Law on
Foreign Investment. An investment licence
is issued by the Ministry of Planning and
Investment and it ratifies the terms of the
PSC.
The major difference arises from the
establishment of a joint operating company
(JOC). The JOC is a non-profit company
that acts as an agent for the contractor
parties. It performs the role of operator
through a separate legal entity.
A joint venture enterprise is a legal entity with

limited liability established under the Law on
Foreign Investment on the basis of a joint
venture contract between one or more
Vietnamese parties and one or more foreign
parties.
Various departments of PetroVietnam are
involved in:
!
!
!
!
regulating of the industry;

licensing foreign investors;
being a partner to the foreign investor in
their petroleum contract; and
being a service provider, such as oil field
services.
The natural gas supply industry is regulated by

the Government and PetroVietnam (a StateOwned Corporation), the only Vietnamese
Company operating in this area. All foreign
investment in the natural gas supply should
cooperate with PetroVietnam. In certain cases,
a long-term gas supply is concluded and the
price is negotiated between the two parties
(the off taker and the seller) with the approval of
the Ministry of Industry. In general, the gas
supply price is mutual agreement between
parties and the pricing is currently not
regulated by the Government.
The natural gas pipeline system is regulated in
Vietnam
Vietnam
Vietnam. The construction and operation of the gas pipeline

system is subject to Government approval. PetroVietnam has
share in all pipelines. However, there is neither specific
regulation in Vietnam that deals with the natural gas
transportation tariffs nor any specific regulations on tariff
control. In general, the tariffs are determined based on market
forces (demand and supply).
!
In relation to a legal basis for access by third parties to natural
gas pipelines and distribution systems, any party who wants to
invest in gas pipelines should cooperate with PetroVietnam. In
respect of foreign investors, only Business Cooperation
Contract is accepted under the existing regulations in relation
to natural gas pipelines. Distribution of natural gas is fully
controlled by PetroVietnam. Foreign investors can get involved
in production and distribution of LPG and gas products, but not
natural gas.
PetroVietnam deals with access issues relating to state-owned
gas distribution systems (pipelines) on a case-by-case basis.
Mining
Any person carrying out mining activities in Vietnam must
obtain a mining licence from the Ministry of Natural Resources
and Environment.
There are different types of mining licences:
! Prospecting licence: this licence gives the right to prospect
minerals in certain areas and does not give the right of
occupation nor the title to the minerals nor the title to the
real property.
Exploration licence: this licence gives the

right to explore minerals but not title to the
minerals.
Exploitation licence: this licence gives the
right to exploit minerals. The holder of the
licence also has title over the minerals
exploited.
Processing licence: this licence will be
issued to organizations and individuals
wishing to conduct mineral processing
activities, except in cases where the
mineral processing right is given together
with the exploitation right.
Each type of mining licence is issued

separately at different stages of the mining
process, and they cannot be combined (with
the exclusion of a processing right given
together with the exploitation right).
The mining licence only gives the right to
conduct certain mining activities. It is different
from an investment licence (i.e. a licence for
setting up a foreign-invested company in
Vietnam).
To carry out prospecting and exploration
activities, a foreign mining company is not
required to set up a company in Vietnam.
Exploitation licences are only given to
companies incorporated in Vietnam. Any
foreign mining company that wishes to carry

out exploitation activities must obtain an
investment licence issued by the Ministry of
Planning and Investment. The exploitation
licence/processing licence are granted by the
Ministry of Natural Resources and
Environment to the foreign-invested mining
enterprise at the same time of issuing its
investment licence, or later.
Power and Utilities

EVN is responsible for all generation,
transmission, supply and distribution of
electricity and, until recently, had a monopoly
position in the power sector. With the
increasing importance of gas in the south and
substantial reserves of coal available in the
north, PetroVietnam and Vinacoal are likely to
start playing important roles in the energy
sector.
Until recently, private participation (both
domestic and foreign) in the power sector has
been limited to small foreign invested plants,
usually built primarily to supply power to
industrial zones and then selling excess
capacity to EVN. However, the Phu My 2.2 and
Phu My 3 power projects have now shown that
foreign-invested projects can be successfully
negotiated and financed. The Phu My 2.2
project is a 715 MW combined cycle gas
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Vietnam
power plant negotiated in the form of a 20-year BOT

concession with a Power Purchase Agreement (PPA) between
EVN and the BOT company, and a Gas Supply Agreement
(GSA) between the BOT company and PetroVietnam. The Phu
My 3 project is a 717 MW combined cycle gas power plant
negotiated in the form of a 20-year BOT concession with a PPA
and GSA.
A PSC operator, or Joint Operating Company

for the Joint Operating Contract, will normally
keep sufficient records to fulfil the reporting
requirements to PetroVietnam and to provide
accounting details under the GAAP used by
the PSC/PC contractor's home office
promulgated GAAP.
6. Taxation
Taxes
Principal Taxes
Mining Companies
Note that foreign-invested enterprises and

domestic enterprises are subject to
different income tax regimes.
There are no specific accounting standards for

mining companies, and they generally follow
VAS.
The Government of Vietnam has indicated

that the tax system in Vietnam consists of
the following main taxes:
!
!
!
!
!
The accounting framework is the Vietnamese Accounting
System (VAS). This is based on detailed accounting rules
and a standard chart of accounts. It is not principles driven.
In the last two years, the Ministry of Finance has issued ten
Vietnamese Standards on Accounting. These are based on
the equivalent International Financial Reporting Standards,
however some important differences still remain. For
example, revaluations of assets and provisions for
impairment are only allowed in limited circumstances and
after obtaining specific regulatory approvals.
There are no specific accounting standards for

power and utility companies. They also
generally follow VAS. Companies can apply
for exemptions from VAS, and request the
application of International Financial Reporting
Standards or US GAAP, providing a strong
case can be made for the inappropriateness of
VAS. However, the granting of such
exemptions is becoming less common.
Corporate Income Tax (Business

Income Tax, BIT)
Rates of Tax
Under the BIT law, foreign invested
companies and foreign parties to Business
Co-operation Contracts (BCCs) are
subject to the tax rates imposed under the
There are no specific accounting standards for the oil and

gas industry. The Petroleum Contract outlines the
accounting which the contractor must follow, with the
relevant clauses mainly based on cost recovery
requirements.
!
!
!
!
business income tax;

value added tax;
special sales tax;
foreign contractor withholding tax;
profits remittance tax (akin to dividend
withholding tax);
import-export tariffs;
natural resource tax;
land rentals; and
personal income tax.
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Vietnam
Law on Foreign Investment. The standard rate of tax is 25%.

Domestic enterprises, branches of foreign companies and
foreign contractors not subject to the Law on Foreign
Investment are taxed at a standard rate of 32% on their profits.
Preferential rates of 10%, 15% and 20% are available where
certain criteria are met and in industrial sectors or locations in
which investment is encouraged. Preferential rates are available
for a period of between ten years and the duration of the
project, starting from the commencement of operating
activities. When the preferential rate expires, the rate generally
reverts to the standard rate.
Oil and gas companies are currently subject to tax at a standard
rate of 50%. A preferential rate of 32% is applied for projects,
which are encouraged. BIT rates applicable to the exploitation
of other rare and precious resources shall be determined on a
case-by-case basis, ranging from 32% to 50%.
Vietnamese persons residing abroad who invest into Vietnam
are eligible for a reduction of 20% of the BIT payable (except
where the 10% BIT rate has already been granted) and a 3%
withholding tax on the profits remitted.
Tax Holidays
Joint ventures, wholly foreign owned companies; foreign
parties to BCCs, branches of foreign companies and domestic
enterprises may be eligible for tax holidays. The holidays take
the form of a complete exemption from BIT for a certain period
beginning immediately after the enterprise first makes profits,
followed by a period where tax is charged at half rate. The
duration of these holiday periods correlates directly with the BIT
rate applicable to the project, and may

continue for up to 8 years.
Refund of BIT
If profits are reinvested in the business or a
new project in Vietnam, for at least three
consecutive years, a portion or all of the tax
paid on the profits may be refunded when
certain specific conditions are met.
Calculation of Taxable Income
Taxable income is the difference between total
revenue, whether domestic or foreign sourced,
and reasonable and valid expenditure, plus
other additional profits (including capital
gains).
The audited financial reports form the basis for
calculating tax liabilities. However, the trend is
toward a greater number of adjustments
between accounting profits and taxable
profits.
Allowable Deductions
Tax-deductible expenditure must be
reasonable and valid. The tax authority has the
power to consider the reasonableness of the
revenue and expenditure.
Tax-deductible expenditure comprises:
Production Costs:
!
Depreciation of fixed assets in accordance
with prevailing regulations (currently
Decision 166)
!
Costs of raw materials, energy and fuel
!
Research and development expenses
!
House and land rent payment.
Employee Costs:
!
Employee remuneration expenses (in
accordance with signed Labour Contracts),
including accrued expenses
!
Severance/retrenchment payments in
accordance with the Labour Code
!
Female employee-related expenses,
payments made to the social and medical
insurance funds for employees.
Financing, Insurance and Accounting
Charges:
!
External services expenses such as
insurance of the enterprise's assets, lease
payments, costs of acquisition, or fees paid
for the right to use technical documents,
patents, technology and technical services
!
Bank charges and interest on loans
(subject to certain restrictions)
!
Provisions for stock devaluation, bad debts
and securities devaluation, as regulated by
the Ministry of Finance
!
Taxes, levies and charges in the nature of
tax (except BIT).
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Vietnam
Management Fees:
!
Board of Management meeting fees in accordance with
joint venture's charter
!
Business management expenses allocated to permanent
establishments in Vietnam by the foreign company in
accordance with the ratio of Vietnam-sourced revenue over
total revenue.
Other Expenses:
!
Expenses on distribution and sale of goods and services
including packaging, transportation, storage and warranty
expenses
!
Other expenses not exceeding 5% or 7% of the total
above-mentioned expenses (with some exceptions),
depending on the type of business and may not always
include cost of goods sold. This category includes,
amongst others, expenses on advertising, marketing and
promotion expenses.
There is no general provision regarding the tax deductibility of
an enterprise's expenses. For certain businesses such as
insurance and lottery, the Ministry of Finance provides specific
guidance on deductible expenses for BIT purposes.
In order to obtain a tax deduction for expenses, an enterprise is
required to have official Ministry of Finance invoices to support
all purchases.
Losses
Joint ventures, wholly owned foreign enterprises, foreign
parties to BCCs and branches of foreign companies and
domestic enterprises may carry forward their losses for five
years. Carry-back of losses is not permitted.

There is no provision for any form of
consolidated filing or group loss relief.
Transfer Pricing
The authorities have introduced the concept of
associated companies. Anti-avoidance
regulations have been issued to ensure that
transactions take place at the same price as
they would between independent companies.
Various methods of calculating this price are
set out in the legislation but remain untested in
practice.
Reserve Funds
Foreign invested enterprises are allowed to
appropriate a percentage of profits, to be
agreed and stated in the Charter, to set up a
welfare fund, reserve fund, business
development fund and other agreed funds.

Taxpayers must file VAT returns monthly, by the
10th of the following month. The tax authorities
process the tax returns and issue a tax
assessment notice to the taxpayer. The
taxpayer must remit the VAT payable by the
25th of the month. At the end of the year the
taxpayer must complete an annual tax
finalization.
BIT returns are filed annually. Provisional

quarterly payments are also required. The
standard tax year is the calendar year. The
Ministry of Finance has approved different
accounting year-ends in a number of cases. Tax
is collected each year in four quarterly
provisional installments according to the
declaration submitted. Payments must be
made in accordance with the tax notice, but no
later than the last day of the quarter. The annual
tax return and the audited financial statements
should be filed within 90 days of the end of the
financial year.

In practice, only Vietnam-source income is likely
to be booked in the Vietnam investment vehicle.
However, there are cases where Vietnam
resident companies are making investments
overseas. The foreign income, under the
domestic tax law, is subject to Vietnam BIT with
tax credits available.
Vietnam currently has over 34 agreements in
force with numerous others at various stages of
implementation and negotiation. The
agreements in force include those with
Australia, France, Germany, Japan, South and
North Korea, Malaysia, the Netherlands,
Singapore, Thailand and the United Kingdom.
These treaty arrangements may affect the
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Vietnam
withholding taxes in relation to dividends, interests and royalties.

Also, for example, the deemed BIT on foreign contractors may
be eliminated or reduced through a relevant Double Taxation
Agreement. Please contact our Partners or Managers for
information in relation to treaty or similar arrangements.

Mining Companies
There have been three distinct eras of PSC/PC tax terms:
1. An exemption from all taxes - up to early 1990s;
2. PetroVietnam assumed responsibility for paying all taxes early 1990s to late 1990s;
3. Contractor parties to be responsible for their own taxes late 1990s to present.
Business Income Tax
From 2004, the standard tax rate applicable to taxpayers is 28%.
Preferential rates of 10%, 15% and 20% are available if certain
criteria are met and in sectors or locations in which investment is
encouraged.
Oil and gas companies are subject to business income tax rates
from 28% to 50% depending on project and upon approval of
the prime minister.
The basic rule of thumb for taxation in the petroleum industry is
that cost recovery equals tax deductibility. However, there are a
few exceptions. The main one relates to commissions agreed in
the oil and gas contract for not being recovered.
Losses
Are unlikely to occur due to cost recovery limits.
authorized to deduct and collect taxes from

these contractors.

Each PSC/PC must obtain a separate tax
registration number. There are no group relief
facilities available in Vietnam. However, within
the area covered by the PSC/PC, expenditure
on exploration and other activities in one work
area can generally be offset against taxable
income arising from other work areas in the
same PSC/PC.
Contractors carrying out a number of

exploration contracts at the same time will be
taxed on each contract separately.
With regard to businesses/individuals carrying

out oil and gas activities by setting up a legal
entity in accordance with the Law on Oil and
Gas, the tax registration and filing are as
follows:
For oil and gas contracts where contractors

directly pay taxes, the coordinator or
coordinating company is responsible for
registering and paying taxes with the local
tax authorities
For oil and gas contracts where
PetroVietnam pays tax, PetroVietnam is
responsible for registering and paying
taxes on the contractors' behalf.
With regard to individuals and organizations

carrying out oil and gas activities without setting
up a legal entity (contractors), PetroVietnam is
Profits Tax on Capital Transfers (or Capital

Gains)
Under the new BIT regulations, capital gains are
subject to the standard rate of 28%. If foreign
investors transfer their shares to companies
incorporated in Vietnam, they will enjoy a 50%
tax reduction. Under the Oil and Gas Law,
capital gains are taxed at 25%. It is not clear
what is the position as result of the introduction
of the new BIT Law. It is likely that the 28% rate
will apply.
The taxable profit is the difference between the
transfer value and the original value of the
transferred capital less any reasonable transfer
fees.
Value Added Tax
VAT applies to the supplies of the petroleum
industry at various rates:
!
!
!
!
export of crude oil : VAT exempt

domestic supply of crude oil : 10% VAT
export of gas : 0% VAT
domestic supply of gas : 10% VAT.
Vietnam
Vietnam
Import Duty
Oil and gas exploration and exploitation enterprises are
exempted from import duty for the following goods:
! Equipment, machinery, specialized means of transport
necessary for oil and gas operations, specialized means of
transport for transporting workers (automobiles having 24 or
more seats, watercraft) including components, detailed
parts, spare parts, support structures, appliances, molds
and accessories accompanying the above equipment,
machinery and specialized means of transport;
! Materials necessary for oil and gas operations which have
not yet been locally manufactured;
! Medical equipment and first-aid drugs used on oil/rigs and
floating projects when an approval from the Ministry of
Health is obtained.
! Goods temporarily imported for re-export, serving oil and
gas operations
! Office equipment serving oil and gas operations.
In addition, equipment, machinery, specialized means of
transport and materials necessary for oil and gas operations are
exempted from VAT on import.
Export Duty
Export duty is charged at the rate of 4% on the export of crude
oil. No export duty applies to the export of gas.
Withholding Tax on Foreign Companies Providing Services
to Vietnam
Many foreign contractors conduct business in Vietnam without
setting up a legal entity. Their contract with the Vietnamese
partners forms the basis of their right to operate. These
companies are subject to Foreign Contractor

Withholding Tax (FCWT), which comprises a
Value Added Tax (VAT) and a Business Income
Tax (BIT) element. The VAT portion will be
creditable to the Vietnamese payer (assuming
they are making taxable supplies). The
standard FCWT rate for general services is 10%
(5% VAT and 5% BIT). Different rates apply for
other services.
Natural Resource Tax
Under Vietnamese law, the State manages
natural resources and those who utilize natural
resources have to pay a royalty to the State.
Natural resource tax rates range from 6% to
25% for oil and 0% to 10% for gas depending
on the exploited volume. PSC/PCs operating in
encouraged investment sectors are entitled to
the privileged tax rates of 4% to 20% for oil and
0 to 6% for gas.

and Gas Activities
the downstream oil and gas activities is mostly
identical to that applicable to an entity engaged
in any other non-upstream business, i.e. the
general tax law. Some special tax incentives
may be granted for large project such as
refineries.

Exports)
Import tax
Under the current Vietnamese tax regulations,
the following duties and taxes normally apply to
oil and gas:
Import Duty
The tariff rates depend on the following:
(i)
The classification of the goods under the

Import/Export Tariff List constructed on the
basis of the Harmonized Commodity
Description and Coding System of the
World Customs Organization (Version
2002). This list is detailed at 8-digit coding
level (at minimum); and
(ii) The country or region of origin of the
imported goods. There are three types of
tariff rates depending on the origin of the
imported goods:
-
preferential rates (or Most Favored

Nation ("MFN") rates) are applicable to
goods imported from countries that
have MFN treatment with Vietnam;
ordinary rates (that is equivalent to

150% of the respective MFN rates) are
applicable to goods imported from
countries that have no MFN treatment
with Vietnam; and
Vietnam
Vietnam
special preferential rates (e.g. CEPT rates) are

applicable to goods imported from countries that have
a special preferential agreement with Vietnam (e.g.
CEPT rates applicable to goods of ASEAN origin).

( which covers Petroleum oils and oils obtained from
bituminous minerals, crude ). The current MFN rate and CEPT
rate (for goods of ASEAN origin) for crude oils is 15% and 5%
respectively.
waste oils. Please note that the tariff rates for refined oil
products are subject to frequent changes depending on the
fluctuation of crude oil prices in the international market. (Note:
The domestic gasoline price is under strict control of the
Government. Thus, the Government uses import duty as a tool
to regulate the domestic price). The current import duty rate for
refined oil products ranges from 0% to 20%, depending on the
category of products imported. There are no CEPT rates for
refined oil products.
Natural gas is classifiable under HS 27.11, which covers
import duty rate (both MFN and CEPT) for natural gas is 5%.
According to a recent regulation issued in

August 2004, the value of imported goods, for
the purpose of computing import duties (the
"import dutiable price"), is determined in
accordance with the principles of GATT and at
CIF (Cost, Insurance and Freight) term.
Special Sales Tax ("SST") (Only Applicable to
Petrol, Naphtha, Reformate Component and
Other Components to be Mixed in Petrol)
SST is a form of excise tax that applies to
certain goods and services, including petrol,
naphtha, reformate component and other
components to be mixed in petrol.
The current SST rate is 10% and SST is
calculated based on the import dutiable value
plus import duty.
Import Value-Added Tax ("VAT")
The general VAT rate of 10% will apply based
on the import dutiable value plus import duty
and SST (if any).
Export Taxes
Crude oil is subject to export duty at a rate of
4% (based on FOB price) and is exempted
from VAT (i.e. input VAT incurred in the
production of crude oil is not claimable).
No export taxes are applicable to refined
products and natural gas.
Tax Framework for Mining

Companies
Tax Framework for Upstream Mining
Activities
Business Income Tax
From 2004, the standard tax rate applicable to
taxpayers is 28%. The BIT rate applicable to
exploration and exploitation of precious
natural resources ranges from 28% to 50%
depending on projects and upon approval of
the prime minister.
Preferential rates of 10%, 15% and 20% are
available if certain criteria are met and in
sectors or locations in which investment is
encouraged.
Foreign invested mining companies are
subject to the same regulations on BIT
treatment as general foreign-invested
companies. Reasonable expenses incurred
in relation to the generation of taxable income
on the taxable period are deductible. There is a
list of deductible expenditures stipulated in the
BIT regulations. The expenditures, which are
not specifically listed, can be seen as not
deductible. Main deductible items include:
Depreciation of fixed assets according to

the current regulations
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Vietnam
!
!
!
!
!
!
!
Materials, fuel used for production purposes

Labour costs
Power and utility costs
Interest expenses
Provisions for major overhauls
Advertisement and entertainment expenses, limited to
10% of total deductible expenditures
Head-office management expenses allocated to a
permanent establishment in Vietnam.
Losses
Losses can be carried forward within the 5-year limit. Carry
backward of losses is not allowed.
Where processed mining products are

exported, they are entitled to a zero rate.
However, exported unprocessed mineral
products (except coal and natural gas) are VAT
exempt and any related input VAT would not be
recoverable.
Import Duty
Natural resource exploitation and exploration
enterprises are exempted from import duty as
stipulated in the general regulations in respect
of goods imported to form fixed assets,
including:

The same as other businesses, enterprises operating in the
natural resource exploitation and exploration industry are also
subject to general tax laws for tax registration. There is no
group relief available in Vietnam.
a)
b)
Profits Tax on Capital Transfers (or capital gains)

The profits tax on capital transfers is subject to a standard rate
of 28%. A 50% tax reduction applies to the income gained by
foreign investors on the transfer of shares to enterprises set up
under the laws of Vietnam. The taxable profit is the difference
between the transfer value and the original value of the
transferred capital less any reasonable transfer fees.
c)
Value Added Tax

Domestic consumption of mining products is subject to a VAT
rate of 5% or 10% depending on the type of mineral.
d)
Machinery and equipment.

Specialized means of transport which
form part of the technological process and
vehicles used for workers transportation
(automobiles of 24 seats or more,
watercraft).
Components, detailed parts, spare parts,
support structures, molds and
accessories of the above equipment,
machinery, specialized means of transport
and vehicles stipulated in paragraph b of
this clause.
Raw materials and supplies imported to
manufacture equipment and machinery
which form part of the technological
process, or to manufacture components,
detailed parts, spare parts, support
structures, molds and accessories of the
e)
equipment and machinery.

Construction materials which have not yet
been locally produced.
Export Duty
Export duty is charged at different rates for
different types of exported minerals. For
example, unprocessed precious stone is
subject to 5% export duty, processed stone is
subject to 1%. The associated waste is subject
to 3%.
Withholding Tax on Foreign Companies
Providing Services to Vietnam
Same as those for oil and gas companies.
Royalties ranging from 0% to 8% are levied on
the different types of mining products.
Tax Framework for Downstream

Mining Activities
Same as normal business, however,
preferential tax rates (e.g. 20% BIT for the first
10 years) may be applicable to downstream
mining activities.

Companies
the power and utility companies is mostly the
same as applicable to an entity engaged in
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Vietnam
other general businesses, i.e. the general tax law. A specific

model of investment in the power sector is the BOT form, which
is subject to additional tax incentives.
Withholding Tax on Foreign Companies

Providing Services to Vietnam
The general tax rules apply.
Business Income Tax

The BIT rate applicable to power and energy companies is
28%. Currently, the preferential rate applying to infrastructure
projects, including water supply, sewerage and electricity, is
20% for the first 10 years.

Royalties ranging from 0% to 4% are levied on
the different uses of water.
Losses
Losses can be carried forward within the 5-year limit. Carry
backward of losses is not allowed.
Special Rules for BOT Companies

BOT companies are subject to special tax
incentives. BOT companies and their foreign
contractors are exempted from import duty for
materials, fuels for production and operation of
a project in addition to the normal exemptions
from import duty provided to other non-BOT
companies. BOT companies are exempted
from land rental.

Profits Tax on Capital Transfers (or Capital Gains)
The general rules apply.
Value Added Tax
Electricity for consumption is subject to 10% VAT. Clean water
for production and other consumption is taxed at 5%.
Import Duty
Same as those for the mining industry.
Export Duty
No export duty is due on power and utilities exports.
Vietnam
APPENDIX I
Statistical Overview Chart (by Country)
As of 2003
Australia
Brunei
China
India
Indonesia
Malaysia
New Zealand Philippines
Singapore
South Korea
Thailand
Vietnam
Population, total (millions) (in 2003-actual)

Population growth (%) *
19.7
0.4
1,295.2
1,048.3
238.5
23.1
3.9
84.6
4.6
48.3
64.3
1.1
2.3
0.8
1.7
1.3
2.3
0.7
2.2
2.1
0.8
0.7
1.3
Urban population (% of total population) *
91.0
73.0
38.0
28.0
43.0
59.0
86.0
60.0
100.0
83.0
20.0
25.0
Social
81.6
Economic indicators
Gross national income (GNI) - in US$ billions (in 2003) *
Gross domestic product (GDP) - in US$ billions
Annual GDP growth (%)
Annual inflation (%) *
Consumer Price Index (general)
386.5
n/a
1,219.1
494.8
149.9
86.0
53.1
81.5
86.2
473.1
122.0
34.8
528.0
4.8
1,471.8
560.0
208.3
104.6
77.5
78.0
91.4
521.4
126.5
39.0
2.9
3.2
9.1
8.3
4.1
4.4
2.7
3.7
1.1
2.5
6.4
7.2
3.1
0.3
2.7
3.8
6.8
5.6
2.7
4.9
0.5
3.5
1.7
3.1
4.4
n/a
0.3
3.7
n/a
104.5
2.6
172.8
0.5
4.1
106.3
(0.4)
Structure of economy (% of GDP)

Agriculture
Industry
Services
3.7
n/a
14.6
22.6
15.0
7.5
4.7
14.8
n/a
3.9
9.2
22.3
26.5
n/a
52.3
26.6
45.4
33.5
27.6
31.9
33.3
41.8
43.7
36.6
69.8
n/a
33.1
50.8
39.6
59.0
67.7
53.3
66.7
54.3
47.1
41.1
n/a
Australian
Dollar
Brunei
Dollar
Chinese
Remnimbi
Indian
Rupee
Indonesian
Rupiah
Malaysian
Ringgit
New Zealand
Dollar
Philippines
Peso
Singapore
Dollar
Korean
Won
Thai
Baht
Vietnamese
Dong
Country risk rating

EIU (A= least risky, E=most risky)
General information
Currency
Currency control
Exchange rate at 31 December 2003 (US$ 1)
Foreign investment restriction
Language spoken
Time zone
No
Limited
Limited
Limited
No
Yes
No
Limited
No
No
No
Limited
1.5
1.7
8.3
46.6
8,577.0
3.8
1.7
54.2
1.7
1,191.7
39.8
15,500.0
Limited
Limited
Malay,
English
Limited
Mandarin,
English
Limited
Hindi,
English
Limited
Indonesian,
English
Limited
Malay,
English
Limited
English
Limited
Tagalog,
English
Limited
English
English
Limited
Korean,
English
Limited
Thai,
English
Limited
Vietnamase,
English
GMT +10 (Sydney)
GMT +8
GMT +8
GMT +5.5
GMT + 7 (Jakarta)
GMT +8
GMT +12
GMT +8
GMT +8
GMT +9
GMT +7
GMT +7
Sources : - The Economist Intelligence Unit : Viewswire, 2003-2004 (Except those marked with *)
(*) - other public data & secondary sources
n/a - information not available
APPENDIX II
A Comparable Summary of Information (by Country) Key Energy, Utilities & Mining Data
As of 2003
Proven oil reserves (billion barrels)
Oil Production (thousand barrels per day)
Australia
Brunei
China
India
Indonesia
Malaysia
New Zealand* Philippines
Singapore
Thailand
South Korea
Vietnam
3.5
1.3
18.3
5.4
4.7
3.0
0.1
0.2
None
None
0.6
0.6
714.8
196.0
3,540.0
819.0
1,020.0
764.8
24.0
23.5
None
None
193.2
352.5
Oil Consumption (thousand barrels per day)
881.0
12.0
5,560.0
2,200.0
1,130.0
470.0
133.6
342.0
746.0
2,100.0
821.0
202.0
Net Oil Export (Import) (thousand barrels per day)
(166.2)
184.0
(2,020.0)
(1,400.0)
(110.0)
294.81
(109.6)
(318.5)
(746.0)
(2,100.0)
(627.8)
150.5
90.0
13.8
53.3
30.1
90.3
75.0
3.5
3.8
None
None
13.3
6.8
1,170.0
366.0
1,150.0
883.0
2,480.0
1,900.0
349.9
0.4
None
None
845.0
79.8
Natural Gas Reserve (trillion cubic feet)

Natural Gas Production (billion cubic feet)
Natural Gas Consumption (billion cubic feet)
824.0
59.0
1,150.0
883.0
1,200.0
1,100.0
349.9
0.4
42.0
739.0
845.0
79.8
Net Gas Export (Import) (billion cubic feet)
346.0
307.0
n/a
n/a
1,280.0
800.0
None
n/a
(42.0)
(739.0)
None
None
Coal Reserves (million metric tons)
82,091.6
n/a
114,488.6
84,369.6
5,370.6
3.6
7,801.9
332.0
None
78.0
1,995.8
149.6
Coal Production (million metric tons)
323.8
n/a
1,378.9
356.5
130.6
0.4
4.7
1.4
None
3.8
19.6
13.1
Coal Consumption (million metric tons)
130.9
n/a
1,288.2
381.9
28.2
2.8
2.5
8.4
None
68.7
24.5
8.3
Net Coal Export (Import) (million metric tons)
192.9
n/a
90.7
(25.4)
102.3
(2.5)
2.3
(7.0)
None
(64.9)
(4.9)
4.8
Electricity Generation Capacity (gigawatts)
42.7
0.5
338.0
120.0
25.6
14.0
8.7
13.0
7.7
52.0
21.0
8.3
Electricity Production (billion kilowatt hours)
198.2
2.5
1,575.0
547.0
99.3
65.0
40.0
45.2
29.9
273.6
98.0
29.8
Electricity Consumption (billion kilowatt hours)
184.4
2.2
1,840.0
573.2
92.4
12.6
40.0
42.0
30.5
n/a
111.0
30.0
Source : www.eia.doe.gov (2003)

(*) Ministry of Economic Development - Energy Data File
(January 2004) (New Zealand)
Note : n/a = data not available
gross export only. Data not available in relation to imports.
peak demand
Electricity Generation Capacity statistics for Australia is

in million kilowatt hours and not in gigawatts
APPENDIX III
Australia
Sector/Subject
Data/Statistics
Oil and Gas

Net Oil Imports
Major Oil Suppliers
Crude Oil Refining Capacity
Major Producing Oil Fields
Oil Refineries
166,200 Bbl/d
Vietnam, Middle East, Indonesia
848,250 Bbl/d
Roller, Skate, Bass Strait, Wanea-Cossack, Laminaria, Corallina
BP Amoco - Bulwer Island (69,825 Bbl/d), BP Amoco - Kwinana
(138,500 Bbl/d), Caltex - Kurnell (114,000 Bbl/d), Caltex - Lytton
(105,500 Bbl/d), Inland Oil Refiners - Eromanga (1,425 Bbl/d),
ExxonMobil - Adelaide (74,000 Bbl/d), ExxonMobil - Altona
(135,000 Bbl/d), Shell Clyde (85,000 Bbl/d), Shell - Geelong
(119,000 Bbl/d)
Oil Tanker Terminals

Net Gas Exports
Major Gas Fields
LNG Plants
Major LNG Customers
All capital cities plus other industrial centres

346 (billion cubic feet)
Bass Strait, Cooper Basin, North Rankin, Goodwyn, Gorgon
3 plants
(1) Northwest Shelf's 12.9 Tcf Gorgan Field
(2) Darwin, Australia's Northern Coast
(3) Greater Sunrise natural gas field in the Timor Sea
Japan, South Korea, Spain
Coal Production
323.8 million metric tons
Coal Consumption
Net Coal Exports
Major Coal Customers
Japan (60%), The Philippines, others
Mining
Power
Types of electricity generation sources
Thermal, which consists of oil, gas and coal (85%), Hydro (14%),
Other (1%)
Sources : US Energy Information Administration, US Department of State, IBISWorld Pty Ltd , other public data
Note : n/a = data not available
APPENDIX III
APPENDIX III
Brunei
Sector/Subject
China
Sector/Subject
Data/Statistics
Oil and Gas

Net Oil Exports
Major Oil Customers
Oil Refineries
Data/Statistics
Oil and Gas

184,000 Bbl/d
7 Countries, including Japan, Korea, the United States, Australia,
New Zealand, China and India
8,600 Bbl/d
9 (Champion, Southwest Ampa, Fairley, Fairley - Baram, Gannet,
Net Oil Imports

Major Oil Suppliers
Oil Refineries (major)
2,020 (thousand barrels per day)

Middle-East, Russia, Indonesia
4.5 million Bbl/d
Daqing, Shengli, Xinjiang
Fushun, Maoming, Qilu, Gaoqiao, Dalian, Yanshan, Jinling,
Magpie, Iron Duke, Rasau and Seria - Tali)
Major Gas Fields
Zhenlai, Xinjiang, Sulige (Ordos Basin), Yancheng, Chunxiao,
1 Refinery (Brunei Shell Petroleum, a 50 : 50 joint venture between
Sebei (Qaidam Basin)
Shell and the government of Brunei, operates the country's only
LNG Terminals
3 Terminals
oil refinery)
(1) Near Guadong by BP and CNOOC;
Net Gas Exports
307 (billion cubic feet)
(2) At Zhangzhou by BP; and
Major Gas Fields
LNG Plants
1 Plant (Brunei LNG Sdn Bhd, Lumut)

2 Countries (Japan and Korea)
Major LNG Customers
(3) At Zheijang
Major LNG Suppliers
Australia, Indonesia
Coal Production
Coal Consumption
1,378.9 million metric tons

1,288.2 million metric tons
Japan, South Korea, India, the Philippines
Thermal (83%), Hydropower (14%) and Nuclear (3%)
Mining
Power
Thermal (gas) 100%
Power
Note : Figures taken from the 2002 Brunei Government Statistical Yearbook; other public data
Source : Energy Information Administration, other public data
APPENDIX III
APPENDIX III
India
Indonesia
Sector/Subject
Sector/Subject
Data/Statistics
Oil and Gas

Net Oil Imports
Major Oil Suppliers
Oil Refineries
Key Product Pipelines
Oil and Gas

Net Oil Imports **
Major Oil Customers **
Major Producing Oil Fields/Blocks
1,400 (thousand barrels per day)

Saudi Arabia, Kuwait, Abu Dhabi, Malaysia, Libya and Nigeria
2.1 million Bbl/d
Bombay offshore region, Easter offshore region, onshore fields in
Rokan Riau, South East Sumatra, Rimau, West Pasir, Offshore
Gujarat, Assam, Nagaland, Tamil Nadu, Andhra Pradesh and
992,745 Bbl/d
Arunachal Pradesh.
Oil Refineries
Nine oil refineries (all owned and operated by state oil and gas
18 refineries (16 in public sector, one in joint sector and one in
company Pertamina). These refineries are Pangkalan Brandan,
private sector)
Dumai, Sungai Pakning, Musi, Cilacap, Balikpapan, Balongan,
6802 Km of petroleum product pipelines (including 1233 Km of
Kasin and Cepu. The nine refineries are located in Sumatra, Java,
East Kalimantan and Irian Jaya.
333 terminals
Major LNG Suppliers
Western offshore area, Assam, Andhra Pradesh and Gujarat

2 Terminals
(1) At Dahej by Petronet LNG; and
(2) At Hazira by Shell
RasGas Qatar

Net Gas Exports
Major Gas Fields
Coal Production
Coal Consumption
Major Coal Suppliers

Indonesia, New Zealand, Australia, China
Mining
LNG Plants
Major LNG Customers
440 Km of Trans Java Pipelines (Integrated Transmission and

Trans ASEAN Gas Pipeline projects are at different stages of
planning/execution).
17 terminals
1,280 (billion cubic feet)
18 major gas fields spread over Aceh, Natuna, Kalimantan, South
Sumatra, Irian Jaya, West Java and Central Sumatra.
3 Plants (Bontang, Arun and Tangguh)
Japan, South Korea, Taiwan and China
Coal Production
Coal Consumption
Countries in East Asia and India
Thermal (87%), hydro (10.5%), and geothermal (2.5%).
Mining
Power
110,000 Bbl/d
Japan, South Korea, Australia, Singapore, China, USA, Thailand
North, West Java, Offshore Natuna Sea, Jabung (Jambi).
LPG pipeline)
Major Gas Fields
LNG Terminals
Data/Statistics
Thermal (72.5%), hydro (24%), nuclear (2.4%), and wind (1.1%)
Power
Sources : Ministry of Petroleum and Natural Gas (MOPNG), Ministry of Coal, Ministry of Power,
Source : www.eia.doe.gov/emeu/cabs/indonesia.html and www.pertamina.com
Petroleum Planning and Analysis Cell and Economic Survey
** Indonesia has become a net importer recently (since early 2004)
APPENDIX III
APPENDIX III
Malaysia
Sector/Subject
New Zealand
Data/Statistics
Sector/Subject
Oil and Gas

Net Oil Exports
Major Oil Customers
Oil Refineries
Oil and Gas

294,800 Bbl/d
Thailand, South Korea, Australia, India and Japan
516,000 Bbl/d
Bekok, Bokor, Erb West, Bunga Kekwa, Guntong, Kepong,
Net Oil Imports

Major Oil Customers
109,600 Bbl/d
Australia, and the New Zealand Refinery Company (NZRC)
Kinabalu Pulai, Samarang, Seligi, Semangkok, Tapis, Temana,
Oil Refineries
1 NZOR (New Zealand Oil Refinery)
Tiong
Kertih (Petronas), Melaka I & II (Petronas), Port Dickson (Shell),
Maui and Kapuni

Pipe from the NZRC to storage facility in Auckland and pipe
International Airport.
Peninsular Gas Utilisation (PGU) II (681Km) and PGU III (450Km)

Gas Pipeline

LNG Exports
Major Gas Fields
5 million t/year
delivering jet fuel from storage facility in Auckland to Auckland
Port Dickson (ExxonMobil), Lutong (Shell)

Data/Statistics
Most ports have their own storage facilities for refined petroleum
products which are distributed by road to their required locations.
8 terminals
LNG Plants
Major LNG Customers
0.8 Tcf
14 major producing gas fields (amongst them are EII, F23, F6, M1,
Jerneh, Resak)
MLNG1 (Malaysia LNG1), MLNG2 & MLNG3
Japan, Taiwan and South Korea
Coal Production
Coal Consumption

Australia, India and Indonesia
Gas (73%), Coal (16.5%), Hydro (7.0%)
Major Gas Fields
Maui and Kapuni
Coal Production
Coal Consumption

Japan, China, South Africa, Australia, Chile, India and Northern
Europe
Hydro (61.6%), thermal (28.6%), geothermal and others (9.8%)
Mining
Mining
Power
Power
Source : www.eia.doe.gov/cabs/malaysia.html and other various sources
Source : Ministry of Economic Development - Energy Data File (January 2004) (New Zealand)
APPENDIX III
APPENDIX III
Philippines
Sector/Subject
Singapore
Sector/Subject
Data/Statistics
Oil and Gas
Oil and Gas

Net Oil Imports
Major Oil Suppliers
Major LNG Customers
318,500 Bbl/d
Saudi Arabia, United Arab Emirates, others
419,500 Bbl/d
Malampaya, Cadlao, Galoc fields
Shell (Batangas), Petron (Bataan)
Oil (Batangas-Manila Pipeline), gas (Malampaya-Batangas)
Subic, Bataan & Batangas
Malampaya, Palawan
Batangas
Gas-fired power plants
Coal Production
Coal Consumption

Indonesia, China and Australia
Oil Refineries
Major Gas Field
LNG Plant
Net Oil Imports

Major Oil Suppliers
Major Oil Customers
Oil Refineries
Mining

Major LNG Customers
Power
Data/Statistics
Coal (23%), geothermal (23%), natural gas (15%), hydro (9%), oil
(4%), other 26%
746,000 Bbl/d
Malaysia and Indonesia
China (Refined products)
1.3 million Bbl/d
None
3 refineries
Local: 2,800 Km island-wide pipelines for transmission and
distribution of natural gas
Imports:
!
Trans-national pipeline from Malaysia (155 million standard
cubic feet per day (Scfd))
!
640 Km armoured sub-sea pipeline from Indonesias West
Natuna field (325 million Scfd)
!
480 Km onshore and submarine pipeline from the Grissik
field in South Sumatra, Indonesia (currently between 100150 million Scfd)
23
!
Gas imported from Malaysia is used by Senoko Power for
generation of electricity.
!
Gas imported from Indonesia serves mainly power stations
(Tuas and Seraya) and other large industrial consumers in the
Tuas and Jurong industrial areas
Power
Source : Philippine Energy Plan 2003-2012; www.eia.doe.gov/emen/cabs/philippi.html
100% fossil fuel is used in the generation of electricity:

!
Fuel oil (50.9%)
!
Natural Gas (43.5%)
!
Refuse (3.2%)
!
Synthesis Gas (1.5%)
!
Orimulsion Fuel (0.6%) and
!
Diesel (0.3%).
Source : www.mti.gov.sg/www.ema.gov.sg/www.singstat.gov.sg
APPENDIX III
APPENDIX III
South Korea
Sector/Subject
Thailand
Sector/Subject
Data/Statistics
Oil and Gas

Net Oil Imports/Consumption
Major Oil Suppliers
Oil Refineries
Data/Statistics
Oil and Gas

627,800 Bbl/d
Oman, United Arab Emirate, Saudi Arabia, Brunei and Indonesia
Ulsan (817,000 Bbl/d); Onsan (520,000 Bbl/d); Yocheon (633,600
Net Oil Imports

Major Oil Suppliers
Bbl/d); Daesan (310,000 Bbl/d) and Inchon (270,000 Bbl/d)
Oil Refineries
Thaioil, Bangchak, Esso, Thai Petrochemical Industries (TPI),
2.1 million barrels per day

Various, including Malaysia and Indonesia
2.6 million Bbl/d
Major Gas Fields
Donghae-1 development in Ulchin (Southeastern South Korea)
LNG Regasification Terminals
Pusan, Inchon, Kunsan, Mokpo and Ulsan
Major LNG Suppliers
Qatar, Indonesia, Malaysia, Oman and Brunei
703,100 Bbl/d
Sirikit and Benchamas
Rayong Refinery (RRC), Star Petroleum Refinery (SPRC), and
Rayong Pure Refinery (RPC)
2,657-Km gas pipeline network from Gulf of Thailand to Map Tha

Put and other areas (maximum capacity of 3,170 MMScfd)
Mining
Coal Production
Coal Consumption
Recoverable Coal Reserves

Australia, China, the United States
Two
Major Gas Fields

LNG Plants
Bongkot, Pai Lin, Arthit, Erawan, Platong, Tantawan, Benchamas

None
Coal Production
Coal Consumption

Power plants and industrial users
Natural gas, lignite, hydro, and other (e.g. fuel oil & diesel)
Mining
Power
Natural gas (majority) and hydro
Power
Source : http://www.eia.doe.gov/emeu/cabs/skorea.html
Source : Ministry of Energy, Petroleum Institute of Thailand (PITI) and PTT 2002 Annual Report
APPENDIX III
Vietnam
Sector/Subject
Data/Statistics
Oil and Gas

Net Oil Exports
Major Oil Customers
150,500 Bbl/d
Various (Japan, Singapore, the United States and South Korea)
Oil Refineries
4 major fields (Bach Ho, Rang Dong, Hang Ngoc and Dai Hung)
Note1 (refer below)
Note1
600Km of offshore gas pipelines
Major Gas Fields
Bach Ho field, Ruby and Rang Dong field, Flying Dragon field and
Tien Hai field

Major LPG Plant
Dinh Co Plant
Major Gas Customers
Domestic only
Coal Production
Coal Consumption

Japan, Thailand, the European Union, Mexico and Brazil
Thermal (51.2%), hydro (48.8%)
Mining
Power
Source : www.eia.doe.gove/emen/cabs/vietnam.html and others

Note1
Vietnam does not have a major refinery, but it is in process of building its first.
The US$ 1.3 billion Dung Quat Refinery (Quang Ngai province) will have a capacity of 140,000 Bbl/d.
APPENDIX IV
Selective PSC and Mining Terms (by Country)
PSC Terms (by Country)
Brunei
China
India
Indonesia
Malaysia
Philippines
Vietnam
Duration:
- Exploration
8 yrs for onshore,

17 yrs off shore
7 years offshore,
8 yrs on shore
Negotiable
6-10 yrs
5 yrs
1 yrs seismic option, 10 yrs

maximum
5 yrs
- Production
38 yrs on shore and 40 yrs for

offshore inclusive of exploration
15 years, total 30 years
Negotiable
30 yr inclusive of exploration
4 yrs development, duration

15 yrs for oil and 20 yrs for gas
30 yrs
20-25 yrs
- Extension
30 yrs available
Offshore-available, onshorenone
Negotiable
20-30 yrs
Negotiable
Negotiable
Negotiable
Cost recovery limits
None
Offshore-50-62.5%, on shore60%
None
80-85% for oil, none for gas
50% for oil, 60% for gas
70%
40%
Signature bonus
Amount negotiable
Amount negotiable
None
Amount negotiable
None
Amount negotiable
Amount negotiable
Production bonus
Amount negotiable
Amount negotiable
None
Amount negotiable
None
None
Amount negotiable
Royalty
12.5% on shore, 8-10% of shore
Offshore: 4-12.5% for oil, 1-3%

for gas, plus 5% commercial tax
for both based on gross
revenue; On shore: 1-12.5% for
oil and gas, plus 5% commercial
tax based on gross revenue
None
None
10% plus 0.5% for research
1.5-7.5%
None
Equity oil (in favor of the

government) after tax
None
Negotiable ranging from 1060% in favor of the government
Government share ranges

from 10-40%
85%/15%
70-50%/30-50% depending
on production
60/40%
84-68%/16-32% depending
on production
Equity gas (in favor of the

government) after tax
None
Negotiable
Negotiable
70-65%/30-35%
70-50%/30-50% depending
on production
Negotiable
Negotiable
Domestic market obligations (DMO)
None
None
None
25% of equity oil, no DMO for

gas
None
Pro rata amount of

contractors oil
Government has option to

take all production at market
price
Depreciation
n/a
6 yrs straight line depreciation
4 yrs straight line

depreciation
7 yrs declining balance for oil,

and 14 yrs declining balance
for gas
10% straight line depreciation
10% per yr
Varies per contract
Tax rate
55%
30% income tax, 3% local tax

and 10% surcharge
50%
44% above equity split after

tax
20% duty on equity oil

exported, 40% tax paid by
government, above equity
split after tax
None, paid out of

government share
Paid by government, above

equity split after tax
Ringfencing
Applicable for cost recovery, for

tax - not applicable (offshore)
but applicable (on shore)
Applicable for development

costs, not applicable for
exploration costs
Applicable for cost recovery

and tax

and tax
Applicable except for

deepwater blocks

and tax
National participation

acquire 50%

acquire 51% upon
commerciality
Government has a 30%

back-in
10% undivided interest upon

commerciality
Government has option up to

15%
None, interest acquired

through National
participating units
Government has an option to

acquire a negotiated percent
Note : Australia, Hong Kong, New Zealand, Singapore, South Korea and Thailand do not operate a PSC regime.
APPENDIX IV
Selective PSC and Mining Terms (by Country)
Mining (Coal) Terms (by Country)
Australia
China
India
Indonesia
New Zealand
Phillippines
South Korea
Thailand
Malaysia
Vietnam
Royalty
Black Coal: Royalty

$1.70 - $2.2 per
tonne for New South
Wales and royalty
2% (local sales) and
7% (export sales) of
the coal value for
Queensland. Brown
coal royalty is
payable at 33 cents
per gigajoule of
energy.
Royalty rate of 2%
and 0.5% - 1% of
gross revenue is
payable to central
government and
local government,
respectively.
Royalty rates are

divided into 6 coal
groups based on
coal quality of Rs
250, Rs 165, Rs 115,
Rs 85, Rs 65 and Rs
90 for group 1,
2,3,4,5 and 6
respectively.
CCoW determines
royalty to be 13.5%
of sales revenue
(FOB) minus
marketing and some
transportation
expenses. The
royalty is payable on
quarterly basis.
If net sales revenue

is below
US$100,000, no
royalty is payable;
Net sales between
US$100,000 - US$ 1
million is subject to
royalty of 1% from
net sales revenue;
and for net sales
greater than US$ 1
million, royalty is
payable at 1% of
net sales revenue or
5% of accounting
profits whichever is
higher. Royalty is
payable on half
yearly basis.
Excise tax of Peso

10 per metric ton is
paid by a coal
mining company
Royalty payment are

determined under
bilateral agreement
between the owner
and royalty payer
based on Article 59
of the Mines Act in
South Korea.
However, the royalty
should not exceed
5% of the
production value.
Royalty rate is 20
Baht per tonne of
coal sold.
An ad valorem
royalty payment is
made on mining
permit. The rate
varies between
states.
Natural resources
tax is 3% of actual
production valued at
market price for
lignite coal, 1% for
pit anthracite and
2% for open cast
anthracite coal and
other coals.
Corporate Income Tax for

coal mining company
Corporate income
tax rate is at flat rate
of 30%.
Corporate tax rate is

33% comprising
30% state income
tax and 3% local tax.
This rate may be
reduced to a half for
the first three and a
half years, and is
extendable for
further 5 years.
The effective tax rate

for domestic and
foreign companies is
36.59% and 41.8%.
MAT is payable at
7.875% on the tax
book profit.
Corporate tax rate

ranges from 30% 45% depending
upon CCoW
generation.
Corporate income
tax rate is at flat rate
of 33%.
The effective tax rate

is 32%.
For income of less

than 100 million
Won, the tax rate on
profits is 15%. Any
income in excess of
100 million Won is
subject to a tax rate
of 27%.
Corporate income
tax rate is at a flat
rate of 30%.
Corporate income
tax rate is at a flat
rate of 28%.
Corporate income
tax rate is 25% for
foreign companies
and 32% for
domestic
companies.
VAT
GST is not levied on

exports of black
coal, but must be
charged for
domestic sales and
is refundable. No
GST is charged for
brown coal.
Effective VAT rate is

7-9% (gross 18%).
None.
Coal, except in a
briquette form is not
subject to VAT, or is
not a VATable good.
No VAT is charged
on sales. The input
VAT is not creditable
except for earlier
CCoWs.
GST is applied at
uniform rate of
12.5%.
Domestic sale is
subject to 10% VAT
but for exports it is
0%.
VAT rate is 10% for

domestic sales.0%
rate is applied for
export.
VAT rate is 7% for

domestic sales. 0%
rate is applied for
export.
Exempted.
VAT rate is 5% for

domestic sales. 0%
rate is applied for
export.
CCoW: Coal Contract of Work; MAT: Minimum Alternate Tax

Note 1: Brunei and Singapore have no commercial coal resources. Therefore, we have not included coal mining information in respect to Brunei and Singapore in the above summary.
Note 2: Please note that coal contracts and associated mining regimes are largely different in various aspects for nations within the Asia-Pacific region. Therefore, providing a meaningful comprehensive comparable summary of coal mining information is not viable.
However, we have summarized a high level summary above for readers' quick reference. This is primarily sourced from existing fiscal regimes and other sources.
For more information on coal and other mining, please contact our Partners or Managers named in this guide.
Source: Fiscal Regimes (various countries) and other sources.
APPENDIX V
Energy, Utilities and Mining (EU&M) Transaction Services Directory
Regional key contacts
Larry Luckey, EU&M TS Leader,

Asia Pacific (based in Jakarta)
Indonesia
Sanjeev Gupta, EU&M TS Director,

Asia Pacific (based in Jakarta)
Indonesia
Phone: +62 21 521 2901

Mobile: +62 818 770 278
larry.luckey@id.pwc.com
Phone: +62 21 521 2901

Mobile: +62 811 996 568
sanjeev.a.gupta@id.pwc.com
Jock O'Callaghan, Partner,

Melbourne, Australia
Wim Blom, Partner,

Sydney, Australia
Phone: +61 3 8603 6137

Mobile: +61 4 0289 2632
jock.ocallaghan@au.pwc.com
Phone: +61 2 8266 0333

Mobile: +61 4 3863 0328
wim.blom@au.pwc.com
Country key contacts

Australia
APPENDIX V
APPENDIX V
Brunei
China (incl. Hong Kong)
Suresh Marimuthu, Partner

Brunei Darussalam
Phone: +673-2223341
Mobile: +673-8730413
suresh.marimuthu@bn.pwc.com
Alan Wu, Partner,

Mergers & Acquisition
Tax Leader
Beijing, China
Xie Tao, Partner

Transaction Services Leader
Energy, Utilities & Mining Group
Beijing, China
Phone: +86 6561 2233 extn. 7388

Mobile: +86 1391 121 0089
alan.wu@cn.pwc.com
Phone: +86 10 6505 3333 extn. 5600

Mobile: +86 13911651700
xie.tao@cn.pwc.com
Martin Leech, Director

Leader of Transaction Services
Energy, Utilities & Mining Group
Beijing, China
Ian Farrar, Senior Manager,

Utilities Specialist
Hongkong
China
(incl. Hong Kong)
Spencer Wong, Partner,

Energy Leader
Hong Kong/China
Rex Clementson, Partner,

Oil & Gas Leader
Hong Kong/China
Raymund Chao, Partner,

Utilities Leader
Hong Kong/China
Phone: +86 21 6386 3388

extn. 3456
Mobile: +86 13311157642
spencer.wong@cn.pwc.com
Phone: +852 2289 2123

Mobile: +852 9188 1040
rex.clementson@hk.pwc.com
Phone: +86 10 6505 3333

extn. 5222
Mobile:+86 139117 88688
raymund.chao@cn.pwc.com
Phone: +86 10 6505 3333 extn. 5800

Mobile: +86 13918183695
martin.leech@cn.pwc.com
Phone: +852 2289 2313

Fax: +852 2504 4991
ian.p.farrar@hk.pwc.com
APPENDIX V
APPENDIX V
India
Indonesia
Deepak Kapoor, Partner,

New Delhi, India
Sanjeev Krishan, Associate Director,

New Delhi, India
Taruna Kalra, Manager,

New Delhi, India
Tim Watson, Tax Partner,

Jakarta, Indonesia
Ray Headifen, Tax Partner

Jakarta, Indonesia
Anthony Andersen, Senior Manager

Jakarta, Indonesia
Phone: +91 11 51350501

Mobile: +91 98100 96203
deepak.kapoor@in.pwc.com
Phone: +91 11 51250419

Mobile: +91 98114 04224
sanjeev.krishan@in.pwc.com
Phone: +91 11 51250479

Mobile: +91 9811226703
taruna.kalra@in.pwc.com
Phone: +62 21 521 2901

Mobile: +62 811 897 042
tim.watson@id.pwc.com
Phone: +62 21 521 2901

Mobile: +62 811 158 216
ray.headifen@id.pwc.com
Phone: +62 21 521 2901

Mobile: +62 811 937 951
anthony.andersen@id.pwc.com
William Deertz, Partner,

Jakarta, Indonesia
Marc D. Upcroft, Partner,

Jakarta, Indonesia
Firdaus Asikin, Tax Partner,

Jakarta, Indonesia
Sacha Winzenried, Director,

Jakarta, Indonesia
Nas Zakaria, Manager,

Jakarta, Indonesia
Phone: +62 21 521 2901

Mobile: +62 811 187 126
william.deertz@id.pwc.com
Phone: +62 21 521 2901

Mobile: +62 811 937 949
marc.upcroft@id.pwc.com
Phone: +62 21 521 2901

Mobile: +62 816 921 542
firdaus.asikin@id.pwc.com
Phone: +62 21 521 2901

Mobile: +62 811 802 256
sacha.winzenried@id.pwc.com
Phone: +62 21 521 2901

Mobile: +62 812 131 5108
nas.zakaria@id.pwc.com
Indonesia
APPENDIX V
APPENDIX V
Malaysia
New Zealand
Uthaya Kumar
Partner,
Kuala Lumpur, Malaysia
Ramesh Rajaratnam
Executive Director,
Kuala Lumpur, Malaysia
Phone: +60 3 2693 1077

Fax: +60 3 2693 0997
uthaya.kumar@my.pwc.com
Phone: +60 3 2693 1077

Fax: +60 3 2693 0997
ramesh.rajaratnam@my.pwc.com
New Zealand
Teresa Farac, Tax Partner,

Auckland, New Zealand
Pip Cameron, Senior Manager,

Phone: +64 9 355 8443

Mobile: +64 25 600 2253
teresa.farac@nz.pwc.com
Phone: +64 9 355 8253

Mobile: +64 21 358 010
pip.cameron@nz.pwc.com
Philippines
Craig Rice, Partner,

Lynne Taylor, Director,

Graeme Pinfold, Partner,

Ador C. Mejia, Partner,

Manila, Philippines
Lito S. Tayag, Partner,

Manila, Philippines
Rodelio C. Acosta, Partner,

Manila, Philippines
Phone: +64 9 355 8641

Mobile: +64 21 624 462
craig.rice@nz.pwc.com
Phone: +64 9 355 8573

Mobile: +64 21 779 088
lynne.taylor@nz.pwc.com
Phone: +64 9 355 8044

Mobile: +64 21 358 001
graeme.pinfold@nz.pwc.com
Phone: +63 (2) 459-3008

Mobile: +63 918-9124662
ador.mejia@ph.pwc.com
Phone: +63 (2) 459-3014

Mobile: +63 918-9124667
jose.tayag@ph.pwc.com
Phone: +63 (2) 459-3039

Mobile: +63 918-9196061
rodel.acosta@ph.pwc.com
APPENDIX V
APPENDIX V
Philippines
Singapore
Rosmini de la Cruz, Director,

Manila, Philippines
Phone: +63 (2) 459-3076
Mobile: +63 917-8138275
rosmini.d.dela.cruz@ph. pwc.com
South Korea
Yeoh Oon Jin, Partner,

Assurance Business Advisory Services
Singapore
Chua Kim Hong, Partner,

Transaction Services
Singapore
Phone: +65 6236 3108

Mobile: +65 9733 9778
oon.jin.yeoh@sg.pwc.com
Phone: +65 6236 3399

Mobile: +65 9733 9868
kim-hong.chua@sg.pwc.com
Thailand
Yong-Soo Kim, Partner,

Seoul, South Korea
Tae-Young Park, Director,

Seoul, South Korea
Hyun-Kook Jang, Manager,

Seoul, South Korea
Suchart Luengsuraswat, Partner,

Bangkok, Thailand
Nangnoi Charoenthaveesub, Partner,

Bangkok, Thailand
Mihir Trivedi, Director,

Bangkok, Thailand
Phone: +82 2 709 0420

Mobile: +82 011 443 0420
kyongsoo@samil.com
Phone: +82 2 709 0424

Mobile: +82 019 335 2610
kyongsoo@samil.com
Phone: +82 2 709 0748

hkjang@samil.com
Phone: +66 2 344 1129

Mobile: +66 1 842 8349
suchart.luengsuraswat@th.pwc.com
Phone: +66 2 344 1381

Mobile: +66 1 905 1281
nangnoi.charoenthaveesub@th.pwc.com
Phone: +66 2 344 1383

Mobile: +66 1 838 8974
mihir.trivedi@th.pwc.com
APPENDIX V
APPENDIX V
Thailand
Vietnam
Steve Sloman, Partner,

Bangkok, Thailand
Chinnarat Boonmahanark, Director,

Bangkok, Thailand
Paul Stitt, Tax Partner,

Bangkok, Thailand
David B Fitzgerald, Partner,

Ho Chi Minh City, Vietnam
John Gavin, Senior Manager,

Phone: +66 2 344 1256

Mobile: +66 1 816 9835
steve.sloman@th.pwc.com
Phone: +66 2 344 1426

Mobile: +66 1 826 7124
chinnarat.boonmahanark@th.pwc.com
Phone: +66 2 344 1119

Mobile: +66 1 814 5975
paul.stitt@th.pwc.com
Tel: 84-8-8230796
Fax: 84-8-8251947
david.b.fitzgerald@vn.pwc.com
Tel: 84-8-8230796
Fax: 84-8-8251947
john.j.gavin@vn.pwc.com
Kelvin Lee, Partner,

Dinh Thi Quynh Van, Director,

Hanoi, Vietnam
Tel: 84-8-8230796
Fax: 84-8-8251947
kelvin.cj.lee@vn.pwc.com
Tel: 84-4-8251215
Fax: 84-4-8251737
dinh.quynh.van@vn.pwc.com
Vietnam
APPENDIX VI
PwC Publications (by Country)
APPENDIX VI
PricewaterhouseCoopers Publications (by Country)
Australia
Malaysia
!
!
!
!
!
!
!
A World of Difference: strategic options for Australia's

energy sector
Climate Changes Services
Coal Seam Methane in Queensland
Doing Business and Investing in Australia
Minerals Industry Survey Report
Outlook on Mining
Outlook on Utilities: transition to IAS
Setting Up Business in Australia: Considerations for Oil &
Gas Companies
New Zealand
!
!
!
Doing Business and Investing in New Zealand

Leading Energy
PwC Electricity Lines Business and Gas Pipeline Business
Information Disclosure Compendium
Philippines
!
Brunei
!
Doing Business and Investing in Malaysia
!
!
!
Doing Business and Investing in Brunei
Consolidated Withholding Tax and Fringe Benefits Tax

Regulations
Doing Business and Investing in The Philippines
How to Invest in the Philippines
Investment Incentives in the Philippines
China (Incl. Hong Kong)

!
Singapore
Doing Business and Investing in the People's Republic of

China, 2002
Doing Business and Investing in Singapore
India
South Korea
!
!
Destination India - A Brief Overview of Tax and Regulatory

Framework
Doing Business and Investing in India
IFRS, US, UK and Indian GAAP - A Comparison
Doing Business and Investing in South Korea
Thailand
!
Doing Business and Investing in Thailand
Indonesia
Vietnam
!
!
!
!
!
Doing Business and Investing in Indonesia

Indonesian Mining Industry Survey
Mining in Indonesia: Investment and Taxation Guide
Oil and Gas in Indonesia: Investment and Taxation Guide
Energy, Utilities & Mining NewsFlash
Doing Business and Investing in Vietnam
APPENDIX VII
Glossary of Terms and Abbreviations
APPENDIX VII
AASB
ABARE
AC
ACCC
ACD
AFFA
AGSO
AHTN
AIFRPs
ALP
AME
APEC
APEL
APIA
APM
ASBE
ASEAN
ASIC
ASRB
ATF
Bapepam
Bbl
Bbl/d
BCC
BCD
Bcf
Bcf/d
BCM
BE
BED
BEDB
BHP
BIFC
BIR
BIT
BJP
BKPM
BKPMD
Australian Accounting Standards Board

Australian Bureau of Agriculture and Resource Economics
Alternate Current
Australian Competition and Customer Commission
Additional Custom Duty (India)
Agriculture, Fisheries and Forestry Australia
Australian Geo-Science Organization
ASEAN Harmonized Tariff Nomenclature
Australian International Financial Reporting and Procurements
Australian Labour Party
Australian Mineral Economics
Asia-Pacific Economic Cooperation
Australian Power and Energy Limited
Australian Pipeline Industry Association
Administered Price Mechanism
Accounting System for Business Enterprises
Association of South East Asia Nations
Australian Securities and Investment Commission
Accounting Standards Review Board (New Zealand)
Aviation Turbine Fuel
Badan Pengawas Pasar Modal/Capital Market Supervisory Board (Indonesia)
Barrels
Barrels per day
Business Co-operation Contract
Basic Custom Duty (India)
Billion cubic feet
Billion cubic feet per day
Billion cubic metre
Business Entity
Basic Excise Duty (India)
Brunei Economic Development Board
Australias Broken Hill Proprietary
Brunei International Financial Centre
Bureau of Internal Revenue
Business Income Tax
Bhartiya Janta Party (a political party in India)
Badan Koordinasi Penanaman Modal (Capital Investment Coordinating Agency)
Badan Koordinasi Penanaman Modal Asing Daerah/Regional Capital Investment
Coordinating Agency (Indonesia)
Bkwh
BLNG
Bmt
BNPC
BOC
BOI & PEZA
Bopd
BOT
BPCL
Bpd
BPH-Migas
BP-Migas
BSAP
BSP
Bst
CBDT
CBEC
CBM
CC
CCA
CCDG
CCoW
CDT
CENVAT
CEPT
CFCs
CIBD
CIF
CIL
CMA
CMR
CNG
CNOOC
CNPC
CoW
CPA
Billion kilowatthours
Brunei LNG (Brunei Liquified Natural Gas Sdn Bhd)
Billion metric tons
Brunei National Petroleum Company
Bank of China
Board of Investment and Philippines Economic Zone Authority
Barrels of oil per day
Build-Operate-Transfer
Bharat Petroleum Corporation Limited
Barrels per day
Badan Pengatur Hilir Minyak dan Gas (The Oil and Gas Downstream Regulatory
Body in Indonesia)
Badan Pelaksana Minyak dan Gas. (The Oil and Gas Upstream Implementing
Body in Indonesia)
Board of Supervision of Auditing Practice
Brunei Shell Petroleum Company Sdn Bhd
Billion short tons
Central Board of Direct Tax
Central Board of Excise and Customs (India)
Coal Bed Methane
Commerce Commission
Coal Co-operation Agreement (Indonesia)
Council on Corporate Disclosure and Governance
Coal Contract of Work (Indonesia)
Corporate Dividend Tax
Central Value Added Tax (India)
Common Effective Preferential Tariff
Controlled Foreign Corporations (New Zealand)
Construction Industry Development Board (Malaysia)
Cost, Insurance and Freight
Coal India Limited
Crown Minerals Act
Crown Mineral Regulations
Compressed Natural Gas
CNOOC Limited (formerly China National Offshore Oil Corporation)
China National Petroleum Corporation
Contract of Work (Indonesia)
Certified Public Accountant
APPENDIX VII
CPC
CPI
CSRC
CSTA
CTR
DC
DENR
DGH
DGT
DMF
DMO
DoE
DOTC
DPR
DTA
DTI
E&E
E&P
EC
EDB
EFPS
EGAT
EIA
ELB
EMA
EMEA
EO
EPIRA
EPMI
EPPO
EPU
ERC
ESAA
ESB
EU&M
EVN
FAS
FCDU
APPENDIX VII
Communist Party of China

Customer Price Index
China Securities Regulatory Commission
Central Sales Tax Act 1956 (India)
Conduit Tax Relief (New Zealand)
Direct Current
Department of Environment & Natural Resources
Directorate General of Hydrocarbon (India)
Directorate General of Taxes (Indonesia)
Department of Mineral Fuels
Domestic Market Obligation
Department of Energy
Department of Transportation and Communication
Dewan Perwakilan Rakyat (People's Representative Council-Indonesia)
Double Tax Agreement
Department of Trade and Industry
Electronic and Electrical
Exploration and Production
Energy Commission (and also Electricity Commission)
Economic Development Board (Singapore)
Electronic Filing and Payment System (the Philippines)
Electricity Generating Authority of Thailand
Energy Information Administration
Electricity Line Business
Energy Market Authority
the Americas and Europe, the Middle East and Africa (PwCs regional group)
Executive Orders
Electronic Power Industry Reform Act
Esso Production Malaysia Inc.
Energy Policy and Planing Office
Economic Planning Unit
Energy Regulatory Commission
Electricity Supply Association of Australia
Enhanced Single Buyer
Energy, Utilities and Mining
Electricity of Vietnam
Financial Accounting Standard
Foreign Currency Deposit Unit
FCM
FCWT
FDA
FDI
FEC
FEMA
FIE
FIPB
FOB
FPIA
FRA
FRF
FRS
FTAA
FTP
GAAP
GAIL
GATT
GBP
GDP
GNI
GoI
GSA
GSPC
GST
GTL
GW
GWh
HPCL
HR
HS Code
IAET
IAS
IASB
IBP
ICAAT
ICAI
ICC
Full Cost Method

Foreign Contractor Withholding Tax
Foreign Dividend Account (Australia)
Foreign Direct Investment
Foreign Exchange Certificate
Foreign Exchange Management Act
Foreign Investment Enterprises
Foreign Investment Promotion Board
Free on Board
Filipino Participation Incentive Allowance (the Philippines)
Financial Reporting Act
Financial Reporting Foundation
Financial Reporting Standard
Financial or Technical Assistance Agreement
First Tranche Petroleum
Gas Authority of India Limited
General Agreement on Tariff and Trade
An Indonesian coal company in East Kalimantan
Gross Domestic Product
Gross National Income
Government of India
Gas Supply Agreement
Gujarat State Petroleum Corporation
Goods and Services Tax
Gas to Liquids
Gigawatt
Gigawatt Hour
Hindustan Petroleum Corporation Limited (India)
House of Representative
Harmonized System Codes (relates to customs and taxes)
Improperly Accumulated Earning Tax
International Accounting Standards
International Accounting Standard Board
IBP Company Limited (India)
Institute of Certified Accountants and Auditors of Thailand
The Institute of Chartered Accountants of India
Indigenous Cultural Community
APPENDIX VII
ICRA
IEA
IFRS
IIN
IMF
INC
IOC
IOSCO
IP
IPO
InPP
IPP
IRR
IT
ITES
JDA
JOC
JPDA
JV
JVC
KASB
KBBL/D
KEPCO
Keppres
Km
KNOC
KOGAS
KP
KPC
KWh
LCT
LEDAC
LNG
LOFC
LP
LPG
MASB
MAT
APPENDIX VII
Investment Information and Credit Rating Agency

International Energy Agency
International Financial Reporting Standards
Importer Identification Number (Indonesia)
International Monetary Fund
Indian National Congress
Indian Oil Corporation
International Organization of Securities Commissions
Indigenous People
Intellectual Property Office (and also Investment Priority Plan)
Investment Priority Plan (Phillippines)
Independent Power Producer
Implementing Rules and Regulations (and also Internal Rate of Return)
Information Technology
IT Enabled Services
Joint Development Area
Joint Operation Contract
Joint Petroleum Development Area (East Timor)
Joint Venture
Joint Venture Contract
Korean Accounting Standard Board
Thousand barrels/day
Korean Electric Power Corporation
Keputusan Presiden/President Decree (Indonesia)
Kilometers
Korean National Oil Company
Korea Gas Company
Kuasa Pertambangan (Mining Concession)
PT. Kaltim Prima Coal
Kilowatthour
Luxury Car Tax (Australia)
Legislative Executive Development Advisory Council (The Phillippines)
Liquefied Natural Gas
Labuan Offshore Financial Centre
Liberal Party
Liquefied Petroleum Gas
Malaysian Accounting Standards Board
Minimum Alternate Tax
MCA
MCIT
MDTCA
MEA
MECM
MFN
MIA
MIC
MICPA
MIGAS
MITI
MLNG
MLR
MMBFOE
Mmcf/d
MMDR
MMP
MMscfd
Mmst
Mmt
MMTONS
Mmtpa
MOE, MoEN
MOF
MOFCOM
MOFTEC
MOP&NG
MP
MPR
MS
MT
MTBE
MTI
MTJA
MW
NCMP
NDP
NEA
Malaysian Chinese Association

Minimum Corporate Income Tax
Ministry of Domestic Trade and Consumer Affairs
Metropolitan Electricity Authority
Ministry of Energy, Communication and Multimedia (Malaysia)
Most Favored Nation
Malaysian Institute of Accountants
Malaysian Indian Congress
Malaysian Institute of Certified Public Accountants
Directorate General of Oil and Gas (Indonesia)
Ministry of International Trade and Industry
Malaysia Liquefied Natural Gas
Ministry of Land and Resources (and also Minimum Lending Rate)
Million Barrel of Fuel-Oil Equivalent
Million cubic feet per day
Mines and Minerals Development and Regulation
Mixed Member Proportional
Million standard cubic feet per day
Million short tons
Million metric tonnes
Million tons
Million metric tons per annum
Ministry of Energy
Ministry of Finance
Ministry of Commerce
Ministry of Foreign Trade and Economic Cooperation
Ministry of Petroleum and Natural Gas
Member of Parliament
Majelis Permusyawaratan Rakyat/Peoples Consultative Body (Indonesia)
Motor Spirit
Metric Tons
Methyl tertiary butyl ether
Ministry of Trade and Industry
Malaysia-Thailand Joint Authority
Mega watt
Non-Constituency MP
National Development Plans
National Electrification Administration
APPENDIX VII
NECA
NEDO
NELP
NEM
NEMMCO
NEPC
NGL
NIPAS
NMP
NP
NPC
NPL
NPPAP
NPWP
NRDC
NRWT
NSV
NSW
NZ
NZ$
NZOR
NZRC
OCC
OECD
OIDB
OIL
ONGC
OPEC
PB I
PC
PCR-1
PDS
PE
PEA
PEG
PERPU
Pertamina
APPENDIX VII
National Electricity Code Administrator

Japanese New Energy and Industrial Technology Development Organization
National Exploration and Licensing Policy
National Electricity Market
National Electricity Market Management Company
National Energy Policy Committee
Natural Gas Liquids
National Integrated Protected Area System Act (Philippine)
Nominated MP
National Party
National People's Congress (and also National Power Corporation)
Non-Performing Loan
New Players Petroleum Association of the Philippine
Nomor Pokok Wajib Pajak (Tax Identification Number-Indonesia)
National Reform and Development Commission
Non-Resident Withholding Tax
Northwest Shelf Venture
New South Wales
New Zealand
New Zealand Dollar
New Zealand Oil Refinery
New Zealand Refinery Company
Oil Co-ordination Committee
Organisation of Economic Cooperation for Development
Oil Industry Development Board
Oil India Limited (India)
Oil and Natural Gas Corporation Limited (India)
Organisation of Petroleum Exporting Countries
Pajak Pembangunan I/Development Tax (Indonesia)
Petroleum Contract
First Petroleum Public Contract Round (Philippine)
Private Debt Securities
Permanent Establishment
Provincial Electricity Authority
Partnership for Equitable Growth
Peraturan Pemerintah Pengganti Undang-Undang/Government Regulation in
Lieu of Law (Indonesia)
Indonesian State-owned Oil Company
Petechim
PETRONAS
PGN
PGU
PhP
PITA
PJ
PJB
PLN
PM
PMA
PNG
PNOC
POSCO
PP
PPA
PPAC
PRC
PSAK
PSALM
PSC
PSU
PTBA
PTT
PTTEP
PwC
R&D
R&M
R.A
R/C
RBI
RBNZ
RHQ
Rm
Rmb
RoC
PetroVietnam Trading Company

Petroliam Nasional Berhad (Malaysia)
Perusahaan Gas Negara/Indonesian State Gas Company
Peninsular Gas Utilisation
Philippine Pesso
Petroleum Income Tax Act
Petajoule
PT. Pembangkit Jawa Bali (Indonesia)
Perusahaan Listrik Negara (National Electricity Corporation-Indonesia)
Prime Minister
Penanaman Modal Asing (Foreign Capital Investment-Indonesia) or Philippines
Mining Act
Papua New Guinea
Philippine National Oil Company
a Korean Steel Company
Peraturan Pemerintah/Government Regulation (Indonesia)
Power Purchase Agreement
Petroleum Planning and Analysis Cell
People's Republic of China
Pernyataan Standar Akuntansi/Indonesian GAAP
Power Sector Assets and Liabilities Management
Production Sharing Contract, also Politburo Sanding Committee (China)
Public Sector Undertaking
PT Tambang Batubara Bukit Asam (an Indonesian Stated-Owned Company)
Not an abbreviation, but formerly referred for Petroleum Authority of Thailand
PTT Exploration and Production PCL. (Name of a company in Thailand, not
abbreviation)
Research and Development
Refining and Marketing
Republic Act
Revenue over cost concept
Reserve Bank of India
Reserve Bank of New Zealand
Regional Headquarters
Ringgit Malaysia
Renminbi
Registrar of Companies (India)
APPENDIX VII
RPC
RRC
Rs
S$
SAFE
SAIC
SARS
SASAC
SAT
SC
Scfd
SEB
SEBI
SEC
SED
SEM
SESB
SESCo
SET
SEZ
SFAS
SIA
Sinopec
SKFAS
SLM
SME
SoC
SOE
SPC
SPEX
SPP/CPM
SPRC
SRB
SST
STLG
SX
TAS
TCC
APPENDIX VII
Rayong Pure Refinery

Rayong Refinery
Rupees (India)
Singapore Dollar
State Administration of Foreign Exchange
State Administration for Industry and Commerce
Severe Acute Respiratory Syndrome
State-Owned Assets Supervision and Administration Commission
State Administration of Taxation
Securities Commission (and also Service Contract)
Standard cubic feet per day
State Electricity Board
Securities Exchange Board of India
Securities and Exchange Commission
Special Excise Duty (India)
Successful Efforts Method
Sabah Electricity Sdn Bhd
Sarawak Electricity Supply Corporation
Thailand stock market index
Special Economic Zone
Statement of Financial Accounting Standard
Secretariat for Industrial Assistance (India)
China Petrochemical Corporation
Statement of Korean Financial Accounting Standard
Straight Line Method
Small and Medium Enterprises
Scheme of Control
State-Owned Enterprise
State Power Corporation (China)
Shell Philippine Exploration
Southern Pacific Petroleum/Central Pacific Minerals
Star Petroleum Refinery Company
Special Remunerary Benefit
Special Sales Tax
Sales Tax on Luxury Goods
Stock Exchange
Thailand Accounting Standard
Tax Credit Certificate (the Philippines)
Tcf
THB
TNB
tpa
TPI
TWh
UGP
UK
UMNO
UNTAET
USA
VAS
VAT
Vinacoal
VND
WET
WHT
WTO
ZOCA
Trillion cubic feet

Thailand Baht
Tenaga Nasional Berhad
tons per year
Thai Petrochemical Industries
Trillion Watt hour
Unique Gas & Petrochemical Plc
United Kingdom
United Malays National Organisation
United Nations Transitional Administration in East Timor
United States of America
Vietnamese Accounting System
Value Added Tax
Vietnam National Coal Corporation
Vietnamese Dong
Wine Equalization Tax (Australia)
Withholding Tax
World Trade Organisation
Zone of Cooperation A (East Timor)

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Asia-Pacific Energy, Utilities & Mining Investment Guide

"PricewaterhouseCoopers" refers to the network of member firms of

PricewaterhouseCoopers partners and managers who have

Asia-Pacific Energy, Utilities & Mining Investment Guide

Asia-Pacific Energy, Utilities & Mining

Any business intending to invest in Asia-Pacific will need to

Asia-Pacific Energy, Utilities & Mining Investment Guide

Asia-Pacific Energy, Utilities & Mining Investment Guide

China (including Hong Kong)

Indonesia (including East Timor)

Statistical Overview Chart (by Country)

III. Other Summary of Information (by Country)

Energy, Utilities & Mining Transaction Services Directory

VI. PricewaterhouseCoopers Publications (by Country)

Asia-Pacific Energy, Utilities & Mining Investment Guide

Asia-Pacific Energy, Utilities & Mining Investment Guide

Asia-Pacific Energy, Utilities & Mining Investment Guide

Asia-Pacific Energy, Utilities & Mining Investment Guide

In Asia-Pacific, the mining industry remains to be dominated by

Asia-Pacific Energy, Utilities & Mining Investment Guide

Please refer to the summary

Asia-Pacific Energy, Utilities & Mining Investment Guide

The Liberal Party/National Party coalition came to power in the

Asia-Pacific Energy, Utilities & Mining Investment Guide

Australian Competition and Consumer

Asia-Pacific Energy, Utilities & Mining Investment Guide

Financial Markets Environment

Please refer to the Statistical Overview Chart (by Country)

The Reserve Bank of Australia, Australia's

Asia-Pacific Energy, Utilities & Mining Investment Guide

The Australian dollar is floated freely against all

part of the Australian market, there has

3. Energy, Utilities & Mining

exporter and has significant natural gas reserves. Australia's

Asia-Pacific Energy, Utilities & Mining Investment Guide

exploration off Southern Australia is led by

Australia's oil production had increased gradually since 1980,

Asia-Pacific Energy, Utilities & Mining Investment Guide

Queensland and pressuring Australian refiners

fourth biggest refining company is owned by

Natural Gas and Pipelines

reserves are located offshore of the country's northwestern

Asia-Pacific Energy, Utilities & Mining Investment Guide

are estimated to contain 4.0 Tcf of natural gas

in 1995 to 824 Bcf in 2003. Over the next two

Australian LNG. NSV operates three offshore LNG facilities,

Following approval of the Timor Sea

While NSV currently dominates Australia's LNG market, there

A third LNG project, led by Woodside

Asia-Pacific Energy, Utilities & Mining Investment Guide

Given the anticipated increase in importance of

country's centrally located fields to coastal

Meanwhile, controversy surrounding the viability of a proposal

Asia-Pacific Energy, Utilities & Mining Investment Guide

Millions of Metric Tons

proposed to support the LNG ventures described above. A few

Source : AME Report 2003

Australia is estimated to contain 82.1 Billion

in Queensland, while NSW leads in thermal

production, making it the largest exporter of coal (31% of global

Asia-Pacific Energy, Utilities & Mining Investment Guide

large amounts of natural gas to fuel their power

government of the state of Western Australia

On the supply side, the NEM has been successful in