Angola’s Oil Services Tax Leaves Companies Unsure of Recoup

Angola’s implementation of a 10 percent tax on some oil services, which passed into law two months ago, has left companies unsure how they can recoup expenses, a lawyer said.

Companies operating in Africa’s second-biggest oil producer would prefer to offset the levy against income tax owed instead of the cost of producing oil as this would mean years could pass before expenses were recovered, said Goncalo Falcao, a partner at the Rio de Janeiro office of law firm Mayer Brown. The law doesn’t make it clear which option should be used, he said. Total SA, Chevron Corp., BP Plc and Exxon Mobil Corp. are among the biggest operators in Angola.

Gilberto Luther, associate director of the government’s tax reform project, said in an e-mail he couldn’t immediately respond to questions about the tax.

“The oil companies need direction from the government and they haven’t got it despite a conference on the tax” in October, Falcao, whose firm advises oil companies, said in an interview in the capital, Luanda. “If companies charge it against income tax it will mean no net gain for the state.”

Companies spend about $20 billion a year in petroleum exploration and production in Angola, according to London-based GlobalData Ltd. and Oilfield Support Angola Lda based in Luanda. The consumption tax increases the government’s cash flow, allowing it to finance infrastructure spending on better terms as it recovers from a 27-year civil war that ended in 2002.

Tax Rates

Drilling rig leases and other equipment rentals are taxed at 10 percent, according to the law, while most other services are at a 5 percent rate. A government-sponsored conference after the tax was implemented Oct. 14 also raised questions on whether the tax would apply to downstream operations such as gasoline sales and if there would be a moratorium on the tax until details were determined, Falcao said.

Concession agreements allow companies to charge exploration and production expenses against oil sales in a ratio that often starts at 40 percent of production being used to pay for costs in the early years of a 25-year contract before declining to a lower percentage in later years.

Mayer Brown generates revenue of more than $2 million a year in Angola and is opening a local office in 2014, Falcao said.

Before it's here, it's on the Bloomberg Terminal.