Taxation of petroleum operations
The taxation of petroleum operations in Timor-Leste is partly covered by the TDA. However, the TDA operates only to modify the taxation of petroleum activities pursuant to a number of legacy tax regimes. These modifications apply to contractors, sub-contractors, and any other parties receiving income from the supply of goods or services to a contractor or sub-contractor.
A contractor is defined as a person with whom the responsible Ministry or Designated Authority, as the case may be, has made a petroleum agreement. A sub-contractor includes any person supplying goods or services directly or indirectly to a contractor in respect of petroleum operations.
Specific provisions for the taxation of petroleum operations include:
- A CIT rate for contractors of 30% on taxable income, while sub-contractors will generally be taxed on a final WHT basis at a rate of 6% (although see JPDA below).
- No tax on branch profit remittances (although see JPDA below).
- Where 'net receipts' exceed specified levels, an SPT can apply.
- The 'ring fencing' of income and expenditure within the contract area.
- Modified deductibility rules, including around the deductibility of interest for contractors and a modified depreciation regime.
- A specific WHT regime.
- A specific transfer pricing and associated anti-avoidance provision.
Special tax regime for Production Sharing Contracts (PSCs) within the Boundary Treaty
On 6 March 2018, Timor-Leste and Australia signed the Boundary Treaty (though not yet ratified) effectively replacing the agreements that resulted in the Joint Petroleum Development Area (JPDA). This has resulted in Timor-Leste holding full taxing rights to revenues arising from the (former) JPDA, which was of 90:10 (in favour of Timor-Leste), and a number of other fields not within the JPDA. The fiscal arrangements for the undeveloped Greater Sunrise field are to be split 70:30 or 80:20 (in favour of Timor-Leste) according to where the gas processing occurs.
The income tax rates should now be 30% for all upstream participants. A 20% WHT should apply to most payments for services or passive income paid to non-residents (according to the PSC).
The tax regime as outlined under ‘Taxation of petroleum operations’ above also applies in the JPDA (except for former ‘Annex F’ PSCs). This is, however, with a number of important modifications, including the exclusion of the service tax, excise tax, sales tax, import duty, and WIT.