Australia as an international capital centre and headquarters for oil and gas investments

Abstract

Oil and gas projects inherently require significant sums of capital investments. Uncertainty in the global financial climate, coupled with volatile commodity prices and unrelenting cost escalations, is contributing to the risk of a world-wide credit crunch. In an ever-tightening capital market, investors are forced to compete globally for equity amidst rising costs of capital and an unprecedented demand for accountability by capital providers.

Despite tough economic times, Australia has remained one of the world’s leading centres for raising capital for global oil and gas exploration and development exploits. Many players increasingly access Australia’s liquid capital markets to fund emerging oil and gas ventures in locations including Africa, Asia and the Americas.

Australia has conducive regulatory and fiscal rules, which make it an attractive holding company jurisdiction to locate either global or regional oil and gas headquarters. There are, however, many aspects of Australia’s fiscal rules that are often overlooked and can prove costly for the global tax effectiveness of investing through Australia and the flow-on impact on global after-tax funding costs in a capital-constrained environment. This peer-reviewed paper seeks to canvass the following:

• overview of Australia’s holding company tax regime, including Australia’s participation exemption, branch profits exemption and controlled foreign company rules;

• accidental permanent establishment risks for Australian entities operating abroad;

• treatment of equity-raising costs;

• cost allocations for management, technical services and head office support;

• funding of foreign operations and subsidiaries;

• holding intellectual property rights and conducting research and development in Australia versus abroad; and

• Australia’s arm’s length rules.