1. law, govt and politics
2. legal issues
3. human rights

TP Strategies
Across the supply chain of
an integrated energy
company
Louis van Melsen – 30 & 31 March 2015
Agenda
① Brief overview of Addax’ position within the wider SINOPEC group
② Questions
③ Head office (support) charges
④ The concept of “Official Selling Prices” or “OSP”
⑤ Trading
⑥ Manufacturing / Markets & Goods
⑦ Closing remarks
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Addax within the wider SINOPEC group
 SINOPEC is a Chinese SOE, with over 1 million employees globally
 One of the largest O&G producers in China
 The biggest oil refiner in Asia and the 3rd largest worldwide
 In 2014 SINOPEC entered the top 3 of the Global Fortune 500 behind Shell and Wallmart
 Addax is one of SINOPEC’s largest non-Asian E&P operations with production levels north of
200K bp/d
 Locations of production: mainly West-Africa (Nigeria, Cameroon and Gabon), Middle-East
(Kurdistan/Iraq) and the North Sea (UK)
 Support offices in Geneva (Head Office), Houston and Aberdeen
 Strategic non-Asian E&P vehicle for SINOPEC
 Centre of excellence / international expertise in GVA for SINOPEC
 Focus on Africa (hub) and North Sea
 Production demand of China
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Questions
 Is TP the single most important element of international taxation today?
 Is BEPS a “game-changer” for our industry?
 Can you dictate strategy?
 For the Company as a whole
 For the Finance Function
 For the Tax function
 Should you dictate strategy?
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Head office (support) charges 1/2
 Importance for an E&P company
 Head office location, a big factor?
 Cost recovery
 Various charging models one can consider, however, common principles:
 Cost sharing
 Shareholder costs
Shareholder
 Routine services
 Call-off services
 Pricing:
Head office /
Service Company
 Cost-plus
 Cost sharing arrangement
 CUP
 Profit split (in case of mixed activity, i.e. more than….)
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Head office /
Head
office /
Service
Company
Head
office /
Service Company
Service
Company
Operating
entities
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Head office (support) charges 2/2
 Home country compliance versus local deduction for tax purposes versus cost recoverability
 PSC environments (typically no mark-up or profit element allowed / general caps on external
cost levels)
 Local content restrictions
 Absence of tax treaties
 Withholding tax / gross-up?
 APA’s - wouldn’t that be great?!
 Africa playing catch-up, very rapidly, “jumping” on BEPS
Best practices / BEPS context:
 Strong documentation: functional and value chain analysis
 Advance dialogue with the authorities (can be more than 1 per country)
 Transparent accounting and re-charge methodology
 More important than agreement on acceptable “CUP”
 Business model awareness – tool: e.g. corporate KPI’s re level of shareholder cost @ Head
Office
 Tax (and Cost Recovery function) to guide C-suite
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Concept of “Official Selling Prices” (“OSP”)
 Key element in the context of an E&P Company (Africa, Middle East)
 Periodically fixed unit price by National Oil Companies (or other government body) to be
followed for local accounting and tax purposes by the IOC
 Early experience shows that OSP is considered to be “at arm’s length” de facto
 do we agree?
 Planning opportunity / pricing strategy is therefore limited in E&P stage (HTJ; Trade-co in LTJ
 losses!)
Best practices / BEPS context:
 “Excellent” head office re-charges methodology
 Maximize interest deductions (very difficult in practice) and local allowances (timing!)
 Some planning with service companies / subcontractors thinkable (establish SPV JVs)
 Ownership of assets versus lease (from tax heaven or preferential regime jurisdiction with e.g.
Tonnage Tax) - tax inclusive pricing, share the tax benefit
 Ring-fence / Rate differential planning (split your operations and your personnel)
 Local content focus
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Trading
1/2
 Internal Trade-co: typically located in low tax jurisdiction (statutory regime or ruling practice)
 SINOPEC / Addax context: pricing of crude very comparable to 3rd party situation due to
Chinese “silo” approach
 Pricing typically consists of a premium or discount on OSP (based on quality) + marketing fee (X
cents per barrel)
Op-co
Trade-Co 1
Trade-Co 2
Refiner
3rd party
1) OSP; 2) 3rd party comparable price; 3) 2) + margin
Physical supply chain may involve:
 Transportation through pipeline or vessel
 Storage (port)
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Trading
2/2
Best practice / BEPS context:
 Substance based
 Potentially asset intensive
 Mainly people intensive
 Integrated energy company likely to be pushed towards full value chain disclosure (Master file)
 PSM
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Manufacturing / Markets & Goods
Manufacturing
 Refining & petrochemical manufacturing
 Mainly onshore
 Toll manufacturing: “recipes / mixing”
 IP; ownership
Markets & Goods
 Added value of the sales office (petrol station)
Best practice / BEPS context:
 Manufacturing: 1) CUPs should be available; 2) Greater transparency / more documentation
 no real change in pricing practice
 IP: high level of scrutiny; more sophistication in substantiation; substance and documentation
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Closing Remarks 1/2
 TP in China
 TP in Africa
 Centralized versus De-centralized business models
 Current economic environment: PAIN, where, when and what?
 Starbucks, Amazon and the rest…….what about BP, Shell and Exxon Mobil?
Best practice / BEPS context:
 ………………
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Closing Remarks 2/2
My view on the questions raised earlier:
 Yes
 No / to an extent
 Maybe…………
 YES!
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THANK YOU!
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