Wednesday 28th September, 2005

 
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Mr. Speaker, permit me to say a few words on Trinidad and Tobago's role in the CSME and more generally, about our support for and commitment to regional integration.

As Honourable Members are aware, Trinidad and Tobago is the largest market in CARICOM, and we are responsible one way or the other for about 80 percent of the trade that takes place in the CARICOM arena. CARICOM represents Trinidad and Tobago's second largest export market behind the USA. In 2004, Trinidad and Tobago's exports to CARICOM amounted to US$1 billion while imports were valued at US$94 million, resulting in a trade surplus of US$916 million. The trade surplus vis-à-vis CARICOM has averaged over US$700 million in the period 1999-2004.

What this means, Mr. Speaker, is that thousands of jobs of our citizens - in manufacturing, in financial services, in shipping and trading and in various other services - depend on the maintenance of satisfactory levels of economic activity in CARICOM.

It is for this reason that it is critical that we provide whatever assistance we can to our CARICOM neighbours.

Last year in the face of rising oil prices, the Government established a petroleum fund to provide assistance of TT$300 million (US$48 million) to CARICOM countries. This assistance was to be directed to poverty alleviation and disaster recovery efforts.

For the coming fiscal year, the Government will maintain the Petroleum Fund at the same level - TT$300 million (or the equivalent of US$48 million). This Fund, will be administered by the CARICOM Secretariat and a Committee of CARICOM Prime Ministers. Disbursements and accounting arrangements will be handled by the Central Bank of Trinidad and Tobago.Major Initiatives bearing on the 2005-2006 Budget

Energy and Tax Reform

Mr. Speaker, I now turn to the fiscal measures which are included in the 2005-2006 Budget.

Gas

In the Budget presentation of October 2004, I indicated the Government's intention to review and revise the energy sector fiscal regime. The review was seen as appropriate given that the last significant modification to the petroleum fiscal legislation was in 1992. The 1992 legislation was instrumental in fuelling the tremendous growth in the energy sector over the last 15 years. While I will do nothing to interrupt this successful track record, the structural changes in the global energy market and the growth of the local gas industry dictate that a review is timely and appropriate.

Recognising that these changes could not be undertaken lightly, we took the prudent step to engage in a deep enquiry which involved extensive research using world-class energy taxation consultants and wide ranging consultation with all the stakeholders. As I said in my last Budget, the issues involved in energy taxation are very complex and out of an abundance of caution, my government sought to take the time necessary to arrive at a solution that provides government with a fair share of returns accruing to the energy sector while maintaining incentives for continued investment in the industry.

I am pleased to report that over the course of the last year, the government has had fruitful discussions with the industry and arrived at a position that I believe is equitable and fair under the current circumstances. The comprehensive review has led the government to make amendments to the fiscal regime with the following objectives:

* Continue to provide incentives for further exploration and development activity through accelerated capital allowances provisions;

* Create an appropriate balance in allocation of future gas sales between LNG and gas sold to the local downstream energy sector;

* Assurance that all contracts along the LNG value chain should be based on Fair Market Value principles;

* Review the relevance of the continuation of any concessions provided to facilitate the development of the LNG industry;

* Provide incentives to stimulate oil production.

Oil

Mr. Speaker, in July 2005, an amendment to the Finance Bill 2005 was enacted that included measures to reform the system of taxation of income from oil production. This, and the reform of taxation regime for income from gas production are major initiatives which will increase significantly the revenue that the people of Trinidad and Tobago will receive from their energy wealth.

I would like to acknowledge publicly the tremendous work done by the Energy Tax Committee, chaired by Prof. Kenneth Julien, which laboured long and hard to bring this very important exercise to a successful conclusion. The new tax regime has a number of highly technical aspects that I would not seek to outline at this time. I would, however, review some of the salient features as follows.

Mr. Speaker, income from oil production is taxed through a Petroleum Profits Tax (PPT), a Supplementary Profits Tax (SPT) and the Unemployment Levy. The PPT yields about 60 percent of the tax and the SPT about 30 percent.

Under the old regime, the tax base for the SPT was determined after deducting capital allowances which invariably included expenses in respect of both oil and gas exploration and development. Under the new regime, SPT would be computed on gross crude oil income with no allowances except for the royalty allowance, but at slightly lower rates.

To compensate for the increase in the taxable base, the rate of tax has been lowered. The rate reduction is somewhat larger at oil prices below US$21 per barrel than at higher oil prices. The trigger price at which SPT becomes payable has also been increased slightly.

Moreover, under the new regime, SPT payments are now based on a weighted average price of crude calculated quarterly instead of annually. Previously, SPT was assessed annually but paid on a quarterly basis. This often reduced the Government's cash-flow pending end-of-year adjustments.

The major advantages of the new regime are (i) it is simple to administer and would provide a more predictable, stable and transparent revenue flow (ii) as oil prices increase, the Government will realize a greater share of the additional revenues than previously and (iii) a company's increase/decrease in exploration and development expenditure will not affect the SPT take.

As regards the Petroleum Profits Tax (PPT), the amendments to the existing regime involve:

(i) the removal of the first year allowance for both tangible and intangible expenditure and the postponement of annual allowances to year two or until commencement of commercial products or whichever is earlier.

(ii) the shift to quarterly tax payments calculated on a current year basis;

(iii) non-deferral of capital allowances and allowing decommissioning and abandonment costs only when they are incurred; and

(iv) limiting deductible management charges to 2 percent of expenditure.

As part of the discussions with the industry, the government sought to ensure that the levels of taxation were equitable across all the industry players. In that regard, as part of our fiscal reform process, we asked the largest energy company, BP Trinidad and Tobago to consider accelerating the onset of a 10 percent gas royalty - currently due to commence from 2017. I am happy to announce that my government has secured agreement with the company to a volume equivalent to 10 percent of gas sold for LNG. This royalty will be implemented in a phased manner beginning in 2005 and be fully effective by 2008. The company currently sells some gas through NGC at preferential prices for use for power generation. This value is recognized by the government as equivalent to a similar royalty on gas sold to local industry through NGC.

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