Based on Petronas’ FY19 capex of RM47.8 billion, the additional sales tax that could be imposed by the East Malaysian states translate to seven per cent of FY20F capex of RM38 billion. — Bernama photo
KUCHING: Petroliam Nasional Bhd (Petronas) has been estimated to bear up to RM2.5 billion additional tax annually from East Malaysia, which will vary based on crude oil and natural gas prices.
To note, Petronas has reportedly withdrawn its appeal against the Kuching High Court’s ruling that Sarawak is entitled to collect sales tax on petroleum products. At the same time, the Sarawak government also withdrew its cross-appeal over jurisdiction issue of the High Court on the state sales tax (SST).
“Petronas and the Sarawak state have mutually withdrawn the appeals over Petronas’ failed judicial review application against the Sarawak government and the state’s Comptroller of SST amounting to RM2 billion sales tax which was imposed as an additional five per cent tax on all petroleum products sold in the state starting January 2019,” AmInvestment Bank Bhd (AmInvestment Bank) recapped.
“When the extra sales tax issue arose as both Sarawak and Sabah were in talks with the Pakatan Harapan government on their share of oil revenue under the Malaysian Agreement 1963, Petronas sought orders to cancel notices of assessment for an amount of over RM1.3 billion issued by Sarawak’s Comptroller of SST, and declarations that the Sarawak government is not entitled to impose SST on petroleum products.
“Otherwise, the authority of the Petroleum Development Act (PDA) 1974, which grants exclusive ownership of Malaysia’s petroleum resources to Petronas, would effectively be rendered as non-absolute. Currently, Petronas already pays a royalty tax of five per cent to the East Malaysian states.”
AmInvestment Bank further recapped that as Petronas did not pay the tax, Sarawak filed a RM1.3 billion civil suit against the national oil firm.
The research firm recalled that subsequently, Petronas’ president and group chief executive (CEO) Tan Sri Wan Zulkiflee Wan Ariffin stepped down on July 1 this year, and was replaced by the group’s chief financial officer, Tengku Muhammad Taufik Tengku Aziz.
“Back then, Petronas viewed that the sales tax was not valid under the Federal List and should not be double-taxed as the group already bears a petroleum income tax of 38 per cent.
“Additionally, the sales tax also appears to overlap with the PDA 1974, which states that Petronas is the regulator of all oil and gas assets in Malaysia.
“With the withdrawal of its appeal against the Sarawak state government, Petronas has set a precedent for Sabah, which joined Malaysia in 1963 together with Sarawak.”
That said, the research firm does not think that other states in Peninsular Malaysia will follow suit, as the National Land Code allows the compulsory acquisition of land by the federal government.
“Based on the RM500 million being sought since April last year by the Sabah state, which has lower producing fields compared to Sarawak, we estimate that Petronas may have to bear up to RM2.5 billion additional tax annually from East Malaysia, which will vary based on crude oil and natural gas prices.
“This represents six per cent of Petronas’ financial year 2019 (FY19) core earnings and three per cent of net cash of RM88 billion (including fund investments).”
AmInvestment Bank gathered that Petronas, which had earlier indicated its intention to maintain domestic capex, has already announced cuts of 21 per cent for capital and 12 per cent operating expenditure this year due to the current Covid-19-impacted cyclical downturn, exacerbated by the Saudi-Russian price war earlier this year.
The research firm also gathered that based on Petronas’ FY19 capex of RM47.8 billion, the additional sales tax that could be imposed by the East Malaysian states translate to seven per cent of FY20F capex of RM38 billion.
“Even though a measure of optimism has returned for crude oil prices, we expect oil producers to proceed with their planned production cuts for this year given that demand globally remains depressed amid the prolonged Covid-19 movement restrictions and social distancing measures across the new normal which could mean potentially long-term changes in energy usage.
“So far, 20 per cent to 30 per cent capex reductions for 2020 have been announced by Exxon Mobil, Royal Dutch Shell, Saudi Aramco and Petrobras.
“In the first half of 2020 (1H20), new contract awards to Malaysian operators dropped 62 per cent year on year (y-o-y) to RM2.2 billion, with the worst fallout yet to come in 2H20 onwards.”