Today’s business news is filled with stories about the “shale gale” of natural gas now available through hydraulic fracturing (fracking) and horizontal drilling in the US.
For chemical companies, shale gas is a major game changer that involves feedstocks, research and development (R&D), the value chain; and logistics and distribution. Less noted — but equally important — are new tax opportunities arising from the shale gas revolution that can have a significant impact on the financial and competitive positions of global chemical companies.
Most if not all of the developments in shale gas will impact chemical companies for years to come. At the same time, companies need to consider possible tax implications of the shale gas revolution, including major shifts in profitability across regions; potential trapped losses due to possible shut-downs of non-profitable assets; and tax advantages under the arm’s length principle.
KPMG believes that the shale gas revolution presents significant tax opportunities for chemicals companies setting up any of the following four entities:
These companies would operate as the economic owner of IP and intangibles (not necessarily the legal owner). IP companies may be entitled to an arm’s length return in which a lower tax rate can apply. IP may include new CTO technologies; bio-based technologies; and new production technologies for propylene, butadiene and benzene production processes.
Group lease companies might be planning to invest in a US petrochemicals asset base, LNG export facilities or other investments in logistical assets. If established in the right location under the right circumstances, the lease companies may be taxed at a lower rate.
Supply security is becoming a key strategic risk for some downstream operations. Managing the procurement risk as a profit center may warrant a higher return, especially when depending on scarcer future feedstock as propylene, butadiene or benzene. Tax opportunities may be available by centralizing or relocating a newly set-up procurement company to a low-tax environment. In addition, companies should adopt a buy-sell transactional approach in order to maximize benefits.
Centralizing the management of key value adding processes typically attracts residual profits. In some cases, this could involve trapped European losses due to plant closures. The company must make sure that sufficient profitability is available in the entity where closure costs are recorded, using methods such as consolidating upstream or downstream profits, other business unit profits, other function’s profits or other geography profits.
The manufacturing company pays tolls for the principal company or acts as a contract manufacturer. The manufacturing company has a limited risk profile as a cost center.
The implications of the shale gas revolution will affect chemical companies worldwide in several aspects, and companies need to be aware of the tax implications resulting from major shifts in profitability across regions; potential trapped losses due to shut downs; changing risk profiles; and value-driving IP and intangibles. Chemical companies can possibly realize tax opportunities in four areas: assuming IP profits in a value chain located in a low-tax environment; leasing returns if a capacity company is set up; procurement risk that drives profitability assumed in a low-tax environment; and the major centralization of the value chain for a principal company in low-tax jurisdictions.
If you have any questions, please contact:
Frobert van Zijl or Jeroen Kuppens
+31 206 564563 or +31 206 561424