Tax deductions

Albanian new petroleum tax law places limits on tax deductions that could discourage future investments

Albania offers upstream acreage in the form of production sharing agreements (PSAs). The initial costs of the tax system include signing and production bonuses, training fees, royalties collected at a rate of 10% and a government allowance at a rate between 1 and 5%. Both the royalty and the government allowance are levied on gross production.

After deduction of the initial costs, licensees have the right to recover the petroleum costs incurred subject to a cost recovery limit of approximately 80-90%, the remaining part of the production is then distributed between the license holder and the state. The state’s share of production is generally between 0 and 17.5%. Subsequently, a tax of 50% on the profits of licensees is applied. The state does not participate directly in licensing.

Under minimum PSA conditions, the Albanian tax system offers the lowest rate of return and highest tax intake among its regional peers, which could discourage investments in the future. Due to the regressive nature of gross production royalties, when prices fall or costs rise, the tax burden increases. However, using the R factor for the government allocation and the allocation of Profit Oil helps to alleviate the tax burden that investors face when prices and costs change negatively. This, combined with the fact that the majority of tax is paid only on profits, means that the overall tax burden remains relatively proportional to the amount of profits made.

Albania has offered several blocks in recent years, including Blocks B and E in 2021. It has effectively maintained interest in its upstream oil and gas sector and has successfully awarded three onshore blocks to Shell and one block. to Eni during the period 2018-2019. A new petroleum tax law entered into force on February 2, 2021, which imposes an 85% limit on tax deductions and therefore a minimum level of taxation.

In addition, the law includes ambiguous terminology regarding the fiscal stability provisions for existing PSAs, which could create uncertainty for existing investors in the petroleum sector. The government is currently exploring ways to take advantage of the trans-Adriatic pipeline and an LNG import terminal that could potentially be developed by ExxonMobil and Excelerate.

Figure 1: Albania – Comparison of fiscal terms, regional context

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