Fuelling Uncertainty: Tax and Legal Issues in Volatile Energy Markets

Workforce considerations

Employees based in the Middle East in some circumstances have been required to, or requested to, work temporarily from other countries.

A Corporate Income Tax or VAT presence may be triggered even where activities are undertaken in a new jurisdiction. Under OECD principles, six months is the typical time limit beyond which a place of business (e.g. office space) may trigger a PE. Where traders are concluding contracts the relevant PE trigger is the ‘habitual’ conclusion of contracts, an ambiguous term with scope for tax authorities to interpret this test in a stringent manner. We are not aware of any relaxations being issued akin to those during COVID.

Even short-term work periods can create tax and immigration obligations for employers including right‑to‑work requirements, withholding/reporting obligations and additional tax liabilities.

Contractual uncertainty

Contractual risks such as force majeure, suspension, termination or damages provisions are in some circumstances being triggered. Collating and categorising the contracts affected can be a legal challenge where volumes and variety are high. Deploying technology is helpful for these exercises.

When identifying mitigation options for contractual risks, businesses should include those which may not be provided for in the contracts. Agreeing contractual changes to obligations is often preferable to both parties where external conditions diverge from those contemplated by the contract.

When exercising formal contractual rights it is critical to understand the counterparty’s sensitivities, e.g. around security of assets and well-being of people. A counterparty’s reaction may be much more favourable if rights are exercised after critical security challenges have been addressed, even if contractual provisions require prompt notification.

Analysis of the tax treatment of any related costs, such as termination/restitution payments, will be required.

Beyond the short term

It is important to consider the route to resuming normal contractual performance now as remobilising can be time consuming, even after performance is possible again. Contractual deadlines are likely to need adjusting accordingly.

A real time evaluation of intragroup outcomes in the context of transfer pricing will be a valuable exercise. Unusual market conditions can lead to unexpected and material swings in profits / losses, which can raise the risk of tax authority challenge in future years. It is good practice to track where losses / profits will be recognised within a group and to ensure these outcomes align with the risk allocation under transfer pricing policies and can be supported as arm’s length. Monitoring the functional analysis and decision-making processes of trading teams across geographies during these unusual market conditions can provide a helpful case study as to how risks are controlled in the organisation. For some, this could trigger a reassessment of existing transfer pricing models in order to align profit allocation with business reality.

Please speak to the authors or your usual KPMG in the UK contact if you would like to discuss your organisation’s response to current events.

For further information please contact:

• Claire Angell
• Richard Murray