The UK Bribery Act is scheduled to take effect on July 1, 2011, and according to a recent study by Ernst & Young, it will hit the oil and gas industry the hardest.
Ernst & Young's news release revealed some troubling statistics regarding bribery prosecutions under the US Foreign Corrupt Practices Act (FCPA) since its inception in 1977. In the study, Ernst & Young analyzed 118 FCPA cases involving 242 companies (including subsidiaries) and 167 prosecutions (an additional 30 are still pending) to determine which industries were most likely to be prosecuted. The data revealed that oil and gas companies were the most likely to be prosecuted under the FCPA, accounting for 18 percent of all prosecutions. Life sciences and consumer products were the second and third most prosecuted industries, accounting for 13 and 12 percent of prosecutions, respectively. Criminal fines were the most common outcome of an FCPA investigation in all three sectors.
Ernst & Young noted in the release that it expects the oil and gas industry to see the harshest impact of the UK Bribery Act, not because the sector is somehow predisposed to greater corruption, but because the sector operates in different parts of the globe. David Lister, a director at the firm’s Fraud Investigations and Dispute Services team, explained "There is no suggestion that individuals and companies within the oil and gas sector [or other sectors on the list] are intrinsically more corrupt than their counterparts in other sectors. Rather, it is the nature and locations of their businesses that exposes them to additional risk."
According to Ernst & Young, it elected to examine the historical data on FCPA prosecutions to forecast the impact of the UK Bribery Act because the Act’s provisions are similar to the FCPA and prohibit similar conduct. It is not exactly comparing apples to apples, however, because the UK Bribery Act, as written, is stricter than the FCPA, criminalizing the following three major areas that are not covered by the FCPA.
1. Bribery of private individuals and companies – The UK Bribery Act extends the prescribed conduct to include private commercial bribery, e.g., bribery between private individuals and companies, where a foreign official is not involved.
2. Offerors and acceptors of bribes are equally culpable – The FCPA only criminalizes the offer or payment of a bribe. The UK Bribery Act punishes not only the offer and payment of a bribe, but also the acceptance of a bribe.
3. Facilitation payments – Unlike the FCPA, the UK Bribery Act contains no exception for facilitation payments – monies paid to expedite the performance of a routine governmental action by a foreign official to which the payer is legally entitled – but rather, specifically prohibits their use.
Companies doing business in both the UK and United States should take note of the differences between the UK Bribery Act and FCPA, and will need to revise their existing compliance programs to reflect the more expansive provisions of the UK Bribery Act and the distinctions between the two.
Friday, May 20, 2011
Wednesday, May 18, 2011
Global Cooling: A Cautiously Optimistic View of the Next Two Years
Global oil demand experienced some modest destruction last month (about 3.5%) and the IEA and EIA both released declining demand projections which many believe will continue through the third quarter of 2011. However, many stock analysts remain bullish on energy because of expected overall growth in demand attributable to Asia, former Soviet bloc countries (FSU), and Latin America. Projections put crude prices at around $105/bbl (Brent) at 2011 year end, $110/bbl (Brent) and gas at $5.25/mcf next year with those prices holding through 2013, so there is good reason to be optimistic.
One of the only variables in this scenario that could cause material demand destruction in the sector is taxation.
Globally, fewer countries are subsidizing gasoline now than they were five or ten years ago because the cost simply became too high and more countries are placing higher taxes on fuel. In the U.S., though unlikely this year, the looming threat of Obama-driven taxes on oil and gas as well as his proposed removal of development incentives for the industry (e.g., IDC deductions) could contribute to substantially higher prices at the pump.
What does this all mean? There are so many factors involved in the global commodities markets that it is difficult to make generalizations. However, taxation is one factor where generalization is simple:
Increased taxation will push up consumer prices and increase demand destruction.
“Taxation” of course means increased direct taxes on energy companies. It also means the removal of tax incentives for domestic development. Further, “taxation” means any legislation that has the effect of increasing costs or inhibiting development, thereby driving up prices (e.g., restrictions on U.S. offshore production, onerous anti-fracing legislation, etc.).
From an international perspective, don’t underestimate the fact that the areas with the greatest demand growth also have much higher rates of population growth and rapid urbanization and motorization. This means exponential demand on supply.
So what price is too high?
Today the economy is less sensitive to price increases than it was during the 1970s when spikes in oil prices contributed much of the inflationary pressures on consumers. Nonetheless, the stress on supply from increasing global demand (especially volatile global demand since China, while representing 11% of global production accounts for more than one third of all demand growth since 2005, and Latin America 7% of global production but 15% of demand growth) and the environmental movement (pushing increased taxation and restrictions on production) have the potential like never before to force unusually high prices.
Increased taxation could be the “tipping point” that creates a demand-destructive, high price scenario.
I would like to hear from you.
What are your perspectives on the near term?
What sorts of strategies are you, your clients, vendors and customers using based on their vision of the next few years?
Please leave a comment below.
One of the only variables in this scenario that could cause material demand destruction in the sector is taxation.
Globally, fewer countries are subsidizing gasoline now than they were five or ten years ago because the cost simply became too high and more countries are placing higher taxes on fuel. In the U.S., though unlikely this year, the looming threat of Obama-driven taxes on oil and gas as well as his proposed removal of development incentives for the industry (e.g., IDC deductions) could contribute to substantially higher prices at the pump.
What does this all mean? There are so many factors involved in the global commodities markets that it is difficult to make generalizations. However, taxation is one factor where generalization is simple:
Increased taxation will push up consumer prices and increase demand destruction.
“Taxation” of course means increased direct taxes on energy companies. It also means the removal of tax incentives for domestic development. Further, “taxation” means any legislation that has the effect of increasing costs or inhibiting development, thereby driving up prices (e.g., restrictions on U.S. offshore production, onerous anti-fracing legislation, etc.).
From an international perspective, don’t underestimate the fact that the areas with the greatest demand growth also have much higher rates of population growth and rapid urbanization and motorization. This means exponential demand on supply.
So what price is too high?
Today the economy is less sensitive to price increases than it was during the 1970s when spikes in oil prices contributed much of the inflationary pressures on consumers. Nonetheless, the stress on supply from increasing global demand (especially volatile global demand since China, while representing 11% of global production accounts for more than one third of all demand growth since 2005, and Latin America 7% of global production but 15% of demand growth) and the environmental movement (pushing increased taxation and restrictions on production) have the potential like never before to force unusually high prices.
Increased taxation could be the “tipping point” that creates a demand-destructive, high price scenario.
I would like to hear from you.
What are your perspectives on the near term?
What sorts of strategies are you, your clients, vendors and customers using based on their vision of the next few years?
Please leave a comment below.
Thursday, May 5, 2011
Another Stinker: New Corporate Tax Proposal Lurks in Halls of Congress
Legislative analysts are buzzing about a new corporate tax proposal coming soon to a Congress near you. The proposal will center around the taxation of "pass-through" entities (like S corporations) that have revenues of more than $50 million.
It involves reducing the corporate tax rate to 28% (the median corporate effective tax rate for companies in the "Russell 3000" was around 32% last year) and eliminating certain deductions (i.e., reducing the rate and broadening the base much in the way the state of Texas did with the so-called "margin" tax). This proposal would presumably be extended to MLPs and LLCs.
The eliminations or changes would include: (i) modification of accelerated depreciation, (ii) elimination of the domestic production deduction, (iii) taxing foreign earnings on a current basis, and (iv) other Obama Budget proposals.
Who would be most adversely affected by the proposal if it becomes law? Low cash and low effective tax rate companies, which will actually see an increase in their taxes due to a loss of available deductions. According to Standard & Poor's and Bloomberg, the energy sector had an overall cash tax rate of 12% and an effective tax rate of 32% last year. This places energy companies within the "middle" of this scenario. However, the possible impact on cash flow and funding could be significant on an indirect basis even for non-pass through companies since many funding sources are pass-throughs.
On the surface, lowering tax rates seems like a good idea. However, it is the elimination of deductions which will make life difficult for many companies, especially those in capital intensive businesses.
The U.S. combined corporate tax rate is over 39%, making it the second highest in the world (second only to Japan)! We must go much further than lukewarm tax reduction! This is the reason literally billions remain unrepatriated outside the U.S. (it seems the new proposal might contain a repatriation holiday but this is just a patch on a broken system).
When are the folks in Washington going to learn that U.S. companies cannot continue to remain competitive with such high rates?
Energy companies desperately need their cash to reinvest in new technology, exploration and rising costs. When combined with the impact on prices due to restrictions on domestic production, Congress is simply restricting the growth of domestic energy jobs and forcing Americans to pay more for their energy. Even if not directly impacted by the proposal, the indirect impact will be felt by many companies through funding sources and increases in the cost of many services.
It involves reducing the corporate tax rate to 28% (the median corporate effective tax rate for companies in the "Russell 3000" was around 32% last year) and eliminating certain deductions (i.e., reducing the rate and broadening the base much in the way the state of Texas did with the so-called "margin" tax). This proposal would presumably be extended to MLPs and LLCs.
The eliminations or changes would include: (i) modification of accelerated depreciation, (ii) elimination of the domestic production deduction, (iii) taxing foreign earnings on a current basis, and (iv) other Obama Budget proposals.
Who would be most adversely affected by the proposal if it becomes law? Low cash and low effective tax rate companies, which will actually see an increase in their taxes due to a loss of available deductions. According to Standard & Poor's and Bloomberg, the energy sector had an overall cash tax rate of 12% and an effective tax rate of 32% last year. This places energy companies within the "middle" of this scenario. However, the possible impact on cash flow and funding could be significant on an indirect basis even for non-pass through companies since many funding sources are pass-throughs.
On the surface, lowering tax rates seems like a good idea. However, it is the elimination of deductions which will make life difficult for many companies, especially those in capital intensive businesses.
The U.S. combined corporate tax rate is over 39%, making it the second highest in the world (second only to Japan)! We must go much further than lukewarm tax reduction! This is the reason literally billions remain unrepatriated outside the U.S. (it seems the new proposal might contain a repatriation holiday but this is just a patch on a broken system).
When are the folks in Washington going to learn that U.S. companies cannot continue to remain competitive with such high rates?
Energy companies desperately need their cash to reinvest in new technology, exploration and rising costs. When combined with the impact on prices due to restrictions on domestic production, Congress is simply restricting the growth of domestic energy jobs and forcing Americans to pay more for their energy. Even if not directly impacted by the proposal, the indirect impact will be felt by many companies through funding sources and increases in the cost of many services.
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