Sponsored briefing: Fiscal regime and main incentives under Turkey’s oil and gas exploration and production legislation

Turkey has been historically highly dependent on oil and natural gas imports, due to low local production levels. The recent discovery of a natural gas reserve in the Black Sea as well as extensive exploration activities in the Mediterranean Sea have increased foreign and Turkish investors’ interest in exploration and production activities. The recent conflict between Ukraine and Russia and Turkey’s dependency on Russian natural gas also stressed the importance for Turkey for diversifying its natural gas sources. In that context, this article aims to give an overview of the fiscal regime and the main incentives for investors under the Turkish Petroleum Law as well as the tax legislation, with a specific focus on incentives regarding exploration activities.

Exploration and production activities (E&P) related to petroleum and natural gas in Turkey are governed by Turkish Petroleum Law no. 6491 (TPL) based on the ‘tax and royalty’ regime.

Taxes and Royalties Levied on Petroleum Right Holders

A petroleum right holder (PRH) is liable to pay a royalty corresponding to one-eighth of the petroleum produced. No royalty will be collected from the petroleum used in petroleum operations in relation to the exploration or production lease. The royalty payable by a petroleum producer is calculated:

• per barrel, for crude oil produced on a unit of petroleum, based on the market price; and
• for natural gas, based on the sales price applied to distribution companies or consumers.

The royalty accrues by declaration to the General Directorate of Mining and Petroleum Affairs (GDMPA) until the end of the 20th day of the following month after the production was effected, and must be paid by the end of the month to the tax office where the related party is affiliated in terms of income or corporate tax. Where the Ministry of Energy and Natural Resources so requests, the royalty may be paid in kind.

For 2021, the corporate income tax rate is 25%. The withholding tax applicable to the services related exploration activities is reduced to 5% instead of 20%. Under Turkish law, the general withholding tax rate applicable to dividend payments is 15%; however, it may be reduced under bilateral double taxation avoidance treaties.

Tax Incentives Available for Petroleum Right Holders

The general value added tax (VAT) rate is 18% in Turkey. However, the VAT Law (3065) provides for a special VAT exemption in relation to petroleum exploration operations, as the delivery of goods and services to persons that conduct petroleum exploration activities is exempt from VAT. This exemption applies only with respect to petroleum exploration operations and production operations are not covered by the exemption. The VAT exemption applies to goods and services delivered to a petroleum rights holder or to any contractor which has been approved by the GDMPA as a ‘rights holder’s contractor’ and whose contract with the rights holder (in relation to the provision of registered exploration-related goods and services) has been registered with the GDMPA.

The TPL also provides for a customs duty exemption with respect to petroleum operations. The import of all materials, equipment, fuel and land, sea and air transportation vehicles approved by the GDMPA (excluding materials relating to the construction, erection or operation of buildings, installations and equipment; and to administrative activities) by a petroleum rights holder itself or a contractor approved by the GDMPA is exempt from customs duty.

Also, under the TPL, contracts executed in relation to exploration and production activities conducted by petroleum rights holders are exempt from stamp tax.

Specific Aspects of the ‘Registered Capital’ for Oil and Gas Operators

The registered capital of a PRH is basically defined as the payments made abroad by the PRH Head Office on behalf of the Branch office, for materials or subcontractors and the cash imported in Turkey by the Branch. Capital in Turkish Lira can be recovered by remitting the surplus revenues generated from E&P activities.

The TPL provides that the recovery of the registered capital will not be subject to any tax and can be remitted abroad freely. However, in order to apply this incentive, the TPL provides that the registered capital amount should be registered, and the recovery should be done following an audit by the GDMPA. The reason is that the imported capital should be spent for E&P activities and the revenue for the recovery should be made from the E&P activity.

The registered capital is part of the audit system that allows the GDMPA to monitor whether the other incentives from which the PRH is the beneficiary (such as customs, VAT and stamp tax exemptions, as well as reduced withholding tax applications) have been properly applied or not, ie, whether the expenses to which the incentives apply relate to E&P activities.