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Tiered Corporate Taxes

The provinces of Daqing, Chicontepec, and Statfjord have a tiered tax schedule.

Their first tier is set for $0 to $100,000 of profit per OF Day, and the tax rate is fairly low. However, when profit surpasses $100,000 in that province, the tax rate on profit beyond $100,000 rises considerably. This is known as progressive taxation and is common in many western countries.

Let's assume you have a well in Statfjord as an example. This province has a first tier tax rate of 10% and a second tier rate of 50%. If you earn $90,000 in profit, you would pay $9,000 in taxes ($90,000 x 0.10). You don't pay the higher rate because your income did not exceed $100,000.

If you double your profit to $180,000, you would increase your tax payment significantly. First you would pay 10% on the first $100,000: an amount of $10,000 as the lower tier taxes. Then you would be taxed 50% on the remaining profit of $80,000 ($180,000 - $100,000). This second tier tax is $40,000 ($80,000 x 0.50), which means the total tax is $50,000 ($10,000 + $40,000).

So in Statfjord, the net income from a $90,000 profit is $81,000. And the net income from $180,000 profit is $130,000. Because of two tiers, the doubling profit does not mean doubling net income. Some interesting financial strategies will be required for handling two-tiered jurisdictions in a financially responsible way.

Unfortunately the OilFinancier program will not allow to you to cut down the flowrate of a well to keep you just under the $100,000 profit threshold. Your only options are (1) to bid appropriately such that the bid reflects the value of the higher tax rate, or (2) to suspend a well or two to keep profits below or close to $100,000, or (3) just pay the high taxes, knowing that you are generating cash for today rather a little more cash at a later time.

© 2014 Dave Volek. All Rights Reserved.