“Decision makers in the oil and gas industry need to be aware of the impact of the new tax rules," said KPMG energy and natural resources tax group head Rod Henderson.

"Failure to properly factor these impacts into any deals during negotiations could cost a company millions of dollars in tax."

The KPMG report, ‘Buying and selling petroleum interests - impact of tax consolidation and other tax reform measures’ examines how the new tax rules will affect how merger and acquisition transactions are negotiated, priced and implemented.

“The new tax changes could materially affect the value of transactions. But as the rules are not uniform, there are several traps for the unwary,” Henderson said.

For example, companies that buy a petroleum interest directly are eligible for a tax deduction for the purchase price. But those that acquire petroleum interests through the purchase of shares in a company, where that company has a pre-existing petroleum licence issued before 1 July 2001, will not enjoy a tax deduction.

"Depending on how an acquisition is structured, the purchase price of a production licence may be entirely deductible, or not at all,” said Henderson.

Oil and gas executives must properly factor any impact the new tax rules may have into their negotiations, according to KPMG tax partner Carlo Franchina.

"Lack of focus on this area could adversely impact the economics of projects,” he said.

“It is unfortunate that despite industry submissions and lobbying, this 1 July 2001 anomaly remains. Tax should not drive how transactions are structured and we encourage the Federal Government to remedy this distortion to provide a level playing field."

Given the breadth and complexity of tax issues surrounding merger and acquisition transactions, vendors and purchasers were likely to have differing expectations concerning tax risks and outcomes, Franchina said.

“Of particular importance for purchasers is exposure to joint and several tax liabilities," he said.

"Without the proper arrangements, purchasers of a company which is part of a consolidated group may find themselves inheriting substantial tax liabilities."

Taking all these factors into account, parties wanting to maximise the value and minimise the risks of buying or selling petroleum interests should make tax considerations integral in purchase price negotiations, KPMG said.