Exchange rate differences in production sharing agreements

Exchange rate differences in the activities of investors in production sharing agreements are one of the ways to assess the value of invested funds.

Exchange rate differences affects both the cost of compensation for shares in production as a result of mining operations, and the cost of extracted hydrocarbon raw materials estimated in monetary terms.

Exchange rate differences affect both the capital in the assets of investors, as well as the value of expected profits.

Exchange rate differences are a sensitive issue for investors, and therefore sometimes lead to litigation and arbitration disputes.

I will give an example, a case Commissioner of Income-Tax and Another v. Enron Oil and Gas India Ltd, decision dated 17th of January, 2008 by the Uttarakhand High Court.

Here is it the court's position below: "when the revenue is accepting the tax on the profit gains arisen out of the change in the foreigner exchanger in other assessments years accrued to the respondent, it cannot deny the deppressiation on account of losses incurred for that reason, substantial questions of law are answered against the revenue".

This is why a cost indexation mechanism is so important for production sharing agreements.

Cost indexation helps investors to evade litigations.

Cost indexation mechanism returns the lost position in the exchange rate differences.