Jason Koutsoukis – Negotiations between the Australian Government and US-based Phillips Petroleum over the tax treatment of a gas project in the Timor Sea remained deadlocked last night amid concerns that further delays may scuttle the project.

The royalties from the Bayu-Undan project are considered crucial to the development of the fledging independent nation, guaranteeing it about $7 billion in revenue over the next 17 years.

Under the terms of an arrangement negotiated between Australia and East Timor last year, Australia agreed to split the revenues 90 per cent in favour of East Timor.

But since that deal was finalised, East Timorese officials increased their company tax revenues in a separate agreement with Phillips. The company has now sought to offset the higher tax by negotiating a more favourable tax arrangement with the Australian Government.

Most of the disagreement centres on a request by Phillips that the Australian Government provide it with a single tax arrangement for the life of the 17-year project.

A meeting last week between Phillips executives and officials from the departments of Foreign Affairs, Industry and Resources, Attorney General, Tax and Treasury, failed to resolve the tax issue.

A spokesman for Phillips Petroleum's Australian chief, Stephen Brand, said the company was concerned at the lack of progress after more than three months of talks. "After reaching agreement with East Timor, Phillips had thought it had achieved a result that was in the interests of all parties and had expected ratification of the treaty before East Timor's independence on May 20," the spokesman said. "No other company in Australia has got that certainty and if we're talking tax certainty for large infrastructure projects over a long period of time that basically amounts to transferring the risk from them to us."

Treasury officials are believed to be concerned that any concession granted to Phillips would be sought for other resource projects such as the Sunrise project operated by the Shell-Woodside consortium. "It's the economic welfare of the nation that we're talking about, actually preserving the value of those resources, not just for the people who are exploiting them, but also for the people who are giving up the resource," the adviser said.

An adviser close to the Australian Tax Office suggested that Phillips had not sifted through all the possible tax arrangements available. "We are not necessarily sure they've completed the process which might provide them with an acceptable solution," the adviser said.

Speaking in Sydney yesterday, East Timor Foreign Minister Jose Ramos Horta said he was confident the treaty would be signed in time for the May 20 independence deadline."I am the foreign secretary and one of the sacred principals is you negotiate something in good faith, you sign it, you honour it," he said.

Key points:

• Disagreement centres on Phillips wanting the Australian Government to provide it with a single tax deal.
• Further delays to the negotiations could scuttle the Timor gas project.