Update re Notice from Moroccan Tax Authorities

1 June 2021

Sound Energy plc

("Sound Energy" or the "Company")

Update re Moroccan Tax Administration Notification

Sound Energy, the Moroccan focused upstream gas company, provides an update further to its announcement of 3 September 2020 that the Moroccan branch of its wholly-owned subsidiary, Sound Energy Morocco East Limited ("SEMEL") had received a written notification by the Moroccan General Tax Administration (the "Moroccan Tax Administration") of a re-assessment in respect of Moroccan taxes pursuant to a tax audit undertaken on SEMEL by the Moroccan Tax Administration during 2020 and related to the fiscal period 2016 to 2018 (the "Notification"). The Company also announces the receipt of an additional, but related, notification from the Moroccan Tax Administration (the "Additional Notification").

The Company entirely refutes the Moroccan Tax Authority's position and having taken detailed specialist taxation and legal advice, is also liaising with Moroccan governmental authorities to seek a satisfactory conclusion of the matter, whilst the formal process related to Notification continues, with the next stage being the first local tax committee (the "LTC" ) hearing on 3 June 2021 in which SEMEL and the Moroccan Tax Administration will present their respective positions (pursuant the Notification) to the LTC. The LTC process can take up to 12 months. Thereafter, the matter may proceed to national committee stage, if not concluded, thereafter for arbitration. Regarding the Additional Notification, the Company will formally write to the Moroccan Tax Administration to formally refute the assessment and the basis thereof.

Notification

In the Notification, the Moroccan Tax Administration suggested (as announced by the Company on 3 September 2020) that it had assessed additional corporate and value-added tax SEMEL liabilities in sharing its intention to examine:

1.   The relinquishment, in 2017, by Sound Energy Morocco SARL AU ("SARL AU") of its operatorship and its 37.5% stake in the Tendrara-Lakhbir Petroleum Agreement. SARL AU is a wholly owned and now dormant Moroccan subsidiary of SEMEL (originally set up to operate the exploration activities in Tendrara-Lakhbir exploration permits, on behalf of the joint venture consortium with the State of Morocco represented by ONHYM established by Tendrara-Lakhbir Petroleum Agreement); and

2.   The entry in 2017 of SEMEL into the Tendrara-Lakhbir Petroleum Agreement, with the prior approval from ONHYM and the governmental bodies.

The Moroccan Tax Administration is asserting that a sale and purchase transaction may have taken place between the Company's two wholly owned subsidiaries SARL AU (asserted to be a seller by Moroccan Tax Administration) and SEMEL (asserted to be a buyer by the Moroccan Tax Authority). In asserting this position, the Moroccan Tax Administration is suggesting that such a transaction would trigger the payment of Corporate Tax, VAT and Withholding Tax.

The Company entirely refutes the Moroccan Tax Authority's position and is firmly of the view that no sale and no purchase took place.

In addition, the Moroccan Tax Administration has indicated that it assessed the signing in late 2018 by Schlumberger Silk Route Services Limited ("Schlumberger") and SEMEL of a new petroleum agreement with ONHYM in Eastern Morocco (the Greater Tendrara Petroleum Agreement), as a sale and a purchase transaction between SEMEL and Schlumberger Silk Route Services Limited in relation to a purported conversion of synthetic interest from the Tendrara Lakhbir exploration permits to the then newly issued Greater Tendrara exploration permits. The Moroccan Tax Administration, despite the clarifications provided by ONHYM, the Moroccan governmental representative of the upstream sector, appears to have misunderstood the fact that that Tendrara Lakhbir exploration permits ceased to exist, in compliance with the Moroccan Hydrocarbon Code, on being replaced with newly issued exploration permits called "Greater Tendrara", with new funding obligations (including the work commitment obligation to drill 4 additional exploration wells during the period 2018-2026). The issue of the replacement permits had previously been approved by ONHYM, the Ministry of Energy and the Ministry of Finance and there was no such conversion of Schlumberger synthetic rights in Tendrara Lakhbir Petroleum Agreement which remain only to Tendrara Concession.  

Since receiving the Notification, the Company has, with the support of its advisors, responded formally to the Moroccan Tax Administration and has subsequently engaged both formally and informally with Moroccan Tax Administration and other governmental bodies in order to seek to successfully resolve the matter.

A meeting was held at the Ministry of Finance on 31 May with the attendance of Sound Energy COO, several senior representatives of the State of Morocco (including the Ministry of Finance, the Moroccan Tax Authority and ONHYM ) and the chairman of Sound Energy shareholder OGIF (which also received a tax notification related to its 37.5% stake in Tendrara-Lakhbir permits, abandoned in 2017). The meeting was held amongst all participants in order to encourage an informal dialogue of understanding, in order to resolve the issue of these matters smoothly and in good order.

The Company has taken detailed specialist taxation and legal advice regarding the matter and remains firmly of the view that the assessment and the basis of the assessment will be satisfactorily resolved, although with the ongoing formal process (next hearing of LTC scheduled on 3 June 2021) the Company cannot speculate on timing of any resolution.

Additional Notification and Information Request

In addition to the update in relation to the Notification provided above, Sound Energy also announces that it has now received an information request (the "Information Request") and a further written notification from the Moroccan Tax Administration notifying a re-assessment in respect of Moroccan taxes ("Additional Notification") pursuant to a tax audit undertaken on SARL AU, the Company's wholly owned dormant subsidiary, by the Moroccan Tax Administration during 2021 and related to the fiscal period 2016 to 2017.

In the Information Request, the Moroccan Tax Administration has asserted that SARL AU remitted, in 2017, certain withholding taxes late and has consequently levied a penalty of 2.7 million MAD (approximately US$300,000). The Company is currently gathering further information regarding the penalty however it believes the penalty to be incorrectly applied and plans to reply to the Moroccan Tax Administration formally before 23 June 2021 outlining its position.

In the Additional Notification, the Moroccan Tax Administration has notified SARL AU that it has the intention to consider, from a SARL AU perspective:

3.   the matters summarized in items 1 and 2 above and already raised in the Notification issued to SEMEL in 2020, as a sale and a purchase transaction. This claim by the Moroccan Tax Administration essentially mirrors that asserted against SEMEL and, if both were enforced would result in a double taxation on a single transaction; and  

4.   certain direct payments made by Sound Energy from the UK for costs of exploration on behalf of its wholly owned Moroccan subsidiary, SARL AU and the JV partners such as the State of Morocco (represented by ONHYM, who invests no monies and were 'carried' during the exploration phase of Tendrara-Lakhbir petroleum agreement) as improper transactions (despite having been validly incurred and having been approved by JV partners).

According to the Moroccan Tax Authority, its assessment of items 3 and 4 above are such that the payment of Corporate Tax, VAT and Withholding Tax are triggered, claiming that for SARL AU alone, additional 2017 liabilities of approximately US$22.5 million are due. These amounts are claimed to be in addition to the approximately US$14 million claimed under the September 2020 Notification in relation to SEMEL.  

The Company has until 23 June 2021 to formally respond to the Additional Notification and the Information Request. Whilst in line with the meeting held on 31 May at the Ministry of Finance, the Company will be engaging constructively with the Moroccan Tax Administration in order to resolve these matters, it will formally write to the Moroccan Tax Administration and formally refute the assessment and the basis thereof.

Further announcements will be made, as appropriate, in due course.

Commenting, Graham Lyon (Executive Chairman) said:

"Whilst I am satisfied that constructive dialogue is ongoing in relation to the original notification, I am exceptionally disappointed to have received the subsequent notifications from the Moroccan Tax Administration relating to Sound Energy Morocco SARL AU. Since entering Morocco in 2015, Sound Energy and its partners have invested over US$140 million, with as yet no production revenue nor capital gain. This inward investment has not only created jobs, provided subsequent employment taxation and economic stimulus in Morocco but has heightened interest in what was hitherto an often-overlooked country for upstream investments.

One of the attractive features of Morocco from an industry perspective is its fiscal code as laid out under its Hydrocarbon Code. This includes a 10-year exemption from corporation tax for upstream producers, as well as, ironically, import duty and VAT exemptions. With Sound Energy on the cusp of concluding commercial arrangements in order to sanction our Phase 1 development project at the Tendrara Production Concession, the continuation of these ill-judged tax notifications is an unwelcome distraction from our goal of delivering value to Sound Energy shareholders and delivering stakeholder value and economic benefits in Morocco.

The tax framework of the hydrocarbon sector not being applied is a poor reflection on doing business in Morocco. Hopefully the meeting held yesterday (31 May 2021), with the assistance of our State-owned partner ONHYM, at the Ministry of Finance will help to satisfactorily conclude this matter."

Commenting, Mohammed Seghiri (Chief Operating Officer) said:

"We are surprised by the position of the tax administration which, despite the lack of neither any field monetization nor capital gain on one hand and the clarifications given by ONHYM on the other hand supporting Sound Energy's position, has decided to seek to tax exploration permits. The attempt to levy double taxation, first claiming taxes from Sound Energy Morocco East before later seeking to claim under the same structure from Sound Energy Morocco SARL AU, for the same exploration work is equally perplexing. We hope that the State of Morocco will confirm that the excellent fiscal terms which have been promoted by ONHYM for the last 20 years, in order to sustain the investment efforts to explore the Moroccan subsurface, by ourselves and other companies listed on AIM remain in force."

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The information communicated within this announcement is deemed to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014. Upon the publication of this announcement, this inside information is now considered to be in the public domain.