This Article was Published on July 9, 2021<\/p>\n\n\n\n
Introduction<\/strong><\/p>\n\n\n\n The issue of taxation of the oil\ncompanies has aroused particular interest ever since it became known that the\nGovernment has to find some $5.391 billion to pay the tax liability of the two\npartners of Esso in the Stabroek Block – CNOOC and Hess \u2013 which reported pre-tax\nprofit of the equivalent of $16.175 billion in 2020. For reasons identified in\ncolumn 90, Esso, the senior partner and Operator of the Stabroek Block, reported\na loss to be carried forward for recoupment in future years. Despite the\nindustry\u2019s well-known proclivity for financial engineering and creative\naccounting, at some point, Esso too will report a profit and will demand that Guyana\npay its taxes as well. <\/p>\n\n\n\n Guyanese are not unfamiliar with\nthe gay abandon with which our governments hand out tax exemptions to the\npowerful, the favoured, and the influential \u2013 the latest group to be rewarded\nwith such fortune are shareholders of private hospitals, some of which are known\nfor extortionate charges and dangerously poor service. But what Guyanese find\nhard to accept is that an agreement can state, as the 2016 Agreement does, that\nan entity is subject to the income tax laws of Guyana, including the Corporation\nTax Act, and yet two paragraphs later, imposes on the taxpayers the burden of\npaying those taxes. But that is exactly what the 2016 Agreement and similar\nagreements have done. And which the Fiscal Affairs Department of the IMF, in a\n2018 Technical Assistance Report, in a peculiarly didactic style, both asks and\nanswers the questions whether post-tax sharing is unique to Guyana, and whether\nit has advantages. <\/p>\n\n\n\n Noise and nonsense purveyors\u00a0 <\/strong><\/p>\n\n\n\n The report\u2019s authors – Thomas\nBaunsgaard, Honore Le Luche and Diego Mesa Puyo \u2013 are persons whose credentials\ncannot be summarily dismissed. At least two of them hold high office and would\nbe the very opposite of noise and nonsense agents who according to our learned\nProfessor \u201ccollude, connive and conspire to conceal the reality of today\u2019s\npetroleum sector and pursues (sic) very outdated narratives.\u201d <\/p>\n\n\n\n This column will examine what these\ndistinguished and knowledgeable individuals wrote about \u201cpost tax sharing\u201d,\ntheir description of the mechanism whereby the tax payable by the oil companies\non their share of the profit under a production sharing agreement is paid by\nthe Government out of its share. Here is their answer to their question about\nuniqueness and advantages: <\/p>\n\n\n\n \u201cNo, this system is\nused in many producing countries such as Trinidad and Tobago, Azerbaijan and\nQatar, just to name a few. Some advantages of the pay-on-behalf-of system is\nthat it provides more certainty on the expected government revenue from oil projects\nand mitigates tax planning, while offering physical stability for both the\ngovernment and contractor against changes in corporate tax rates.\u201d <\/em><\/p>\n\n\n\n This must rank as\nnonsensical a proposition as any that the IMF has published in its name for\ndecades. How one might ask, does this giveaway bring certainty to Government\nrevenue, or prevent tax planning, when the whole idea of pay-on-behalf-of (POB)\nis all about tax planning \u2013 to allow oil companies to receive a certificate issued\nby the tax authorities of a tax ostensibly but not actually paid by them so\nthat they can claim a tax credit in their home country? And stability for\nGovernment? In fact, from all appearances, Budget 2021 does not acknowledge any\nawareness of this liability by the Government or make any provision for its\npayment. For the Government to meet this obligation to the oil companies outside\nof an Appropriation Act would be unlawful and may explain the silence of the\nauthorities on this matter. <\/p>\n\n\n\n IMF examples <\/strong><\/p>\n\n\n\n The practical\nexamples given by the IMF Team are only marginally more sustainable than their conceptual\nlogic. The authors are right about Trinidad and Tobago but fail to acknowledge\nthat this is a decades-old legacy which is no longer widely practised, and has\nnever applied in a post-discovery Agreement. With respect to Azerbaijan, the\nassertion is effectively disputed by one of that country\u2019s academics and by Deloitte,\na Big Four Accountancy Firm. In an article in the July 2015 edition of Journal\nof World Energy Law and Business<\/em>, Nurlan Mustafayev states that Contractors\nand sub-contractors are subject to taxes under the country\u2019s Production Sharing\nAgreements. There is no pre-contract cost, capital expenditure is limited to\n50% of gross production and the cost recovery base and taxes are ring-fenced.\nDeloitte goes further and gives a range of tax rates of 20% to 32% which\npetroleum operations must pay. They both note that each Agreement is the\nsubject of a separate Act of Parliament and neither mentions the Government of\nthat country settling the oil companies\u2019 tax obligations. <\/p>\n\n\n\n And for Qatar, here is how PWC,\nanother of the Big Four accounting giants, sums up that country\u2019s tax regimes\nin respect of petroleum operations: \u201cGenerally, corporate income tax rate at a\nminimum of 35% is applicable to companies carrying out petroleum operations\u2026\u201d\nIn fact, Qatar has moved away from Exploration and Production Sharing\nAgreements (PSAs) to Development and Fiscal Agreements (DFAs). <\/p>\n\n\n\n The dangers of comparison<\/strong> <\/p>\n\n\n\n While comparisons can be useful benchmarks, they ignore the\noverall package and relevant local laws at their peril. In the case of Guyana,\ntwo such laws are particularly relevant: the\nPetroleum Exploration and Production Act Cap. 65:04 (PEPA) and the Financial\nAdministration and Audit Act (FAA). Section 51 of the PEPA provides for\nthe modification of four Acts in respect of\nlicensees under a production sharing agreement. The Acts are the Income Tax\nAct, the Income Tax (In Aid of Industry) Act, the Corporation Tax Act and the\nProperty Tax Act which extends to the Capital Gains Tax Act as well. In\nviolation of section 10 of the PEPA which permits agreements not inconsistent\nwith the Act, the minister went beyond his powers to extend concessions to\npersons who do not hold such licences, including persons not resident in or\ncarrying on any operation or business in Guyana. <\/p>\n\n\n\n The\nGranger Administration which signed the 2016 Agreement, and the PPP\/C\nAdministrations before and after it, will have an enormous task of justifying\nwhether and how a modification or inapplicability of a tax law can amount to a\nreversal of a statutory obligation whereby a tax liability payable to the State\nends up with the Government paying that tax. The FAA in particular appears to raise\nan insurmountable hurdle. It requires any remission, concession or waiver\nto be expressly provided for in a tax Act or subsidiary legislation. Seems that\nthe oil companies might have thought that the vaguely worded Order No. 10 of\n2016 to give effect to the Petroleum Agreement would allow the pay-on-behalf-of\ntrick. But the FAA deals with that as well. It provides that no Order (or other\nsubsidiary legislation) will be valid unless the Act under which the subsidiary\nlegislation is made expressly permits the remission, concession or waiver. The\nOrder is made under the PEPA which does not, even by implication, let alone\nexpressly, permit[s] the POB formula. <\/p>\n\n\n\n Conclusion\n\n\n\nIt seems clear that the taxation Article of the\nAgreement contains several provisions which do not meet the test of \u201cnot\ninconsistent\u201d with the Act. The Government must surely be aware of this. In the\nfinal analysis, it has to decide whether it stands on the side of the law or\nwith Esso and its partners. The choice should be an easy one. But logic and the\nlaw never apply to politics in this country, even when it involves substantial\nrevenues to the State. \n\n\n\n<\/p>\n","protected":false},"excerpt":{"rendered":" This Article was Published on July 9, 2021 Introduction The issue of taxation of the oil companies has aroused particular interest ever since it became known that the Government has to find some $5.391 billion to pay the tax liability of the two partners of Esso in the Stabroek Block – CNOOC and Hess \u2013 … <\/p>\n