Benefits from an Oil and Gas Industry (Conclusion)

Apr 16, 2017 News

---

By Kiana Wilburg

(Continued from last week)
Leaders of many oil-rich nations can testify that the oil and gas sector often attracts some of the most notorious elements of corruption. And since the discovery of significant oil finds in Guyana’s backyard, advice has been pouring in on

how the authorities of the day can protect the sector as much as possible from fraudulent schemes.
If used correctly, the oil and gas sector can have a booming effect on Guyana’s growth and development, providing the various contracts and agreements are appropriately designed. One of the ways in which the Government can ensure that Guyana benefits from the oil sector is with the use of a Production Sharing Agreement (PSA).
In my article last week Sunday, it was discussed that a PSA is one instrument used to ensure that the country receives a fair return from the industry.
In exploring this subject matter, Kaieteur News interviewed Chartered Accountant, Shawn Naughton.
Naughton provided insight into some of the potential benefits and associated risks to countries with oil, while speaking to the importance of paying attention to partnerships with foreign companies.
According to Naughton, some important potential benefits to a country, which usually flows from the oil and gas industry include: signature bonus, production bonus, rentals, royalty, the country’s equity share, corporate tax, export duty, withholding tax, value added tax, and income tax. These were explained last week.
Today, we continue with this subject by exploring other potential benefits and associated risks.

REVENUE RISK AND CORPORATE TAX
According to Naughton, the International Monetary Fund (IMF) found in July 2015, that profit-shifting by major companies deprives developing countries of approximately US$200B per year. In a separate case from Australia, Chevron (Oil Company) was forced to pay approximately US$300M. News articles indicate that Chevron created a subsidiary (a related entity) in Delaware USA (low tax territory) to charge excessive interest (increasing the interest expense of Chevron and therefore Australian taxes payable).
Naughton explained that this is a valuation issue which, before the court’s decision, resulted in a potential loss of US$260M in Australian tax (US$300M including penalties).
In addition to the valuation risks, Naughton said that there is a risk that foreign companies, which provide support services to the oil company, will be able to avoid corporate tax of the oil-producing country.
In this regard, he said, “Basically, if any person (corporate or not) earns income in a foreign country, taxes are payable to that foreign country on that income. A branch of a US company should therefore be made to pay corporate taxes to Guyana if it provides services here (whether to an oil company operating here or to any other entity here).”
Naughton continued, “The conditions for determining when a foreign company is earning income from business activities ‘in’ (say) Guyana as opposed to ‘with’ Guyana need to be unambiguously described in law. This distinction is important since Guyana would not have taxing rights over the income if it is not earned from business activities ‘in’ Guyana.”
The Chartered Accountant added that the law needs to provide an approach to calculating the profits of a local branch of a foreign company. He said that this may seem straightforward, but there are likely to be business transactions between the foreign company (head office) and the branch which may pose valuation problems, if parameters are not set in law.

EXPORT DUTY
Naughton explained that Export duty is simply a tax levied on the export of the oil to foreign countries, once produced. He said that this represents a further source of earnings for the oil-producing country, where agreed.

WITHHOLDING TAX
Countries seek to have foreign companies, which are operating domestically, retain their profits in the domestic country. Naughton said that this is because the domestic country stands to benefit from these profits being reinvested domestically (job creation etc). To discourage repatriation of profits to foreign countries, the tax expert said that domestic countries typically impose a withholding tax on profit repatriated in the form of dividends. He said that any portion of profits retained in the domestic country escapes the withholding tax.

VALUE ADDED TAX
According to Naughton, the general rule about VAT on professional services is that the service is consumed where the benefits of the services are received. He said that this means that companies (whether domestic or foreign) which provide services to the oil company, will typically have to charge VAT on those services, which should be collected by the oil-producing country.

INCOME TAX
The Chartered Accountant said that employee income tax is generally receivable by the oil-producing country from all employees earning in that country, regardless of his/her place of residence. He said that this is because the legal position that is widely applied is that the country in which income is earned has priority taxing rights over that income. He said it therefore does not matter whether the employee is from the oil-producing country or simply came in to the country to work in the industry.
Naughton also noted that double tax treaties may however allow for some flexibility with respect to taxing rights.

OFFSHORE OIL AND GAS EXPLORATION AND PRODUCTION
Offshore activities have some specific risk issues as it relates to the oil-producing country’s revenue. The question of whether or not an employee is earning income ‘in’ a country depends on the boundaries set in the laws of that country for answering this question.
Naughton said that clearly those boundaries need to include the country’s waters if income earned offshore is to be taxed by that country.
He said that local branches of a foreign company must have a fixed place of business through which it operates its business locally.
“This is the global opinion. Clearly, offshore vessels operated by a foreign company, may or may not meet the ‘fixed place’ component of the definition. Typically, a vessel operating offshore in one fixed location for an extended time period, would meet this component of the definition. There is therefore a need for clarity of law on the issue of ‘fixed place’ and ‘boundaries’ if offshore oil and gas revenue risk is to be effectively minimized,” the Chartered Accountant expressed.

CONCLUSION
For Naughton, Guyana’s tax laws have always focused on domestic tax issues. He said that these laws therefore do not offer much help with the protection of the country’s revenues, as it relates to international tax issues.
Naughton said that Guyana is now being forced to make a quantum leap from managing purely domestic taxes to managing the specialized international tax area known as “upstream oil and gas tax.”
“We therefore have no option but to rely on a strong PSA for revenue protection, as it relates to our oil and gas industry. There is also an urgent need for the updating of relevant laws to further assist in our attempts to protect this resource.”
The Chartered Accountant said that Guyana can benefit significantly from its offshore oil and gas resource, providing the various contracts and agreements are appropriately designed. With that in mind, he stressed, “Guyana has a valuable asset which can only be exploited once; no second chance to get it right. Therefore, this period of preparation is crucial.”

---

---