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Stringent policing needed to protect Guyana from oil companies’ excessive debt financing- GRA Boss
GRA Commissioner General, Godfrey Statia
Yesterday, Commissioner General of the Guyana Revenue Authority (GRA), Godfrey Statia, acknowledged that the road ahead is no easy one as the Authority gets ready to police the oil industry.
However, he said that it is always easier to get where you are going if you have direction. The Commissioner General said that his agency has direction; it knows what are the things needed to be done to help Guyana secure its right share of revenue from the oil industry.
Statia said that one of the major things that his agency needs to do is to develop capacity to protect Guyana from excessive debt financing.
The Commissioner said this at an informative session on oil and gas for private sector members held by the Consultative Association of Guyanese Industry at the Marriott Hotel.
Statia said that the oil industry has a lot of good to offer Guyana but there are also some risks. He pointed to several other countries that are worst off with oil.
Statia said that it is not unusual for multinationals to incur legitimate costs in the form of business overheads for services such as accounting, human, marketing, procurement, IT etc. He said that these costs, however, should be fair, reasonable and in line with arm’s length principles.
The Commissioner said that excessive debt financing, and recoverable interest should also be subjected to scrutiny and be subjected to limitations especially so when the loan transactions are between affiliated or associated companies.
Statia said that thinly capitalized positions in the absence of rules aimed at limiting interest claims will be challenging and will require stringent policing efforts by the GRA.
Guyana has committed to paying all the interest on loans secured to fund operations at the Stabroek Block.
The 2016 Production Sharing Agreement (PSA) that Guyana signed with ExxonMobil states that ExxonMobil will be able to recover the cost of “interest, expenses and related fees incurred on loans raised by parties comprising the contractor for petroleum operations and other financing cost provided that such expenses, fees and costs that are consistent with market rates.”
Similar provisions are in other contracts that Guyana has with various oil companies.
The provision is very broad and covers any cost that a company may incur for petroleum operations and even “other financing.”
IMF thinks that this provision can prove to be disadvantageous to Guyana.
The international body said that the treatment of interest expenses in the ExxonMobil/Guyana contract appears to be generous.
The fund said that the treatment of interest expense is important because “excessive or abusive use of debt can have a detrimental impact on the amount of profit oil to be shared between the government and the contractor.
“The mission understands that in Guyana, PSA interest expenses, irrespective of the source of financing, are permitted to be recovered provided that such expenses are consistent with market rates.”
IMF noted that interest payments are exempt from withholding taxes, providing yet another incentive for contractors to finance their costs with debt.
Further, IMF said that it is quite common to have limitations on interest deductibility.
Some countries disallow interest expenses or limit the amount of debt permitted for cost recovery purposes through caps on debt to equity ratios or earning stripping rules.
The international body said that other countries may prescribe that interest may be deductible only on borrowing to fund development costs or a maximum percentage of such costs.
IMF pointed to Uganda’s model PSA, which allows interest on loans (from any source) to finance development operations only up to 50 percent of the total financing requirement. Interest on loans to finance exploration is not allowed.
In many cases, oil companies, which form a consortium for a project, would borrow from their parents companies. And there are innumerable case studies which show that it is in these instances, corruption takes place.
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