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Oil companies often misallocate operating and capital costs
GRA Commissioner General, Godfrey Statia
…Int’l team warns that vigilance will be needed by local authorities
The authorities of oil producing nations should not only be on the lookout for inflated costs, but also, misallocated costs by petroleum companies.
This is according to the Canada-based organization, Publish What You Pay (PWYP).
In its most recent report, the entity warns that there are strong incentives for companies to misallocate costs between different categories and, for some fiscal regimes, between different concessions or blocks.
The anticorruption agency said that most fiscal regimes draw a clear distinction between capital costs (e.g. permanent infrastructure and machinery) and annual operating costs (e.g. salaries and consumables such as fuel).
It noted that operating costs can be fully claimed in the year in which they were incurred. In most cases, however, capital costs are “depreciated,” meaning that they are claimed over a series of years.
Publish What You Pay says that the depreciation of capital costs affects the timing of government revenues.
The international organization said, “Companies therefore have an incentive to classify costs as operating costs when they should in fact be classified as capital costs.
“Auditors from India for example, have highlighted the revenue risks due to the misclassification of costs between the different project phases (exploration, development and production) and also between capital and operating costs.”
Furthermore, the company stated that costs can be misallocated between different blocks or concessions. It said that this is common, particularly in the petroleum sector, for operations to be “ring-fenced” at the level of the contract area or block.
PWYP said this means that revenues, costs and taxes are calculated separately.
It noted that when ring-fencing provisions are not in place, nations can end up paying for unwarranted works.
It said, “Particularly during the exploration phase, companies can benefit from allocating costs to those blocks that hold the greatest prospect of future production. For example, seismic testing, which is often carried out across multiple blocks, could be disproportionately allocated to a highly prospective block in order to increase the likelihood that the bulk of the costs could be recovered.”
It said that a concrete example comes from Timor-Leste, where costs for a well drilled in an area to be handed back to the government (relinquished) was claimed against a producing block. It said that Timor-Leste lost billions of dollars in revenue due to costs being misallocated from one block to the next.
GRA PROMISES SAFEGUARDS
Commissioner General of the Guyana Revenue Authority (GRA), Godfrey Statia, has assured that safeguards will be in place to combat notorious accounting practices by oil companies operating here.
During a Press Conference, recently, the tax chief said that addressing inflated costs, among other practices, requires that there is adequate information flow at all times with all oil companies.
He said, “You cannot wait until the end of the period within which you are going to start an audit or I wouldn’t even call it that, I would say a review. A review should be continuous. You should have persons on the spot specifically trained in these activities and have them reviewing the activities on a day by day basis…”
Commenting further on the need to have competent staff, Statia revealed that by 2020, GRA’s team would increase by 100 persons. He said it would entail people from all spheres of the petroleum industry.
The tax chief said, “We would need to have a mix of engineers and lawyers, too, or else you would be in problems etc. Additionally, we are slated to send eight persons from GRA to England to study oil and gas and we are trying to be at the forefront of these issues instead of waiting on the other departments.”
The Commissioner General subsequently reiterated to Kaieteur News that GRA is working towards ensuring that the necessary safeguards are in place to ensure Guyana gets its fair share of taxes.
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