Govt. must cap interest on debt incurred by oil companies; our revenue depends on it - Ramson

Govt. must cap interest on debt incurred by oil companies; our revenue depends on it – Ramson

Oct 01, 2018 News

By Abena Rockcliffe-Campbell

The oil business is quite intricate. There seems to be no less than a 100 tricks that oil companies employ to rob nations. One of those tricks is thin capitalization.

Attorney-at-Law, Charles Ramson

Attorney at Law and oil and gas consultant, Charles Ramson has warned that the APNU+AFC Government must quickly look at ways to avoid thin capitalization. Also, Ramson said that future contracts must explicitly address this issue so as to avoid Guyana being robbed its rightful share of the oil money.
Ramson said this at a recent press conference. His pronouncement came days after Head of the Department of Energy, Dr. Mark Bynoe announced that moves will be made to tweak Guyana’s model Production Sharing Agreement (PSA).
Oil companies are typically financed or capitalized through a mixture of debt and equity. Thin capitalization refers to when a company is financed through a relatively high level of debt compared to equity.
Ramson stressed that thin capitalization is used as a tax avoidance measure. He said that when oil companies want to rob countries they “ramp up their debt position so that it increases their cost as result of their interest payments.” When cost is increased, it is obvious that profit will be less. Less profit oil to be shared means less money for Guyana.
The Lawyer said that Guyana needs to quickly decide how much interest it is going to allow on debt incurred by oil companies.
He said, too, that it would be wise if the country ensures that the accepted interest rate is in keeping with market rate.
“If the market value of the interest payment is let’s say eight percent or 10 percent, and you put a cap on that, then they will know that there is no real economic benefit in taking on debt that is more than necessary,” said Ramson.
Ramson said that all existing contracts that Guyana has with oil companies allow for oil companies to take advantage via thin capitalization.
“We got opportunities for other agreements and to include them in there. Otherwise, we are going to be robbing ourselves of revenue.”
Ramson said that this is especially so since the oil companies are getting that financing from some type of subsidiary or parent company. He said that in such cases, “Instead of the market rate of 10 percent, they go with 18 percent. Just like that we lose an additional eight percent and overtime, that adds up.”
Ramson said that any contract going forward must address thin capitalization.
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 are consistent with market rates.”
The provision is very broad and covers any cost that ExxonMobil may incur for petroleum operations and even “other financing.”
Interest payments are exempt from withholding taxes, providing yet another incentive for contractors to finance their costs with debt.