Govt. Advisor says… Ring-fencing and Tax avoidance issues fixed in new PAS template.

Feb 14, 2019 News

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By Kiana Wilburg

Tight ringfencing provisions and mechanisms to address tax avoidance by oil companies are just some of the critical features in the nation’s new template for Production Sharing Agreements (PSAs).
This is according to Petroleum Advisor to Government, Matthew Wilks.
With rigid ring-fencing arrangements in place, the government will be protected from paying for costs associated with one well being carried over to another.
In Guyana’s PSA with ExxonMobil for example, there are no ring-fencing provisions. This means that costs from one well in Liza Phase One, whether productive or not, can be carried over to the Liza Two Project. In short, the nation can pay for costs several times over.
The new template will also put Guyana in a better position to mitigate the loss of revenue from transfer pricing by oil companies.
Wilks also said that the new template has more favourable terms for Guyana. At press conference on Monday, he said, “I think there is generally a tightening up that will go on in the PSAs which will give the government more opportunities to have a say as the exploration proceeds through exploration…to production.”
He said, too, that there would be a variant of the Stabilization clause in future PSAs as well as the categorization of what costs can be deemed recoverable and non-recoverable by the contractor. The Petroleum Advisor said that royalty was not touched as it would be negotiable in `future bidding rounds.

UNDP MAKES APPEAL
A report that was commissioned by the United Nations Development Programme (UNDP) and prepared by Oil and Gas Consultant, Anthony Paul, had called on the government of Guyana to have future oil deals subjected to strict ring fencing provisions.

Paul in the UNDP report notes that Guyana must guard against this in future contracts. The Local Content Expert also notes that the government must require where there is no prior commitment, a new model licence, asserting that it will be subject to new laws and regulations. He said that government must require signature bonuses, retain equity in all new licences, and seek early or aggressive relinquishment clauses.

ANTI-ABUSE LEGISLATION/OTHER MEASURES
Given the troubles many countries have faced with collecting taxes from oil operators, the Natural Resource Governance Institute (NRGI) is one international body that has urged Guyana and other emerging oil producers, to institute strong safeguards against tax avoidance by oil companies.
At the top of the Institute’s list is a robust anti-abuse legislation which would allow revenue collecting authorities to reallocate items of income and expense.
Among other measures, the Institute called for clear definitions and procedures concerning the treatment of transfer pricing and multiple mechanisms for the government to obtain and exchange taxpayer information from other governments.
But the NRGI is not the only body that is calling on Guyana to be cautious.
Oil and Gas Expert, Anthony Paul, has noted on several occasions that local authorities should pay attention to what happened in Trinidad and Tobago. He pointed out during an interview with Kaieteur News that his homeland lost more than US$200M annually due to transfer pricing schemes of oil companies.
According to Paul, transfer pricing involves the purchasing of items from one company, or selling to related parties at artificially high or low prices. This is done to shift taxable income out of the hands of the host country. But that is just one form of transfer pricing. When it comes to oil and gas, the schemes are many.
The Oil and Gas Consultant said, “In another form of transfer pricing, some companies use mechanisms to increase the reported cost of their operations, so as to again, reduce profitability and tax burden.
A common example is the bundling of services with affiliates overseas, so that there is no transparency on actual cost, but the high costs can be moved to higher profit centres. This has been going on for years in TT, with companies using different techniques, knowing well that government does not routinely check across jurisdictions.”
He continued, “Another victim of such actions, of course, is the local service industries, who, through a series of meandering rationales are told they are either suddenly not safe enough, certified enough or competent enough to deliver a service they have been safely, efficiently and cost-effectively providing for years.”
The Chatham House Advisor added, “Suddenly, a foreign supplier is brought in, without necessarily having to go through the same hoops and is paid much more. Today, for instance, there are marine services companies working off the East Coast in TT, at the expense of locals and charging the operator up to 10 times the cost of the local who was doing it before.”
The Oil and Gas Consultant said that examples on what to do in the oil and gas industry and how to protect Government revenue are all around Guyana.
“All its authorities need to do is simply pay attention.”
For the time being, the Guyana Revenue Authority (GRA) is gearing for a round of meticulous training from the Inter-American Centre of Tax Administration, an international agency that is versed in detecting any petroleum scheme used by oil operators.
This was confirmed recently with GRA’s Commissioner General, Godfrey Statia.
Kaieteur News understands that the Centre will provide GRA with a general overview of the oil and gas industry, information on tax regimes and tax models. As it relates to tax and contractual issues, GRA will be given a crash course in tax and contractual compliance, commodity pricing, ring fencing and transfer pricing.
Other issues to be discussed include: tax administration structure and procedures, tax risk assessment and evaluation and tax audit procedures.

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