Addressing transfer pricing in oil sector…Implement provision to adjust costs between related parties

Addressing transfer pricing in oil sector…Implement provision to adjust costs between related parties – Int’l Policy Advisor

Mar 04, 2019 News

By Kiana Wilburg

International Oil and Gas Consultant, Anthony Paul

Senior Policy Advisor at Oxfam America, Daniel Mulé

If first-time oil producers like Guyana are really serious about addressing transfer pricing by operators, then they will ensure that they will put a provision in place to adjust costs between related parties.
This is according to Oxfam America, an international body that advocates for transparency in the extractive sector.
The organization said, “Bearing in mind the challenges of implementing this arms-length principle, the government should also explore the feasibility of adopting alternative tax policy rules that are clear, objectively verifiable, and easier to administer.”
Expounding further on this matter to Kaieteur News was one of Oxfam’s Senior Policy Advisor, Daniel Mulé. The Tax and Extractive Industries Advisor said that if the Government will be using cost audits as a means of controlling issues like transfer mispricing, then indeed, legal controls to contain costs are important. He said that readers should bear in mind that costs represent at least 40 cents on each dollar of revenues, as such, even small gains could have big impacts for host country governments.
Mulé said, “It’s also important to have a strong auditing framework in order to effectively audit. Governments should have clear legal provisions, good interagency coordination between tax authorities and petroleum regulators, strong human and technical capacity for auditing costs, reliable benchmark data, a proactive and timely approach to auditing, and transparency and public oversight mechanisms to ensure accountability.”
However, if governments lack those elements and find administering cost audits and securing adjustments is too difficult, the Tax Advisor said that they may consider other alternatives. He said that one potential alternative might be to adopt a gross split method, as has been done recently in Indonesia. He noted however, that this is more likely to be feasible for new projects under negotiation. He warned that stabilization provisions might impede making such a change for existing projects.
Also speaking on this issue with Kaieteur News was International Oil and Gas Consultant, Anthony Paul. He said that one way Guyana might learn from its sister territory, Trinidad and Tobago, is that failing to implement rules and regulations can be extremely costly.
The Chatham House Advisor said, “There have been provisions in TT’s Petroleum Taxes Act since 1974. These include provisions for arms-length and market value determination…There is established, under Regulations to that Act, provisions for a methodology and body (the Permanent Petroleum Pricing Committee) to enforce the counter transfer-pricing measures…”
Paul added, “However, this body has not been functioning or effective for at least 15 years resulting in losses around the scale of the national debt. This is a consequence of the limited capacity and accountability of the regulators, caused by the sector’s opaqueness and lack of Parliamentary oversight mechanisms, similar to those which are provided for in Guyana’s Constitution.”

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