Expats, Sub-contractors exemptions from tax abnormal

Jul 01, 2019 News

… these are among 13 major loopholes Guyana’s model PSA must address – Petroleum Consultant

By Kiana Wilburg

The paltry two percent royalty in Guyana’s Production Sharing Agreement (PSA) with ExxonMobil is not the only fiscal provision considered by industry analysts to be abnormal.
University of Houston Instructor, Tom Mitro, recently pointed out that there are absurd provisions which allow expatriates and sub-contractors’ salaries or income to not be subject to tax.
The Petroleum Consultant noted that under Section 15.12 of the PSA, expatriates’ salaries are not subject to Income tax if they don’t spend more than 183 days in country.

University of Houston Instructor, Tom Mitro

Mitro said that this is an old trick in the book as the company simply gets many expatriates to be in rotation to avoid going over the 183 days. The Consultant stressed that most countries have plugged this tax avoidance loophole that companies have been abusing. Guyana should too.
With respect to subcontractors’ income, Mitro highlighted that Section 15.10 of the PSA allows for it to be exempted from Corporate Income tax during the exploration period. The Consultant categorically stated that this is somewhat bizarre and should be corrected in Guyana’s model PSA.
Another strange feature he highlighted is that Guyana has opted to not impose any Capital Gains Tax on a sale of interest.
Take the case of Eco Atlantic and Tullow, two oil and gas firms which signed a PSA for the Orinduik Block with the Granger administration. The contract was sealed in 2016 but months after getting the block, Eco which had 40 percent of the shares in the Orinduik Block, sold 25 percent of that to French oil major, Total.
Eco only had to pay a measly $100,000 to the government as a fee for allowing Total to buy into the block. Eco on the other hand, sold its shares to Total for some US$12.5M.
Had Guyana imposed the Capital Gains Tax, it would have been able to tax that very US$12.5M and earn more.
Mitro told Kaieteur News that may countries have recognised how much they are losing in this regard and are already imposing the tax. He recommended that Guyana does the same.
Mitro stressed that while it is not unusual to allow the contractor to recover costs, Guyana must put a cap on how much excess costs can be carried over for recovery in a given year. At the moment, Guyana’s PSA allows Exxon and its partners to recover 75 percent of its costs annually. But there is an unlimited carry forward of any unrecovered costs.
Mitro said this loophole has to be closed going forward.
What he also found odd, is that Guyana failed to establish in the PSA with Exxon, its right to have a National Oil Company acquire an equity share at the point of development. Not having this obligation is a real benefit to Exxon and partners, the consultant stated.
Other issues Mitro said must be corrected include, paying the contractor’s income tax out of the country’s share of profits, rectifying the unusually large size of the blocks, upgrading the work obligations contractors have to meet as licensed holders, increasing the size of signing bonuses, implementing ring-fencing provisions to prevent costs of unsuccessful wells being carried over to that of successful wells, removing clauses which allow insurance premiums to be recoverable, removing the troubling provision that allows the operators to fully recover interest and financing costs, and establish a fund for the companies to make contributions to which would subsequently be used to service to costs of decommissioning.