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Measure what you give in tax breaks, against what you get in return – African Centre for Energy Policy
Kaieteur News – Governments, especially of developing countries, should be more prudent in their determination of tax waivers for companies in their extractive sectors. There is a need for those governments to establish a basis for exemptions, through scientific analysis of what they will cost the government and how they are expected to benefit the country in return.
That forms part of several pieces of advice for developing countries by African Centre for Energy (ACEP), a policy think-thank formed a decade ago to conduct high quality research, analysis and advocacy in the energy and extractives sector in Africa.
ACEP published a report in January titled The Relevance of Tax Exemptions in Ghana: The Case of the Mining Industry. It stated that as a major contributor to the Gross Domestic Product (GDP), mining attracts significant investment inflows. For example, it attracted USD$11.6 billion between 2006 and 2017.
The sector contributed GH₵2.16 billion (Ghanaian Cedis) or GYD$76.7 billion and GH₵2.36 billion or GYD$83.8 billion in tax revenues in 2017 and 2018 respectively, according to the Ghanaian Chamber of Mines. The country, ACEP said, had granted GH₵1.422 billion or GYD$50.5 billion in tax exemptions to the sector between 2008 and 2015.
ACEP pointed out these numbers in the context of a statement that taxation has been identified as the most sustainable source of revenue mobilization for socioeconomic development.
“This brings to the fore,” it said, “the need to examine the trade-offs between investments and exemptions.”
The Centre noted that tax exemptions are generally given with an expectation that it would return increases in employment, investment commitments for specific locations, capital attraction to competition and domestic market efficiency, and investments in specific economic sectors or activities as part of an industrial development strategy.
It said that a cost-benefit analysis would objectively determine the costs and associated benefits before tax exemptions are granted.
This is necessary, it said, since studies show that tax exemption frameworks for extractive sectors by developing countries tend not to be properly designed, nor are they informed by adequate scientific analysis. Furthermore, it said that these exemptions undermine business development in Ghana as they force locals to operate on an uneven playing field.
In Guyana, tax waivers granted to extractives companies have formed a point of controversy over the years, and the debate has been exacerbated by the recent development of the oil sector. Virtually all of Guyana’s petroleum agreements have granted oil companies permanent waivers of all taxes. These agreements are held in place by rigid stabilization clauses, which dictate that if the government were to revise its legislation or tax framework in a manner that affects the economics of the contracts, it would have to compensate the contractors, their sub-contractors and affiliates for any losses, which occur as a result of the revisions.
The exemptions are widely seen as excessive. One Canada-based commentator, Darshanand Khusial of the Oil & Gas Governance Network (OGGN), wrote that as taxes are fundamental to developing the social, physical and economic infrastructure of a country, the waiver granted by Government to these companies is unfair, especially when compared to what local commercial enterprises in Guyana are made to pay.
The 2019 Report of the Auditor General into public finances revealed that Guyana forfeited US$600 million in taxes for 2019. Guyana made less than US$150 million in 2020 from the sale of its crude, according to the Inter-American Development Bank (IDB).
Guyana is projected to lose in excess of US$650 million over the next five years from the tax breaks in the Stabroek block Production Sharing Agreement (PSA) alone, according to a report from the US-based Institute for Energy Economics and Financial Analysis (IEEFA).
During a recent interview on Kaieteur Radio, Vice President Dr. Bharrat Jagdeo said that the tax regime is too liberal. He then committed to producing better future agreements.
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