IMF encouraged Guyana to illegally pay Exxon, partners’ income taxes

Jul 15, 2021 News

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Kaieteur News – Chartered Accountant and Attorney-at-Law, Christopher Ram, recently highlighted that Guyana’s leaders made a colossal blunder in 2016 when they allowed the Stabroek Block Production Sharing Agreement (PSA) to carry a provision, which sees the State paying the income taxes for ExxonMobil, Hess Corporation and CNOOC Petroleum Guyana.

But what he finds more preposterous and mindboggling, is the fact that the International Monetary Fund (IMF), one of the nation’s development partners on the sector, encouraged Guyana to continue with the provision in spite of the fact that it is not consistent with any of its laws. Ram had previously noted that the provision that sees Guyana paying the income taxes of the oil companies out of its share of the profit oil is called the” Pay on Behalf (POB)” formula. The Chartered Accountant was keen to note, that Guyana’s use of the POB is not catered for in two of the nation’s laws, specifically the Petroleum Exploration and Production Act Cap. 65:04 (PEPA), and the Financial Administration and Audit Act (FAA).
In spite of this, Ram noted in his recent writings that the IMF’s Fiscal Affairs Department in a 2018 Technical Assistance Report, encouraged the use of the provision and “in a peculiarly didactic style, both asks and answers the questions on whether post-tax sharing is unique to Guyana, and whether it has advantages.”
In answering the question, the IMF report says: “No, this system is used in many producing countries such as Trinidad and Tobago, Azerbaijan and Qatar, just to name a few. Some advantages of the pay-on-behalf-of system are that it provides more certainty on the expected government revenue from oil projects and mitigates tax planning, while offering physical stability for both the government and contractor against changes in corporate tax rates.”
Upon noting this, Ram said, “This must rank as nonsensical a proposition as any that the IMF has published in its name for decades. How one might ask, does this giveaway bring certainty to Government revenue, or prevent tax planning, when the whole idea of pay-on-behalf-of (POB) is all about tax planning – to allow oil companies to receive a certificate issued by the tax authorities of a tax ostensibly, but not actually paid by them, so that they can claim a tax credit in their home country?”
He added, “…From all appearances, Budget 2021 does not acknowledge any awareness of this liability by the Government, or make any provision for its payment. For the Government to meet this obligation to the oil companies outside of an Appropriation Act, would be unlawful and may explain the silence of the authorities on this matter.”
Expounding further, the lawyer said the practical examples given by the IMF are only marginally more sustainable than their conceptual logic. He said the authors of the report write about Trinidad and Tobago utilising the POB formula, but stressed that they failed to acknowledge that this is a decades-old legacy, which is no longer widely practiced, and has never applied in a post-discovery agreement.
With respect to Azerbaijan, Ram said the assertion is effectively disputed by one of that country’s academics and by Deloitte, a reputable accounting firm. In an article in the July 2015 edition of Journal of World Energy Law and Business, Ram quoted Nurlan Mustafayev as stating that “Contractors and sub-contractors are subject to taxes under the country’s Production Sharing Agreements. There is no pre-contract cost, capital expenditure is limited to 50 percent of gross production and the cost recovery base and taxes are ring-fenced.”
He said too, that Deloitte goes further and gives a range of tax rates of 20 percent to 32 percent, which petroleum operations must pay. Ram said they both note that each agreement is the subject of a separate Act of Parliament and neither mentions the Government of that country settling the oil companies’ tax obligations.
As for Qatar, Ram cited another analytical piece, this time by PricewaterhouseCoopers, another accounting giant. PWC in summing up Qatar’s tax regimes in respect of petroleum operations said: “Generally, corporate income tax rate at a minimum of 35 percent is applicable to companies carrying out petroleum operations…” Further to this, Ram noted that Qatar has moved away from Exploration and Production Sharing Agreements (PSAs) to Development and Fiscal Agreements (DFAs).
While comparisons can be useful benchmarks, Ram said it is clear when one contemplates the foregoing that they ignore the overall package and relevant local laws at their peril.
In the case of Guyana, Ram said the former regime therefore erred when it used the POB formula since it violates the Petroleum Exploration and Production Act Cap. 65:04 (PEPA) and the Financial Administration and Audit Act (FAA). Ram also expressed dismay during a telephone interview with Kaieteur News that the IMF, which was supposed to be protecting Guyana’s interests, encouraged such an illegality.

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