Govt. will not institute windfall taxes at this time – Jagdeo

Nov 29, 2024 News

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Kaieteur News- Vice President (VP) and Chief Policy maker in the oil and gas sector, Bharrat Jagdeo on Thursday maintained his government’s position that windfall taxes will not be instituted at this time.

Windfall tax is a tax levied by governments against certain industries when economic conditions allow those industries to experience above average or projected profits.

Jagdeo, in response to a question posed by Kaieteur News on why the government is not implementing windfall taxes since it does not breach the existing Production Sharing Agreement (PSA) with ExxonMobil and its partners, Jagdeo said, “I have dealt with windfall profits in the past, and why we believe that windfall taxation should not be pursued at this time. I dealt with it in the past, if you go back and read.”

In May 2022, Kaieteur News questioned the Vice President on the issue and at that time he admitted that citizens in Canada, and the United States had forced their governments to increase their royalties charged to oil operators. In the United Kingdom, the government increased the one-off tax slapped on oil companies.

At that time, this publication reported extensively on the changes in the fiscal regimes for the oil operators in those countries. Canada had moved its royalty charged between five and 40%, the US in December of 2021 raised its royalty rate higher than the 18.75% it had been receiving while the UK slapped a one-off 25 percent tax on the oil companies there.

Jagdeo had told the media that the windfall tax that some countries are exploring only came after intense pressure from their populations. However, he explained why the institution of the tax could not be replicated in Guyana.  “We are bound by a PSA (Production Sharing Agreement) with very specific terms on the taxation side.”  To this end, he suggested “if you change the taxation here, it’s considered a breach of the contract.”

Seeking to draw a distinction between Guyana and the ABC countries, Jagdeo suggested that the oil companies would have been operating for decades in those jurisdictions and as such would have come under the standard tax regime for the respective countries within which they operate.

According to the Vice President, under such a situation the parliaments of those countries could by way of legislation easily make the changes to institute for example a windfall tax. He was adamant, this is the key reason the same cannot be done in Guyana if the administration did in fact go ahead and make the legislative changes; it would be considered a breach of the contract and “we would run afoul of the agreement.”

Notwithstanding, the occurrences in other oil producing countries, Jagdeo remains firm in his stance that going after windfall taxes will affect the sanctity of the contract, despite industry experts sharing a different opinion. Trinidadian Energy Expert and International Consultant, Anthony Paul recently shared his perspective with Kaieteur News.

Paul’s view is that “Since all contracts must abide by national law and since such an instrument does not violate existing contracts, Windfall Profits Taxes provide a simple and fair mechanism to ensure that countries get their just dues.”

In a November 24, 2024 article, Paul made the point that oil companies do not produce oil; nature does. The role of the oil companies is simply to extract the resource.

Paul explained, “Nature blesses countries with it. Once the oil company removes it, that asset is gone forever. For this reason, countries should realise that they are not just innocent bystanders to the business venture of oil and gas.”

In fact, the Energy Expert described the role of countries as “active contributors,” providing their natural heritage as an asset in the business. This, he noted, makes countries co-investors with a contractor, so that both can make money.

“An investor who brings money wants to make profit in proportion to the amount it invests. Similarly, countries should make a return on the investment of their asset, proportional to the value of that asset,” the International Consultant pointed out.

He was keen to note that Stabilisation clauses in contracts are based on an agreed economic model which contemplates a rate of return to the contractor, based on a projected price or pricing formula for the commodity on an agreed market.

However, Paul explained that when the price of the commodity is far higher than the projected price in the economic model, the extra profit is referred to as a windfall. To this end, he noted, “Since the market conditions are generally beyond the control of the producer, it is the commodity itself that creates the higher revenue, not any action of the contractor.”

It has therefore become customary in jurisdictions around the world, including developed countries, to introduce a Windfall Profits Tax to ensure that the owner of the resource gets a bigger share of the profit, in line with the disproportionate contribution the resource makes to the increased revenue, the Energy Expert said.

Further, “Since all contracts must abide by national law and since such an instrument does not violate existing contracts, Windfall Profits Taxes provide a simple and fair mechanism to ensure that countries get their just dues,” Paul noted.

He explained that while a law may be necessary, it is far from sufficient, adding that Guyana can learn a lot from its neighbour in Trinidad and Tobago, where, despite excellent legacy policy and legal provisions, poor implementation means that the twin island has been losing billions of dollars each year for more than two decades.

(Govt. will not institute windfall taxes at this time)

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• Contract, Jagdeo, pursued., Taxation, windfall taxes

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