The column today seeks to demystify the question of taxation and the oil companies. It is almost depressing the extent to which some persons, including officials, continue to misrepresent the true position regarding the confidentiality of the oil contracts and the payment of taxes by oil companies. I found it astounding that an online oil and gas blog earlier this week quoted a “source” defending the secrecy surrounding the petroleum agreement on the grounds that it has over a thousand clauses!
That is such nonsense and it is regrettable that the relevant authority has not sought to correct such rubbish. In fact, the model petroleum agreement has thirty-three Articles. That is the model which is given to all the oil companies around which negotiations take place. The model was so generous to the companies because of the low probability of finding oil that there was little, if anything to negotiate. That model contract is widely available but no one wants to make the time to read and analyse it.
The second piece of misinformation is about the areas or blocks which have been allocated by the Government to operators. That too is on the internet and even allowing for that lack of knowledge even the most casually informed individual with minimal interest must know that the law provides that for purposes of licensing and exploring for petroleum products, a reference map of the geographical area of Guyana had been prepared, divided into blocks, each identifiable by a number and/or letter. The geographical coordinates and size of every block are also indicated on the map. The law even states that if any block extends into a neighbouring country, only the portion that lies within Guyana can be constituted as a block. And for all those obsessed with secrecy and confidentiality, the law required that the map be published in the Official Gazette, placed at any office specified by the Minister, and forms part of the Regulations.
In other words, whichever friend or foe wanted to know what Guyana is doing in relation to petroleum matters, only needed to scour official sources. Now for taxation.
Let us start by looking at the model petroleum agreement which Guyana adopted following the 1986 Act.
Guyana, like a number of other oil producing countries, has adopted a contractual system in granting exploration and production rights for its hydrocarbons. Petroleum Agreements in Guyana are to be negotiated on the basis of a model production sharing contract (Model PSC). Unlike Kenya, the model is not set out in a schedule to the Petroleum Act and no doubt it was some consultant who advised us on the model. Like Kenya, the Minister responsible for petroleum negotiates, enters into and signs the petroleum agreement/PSC with the contractor on behalf of the government. Paraphrased below is what Guyana’s model agreement has to say, in part, about taxation.
The Minister agrees that a sum equivalent to the tax assessed on the oil company will be paid by the Minister to the Commissioner of Inland Revenue on behalf of the Contractor as income of the Contractor. The Government also accepts that its portion of Profit Oil includes payment in full by the Contractor of Contractor’s share of royalty, income and corporation tax, and any other levy or charge.
A recent taxation article from Kenya describes this kind of contract as a post-tax Production Sharing Contact. Put simply, what this mean is that the government’s share of profit oil is inclusive of all taxes based on income or profits payable by the contractor, specifically taxes payable under the Income Tax Act (ITA) and dividend taxes imposed on the distribution of income or profits by the contractor.
In other words, the oil companies under this regime of taxation pay no corporate tax to their host country but will have a receipt issued by the tax authorities in Guyana for what is an artificial or deemed tax payment. The oil company will then be able to show that “receipt” to its home tax authorities as evidence of its tax payment.
Before we begin to scream and shout, let us remember that such as arrangement is not particularly unusual among new oil countries and that the first wave of oil operators are usually the luckiest, if we ignore that they took the greatest risks. Form the host country’s side, it is worth noting that in assessing the tax system for oil companies, there are a number of factors to be considered: the first being that we never anticipated our luck!