Following much debate about Guyana’s petroleum tax regime and cost recovery, tax chief Godfrey Statia has said that the 2% royalty paid to the government under the 2016 production sharing agreement with ExxonMobil Guyana is not cost in determining the country’s share of profit oil but rather an expense in determining the contractors’ taxable income.
In a statement yesterday, Statia, the Commissioner-General of the Guyana Revenue Authority (GRA), said that the agency was moved to respond to address some instances of “misinformation” in wake of conflicting reports and calculations in the press related to royalty payments to the government, and the recoverability thereof.
With the Stabroek Block, controlled by ExxonMobil Guyana and its partners being the only producer of oil in Guyana, Statia focused on the tax regime applicable to it. He said that the public discourse has failed to distinguish between “the Petroleum Tax Regime” and the “Petroleum Cost Recovery Regime”.
Under Article 15.6 of the production sharing agreement (PSA), EEPGL pays a 2% royalty on the value of all petroleum produced and sold. The royalty is not explicitly mentioned as cost recoverable under Annex C, Section 3.1 (without further approval of the Minister of Natural Resources) or 3.2 (with approval of the Minister). Further, it is not mentioned under Section 3.3 of Annex C as a cost not recoverable under the Agreement.
Statia explained that even though Section 3.4 of Annex C of the PSA, vests the power in the Minister to determine the recoverability of an expense not covered under the provisions of Section 3, such discretion has not been exercised by the Minister of Natural Resources relative to royalty.
Section 3.4 of Annex C states “Other costs and expenses not covered or dealt with in the provisions of this Section 3 and which are incurred by the Contractor in the conduct of the Petroleum Operations are recoverable, subject to the approval of the Minister.”
Articles 11.2 to 11.4 of the PSA outline the methodology for the sharing of profit oil between the contractor and the government, with costs being limited to 75% of total revenue from the sale of petroleum each month. Provision is made for costs exceeding the 75% ‘cap’ to be carried forward to successive months until recouped.
The GRA head said that this allows for the present 12.5% profit share to be allocated to the government in the interim until all costs carried forward are recovered. He added that it also means that Guyana would eventually benefit from a much greater share of profit oil when the recoverable costs are lower than the stipulated 75% ceiling.
He further stated that the royalties paid to the government is an “expense incurred” in the production of income for EEPGL but is not allowable in the calculation of cost oil. Moreover, he explained that the government received a total of 14.5% in royalty and profit oil, 2% and 12.5% respectively. He clarified that it is not 14.25% as being reported in some sections of the press.
“The parties that constitute the contracting consortium, like other companies in Guyana are subject to the Income Tax Act and are required to file returns, pay taxes and maintain books and records. Royalty is a tax-deductible expense pursuant to Section 16 of the Income Tax Act, Cap. 81:01, when filing corporation tax returns in Guyana.
“The Government of Guyana, however, based on Article 15.4 of the Petroleum Contract, opted to institute the ‘Pay on Behalf System’ whereby the Government’s share of Profit Oil includes the income taxes payable by the contractor. Therefore, the Minister with responsibility for Petroleum is required to pay the relevant taxes on behalf of the Contractor,” Statia related.
He said that EEPGL would be issued with tax certificates which would allow them to claim tax credits or deductions in other jurisdictions where they have to pay taxes. He said that under the “pay on behalf” system, additional expenses or deductions result in lower amounts being reflected on the tax certificates due to a decrease in the tax liability of the company.
He clarified that expenses are not tax credits, while adding that a tax credit reduces taxes on a dollar-for-dollar basis, while a tax deduction will lower taxable income, thereby allowing for the payment of lesser taxes.
“The fact that the PSA allows for the contractor’s corporate taxes to be paid out of Guyana’s share of Profit Oil, means that the Net effect on the Consolidated Fund will be NIL. It must further be emphasized that financial income is not taxable income. Financial income is converted to taxable income by allowing for timing differences and tax legislation. Hence the contractor may have financial income but no taxable income, and may not be subject to the payment of corporation taxes for the years when there may be financial income but not taxable income.
“Consequently, until the contractor has taxable income, no taxes would accrue. Rather taxes will be deferred until the company’s taxable position changes. This means that the Guyana Government may not be liable to pay corporate taxes on the contractor’s behalf until such a situation arises,” Statia informed.
The GRA head said that the agency’s mandate is to administrate tax legislation and government agreements for the benefit of all stakeholders in a fair and consistent manner.
He noted that the agency has chosen to maintain its objectivity by not engaging in public discourse or debate on issues related to taxation of the oil and gas industry since a lot of the issues pose a conflict of interest. He added that the agency has the mandate to protect and maintain the confidentiality of its taxpayers’ information.
Additionally, the GRA boss said that some of the issues and positions ventilated in the public fall outside of the purview of the tax agency.
He explained that GRA has tirelessly and dutifully tried to provide services to taxpayers within the petroleum sector and encouraged compliance with local Tax and Petroleum Laws, as well as, the Production Sharing Agreements. Statia said that the Agency would periodically release information aimed at sensitizing the public on the taxation of petroleum operations in Guyana.
Activists and other critics have been calling on the government to renegotiate the contract with EEPGL with the royalty agreement being of major concern.
