The Guyana Revenue Authority chose to maintain its objectivity by not engaging in public discourse/debate on issues related to taxation of the Oil and Gas Industry, since in many instances, these topical matters posed a conflict of interest for the Agency given its remit to protect and maintain the confidentiality of taxpayers’ information. Further, some of the issues and positions ventilated were not within the purview of the Authority.
Instead, as the country’s tax administration, the Revenue Authority have 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. Additionally, the Agency periodically made independent press releases to sensitise the public, inclusive of Oil and Gas taxpayers, on matters integral to the taxation of Petroleum Operations in Guyana.
Nonetheless, over the past few days there has been conflicting reports and calculations in the press related to royalty payments to the Guyana Government, and the recoverability thereof. As such, it is behooving of the Revenue Authority to address some instances of misinformation.
The Authority has noted and that notwithstanding the several contracts signed, the emphasis is on the one entered into between Esso Exploration and Production Guyana Limited, CNOOC Nexen Petroleum Guyana Limited, and Hess Exploration Guyana Limited (hereinafter collectively referred to as the contractor) and the Guyana Government, and apparently so since presently Stabroek is the sole producing block in Guyana.
That being said, the GRA wishes to advise as follows:
1. In the said articles and conversations, there is failure to distinguish between “the Petroleum Tax Regime” and the “Petroleum Cost Recovery Regime”.
2. Under Article 15.6 of the PSA under review, the contractor pays a Royalty of two percent to the Guyana Government on the value of all petroleum produced and sold.
3. This item (Royalty) is not explicitly mentioned as Cost recoverable under Annex C, Section 3.1 (without further approval of the Minister) or 3.2 (with approval of the Minister).
4. Further, it is not mentioned under Section 3.3 of Annex C as a Cost not Recoverable under the Agreement.
5. Even though Section 3.4 of Annex C, 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 relative to Royalty.
6. For the public’s information, Section 3.4 of Annex C reads as follows:
“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.” (emphasis added)
7. Articles 11.2 to 11.4 delineate 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.
8. This allows for the present 12.5% profit share being allocated to the Government in the interim until all costs carried forward are recovered.
9. This 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.
10. Royalties paid to the Guyana Government is an Expense incurred in the production of income for the contractor(s), but is not allowable in the calculation of Cost Oil.
11. It therefore follows that the 2% Royalty payment currently adds to the Government’s take. Hence the Guyana Government presently receives a total of 14.5% in Royalty and Profit Oil (2% plus 12.5%), and not a total of 14.25% as being reported in some quarters.
12. 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.
13. 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.
14. The parties comprising the Contractor would thereafter be issued with Tax Certificates which would essentially allow them to claim Tax Credits or Tax Deductions in other jurisdictions in which they are liable to pay taxes.
15. Due to the elected “Pay on Behalf System”, additional expenses/deductions result in lower amounts being reflected on the tax certificates due to a decrease in the tax liability of the company.
16. Expenses are not tax credits. A tax credit reduces taxes on a dollar-for-dollar basis, while a tax deduction will lower your taxable income, thereby allowing for the payment of lesser taxes.
17. 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.
18. 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.
19. 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.
20. FOR THE SAKE OF REPETITION, the 2% Royalty paid to the Guyana Government is not a cost in determining Guyana’s share of Profit Oil, but is an expense in determining the contractors’ taxable income.
The GRA’s mandate is to administrate tax legislation and Government Agreements for the benefit of all stakeholders in a fair and consistent manner.
I trust that the above lends some clarity to the present discourse and reduce doubt between the “Petroleum Tax Regime” and the “Petroleum Cost Recovery Regime”, as they presently exist.
Godfrey Statia
Commissioner General
