Non-ring fencing of oil fields can delay corporate tax – GRA, GHEITI warn

The country’s inability to quickly apply lessons learnt from the mining sector to the nascent oil and gas industry could have dire consequences on the amount of revenues it makes from the newly found resource. Maxwell Adombila Akalaare reports:   Corporate tax revenues from the upstream oil and gas sector could delay further if government fails to expressly ring fence oil fields, wells and blocks for purposes of tax deductions, the Ghana Extractive Industry Transparency Initiative (GHEITI) and the Revenue Authority have warned.

The two fear that as producing oil companies continue to make new discoveries and go into explorations, investments in such finds, considered costs to the companies, could be added to revenues derived from producing ones, thereby making revenue accounting and tax deductions difficult.

The GHEITI has, thus, recommended that a legislation similar to the amendment on ring fencing in the mining sector be introduced to the petroleum sector.

“As many fields commerce production, ring fencing legislation is needed to ensure early corporate tax receipts,” the Ghana office of the EITI, a global body fighting for transparency of revenue disbursements and receipts in the extractive sector, said in its 2010/2011 annual report on the oil and gas sector.

The Head of the Petroleum Desk at the GRA, Mr Dela Klorbi, told the GRAPHIC BUSINESS in a separate interview that the authority supported GHEITI’s call as it was long overdue.

“This is something we at GRA have been asking for. Even though it exists, it is not explicit and does not limit fields within blocks into separate ones” he said.  

Exemplifying how the non-availability of a ring fencing legislation on the petroleum sector could have negative implications on revenue generation from the sector, the report noted in part that “a contractor may set off expenses that are exclusive to a production area against income from another production area.”

“This may delay corporate tax revenue,” the report added.

Already, projections on corporate tax revenues from the petroleum sector failed to materialise in the 2011 and 2012 financial years, partly causing government to miss its estimated revenues from the sector in those years.

The GHEITI, the country office of EITI, and the GRA thus worry that such delays could continue further into the years and subsequently impact negatively on revenue projections from the sector should government not ring fence each contract or project in the industry into a separate entity as pertained in the mining industry.

RING FENCING

Although corporate tax in the business community is often paid on the gross revenues of a company, in the extractive industry, it is based on a specific concession, field or well, thereby making it unlawful for a company to add costs incurred in one area to revenues in another.

In the industry, a project – an oil field or specific concession –  is often treated as an individual entity given that application for and granting of licence in the industry is often done separately for each project.

In an instance where an exploration and production (E&P)  company also doubles as a player in the mid or down stream sector – oil marketing or refinery business – each segment of the business is to be treated separately for purposes of revenue accounting and tax deductions.

Ring fencing – the singling out of projects by one company into singular entities for purposes of tax computation – is, therefore, necessary to help prevent the E&P as well as mining companies from mixing costs from one project with revenues from another.   

In the mining sector, a legislation of that nature – the Internal Revenue (amendment) Act, 2012 (Act 839) – has been passed, thus disallowing the deduction of expenses exclusively incurred in one mining area against revenue derived from another mining area, probably, a developing or less liquid one, but both belonging to the same company or tax payer. 

The same applies to a company that holds interest in two areas, according to the law.

That express definition of projects is, however, absent in the petroleum sector, something the GHEITI and the GRA said is not in the interest  of the country as far as revenue generation from corporate taxis concern.

“An example is the Jubilee Field. The field straddles two blocks – Cape Three Points and Deep Water Tano. Even though it has been unitised, we expect that partners account separately for the two blocks,” the Head of GRA’s Petroleum Desk said.

“And even with that one too, we expect that each field in the two blocks is accounted for separately otherwise, then they would be doing something wrong,” Mr Klorbi added. 

Although existing contracts on the industry make room for ring fencing, there is no legislation governing its implementation and enforcement, thereby giving companies in the sector some margin of flexibility, the GHEITI said.

Its National Coordinator, Mr Franklin Asiadey, said in an interview that applying what exists in the mining sector to the petroleum sector would be in the interest of the country.

“What we are saying is if we don’t ring fence and new discoveries are made and investments made on them, it will make it difficult for the companies to declare profit and be taxed,” he said.

While admitting that the ring fencing regime in the mining sector could be extended to the petroleum sector as recommended by the GHEITI, Mr Asiadey said such a thing should be done with precision given that the two sectors are different.

“We have to look at the dynamics in the sector first. As said in the report, it should be viewed against the need to obtain more geological data from green fields,” he added.

Oil producing companies such as Tullow Ghana, Kosmos and Andarko – all partners of the Jubilee Field – have started developing new fields they discovered after the start of production of Jubilee late 2010.

One such discoveries is the Tweneboah-Enyeara-Ntomme (TEN) project whose plan of development (PoD) is yet to be approved by the government.

Source: Graphic Business


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