The 2% royalty on oil sold and paid to the government is an expense to determine the taxable income of contractors

Dear Editor,

The Guyana Revenue Authority has chosen to maintain its objectivity by not engaging in public discourse/debate on issues related to taxation of the oil and gas industry, as in many cases these topical issues have posed a conflict of interest for the Agency given its mission to protect and maintain the confidentiality of taxpayer information. In addition, some of the issues and positions expressed fell outside the jurisdiction of the Authority. Instead, as the nation’s revenue authority, the Revenue Authority has tirelessly and conscientiously tried to provide services to oil taxpayers and encouraged compliance with local tax and oil laws, as well as tax agreements. production sharing. In addition, the Agency has periodically issued independent press releases to educate the public, including oil and gas taxpayers, on matters integral to the taxation of petroleum operations in Guyana.

Nevertheless, over the past few days there have been conflicting reports and calculations in the press regarding royalty payments to the Guyanese government and their collectibility. As such, it is the responsibility of the tax administration to deal with certain cases of misinformation. The Authority has noted and that notwithstanding the several contracts signed, the focus 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 Government of Guyana, and apparently since Stabroek is currently the only production block in Guyana. That being said, the GRA would like to offer the following advice:

1. In the said articles and conversations, there is no distinction between “the oil tax regime” and the “oil cost recovery regime”.

2. Under Section 15.6 of the PSA under review, the contractor pays a two percent royalty to the Guyanese government on the value of all oil produced and sold.

3. This item (royalty) is not explicitly listed as recoverable cost under Schedule C, Section 3.1 (without further Ministerial approval) or 3.2 (with Ministerial approval).

4. Furthermore, it is not mentioned in Section 3.3 of Appendix C as a non-recoverable cost under the agreement.

5. Although section 3.4 of Schedule C gives the Minister the power to determine the recoverability of an expense not covered by the provisions of section 3, this discretionary power was not exercised by the Minister regarding the fee.

6. For public information, section 3.4 of Appendix C reads as follows:

“Other costs and expenses not covered or dealt with in the provisions of this article 3 and which are incurred by the Contractor in the conduct of the Petroleum Operations are recoverable subject to the approval of the Minister.”

7. Sections 11.2 to 11.4 set out the method of oil profit sharing between the contractor and the government, with costs being limited to 75% of the total revenue from the sale of oil each month. Arrangements are made for costs in excess of the 75% “ceiling” to be deferred over successive months until recovered.

8. This allows the current profit share of 12.5% ​​to be allocated to the government in the interim until all deferred costs are recovered.

9. This also means that Guyana would eventually benefit from a much larger share of Profit Oil when recoverable costs are below the stipulated 75% cap.

10. Royalties paid to the Guyanese government are expenses incurred in generating revenue for the contractor(s), but are not allowable in the calculation of cost oil.

11. It therefore follows that the payment of the 2% royalty is currently added to the government’s take. As a result, the Guyanese government currently receives a total of 14.5% in royalties and profit oil (2% plus 12.5%), not a total of 14.25% as shown in some quarters.

12. The parties that make up 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. The royalty is a tax deductible expense under Section 16 of the Income Tax Act, Cap. 81:01, when filing corporate income tax returns in Guyana.

13. The Government of Guyana, however, based on Article 15.4 of the Petroleum Contract, has chosen to institute the “payment for account system” whereby the government’s share of oil profit includes income taxes payable by the contractor. Consequently, the Minister in charge of Petroleum is required to pay the related taxes on behalf of the Contracting Party.

14. The parties comprising the Contractor would then be issued with tax certificates which would essentially enable them to claim tax credits or tax deductions in other jurisdictions in which they are liable to pay taxes.

15. Due to the pay-for-account system chosen, the additional expenses/deductions result in lower amounts reflected on the tax certificates due to a reduction in the company’s tax liability.

16. Expenses are not tax credits. A tax credit reduces taxes on a dollar-for-dollar basis, while a tax deduction will reduce your taxable income, allowing less tax to be paid.

17. The fact that the PSA authorizes payment of the contractor’s corporate taxes from Guyana’s share in Profit Oil means that the net effect on the Consolidated Fund will be NIL.

18. It should also be stressed that financial income is not taxable income. Financial income is converted into taxable income taking into account temporary differences and tax legislation. Thus, the entrepreneur may have financial income but no taxable income, and may not be subject to the payment of corporation tax for the years in which there may be financial income but no taxable income.

19. Therefore, until the entrepreneur has taxable income, no tax would accrue. Instead, taxes will be deferred until the company’s tax situation changes. This means that the Guyanese government may not be required to pay corporate taxes on the contractor’s behalf until such a situation arises.

20. FOR REPETITION, the 2% royalty paid to the Guyana government is not a cost in determining Guyana’s share of Profit Oil, but an expense in determining contractors’ taxable income.

The GRA’s mandate is to administer tax laws and government agreements for the benefit of all stakeholders in a fair and consistent manner. I hope the above brings some clarity to the current discourse and reduces the doubt between the “oil taxation regime” and the “oil cost recovery regime” as they currently exist.

Sincerely,

Godfrey Statia

Commissioner General

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