GRA tax audit is no substitute for the audit of the transactions under the oil contract

Dear Editor,

I feel sorry for the public having to endure the level of stupidity emanating from the Government about audits arising out of the Esso/Hess/CNOOC Petroleum Agreement. The public have a legitimate right to question the ill-informed, uncoordinated and often misleading statements by the Government, from the President to his appointed Quintet of Ministers (Messrs. Joseph Harmon, Winston Jordan, Raphael Trotman, David Patterson and Dominic Gaskin) whose statements often lack the level of understanding which citizens would expect from their Government over such a critical part of the country’s future economy.

Many wonder whether the President and his ministers have a basic understanding of the provisions in the Agreement regarding audits, costs and taxation and wonder if these fairly common concepts are so difficult for this Government to grasp, how they will deal with important policy issues on the more complex technical and production aspects of oil and gas production.

Minister Gaskin has assured me, and I believe him, that he has read the Agreement in which case he ought to explain to the President and his colleagues what those provisions are, and more importantly, what they mean. 

The President, and Mr. Harmon who has now replaced Mr. Trotman as the Minister responsible for the petroleum sector, and Mr. Jordan, would be wrong to think that the task of auditing of the operations of the Agreement can properly, legally and meaningfully be performed by the Guyana Revenue Authority (GRA). They must know that the statutory role and function of the GRA are to administer the several tax laws specified in the Revenue Authority Act. It has no jurisdiction over the Petroleum Agreement signed by Trotman under the Petroleum Exploration and Production Act and now falling under Mr. Harmon.  

They should know that the GRA cannot even demand returns from the oil companies since the obligation to submit those returns rests with the Minister. The GRA does however, have the power to audit the respective tax returns under the tax laws to determine whether the return is true and correct in reporting the entirety of the income and that the expenses, deductions and allowances claimed have been wholly and exclusively incurred in the production of that income.

But here is the catch: even if the GRA disallows any of the expenses, deductions and allowances claimed, those disallowances will have no impact on the income of the oil companies since the taxes nominally payable by the oil companies are borne by the Government out of its share of the profits, called profit oil. In fact, as the following examples show, the oil companies will actually gain from any disallowances since it will mean a higher level of nominal taxes payable by them for which the GRA will issue a Certificate of Taxes Paid to be used to claim tax credits in their home countries. 

Suppose the revenue from petroleum sales is $100 and the cost permitted under the Agreement is $40. That works out at a profit of $60 shared equally between the Government ($30) and the Oil Companies ($30).

If as a result of its audit, the GRA disallows $4 of expenses, the cost recognised by the GRA would be reduced by $4 and the profit increased to $64, so that the respective share of profit goes from $30 to $32. However, the $4 of tax disallowed expenses has to be shared equally between the Government and the oil companies restoring them to the same net position they were in prior to the disallowance. 

And what about taxes payable? On a profit of $30, at the current Corporation Tax rate of 27.5% which the contract prevents the Government from ever increasing, the oil companies would suffer nominal taxes of $8.25 but yet receive from the GRA a Certificate that it has actually paid $8.25! (As a relevant aside, for all the uninformed talk, the Agreement makes the Minister the go-between for the oil companies and the GRA, and requires him to deliver to the oil companies the Certificate of Tax paid within 180 days. Effectively, the GRA will have less than 180 days in which to do its work before issuing such a certificate once the oil starts to flow).

However, on an adjusted profit of $32, the tax nominally paid by the oil companies goes up to $8.80. And if the GRA disallows $8, taxable profits rise from $60 to $68 shared equally ($34) between the Government and the oil companies. On $34, the amount of the tax nominally paid by the oil companies increases from $8.25 to $9.35 which has to be borne by the Government but for which the oil companies will receive a certificate as if they actually paid that amount of tax. In other words, the higher the cost and expenses disallowed by the GRA, the more the oil companies actually gain by way of tax credits.

I further submit that not only does the GRA not have the power or the duty to undertake any audit outside of the tax laws, but that its attempt to do so would place it in a conflict situation and open itself to challenges by the oil companies.   I do not know what else Guyanese, and more especially the defenders of this unconscionable contract, need to know to call for its immediate renegotiation. What is frightening is that given the millions and millions of acres which Trotman and this Government gave to Exxon/Hess/CNOOC after the major discovery in 2015, and given the Stability Clause in the Agreement, Trotman and the Government have effectively blocked the Parliaments for the next sixty years and more from passing any law that reverses this tax giveaway, or that adversely affects their economic benefits.   

Are we going to allow blind political loyalty to impose this version of the resource curse on our grandchildren and great grandchildren without even a squeak? Are we the citizens in fact, that stupid, blind and spineless? 

Let me be clear: what I prefer to call a verification rather than an audit of the pre-contract costs is an absolute necessity, as are audits of the petroleum operations on an ongoing basis. But first we must accept that a GRA tax audit is no substitute for the audit of the transactions under the Contract, including exploration and pre-contract costs. The Executive arm of the Government must first understand the contract and how it operates and then legislate for and organise the sector’s regulatory oversight.

Yours faithfully,

Christopher Ram

 

 

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