Gov’t faces big challenge in preparing for oil production – IMF report

The government here is facing a significant challenge in preparing for the start of oil production within possibly 2-3 years, according to an IMF report.

Entitled `Guyana: A Reform Agenda for Petroleum Taxation and Revenue Management’, the report has adverted to the generous deal that ExxonMobil extracted from the government based on what is publicly known about the 1999 and 2016 agreements struck with the company.

Dated November 2017, the IMF report said that while efforts are underway simultaneously across various fronts, “there is a need for strong leadership by the government”. It said it may be helpful to prepare a roadmap of reforms and changes necessary between now and the start of production of oil. The report was commissioned by Minister of Finance Winston Jordan.

Authored by Thomas Baunsgaard, David Baar, Diego Mesa-Puyo and Eliko Pedastsaar, the report also raised questions about the Petroleum Commission Bill which is now before a select committee of Parliament.

The IMF report noted that the Petroleum Commission Bill sets up a regulatory body for the petroleum sector and delineates the functions and duties of the Commission, which include monitoring and regulating the exploration, development and production of petroleum in Guyana.

The report notes that the Commission’s core responsibilities are technical in nature, and encompass monitoring and ensuring compliance with national policies, laws and agreements and ensuring compliance with health, safety and environmental standards among other things.

“However, the Bill also grants revenue collection and fiscal powers to the Commission, fragmenting tax policy for and revenue administration of the sector. For example, the Commission shall: ascertain the cost oil or gas due to operators; participate in the measurement of petroleum to allow for estimation and assessment of royalty and profit oil or gas due to the State and be responsible for the approval of the exercise; provide the necessary information to the relevant authority for the collection of taxes and fees from petroleum operations; be responsible for the collection and recovery of all rents, fees, royalties, penalties, levies, tolls and any other charges payable under the Petroleum (Exploration and Production) Act and any other revenues of the Commission; and advise the Minister of Natural Resources in the negotiation of petroleum agreements and in the granting, amendment, renewing, extending, and revocation of licenses”, the IMF report noted.

It said that if the intention is to have the Guyana Revenue Authority as the single revenue collection agency for the petroleum sector, the Bill should be amended.

“…Moreover, given Guyana’s limited exposure to the petroleum sector and the scarcity of specialized human capital among government ministries and agencies, resources should be used efficiently and strategically. The mission supports centralizing the fiscal administration of the sector (including Production Sharing Agreements) in the GRA. The proposed Petroleum Commission, however, should be responsible for regulating all non-fiscal aspects of the petroleum sector”, the report asserted.

Even with a single revenue collection agency, the report said that coordination between the Petroleum Commission and the GRA is essential. As the sector regulator, the Petroleum Commission will develop a deep technical knowledge of the petroleum sector in Guyana. This technical knowledge will be of great benefit to the GRA in administering Production Sharing Agreements (PSAs) and taxes for the sector.

The report emphasized that a fair and transparent petroleum revenue administration is a vital link in the value chain required to transform petroleum revenues into lasting national wealth.

Ineffectively

“Petroleum tax policies, however well-designed, will not provide the government with the intended revenues if implemented ineffectively. Even if transparent and well-designed, legislation or contractual arrangements will lose its attractiveness to investors if administered unfairly, inconsistently and unpredictably. Investors will also lose confidence in the petroleum tax regime if it is not applied effectively and even-handedly to all taxpayers. Moreover, transparent public financial management of resource revenues will be frustrated if the revenue administration cannot produce timely and accurate reporting. Finally, public confidence in government management of the nation’s petroleum wealth will be undermined if revenues are not seen to be administered efficiently and effectively. Good revenue administration is important in any country, and in particular in a potentially significant new oil producer like Guyana”, the report asserted.

It contended that the exploration, development and production phases of petroleum extraction are potential tax risks for the revenue administration. It noted that very large investments are made upfront in the exploration and development phase before the government may collect direct revenues from the production phase. The exploration and development phase will range over a time span of five or more years, and expenditures incurred during this period will be deductible against future income. Therefore, the report said that the tax administration needs to start monitoring and auditing costs from the start of the exploration and development phases.

It noted that the transition from the exploration phase to the development phase is a particular challenge for a tax administration with no petroleum experience.

Extremely large

“The development expenses are extremely large compared to any industrial investment, especially in a small country like Guyana, typically on goods and services of a very specialized nature and concentrated in a short period. For example, ExxonMobil estimates that the cost to develop phase 1 of the Liza field to start production in 2020 is likely to be around (US)$4.4 billion. Development expenditures represent costs of a different nature than the expenditure in the exploration phase, and a large inflow of new international sub-contractors will enter the country during this phase. It can be difficult for the tax administration to scale-up the capacity to meet this challenge, since this is not primarily a matter of the number of staff, but more the particular skills necessary for the petroleum sector. Moreover, oil companies may also compete with the tax administration for experts with the same professional skills (e.g. accountants, auditors, economists, lawyers) during the development phase”, the report said.

Fragmented

The report pointed out that two state entities are responsible for administering petroleum revenues. “According to the PSA, the Minister responsible for petroleum is administering the petroleum agreement, while the Guyana Revenue Authority (GRA) is responsible for general tax administration.

Fragmented organizational arrangements for the administration of petroleum revenues could create some challenges that must be addressed. In order to establish an efficient and effective administration of petroleum revenues, close cooperation and coordination between the different government agencies is required”, the report cautioned.

It said that more guidance is needed on how to operationalize the pay-onbehalf PSA regime in Guyana. Under this scheme, the contractor is entrusted with preparing a tax return to be filed by the Minister responsible for petroleum, but at present there is no guidance on how to calculate the Corporate Income Tax (CIT) liability.

“A detailed procedure should be established by the GRA outlining how taxable income derived from petroleum operations by a company holding an interest in a PSA is assessed. The procedure should detail the determination of the annual taxable income under a PSA in accordance with the ITA. Since the company’s profit oil share is calculated net of income tax, an amount equivalent to the

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