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

annual income tax “paid-on-behalf” should be added to the company income for tax purposes. The tax deductions for obtaining the taxable income subject to income tax will be made in accordance with the ITA. Initially, a draft practice note should be prepared by GRA. Consultations with the existing holders of PSAs should take place to reach a common understanding on the detailed procedure to be followed”, the IMF report posited.

It added: “A combined PSA and tax fiscal regime, even under the pay-on-behalf system as in Guyana, may be challenging from a revenue administration point of view. If there is fragmentation of responsibilities for revenue collection, coordination strategies become vital but are often difficult to implement in practice. A hybrid tax/PSA regime constitutes two different fiscal regimes that must be applied to the same taxpayer, and on the same stream of revenues. If the two regimes are administered by two different revenue authorities under different ministries, this could create many administrative issues.

It said that one way to ameliorate this administrative challenge is to minimize most of the differences between the PSA and the tax (CIT) regime, including the Corporation Tax Act. The basis for revenue calculations and valuations, timing of deductions and recognition of income, definitions and administrative procedures should be aligned. Such a simplification can ease administration challenges, increase predictability, and enable the administration to focus on the most important issues.

The report stated that the CIT and PSA treatment of income from petroleum operations and the rules for cost recovery (under the PSA) and for cost deductions (under the ITA) is particularly vital.

The report warned that duplication of functions across ministries or agencies is inefficient and increases government costs.

Cost recovery

“The auditing of cost recovery and tax auditing of tax returns is an example of duplication that should be minimized. Under the current fragmented system, joint audits for PSA and tax purposes could reduce the duplication, but need to be coordinated closely. Royalty and CIT are calculated from essentially the same financial data under the PSA. Having a joint audit responsible for those functions would allow development and implementation of a more coherent and effective compliance risk management strategy”, the report added.

On a regular basis, the report said that the GRA may need reliable information from the Ministry of Natural Resources. Examples of information that could be provided are:

* Prospecting licenses awarded, percentage interests in the contract area and any subsequent changes, and the actual PSA contracts;

* Transfers or other changes of license interests, elections for (future) government participation, and production licenses awarded;

* Field development plans and budget statements

* Agreed terms for commercial production and sale of crude oil and natural gas; * Certification of production volumes * Domestic supply arrangements and actual deliveries; and * Pipeline tariffs and contracts. The IMF report said that the tax authority has legal power to request such information directly from the petroleum companies, but to improve services and reduce the taxpayer’s administration burden, internal government information flows should be handled among the relevant authorities. From a taxpayer service point of view, asking taxpayers to provide the same information to different government agencies should be avoided.

“Specific annual reporting obligations to the Minister responsible for petroleum are set out in the PSA. Several of these statements will also be useful for the tax authorities in their risk assessment and revenue monitoring activities. There should be clear and transparent mechanisms in place to ensure that reports mandated by the PSA are forwarded to the tax authorities and vice versa. This would ensure timely information and from a compliance perspective it is advisable that taxpayers are aware of information to which the tax authorities have access”, the IMF report advised.

The IMF mission said it understands that Guyana intends to have only one single revenue collection agency for petroleum.

“The current intention is that the GRA will collect revenue under the PSA, in addition to managing the tax and royalty instruments. This is a very reasonable decision given the key role played by the PSA and the pay-on-behalf arrangement for CIT in existing contracts. However, given the limited experience in the GRA with petroleum taxation there is urgency to develop skills in this area”, the report cautioned.

It said that plans to set up a petroleum industry taxpayer unit attached to the large taxpayer office in the GRA should be prioritized.

It made the following recommendations:

*Prepare a draft practice note on the implementation of the “pay-on-behalf” scheme and hold consultations with existing PSA holders.

* Publish the practice note to be used by companies for preparing income tax returns.

* Undertake an analysis of the differences between the PSA and the ITA regarding income, expenses, recognition of income and expenses, valuation and procedures, and minimize differences that have no specific reason from a tax policy point of view.

* Establish formal and structured working relationships on responsibilities between agencies which have regulatory responsibility for the petroleum sector.

* Draft a memorandum of understanding, if need be backed by regulation, regarding exchange of information between the agencies, in particular the GGMC or the Petroleum Commission and the tax authority at the operational level.

* Appoint GRA as the single collection agency for PSA, royalty, and petroleum tax revenues.

* Finalize the establishment of a petroleum industry taxpayer unit attached to the large taxpayer office.

* Continue to build capacity in petroleum tax administration in the GRA.

The government has so far said nothing publicly about this report.