The IMF report on petroleum taxation and revenue management (Part I)

In last week’s article, we mentioned some of the key findings contained in the IMF report entitled “Guyana: A reform Agenda for Petroleum Taxation and Revenue Management”, dated November 2017. Those findings were gleaned from the various media reports. With the benefit of sight of a copy of the report, we now highlight, without comment, key aspects of the report which readers may find of interest as they reflect on the petroleum agreement between the Government of Guyana and ExxonMobil’s subsidiaries (Esso Exploration and Production Guyana Ltd., CNOOC Nexen Petroleum Guyana Ltd. and Hess Guyana Exploration Ltd.).

The report contains an Executive Summary and five chapters, namely: (i) Introduction (ii) Fiscal regimes for extractive industries; (iii) Extractive industries revenue management; (iv) A roadmap for petroleum sector reforms; and (v) Possible technical assistance and capacity building. The key findings are as follows: (a) The government faces significant challenges in preparing for the start of oil production, especially the need to manage public and political expectations in relation to providing information in clear and simple terms about the expected benefits from petroleum investments;

(b) A comprehensive agenda of policy, regulatory and institutional changes is needed, which requires strong leadership in government to coordinate the reform process;

(c) The immediate priority is to ensure that the fiscal terms agreed on contractually in the petroleum sharing agreement (PSA) and mineral agreements are made to work and diligently enforced;

(d) The GRA should assess base erosion and profit shifting risks contained in petroleum or mineral agreements and consider ways to mitigate such risks. One example is the treatment of interest expense for the purpose of cost recovery. This, combined with the absence of limitations on the use of debt as well as no interest withholding tax, can lead to significant base erosion and profit shifting;

(e) Going forward, fiscal regimes for extractive industries should be reviewed for future investments and operations to enable a reasonable sharing of risk and reward between investors and the Government. In this regard, the Government should consider issuing a temporary moratorium on new licensing until a new fiscal regime is in place;

(f) The intention is for the GRA to be the single collection agency for the petroleum sector. However, the GRA needs to develop capacity in this area, given its limited experience in petroleum taxation, especially where the contractor’s income tax obligations are settled from the Government’s share of profit oil;

(g) Plans to establish a petroleum industry taxpayer unit at the GRA should be prioritized, especially considering the need to commence verification and audits of exploration and development costs;

(h) The revenue forecasting framework can be enhanced by developing project-specific cash flow models for the petroleum project and the two large gold mines;

(i) Once oil revenue begins to flow, fiscal policy objectives should reflect a balance between the need to maintain macroeconomic stability, and providing additional resources for development spending;

(j) The prospect of oil revenue should lead to renewed efforts at strengthening public financial management. This includes the strengthening of: (i) a mediumterm budget framework incorporating revenue forecasts from extractive industries; and (ii) the annual budget process, including enhancing the presentation of the budget;

(k) Given the intention to use oil revenue to scale up investment, it is imperative that the public investment management capacity is strengthened. This includes project appraisal and selection, procurement, implementation, and monitoring and evaluation;

(l) In relation to the plans to establish a natural resource fund that is well underway, there is merit in considering whether to explicitly separate the short to medium run stabilization objective versus the long run saving objective by having separate investment portfolios with different investment policies. There should also be con-