– GRA boss says; everyone else will be subject to taxes

COMPANIES outside of the Production Sharing Agreement (PSA) between Guyana and ExxonMobil will be subject to paying their taxes while performing duties or providing services within the oil sector.

According to Commissioner-General of the Guyana Revenue Authority, Godfrey Statia, “The PSA only relates to the Contractor (ExxonMobil) and the affiliated companies.”
Consequently, companies and sub-contractors and their employees would be subjected to the various tax legislation under the Income Tax Act; Income Tax (In Aid of Industry) Act; the Corporation Tax Act; and the Property Tax Act, thereby allowing for PAYE deductions, Withholding Taxes and corporate and other applicable taxes.

Statia gave this explanation during a presentation to Consultative Association of Guyanese Industry Limited (CAGI) last Monday to show how the GRA is gearing to protect the country’s tax dues in the upcoming oil and gas industry.

He said that despite certain exemptions within the PSA, the sizeable component by sub-contractors “will enhance revenue collection, thereby allowing for Guyana’s take to be within 25 to 30 per cent of the oil revenues.”

Statia said that based on spinoff industries in the downstream activities of the sector, the impact on the economy and its tax take will be remarkable.
Various commentators had argued against tax exemptions for the American oil company, claiming that Guyana stands to lose a lot as a result.

But as Statia told the gathering, “The uniqueness of petroleum taxation when compared to the taxation of other goods and services lie in the industry’s special characteristics: Its contribution to national economies, the high operating and development costs, high uncertainty in exploration activities, the volatility of oil prices, the inability of government to fund its own exploration, the political and economic climate, and hostile neighbouring countries who harbour territorial claims which allow for increased risk, are all factors that warrant the demand for a higher rate of return by investors.”

TERMS OF AGREEMENT
He said that under a PSA or contractual term agreement, the oil company is appointed by the government as a contractor, with the latter retaining ownership of the natural resource. The parties, he explained, agree that the contractor will meet the exploration and development costs in return for a share or a fee for this service, if production is successful.
Statia said that while the contractor has no right to payment in the event of a failed discovery, it is allowed to recover the costs it has incurred if the commodity is found.

“This is known as Cost Recovery or Cost Oil,” he said, adding: “In respect to the accounting for exploratory costs, successful drilling costs are usually considered to be a part of the cost of oil and gas reserves, while unsuccessful exploratory costs are usually written off.”
Development costs, on the other hand, apply to things like building a producing system of wells and related equipment and facilities, hence they are capitalised as part of the cost of the oil and gas.

“This certainly would have been the thinking behind the pre-contract costs of US$460.2M, which represents exploratory costs as stated in Annex C, Section 3(K).”
Statia said that given the nature of Guyana’s “hybid agreement” with Exxon, the nation stands to benefit from both a share of production in the form of profit oil, as well as a fixed 2 per cent royalty on Production Petroleum providing for both concessionary and contractual terms.

Cost, as in cost oil, he said, will be recovered from the value of production to the extent of 75%, with all recoverable costs being carried forward indefinitely until fully recovered.
Statia said that Guyana stands to gain considerably should oil prices increase, or when the cost of production decreases. “Apart from these production (royalty) and profit-based instruments (share of profit oil),” he said, “bonuses and annual rental payments are also features of the PSA, which are aimed at ensuring up-front revenue for the State of Guyana while encouraging investors to explore and develop contract areas more rapidly.”