— If not, why not?

Key Message
The fiscal regime applied to the oil and gas sector in the United Kingdom prior to the introduction of the windfall tax (energy profits levy) in May 2022, comprised of three elements, namely (1) ring fence corporation tax (RFCT), (2) petroleum revenue tax (PRT), and (3) supplementary charge (SC).

Supporting Statement (s)
It is normal practice universally for petroleum producing countries to design a separate fiscal regime specifically for the oil and gas industry that is usually different from the mainstream fiscal regime applied to companies operating in other sectors. This is the case in the United Kingdom and in Guyana. Important to note as well is that there are different types of fiscal regimes that can be applied to the oil and gas industry. Notably, the PRT was reduced from 50 per cent in 1993 to zero per cent in 2016. Importantly, in the interest of a comparative illustration to demonstrate whether the application of a “windfall” tax in Guyana has any merit and justification to so do; this analysis seeks to demonstrate a practical application of the UK’s fiscal regime inclusive of the windfall tax and compared to Guyana’s fiscal regime. In so doing, however, it is crucial to understand that some elements of the fiscal regime in the UK are not comparably applicable to Guyana for the reasons outlined further in this report.

Key Message
The net revenue obtained under the current fiscal regime applied to Guyana versus the fiscal regime applied in the UK inclusive of the recently instituted windfall tax of 25 per cent in the UK, resulted in a higher share for Guyana in contrast to the UK.

Supporting Statement (s)
For illustration purpose, with a profit of US$756 million, the net take for the UK Government is US$226.8 million. Contrastingly, with the same profit oil of US$756 million, applying Guyana’s fiscal regime which is two per cent royalty and 50 per cent profit, Guyana’s Government net take amounts to US$438.5 million. This is US$211.7 million more than that which is obtained for the UK Government or 93.3 per cent more. Also, with the application of the 25 per cent windfall tax, the UK’s Government net take using the same scenario of profit oil amounting to US$756 million, the net take amounts to US$415.8 million which is still US$23 million less than Guyana’s Government’s net take.

Concluding Remarks.
Concluding Remarks Cont’d. The comparative analysis contained herein demonstrates clearly that the situation in the UK is completely different from Guyana, the circumstance altogether in the UK justifies the need for a windfall tax. In contrast, the fiscal regime in Guyana allows for a higher take for the government even when compared to the UK’s fiscal regime inclusive of the windfall tax – that is to say, should the UK’s fiscal regime be applied to Guyana.

The oil and gas revenue contributes just about 2.5 per cent of government’s total revenue in the UK while in Guyana the contribution to total revenue is about 40 per cent based on the projections for 2022. The windfall tax was introduced in the UK because the fiscal regime over the years would have undergone several changes aimed at making the industry more competitive and to attract investments in the industry. For example, the PRT was reduced from 50 per cent in 1993 to zero per cent in 2016. More interestingly, while the fiscal regime in the UK is more sophisticated than Guyana’s, the UK’s fiscal regime is designed with a number of built-in incentives.

For example, the 25 per cent tax levy or windfall tax includes an additional investment allowance of 80 per cent that can be claimed at the point of investment. Overall, the tax relief companies receive from qualifying expenditure in the UK has nearly doubled from 46p for every £1 to 91p for every £1. Put differently, for every US$1 billion invested in the UK’s oil and gas industry, the oil companies receive US$912.5 million in tax relief under the new (current) scheme.

In the final analysis, there is no strong justification and merit for the application of a windfall tax in Guyana in view of the analysis presented herein, and especially since the brent crude price has already begun to hover below US$100.

Concluding Remarks.
Concluding Remarks Cont’d. The comparative analysis contained herein demonstrates clearly that the situation in the UK is completely different from Guyana, the circumstance altogether in the UK justifies the need for a windfall tax. In contrast, the fiscal regime in Guyana allows for a higher take for the government even when compared to the UK’s fiscal regime inclusive of the windfall tax – that is to say, should the UK’s fiscal regime be applied to Guyana.

The oil and gas revenue contributes just about 2.5 per cent of government’s total revenue in the UK while in Guyana the contribution to total revenue is about 40 per cent based on the projections for 2022. The windfall tax was introduced in the UK because the fiscal regime over the years would have undergone several changes aimed at making the industry more competitive and to attract investments in the industry. For example, the PRT was reduced from 50 per cent in 1993 to zero per cent in 2016. More interestingly, while the fiscal regime in the UK is more sophisticated than Guyana’s, the UK’s fiscal regime is designed with a number of built-in incentives.

For example, the 25 per cent tax levy or windfall tax includes an additional investment allowance of 80 per cent that can be claimed at the point of investment. Overall, the tax relief companies receive from qualifying expenditure in the UK has nearly doubled from 46p for every £1 to 91p for every £1. Put differently, for every US$1 billion invested in the UK’s oil and gas industry, the oil companies receive US$912.5 million in tax relief under the new (current) scheme.

In the final analysis, there is no strong justification and merit for the application of a windfall tax in Guyana in view of the analysis presented herein, and especially since the brent crude price has already begun to hover below US$100.

BACKGROUND
Following the introduction of a “windfall” tax on oil and gas companies in the United Kingdom (UK) on the back of soaring oil prices earlier this year, the Political Opposition and others have been calling for similar to be implemented in Guyana. It is critical; however, that one seeks an understanding and appreciation for the current situation in the United Kingdom, the precedence and justification for the measure and more importantly–the fiscal regime for the oil and gas sector in the United Kingdom. While it is always good to examine comparatively these issues across other countries in the world with a view to apply similar policies in the home country, context is particularly important. Within this framework, the situational contexts are often times fundamentally different, hence, not pragmatically applicable.
In this article, the author examined the fiscal regime in the United Kingdom and then sought to compare and contrast same with the Guyana’s context altogether.

DISCUSSION AND ANALYSIS
The Fiscal Regime Applied to the Oil & Gas Industry in the United Kingdom

The fiscal regime applied to the oil and gas sector in the United Kingdom prior to the introduction of the windfall tax (energy profits levy) in May 2022, comprised of three elements, namely (1) ring fence corporation tax (RFCT), (2) petroleum revenue tax (PRT), and (3) supplementary charge (SC).

Ring Fence Corporation Tax – this is calculated in the same way as the mainstream corporation tax applicable to all companies but with the addition of a ring fence. The ring fence prevents taxable profits from oil and gas extraction in the UK from being reduced by losses from other activities or by excessive interest payments. The current rate of tax on ring fenced profits, which is set separately from the mainstream corporate tax, is 30 per cent.

Petroleum Revenue Tax – this is a field-based tax charged on profits arising from oil and gas production from individual fields which were given development consent before March 16, 1993. There are around 100 such fields still producing, of which the majority (around 60) have never been profitable enough to pay PRT. With effect from January 1, 2016, the PRT rate was reduced from 50 per cent to zero per cent. PRT is a deductible expense in computing profits chargeable to ring fence corporation tax and supplementary charge.

Supplementary Charge – this is an additional charge on a company’s ring fence profits (but with no deductions for finance cost). With effect from January 1, 2016, the rate is 10 per cent.

Energy Profits Levy – from 26 May 2022 until the end of 2025, oil and gas companies will pay an Energy Profits Levy (EPL), rated at 25 per cent. The tax base will be similar to that of Ring Fence Corporation Tax but with some adjustments and restrictions.

For example, finance and decommissioning costs cannot be included in the calculation of EPL, and companies are not allowed to carry historical losses forward to reduce their EPL liabilities. The Levy includes an additional investment allowance of 80 per cent that can be claimed at the point of investment.