What guarantee does the Government have that reported production costs by oil companies have not been inflated to reduce taxes along with the State’s share of profit oil?
Without proper controls, companies may use abusive transfer pricing tactics (purchasing from or selling to related parties at artificially high or low prices) to shift taxable income out of the hands of the host country.
This is the view of the National Resource Governance Institute (NRGI), an international body which provides expert advice to administrations around the world as it relates to getting the best deals and arrangements out of extractive sectors. It has on several occasions, provided advice to Guyana on several matters.
Given the frequency with which oil companies have been found engaging in such devious accounting methods, the group insists that the government of any oil-producing nation has a responsibility to tell the citizenry what steps are being taken to guard against inflated costs.
It also notes that Parliamentarians, and the citizenry as a whole, are within their right to demand certain information from the government. In this regard, NRGI said that questions should not only be asked about transfer pricing, but also about the assumptions which have been used by oil companies in projecting revenues for the state. It said that questions should also be asked on whether these “revenue projects” are based on company assertions or independent analyses and verification.
It noted that one should ask the government what kind of risk analysis the relevant authorities have done; if prices increase by 50, 100, or 200 percent, and how the returns to the state and the company will change. And if prices fall by 25, 50 percent, or more, what the outcome would be.
LACK OF PROVISIONS
A careful assessment of Guyana’s Production Sharing Agreements (PSAs) with ExxonMobil , Tullow Oil, Ratio Oil, Eco Atlantic and CGX, would reveal that there are mechanisms in place for these oil operators to recover their exploration, development and production costs.
But what is lacking in all of these contracts is a single clause that speaks to how the Government of Guyana should deal with inflated costs, once detected by these entities.
While such lose provisions exist, other nations have ensured that the necessary provisions have been taken to guard against inflated costs.
Liberia, for example, is known for its oil-rich potential just offshore West Africa. Its oil industry has attracted multinationals such as Chevron and ExxonMobil.
Even though the Government of this English-speaking nation is elated to have the attention of these oil giants, it is by no means an indication that there would be a free for all for those entities as it relates to inflated costs.
In one of its PSAs, Liberia ties ExxonMobil and its other oil partners to a strict set of provisions.
The 2013 Production Sharing Agreement says, “If any such inspection or audit is finally determined to have overstated Petroleum Costs or understated revenue derived from Total Production by more than three percent (3%), all costs of the inspection or audit shall be borne or reimbursed by the Contractor and no portion of such costs of inspection or audit may be included in Petroleum Costs. Appropriate adjustments in payments and cumulative recoverable costs shall be made to adjust for all misstatements identified as a result of any such inspection or audit.”
(More in this regard on the contract can be seen by following this link: (http://www.theperspective.org/2012/block_13_agreement.pdf)).
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