By Kiana Wilburg
After holding several rounds of discussions, the government has decided to change its approach to the treatment of interests under Production Sharing Agreements (PSAs). In fact, a government document seen by this newspaper specifically states that, “interests would no longer be a recoverable/deductible expense” by oil companies.
This move would follow recent revelations by this newspaper that the oil deals governing the Orinduik and the Stabroek Blocks allow for the operators to recover uncapped interest rates on loans taken to fund their exploration and development projects.
Kaieteur News had interviewed University of Houston Instructor, Tom Mitro, on this matter and he had categorically stated that this arrangement leaves Guyana open to the abusive use of debt by the operators. Mitro had stressed that allowing recovery of interest rates, much less uncapped interest rates, is no longer a common practice. If it is allowed, the Consultant stressed that it is vital to establish strict rules that prevent potential abuse.
Mitro said that the most common rule is setting a maximum debt to equity ratio that effectively limits the borrowing to no more than 60-70% of the capital costs. Also, Mitro said that these regimes may limit the repayment period of the local computations so that interest is not excessive.
Another common rule the official pointed out is to cap the rate of interest. In this way, Mitro said that governments avoid companies pushing a lot of their corporate debt at inflated rates into the local project merely to obtain cost recovery benefit at the expense of the government. Mitro said that there have been notable cases of abuse in the absence of rules.
In this regard, he noted that Chevron was accused by the Australian authorities of charging interest to its local affiliate at a rate that was well above actual borrowing rate merely to obtain tax recovery benefits at the expense of Australia.
“So I guess my thoughts with regard to Guyana or any country would be that permitting interest as part of cost recovery should only be considered if there are protective caps built in as noted above. Otherwise, the risks become too great of Guyana ending up inadvertently subsidizing the corporate borrowing of mega companies,” Mitro had said.
Kaieteur News understands that the International Monetary Fund (IMF) is currently playing an instrumental role in developing a Mining and Petroleum Fiscal Regime for Guyana. This process has led to the review of the Income Tax Act where the issue of deduction of interest rates will be addressed.
This newspaper also understands that a recommendation for policy guidance on the matter has been made by the Guyana Revenue Authority (GRA).
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