Kaieteur News – Many years ago, Burnham asked a question to one of his Ministers. The question concerned an incident which had taken place. The Minister replied that he was not aware of it. Burnham told him that as a Minister it was his duty to know.
At a recent press conference, Bharrat Jagdeo, the country’s Second Vice President, was asked whether the 2% royalty, which is supposed to be paid by the oil companies, was taxable. As reported in yesterday’s edition of this newspaper, the Second Vice President said that he did not want to commit himself to saying something which he would later have to retract. He said the issue should be one for the legal personnel to pronounce upon.
It is amazing that the country’s point person in the natural resource sector cannot definitively say whether the 2% royalty which Guyana receives is recoverable. As Burnham would have said, it is his duty to know these things.
The Production Sharing Agreement (PSA) signed between the Government of Guyana, Esso, Hess and CNOOC, does not state explicitly whether the 2% royalty is recoverable. But by definition a payment which comes off the top (that is prior to cost recovery) is not usually recoverable.
Guyana has received the lowest rate of royalty for its oil. If this pittance is taxable, then it would mean that Guyana’s effective royalty would be zero. Not only however is the royalty rate low, it is also a flat rate. Regardless of the international price of oil, Guyana always gets 2%.
Some countries have what is known as sliding scale royalties which provide that as production and international prices increase, the royalty rate increases. Right now oil prices are soaring but Guyana is still receiving 2% as royalties.
Royalties are usually not cost recoverable. This means that nothing is supposed to be deducted from royalties. It is paid up front.
A royalty is an amount paid in recognition of the fact that what is being exploited is an exhaustible resource. It should not therefore be subject to cost recovery.
There are usually two types of oil agreements: concessionary and contractual. Under a contract system, royalties are not subject to cost recovery. Jagdeo ought to know this. In a concession system, however, the royalty is usually considered as an operating expense and is treated as a tax deductible.
Guyana, however, has a production sharing agreement which makes the oil agreement a contract system. The Second Vice President ought to know that under such a system there are four main features: royalty, cost recovery, profit oil and taxes. And he ought to know that under a contractual system, royalties are usually not treated as a recoverable cost.
In the PSA, signed by APNU+AFC, there is an agreed rate of royalty of 2% of the value of the produced oil. At the option of the government, the oil companies can pay the royalties either in cash or kind. Under a contract system, royalties are not usually recoverable.
In terms of cost recovery, there is a cap of 75% which means that the oil companies cannot make deductions for cost greater than 75%. After costs are deducted what remains is profit oil which is then split half and half between the oil companies and Guyana. But strangely, Guyana agreed to pay the taxes of the oil companies.
However, the fly in the ointment is that the APNU+AFC had signed another oil agreement which provided for a 1% royalty that was recoverable by the oil company. As this newspaper reported three years ago, Tullow, a British oil company, got a deal which would allow it to pay only 1% royalty. And to add insult to injury, this 1% is recoverable.
The PSA with Exxon and its partners, however, does not specify that royalties are recoverable. But it also does not explicitly exempt royalties from cost recovery. So are we dealing with a grey area of the contract? Guyana should not even be entertaining any thought that the pittance which it receives as royalties should be recoverable.
This is why it is all the more surprising that such a fundamental cannot be definitively pronounced upon by the country’s Second Vice President. By now he should have been in a position to affirm that royalties are exempt from cost recovery.
(The views expressed in this article are those of the author and do not necessarily reflect the opinions of this newspaper.)
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