Taxation of Oil

7/30/2019 Taxation of Oil

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By: Isaac Nyame

CA (Ghana),FCCA,FCIT & MBAManaging Partner- IKAN Partners

Taxation of Oil & Gas Business in

Ghana

The Institute of Chartered Accountants (Ghana)

Conference on Oil and Gas

Thursday, 28th

October 2010


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Table of Contents

Thursday, 28 October 2010The Institute of Chartered Accountants (Ghana)

Oil and Gas Conference

Details

1 Objectives

2 Legal Framework for Taxation & Overview of RevenueTypes

3 Ascertainment of Chargeable Incomes under PITL &Deductions

4 Withholding taxsubcontractors, employees etc

5 Overview IRA relating to upstream Oil and Gas Operations

6 Review of Petroleum Agreements

2


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Table of Contents-contd



Details

7 Areas of inconsistencies between PITL & IRA and wayforward

8 Overview of Internal Revenue (Amendment) (No. 2) Bill

9 ValueAdded Tax Considerations

10 CEPS related Issues

3


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Objectives


Oil and Gas Conference Thursday, 28 October 2010 4


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Objectives

Enable participants appreciate the general principles of direct &indirect taxes relating to petroleum activities;

Discuss with participants key tax legislations impacting upstream

petroleum operations and compliance obligations of taxpayers;

Share with participants any strategic tax knowledge and tax risks

of the industry; and

Discuss with participants tax risk management issues under the

various laws and the way forward.




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Legal Framework for Taxation &Overview of Revenue Types




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Legal Framework for Taxation of Oil & Gas in Ghana

Source Framework

Primary source The Constitution of Ghana (Art. 174)

DirectTax Regimes The Ghana National PetroleumCorporation Law, 1983 (PNDCL 64)

Petroleum (Exploration and Production)

Law, 1984 (PNDCL 84)-(PEPL);

Petroleum Income Tax Law, 1987(PNDCL 188)-(PITL);




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Legal Framework for Taxation of Oil & Gas in Ghana

(contd)

Source FrameworkDirectTax Regimes

(contd)

The Internal Revenue Act, 2000 (Act

592)-(IRA); and Regulations as

amended; and The Petroleum Agreements-(PA).

Indirect Tax Regime The Value Added Tax Act,1998 (Act 546)

as amended-(VATA) and Regulations

Indirect Tax Regime The Customs,Excise and Preventive

Service (Management) Law, 1993 (PNDCL

330) as amended-(CEPS LAW).




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Overview of Revenue Types

These include:Royalty

Carried interest

Additional interestPetroleum income tax

Additional oil entitlement

Surface rentals

Other rentals

Technology allowance; and

Training allowance




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Overview of Revenue Types (contd)

Royalty

Payment for the right to take oil or gas from the land or sea

Levied as a percentage of the gross value of oil or gas won(produced), irrespective of profitability

Rate ranges from 4% to 12.5% but depends on eachcontractors PA( 5%, 7.5%, 10% etc)

Carried Interest

Participating (or carried) interest entitles GNPC to 10% of

any distribution of petroleum or revenue to interest holdersin any petroleum operation for which GNPC does not payexploration and production expenses

GNPC does this on behalf of the state




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Additional interest

After discovery of petroleum in commercial quantities, GNPC on

behalf of the State would be required to pay an agreed percentage

of the development and production cost to acquire additional

interest in any petroleum operations. This entitles GNPC toadditional interest in any distribution of petroleum or revenue tointerest holders

Petroleum income tax

Petroleum Income Tax is essentially the tax payable on the incomederived from oil and gas production. It includes the corporate tax,

withholding tax of subcontractors and employment tax.




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Additional Oil Entitlement (AOE)

The AOE is an additional profit tax based on the rate of returnachieved. The State is entitled to additional oil, if the Contractor

achieves a specified after tax real rate of return. The Contractors

rate of return is calculated on its net cash flow in accordance with aformula specified in the Petroleum Agreement. The AOE is meant toensure that the State shares in excess profit accruing to Contractors

Applies where contractors actual IRR>Target rate of return used toevaluate the profitability of venture during negotiations




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Surface Rental

Contractors are obliged to pay surface rentals for blocks assigned tothem for petroleum operations

Surface rentals payable to the state are as follows:

Phase of Operation Surface Rental Per Annum

Initial Exploration Period US$30 per sq. km

1st Extension Period US$50 per sq. km

2nd Extension Period US$75 per sq. km

Development and ProductionArea

US$100per sq.km




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Other Rentals

These consist of: Government property

Public lands

Specific services provided by public enterprises (at not morethan commercial rates)

Technology Allowance

A onetime payment by the Contractor to assist GNPC procureplants, equipment and machinery required for petroleum operations.

Training Allowance

Annual payment by Contractor to support GNPC in human resourcecapacity building

The Institute of Chartered Accountants (Ghana)Oil and Gas Conference

Thursday, 28 October 201014


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Specific Legal Framework

Thursday, 28 October 2010The Institute of Chartered Accountants (Ghana)Oil and Gas Conference

Petroleum income tax regimes include:

Petroleum Income Tax Law, 1987 (PNDCL 188);

Internal Revenue Act, 2000 (Act 592);

Petroleum Agreements;

Amendment No. (2) Bill

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Ascertainment of Chargeable

Income & Deductions

16The Institute of Chartered Accountants (Ghana)Oil and Gas Conference Thursday, 28 October 2010

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Ascertainment of Chargeable Income-Basis of Taxation

Article 12.1 of the Petroleum Agreement (PA) stipulates the

following:No tax, duty, fee or other impost shall be imposed by the State or any Political

Subdivision on a Contractor, its Subcontractors or its Affiliates in respect of

activities related to Petroleum Operations and to the sale and export of

Petroleum other than as provided in the Article.

Art.12.2 makes reference to the PITL for taxation purposes and

says:

A contractor shall be subject to Income Tax in accordance with thePITL levied at the rate specified by the PA. The company tax rate of the

PITL is 50%. Most PAs have agreed 35%.



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Ascertainment of Chargeable Income - Charge to Tax

S.2 stipulates:

Everyperson carrying on petroleum operations shall pay tax for each

year of assessment on his chargeable income calculated in the

manner prescribed by the PITL

Chargeable income is calculated by deducting from thegrossincome for the year amounts specified in S.3 of PITL;

Gross income means income from the sale at selling prices

actually realised or export without sale as per PA In the case of a sale to an affiliate or an export without sale at

world market prices as provided for under the specific PA to

which such person is a party (See PA 11.7)



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(contd)

Gross Income is defined as the income derived from the sale orexport without sale of petroleum and income incidental thereto.

Income derived from assignment of interest in any petroleum

agreement is not included in Gross IncomeNote also income from sale of assets used in petroleum operations

under schedule 3 paragraph 6. Divide by 5 years and add to grossincome

Gross income excludes income as per paragraph 5 and 7.

Some matters to consider:

See next slide.............



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(contd)

Matters to consider!!What about other incidental incomes as can be seen below?

Interest income e.g. (i) interest on money deposited in a current

account in the ordinary course of business (ii) Interest arising frominvestment decisions such as treasury bills, fixed deposits etc

PITL does not address other incomes BUTdoes not also make ushelpless, why?

Because of S.39 (5) Repeals of PITL .............So can we dependon this?



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(contd)

Because of S.39 (Repeals).............S.39 (5) says-Except as specifically provided in this Law (PITL) or under

legislative instruments made under S.41, the general laws of Ghana

relating to tax administration, jurisdiction to impose tax and to try

offences in respect of tax matters, shall continue to apply to the mattersprovided for in this Law.

S.41 referred to above relating to legislative instrument has this to

say:Where the Secretary/Minister deems fit, he may by Legislative Instrument

(L.I) exempt a contractor from the operation of any general law or

provisions thereof relating to taxation other than this Law.



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Ascertainment of Chargeable IncomeDeductions

S.6The cardinal principle

Expenses must meet the deductibility test as follows:

All outgoings and expenses must be wholly, exclusively and

necessarilyincurred by such person for the purpose of petroleum

operations for the year of assessment. These include:

Rentals

Royalties

Interest, fees or charges upon any money borrowed by anoperator, BUTthe Commissioner must be satisfied that suchinterest, fees or charges were payable on capital employed for

purpose of petroleum operations .....




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(contd)

Expenses in respect of repairs of premises, plant and machineryor fixtures employed for the purposes of petroleum operations

Debts directly incurred in the conduct of petroleum operationsproved to have become bad or doubtful under certain conditions

Contributions to a pension fund or provident fund approved bythe Commissioner under certain provisos

Sums expended in educating or training of citizens and nationalsof Ghana in an approved educational and technical institutions et

alSpecial Carried Interest Allowance Income from sale of

petroleum transferred by GNPC to the Contractor to settlemoneys advanced by the Contractor in respect of GNPCs

participation interest;


Ascertainmentof Chargeable IncomeDeductions


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Ascertainment of Chargeable Income Deductions

(contd)

Such other deductions as may be prescribed by any rule madeunder the Secretary/Minister (in charge of Revenue) ..

S.3 (4) says. The Secretary may by legislative instrument

prescribe rules and the method for calculating or estimating the

deductions allowed or prescribed under S. 3 (i.e. deductions).Tax losses of prior year after commencement of operations are

legitimate deductions

Loss carry forward in petroleum operations are indefinite(unlimited)

Losses deducted prior to the coming into force of this Law (PITL)

cannot be deducted

24Thursday, 28 October 2010The Institute of Chartered Accountants (Ghana)Oil and Gas Conference



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(contd)

Capital allowance computed and allocated in a manner set forth in the

provisions of the schedule to the PITLSo what about the provisions set forth under the Internal Revenue

Act, 2000 (Act 592) relating to petroleum operations?. We willreview this aspect later..

Take a look at capital allowance in much detail below.

Schedule 3 of PITL has detailed provisions relating to capital allowances(CAs)

CA shall be deducted from the gross income in each year of assessmentand in subsequent years of assessment

CA in the year of commencement is calculated by dividing thesumofpetroleum capital expenditure incurred in the year of commencementand the capital expenditure incurred in previous years by five (i.e. 20%)




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(contd)

Amount so calculated shall be deducted in the year ofcommencement and in each of the immediately succeeding fouryears

CA for the year of commencement shall cease to subsist where it

has been deducted in five (5) successive years including the year ofcommencement

Annual CA is calculated by dividing the total CA incurred in thatyear by five(5) and the amount so calculated shall be deducted in

the year and the subsequent four (4) yearsAnnual CA shall cease after five (5) years

CA for any year shall be the sum of annual CA for that year + CAscalculated for capital expenditure for years before

commencement and in the year of commencement




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(contd)

For purposes of calculating CA for the year of commencement andprior years, capital expenditure shall be determined as follows:

Deduct from capital expenditure consideration paid by any person in

acquiring an interest or proportionate part in a petroleum agreement and

in the assets held in connection therewithDeduct theproceeds of sale of an asset on which petroleum capital

expenditure has been incurred other than underbullet one above

Deduct any insurance moneys, compensations as damages paid in respect

of loss or destruction of any such asset

Deduct sums received as reimbursement of costs and premiums thereonin respect ofsole risk operations conducted in accordance with the terms

of a PA




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(contd)

Deduct any other amounts received in connection with petroleum

operations in or before the year of commencement

In the case of sale of asset after year of commencement, the followingshall apply:

The proceeds of such sale, or in the case of an asset lost or destroyed, anyinsurance moneys, compensation or damages received shall be divided by

five and the resulting amount shall in the year of sale and in each of the

immediately succeeding four years be added to the gross income of such

person from petroleum operations for the purpose of calculating hischargeable income




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(contd)

Any sums received after the year of commencement as reimbursement

of cost and premiumto a sole risk partyunder the sole risk terms ofajoint operating agreement shall be treated as proceeds from the saleof an asset and shall be divided by five and the resulting amount shall in

that year and in each of the following four years be added to the gross

income of such person from petroleum operations for the purpose ofcalculating his chargeable income

The above provisions shall not apply to the assignment of an interest in

a PA any proportionate part thereof or to any other asset assignedtherewith




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(contd)

Assignment of Interest

Where a petroleum operator assigns his interest in a PA or a

proportionate part and his interest in the assets held with regards to

the PA and the proportionate part, this will impact capital allowances

as follows:Capital allowances to which the assignor would have been entitled will

be reduced for that year and subsequent years by a proportion

corresponding to the proportion of the interest of the assignor in the

PA which has been so assigned

CAs to which the assignee would be entitled in that year and

subsequent years will be increased by an amount equal to the amount

by which the assignors CA has been reduced


Ascertainment of Chargeable IncomeDeductions not


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Ascertainment of Chargeable Income Deductions not

allowed

Domestic or private expense

Expenses not wholly, exclusively and necessarily made onpetroleum operations

Any capital withdrawn or sums employed or intended to be

employed as capitalAny capital employed in improvements

Sums recoverable under an insurance policy or contact ofindemnity

Rent of or repairs to any premises or part of premises notpaid or incurred for the purposes of petroleum operations

Any amount paid/payable in respect of income tax, profittax or other similar taxes whether in Ghana or elsewhere


Ascertainment of Chargeable IncomeDeductions not


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sce ta e t o C a geabe co e educto s ot

allowed (contd)

Depreciation of any fixed assets

Any contribution to a pension, provident or other similar

fund not within the terms of section 3 of the PITL



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Withholding tax compliance underPITL Sub-contractors & Employees


Withholding Tax on Sub-Contractors


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34

S.27 (1) Any amounts due to a sub-contractor in respect ofworks orservices under the terms of a contract in connection with a PA, the

person making the payment shall withhold tax from the aggregate

amount as may be specified in a PA

Amount withheld should be paid to the Commissioner and the

payment made shall have the effect provided under S.27 (2) i.e.deemed as a final tax . BUT there is an exception

The PA expressly waives the withholding requirement from the

aggregate payment to the sub-contractor , on condition that the sub-contractor is anaffiliate of the contractor whose services are charged

to the contractor at cost

The Institute of Chartered Accountants (Ghana)Oil and Gas Conference Thursday, 28 October 2010



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35

S.27 (2) deems such withholding tax as final tax on the sub-contractor.It stipulates that when an amount has been withheld from an aggregate

amount due to a sub-contractor as explained earlier, the sub-

contractor shall not in respect of the aggregate amount be liable for taxunder the provisions of any other law in force in Ghana

Withholding tax provisions under the IRA are not applicable to acontract for the supply of goods or the provision of work or services

for or in connection with petroleum operations

Issues to consider: Does the withholding tax regime not cover goods?

Are we to resort to S.39 (5) of PITL in respect of goods? To whatextent?




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Issues to consider:

Assuming it applies that sub-contractors are to suffer final withholding

tax , should sub-contractors not register and file tax returns? Why?

What about when the conditions for the waiver of withholding tax byreason of the affiliate relationship and supply of works or services are

made at cost, should sub-contractors still register and file returns?

How do we determine that works and services supplied by an affiliate

sub-contractor to the operator were made at cost?. Can we verify

supplies made at cost? Challenges of transfer pricing and arms length transaction

implications?


Withholding Tax on Employees


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37

Unless, and to the extent that, a Petroleum Agreement provides inrespect of any expatriate employee employed by a contractor or a

sub-contractor carrying on exclusively petroleum operations the

gains or profits of such employee shall be liable to income tax andthe withholding of tax under the laws of Ghana

PAs have made specific provisions for expatriates..Thus PAs say.. foreign national employees of Contractor,

its Affiliates, and its sub-Contractors shall be exempt from the

income tax and withholding tax liabilities if they are resident inGhana for thirty (30) days or less in any Calendar Year.



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Overview of Internal Revenue Act,

2000 (Act 592) As Amended (IRA)

In Relation to Upstream Oil and

Gas Operations


IRAwithRespect toUpstreamOil & Gas Operations


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IRA with Respect to Upstream Oil & Gas Operations

Some general provisions relating to capital allowances contained inthe Third Schedule to the IRA a follows:

A person shall be granted capital allowances for each year of

assessment in respect of depreciable assets owned by the person at

the end of a basis period ending within the year and used incarrying on a business during that period

The Commissioner shall be notified about any new depreciable

asset acquired within one month after it has been put into use inthe production of the income from the business

Capital allowance which a person is entitled to or granted under

this Act is not transferable either separately or together with any

depreciable asset




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(contd)

Under Class Three of the Schedule, its provided that capital allowancebe granted on Petroleum Operations as follows:

Mineral and petroleum exploration and production rights; assets in

respect of mineral and petroleum prospecting, exploration, and

development costs;Buildings, structures and works of a permanent nature used in respect of

assets used for mineral and petroleum exploration and productionwhich are likely to be of little or no value when the rights are exhausted

or the prospecting, exploration, or development ends, as the caserequires;

Plant and machinery used in mining or petroleum operations



( d)


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(contd)

It is further provided that Costs incurred by a person in theproduction of income from a business in respect of mineral and

petroleum prospecting, exploration, and development are treated as

if they were incurred in securing the acquisition of an asset that is

used by the person in that productionThe rate of capital allowance is 80% in the year the asset was acquired

and 50% on reducing balance basis in subsequent years. 5% of the

cost of assets acquired in a preceding year is added to determine thewritten down value of assets for the current year




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(contd

Issue to Consider:1. Which way do we go? PITL or IRA?

2. Contentions from taxpayers if these differences exists ?

3. Capital allowance matters that have been expressly provided for inthe PITL cannot be replaced by provisions of 592 due to ..S.39

(5) of PITL do you agree?



( td


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(contd

LeasesTwo types namely operating and finance lease

PITL does not provide for this but IRA does, so.

Under IRA (S.34) we have the following:Where a lessor leases a tangible asset to a lessee under an operating

lease then for the purposes of IRA, the lessor is treated as the ownerof the asset and the lease payments are treated as payment received

from the lessee



( td


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(contd

Where a lessor leases a tangible asset to a lessee under a finance lease,and that asset is used by the lessee in the production of that lessee's

income the lease rentals payable by the lessee shall be treated as an

expense deductible for tax purposes

Capital allowances are not granted to the lessee of an asset under bothoperating and finance lease arrangements

Lease rent is fully deductible by lessee under both operating and

finance lease arrangementLessor who leases out an asset under operating lease can obtain

capital allowance and rent payable to him is fully taxable

A lessor who leases out an asset under finance lease is not entitled tocapital allowance in respect of the asset but may reduce the rent



( td


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(contd

A lessor who leases out an asset under finance lease is not entitled tocapital allowance in respect of the asset but may reduce the amount of

rent income of the lessor by a capital amount determined in

accordance with guidelines issued by the Commissioner

Issue to consider

Some assets of contractors may be on leasing possibly finance lease

Do we go by IRAs treatment?



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Review of Petroleum Agreements


Petroleum Agreements

A i l 12 1 f h P l A (PA) i l h f ll i


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Article 12.1 of thePetroleumAgreement (PA) stipulates the following:

No tax, duty, feeor other impost shall be imposed by the State or any Political

Subdivision on Contractor, its Subcontractors or its Affiliates in respect ofactivities related to Petroleum Operations and to the sale and export of

Petroleumother than as provided in theArticle.

RoyaltyPayment for the right to takeoil or gas fromthe land or sea

Levied as a percentage of the gross value of (gross production) of oil or gaswon,irrespective of profitability

Rate ranges from4% to 12.5% but depends on each contractors PA (e.g.5%,7.5%,10% etc)

Income Tax

Income Tax at the rate of 35% calculated in accordance with the AmendmentBill


Petroleum Agreements-contd


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Others include:

Additional Oil Entitlements

Surfacerentals

Rental of Government Property, public lands or provision of specificservices requested by contractor from state affiliates

Surfacerentals

Final withholding tax at 5% on sub-contractors on works and services

but some could be exempt if services are supplied to the contractor are

at costNo export tax on petroleum exported from Ghana and no duty and any

other charge shall be leviedon suchexports

Vessels or other means of loading and transportation not to be liable forany tax, duty, or other charge

48The Institute of Chartered Accountants (Ghana)Oil and Gas Conference


Petroleum Agreements contd

O h i l d


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Others include:

Subject to the local purchase obligations hereunder, Contractor and

Subcontractors may import into Ghana all plant, equipment and

materials to be used solely and exclusively in the conduct of PetroleumOperations without payment of customs and other duties, taxes, fees and

charges on imports save minor administrative charges, provided that:GNPC shall have the right of first refusal for any item imported duty

free under thisArticle which is later sold in Ghana;and




O h i l d


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Others include:

where GNPC does not exercise its right of purchase Contractor may sell

to any other person only subject to all import duty and taxes as if such

items were being imported at the time of such sale; provided, however,that no duty or tax shall be levied if the purchaser could have imported

the item sold free of duty or tax under an exemption similar toContractors hereunder. (PAArticle 12.5).

Foreign National Employees

Foreign national employees of Contractor are allowed to import and re-export personal and household goods free of duties and taxes

Where the person decides to dispose of the items in Ghana, the taxesand duties become due




Oth i l d


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Others include:

Employees PAYE

All employees of Contractors and sub-Contractors are subject to payincome tax in accordance withthe provisions ofAct 592.

However, foreign national employees of Contractor, its Affiliates, and

its sub-Contractors shall be exempt from the income tax andwithholding tax liabilities if they are resident in Ghana for thirty (30)days or less in any CalendarYear.




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Areas of Inconsistencies between

PITL & IRA and way forward



Areas of inconsistencies & way forward


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Areas of inconsistencies & way forward

Income derived from assignment of interest or part thereof andassets connected thereto in any petroleum agreement is not included

in Gross Income from commencement year. Need to clarify the

treatment of such income be it under income tax or capital gains tax

Clarification is needed on income incidental thereto PetroleumOperation as these are to be included in Gross Income

To avoid confusion, capital allowance provisions relating to petroleum

operations be removed from the IRA since PITL is to be the operativeregime



Areasof inconsistencies & way forward-contd


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Areas of inconsistencies & way forward cont d

Taxation of profit earned from assignment of interest in a PA is notcaptured in the PITL

Need to clarify how dividend tax should be applied on distributions

and which legislation should have jurisdiction for dividend taxation

Need to provide clear guidance on how chargeable assets for capital

gains tax and gift tax purposes should be administered on taxpayers

Provide guidance on legislations to be used for leasing transactions. Is

it IRA or there should be amendment to reflect leasing transactionsunder PITL





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Thin capitalisations provisions need to be clearly set out for theupstream oil and gas industry to provide adequate guidance

Transfer pricing rules to guide pricing of transactions between

affiliates and other associated entities

Limits for contribution to Pensions or Provident Fund for both

employer and employee as per PITL 3 (f) being 25% of totalremuneration needs to be revised to reflect the limits of (35%) set

out in the New Pensions ActClarify how joint venture partners should file returns and how the

filing should be done under unitisation

Need to expressly clarify if withholding tax regime does not covergoods at all in the Law




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Under withholding tax on goods supplied by sub-contractors, there isthe need for clarification of what is meant by supply of goods by an

affiliate at cost to merit exemption of the withholding tax

How does the Domestic Revenue Tax Division of the GRA determine

that works and services were supplied at cost?




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Overview of Internal Revenue

(Amendment) (No. 2)



Overview

The Internal Revenue Amendment (No 2) which we will call The


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The Internal Revenue Amendment (No. 2) which we will call TheNo. 2 Bill) is being amended principallyto:

Make revision to some sections of the Internal Revenue Act, 2000

(Act 592) (IRA);and

To introduce a new Part One A to provide for the payment of

Income Tax on petroleum operations, thereby repealing thePetroleum Income Tax, Act 1987 (PNDCL 188) which previously

provided for the taxation of petroleum operations

The No. 2 Bill introduces a fixed income tax rate of 35% forpetroleum operations. This is believed to be comparable to the

rates levied in countries with similar exploration experiences andrisks


Overview (contd)

The Bill introduces tax treatment of DecommissionedFund requiredto


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The Bill introduces tax treatment of DecommissionedFund requiredtobe established by a contractor under the Petroleum (Exploration and

Production) Bill, 2010The Bill retains the provisions in the PITL relating to capital allowances

which are consideredadequate

The Bill provides for the imposition of Capital Gains Tax on petroleumoperations and the imposition of tax on profits arising from the

assignment of interest in a petroleumagreement

The Bill limits interest that should be allowed as deduction to debt to

equity ratio of 3:1 on petroleum operations (thin capitalization);Imposes withholding tax on interest payments, subcontractors,

expatriates etc;and

Provides for relevant sections of Act 592 to apply to petroleum

operations



Specific Changes to PITL

A person conducting petroleum operations shall be subject to


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A person conducting petroleum operations shall be subject to

theInternal Revenue (Amendment) (No. 2) Bill

Pay income tax on chargeable income calculated in accordance

withPart OneA) in each year of assessment

Tax payable in each year of assessment or quarterly period shall

beat therate of35%

CHARGEABLEINCOME

This shall now be total assessable income of a person from the

operations less the total amount of deductions allowed to that

person as specified in the Bill.



Specific Changes to PITL-contd

AssessableIncome


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Full amount of income of a person from the operations accruingin, derived from, brought into or received in Ghana during any

basis period ofa person ending within the year of assessment

Includes:

Income from sale, or disposal without sale of the petroleum to whichthat person is entitled under a petroleum agreement

Income incidental* to those operations before the making of allowable

deductionsExcludes:

Any amounts referred to in para. 5 of Third Sch.A (i.e. pre-commencement (specified incomes/receipts);and

Consideration for an assignment under paragraph7 ofThird Sch.A



Specific Changes to PITL (contd)

AssessableIncome


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Income from sale shall be price actually realised at arms lengthsale

For sale to an affiliate or disposal without an arms length sale at

market values, according to the PA which the contractor is a

party

Excess of consideration received from assignment of an interest

or part of an interest ina PAover the value of the interest or part

of the interest of that person would be taxed at the petroleumincome taxrate at the time ofassignment of the interest**



Specific Changes to PITL (contd)

Excess of consideration received from assignment of an interest


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or part of an interest in a PA over the value of the interest orpart of the interest of that person would be taxed at the

petroleum income tax rate at the time of assignment of the

interest**

Where there is an assignment and the consideration for theassignment is in the form of work by the assignee, that work

shall notbe treated as incomeby the assignor

Issue to considerWhy?. How do we tax this? Should CGTbe assessed? Clearly,this is an

exchange.So


Specific Changes to PITL- Deductions

The cardinal principle still applies (i.e. expenses wholly,


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p p pp ( p y,

exclusively and necessarily incurred in the production ofincome)

Areas affectedinclude:

Interest- Introduction of thin capitalisation rules (94D (C(ii) says:

where debt to equity ratio of any person exceeds 3:1, the interestallowable as a deductionshall be limited to the interest on total loan thatyields a debt to equity ratio of 3:1 forthat person

Decommissioning fund Contributions to a decommissioning fund

set up in accordance with the Petroleum (Exploration and Production)Bill,2010

An expense incurred by a contractor in carrying out work required bythe decommissioning plan approved by the Authority in respect of the

contractors petroleum operations if that work is not paid for directly64Thursday, 28 October 2010The Institute of Chartered Accountants (Ghana)


Specific Changes to PITL- Deductions (contd)

Or indirectly frommoneymadeavailable fromthedecommissioning fund


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Any other applicable deductions specified under Part One of the Act (i.e.

IRA)A deductible expense shall be in respect of income for the year of

assessment or basisperiod in which the expense was incurred andnoother

expenses shall be set off against previous years of assessment or basis

period

Regulations madeunderS.114 of IRA can include anyother deductions

Loss carry forward is permitted up to 10 basis periods (10 years). Losses

shall be carried forward on FIFO basis. Loss carry incurred cannot bemade before commencement of this Bill/Act

Capital allowance provisions remain same as under PITL

A person shall not be allowed any deduction under this Act other than

those specifically provided in Part One and Part OneA.65Thursday, 28 October 2010The Institute of Chartered Accountants (Ghana)



Taxationof Decommissioning Funds-Special Consideration


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An expense incurred in addition to contributions to the fund

shall be deductible fromassessable income

Where the decommissioning fund was established that personunder a petroleumagreement;

Or for the purpose of implementing obligations under anapproveddecommissioningplan

No tax or levy shall be imposed by any law on accumulated

amounts in a decommissioning fund under a PAAn amount withdrawn from the fund for the purpose of

decommissioning shall be exempt fromtax





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An expense incurred by a contractor in the course of carrying

out decommissioning shall not be deductible from assessableincome unless there is a shortage of funds available in the

decommissioning fund to defray cost of decommissioning and

the contractor meets the shortfall from the contractors ownresources

Any surplus fund remaining in a decommissioning fund after

completing decommissioning in accordance with the approveddecommissioning plan, shall be treated as Chargeable Income

andtax imposed on the surplus


Specific Changes to PITL-Deductions (contd)



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The tax shall be the aggregate of:

A. An amount determined by applying to the surplus the applicabletax rate; and

B. An amount determined by applying to the surplus amount, less the

amount determined under para (a) above, the highest rate,calculated in accordance with the formula prescribed in the

relevant petroleum agreement of additional oil entitlement paidby the person during the period in which the person made annual

contributions to the relevant decommissioning fund

C. Any amount standing to the credit of the decommissioning fundafter payment of tax as above shall revert to thecontractor


Transitional Provisions IRO No. 2 Amendment Bill

The petroleum tax regime in respect of an existing petroleum


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agreement is hereby preserved and this part shall not apply to an

existing petroleum agreement except in so far as a contractor isentitled to opt in based on the terms of the petroleum agreement.

Consequential Amendment

Any reference to the PITL in an enactment shall be construed asreference to this part.

69

Miscellaneous Provisions

The provisions of IRA relating to the imposition of tax, assessment,


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collection, recovery, refunds, notices, objections, appeals, offences

and penalties as well as other general and specific provisions includingprovisions to anti avoidance of tax shall, unless expressly excluded bythis part or inconsistent with express provisions of this Part, apply to

petroleum operationsPart 2 of the amended IRA relating to capital gains tax shall apply to

petroleum operations

Where a provision of the IRA is inconsistent with the provision of thisPart (i.e. Part A), the provision of this Part shall to the extent of the

inconsistency prevail over the provision of the IRA

70


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Value Added Tax Considerations


71

Value Added Tax Related Issues

General Considerations


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Under the VAT Act, crude oil and hydrocarbon products (i.e. petrol, diesel,LPG, kerosene and residual fuel oil (Schedule 1, Item 15) are exempt fromVAT;

the Petroleum Agreements grant exemption from the payment of taxes,duties and fees to the main Contractor, its sub-contractors and affiliates in

respect of activities related to petroleum operations and the sale and exportof petroleum;

Exemptions would be granted administratively by way of:

1. A Relief Register and exemption letters for imports;

2. VAT Relief Purchase Orders (VRPOs) and Tax Refunds for DomesticVAT/NHIL;

3. VRPOS made available to the Contractor.

72

Value Added Tax Related Issues-contd

Challenges exist in the administration of the exemption clause in the


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g pPA..

The typical exemption clause in the agreement states that Notax, duty,fee or other impost (including VAT) shall be imposed by the state or anyentity or affiliate political sub-division on the contractor, its sub-contractor oraffiliate in respect of activities related to petroleum

operations and the sale and export of petroleum other than as provided inthis Article.

The meaning of Petroleum Operations for purposes of grantingrelief from VAT/NHIL does not appear to be clear;

Transactions need to be wholly, exclusively and necessarily incurredfor Petroleum Operations to qualify for exemption.

What then constitutes petroleum operations?

73

Value Added Tax Related Issues-Contd

Challenges exist in the administration of the exemption clause in the


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g pPA..

What constitutes wholly, exclusively and necessarily to qualify aspetroleum operations for purposes of exemptions?

Areas of conflict can arise due to grey areas in the exemptionprovisions of PAs and the VATA;

Inappropriate use of VRPOS: Non-issuance (or retrospectiveissuance) of VRPOs and non-submission of VRPO returns.

74


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CEPS Related Issues


75

CEPS Related IssuesGeneral Considerations

C l i i l di d i b i


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Customs controls at importation, landing and exportation begin

from a port. Going by current CEPS law, FPSO-KN is not a portbut a ship;

Accommodation for CEPS officers on FPSO-KN to facilitate their

work is currently unavailableNeed for minimal amendment to CEPS Law to:

Declare FPSO-KN as a port;

Declare the security area around FPSO-KN as a customs area toenable customs laws to apply to ships and tankers that come to thefield; and

Proscribe direct importation to the FPSO-KN.

76

CEPS Related Issues-contd



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Legislation is required to ensure that Contractors do provide

accommodation for CEPS officers.

The current legislation requires amendment to define manufacturing

to include petroleum operations which will then make it mandatory

that operators provide accommodation on FPSO- KN.

77


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Scope for further Laws and Legislative

Reviews ?

Thursday, 28 October 2010The Institute of Chartered Accountants (Ghana)Oil and Gas Conference 78

Further Laws and legislative reviews ?

The following draft bills which when passed into law will also form partof the legal and regulatory framework:


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of the legal and regulatory framework:

Internal Revenue (Amendment) (No.4) Bill;

Ghana Petroleum Regulatory Authority Bill;

Petroleum (Exploration and Production) Bill; and

Ghana Petroleum Revenue Management Bill.

The Internal Revenue (Amendment) (No.2) Bill will encapsulate all

the income tax laws relating to petroleum operations;

Some issues identified for additional legislation are likely to beaddressed in the No. 2 Amendment Bill and possibly Regulations

VAT and CEPS might issue internal regulations or seek minor

amendment in the Law to address issues identified.79

Thank you


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Thank you


Questions, Contributions, Comments

et al

80

Contact emails:[email protected] or

[email protected]


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[email protected] or

[email protected]

81

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Documents

Taxation of Oil