How much taxes should Exxon and the oil companies have paid?
June 2 ,2021
As per the 2016 Stabroek Block contract, for the oil production lifecycle, from the preparation for oil production to when the oil is finally sold, the oil companies pay no taxes (see Article 15.1). The applicable income tax laws assess the Contractor’s tax due on taxable income (Article 15.3) and the Minister agrees to pay the tax assessed to the Guyana Revenue Authority on behalf of the Contractor (Article 15.4(a)). How much taxes would have been collected from the oil companies if the Stabroek contract required the oil companies to pay taxes?
Except for telecommunication companies, Guyanese businesses pay two rates of profit taxes (called corporation tax): 40% of the chargeable profits from commercial activities and 25% of the chargeable profits from non-commercial activities. Nominally, oil producing companies fall under the 25% category but they do not pay the taxes – the Government does it for them.
The oil companies also have business tax exemptions from the raw materials used to enable pumping of oil. Such items as imported steel pipes, cement, protective paints, and so on, are tax-exempt. This is in contrast to regular Guyanese businesses that are subject to taxes on listed raw materials and final profits tax. The reason for this dual tax system, one for taxation of locals and zero taxes for foreign oil companies is because section 51 of the Petroleum Exploration and Production Act 1986, over-rides Guyana’s operating tax laws.
What is even more alarming is the possibility that oil companies may be eligible to use tax receipts or certificates obtained under Article 15.5 from the Guyana Revenue Authority under Article 15.4(b), to receive a tax-credit in the US for taxes they never actually paid in Guyana.
The Contractor’s tax benefit assigned could be assessed by analysing a press release dated March 10, 2021, in which the Ministry of Natural Resources stated as of February 5, 2021 the total earned from oil in the Stabroek Block was US$267.7 million dollars. Without royalties the amount was US$246.5 million. We know that the oil companies can expense up to 75% of oil revenues and Guyana receives a 2% royalty included as an expense. Guyana and the oil companies split the remaining revenues as profit share, with each receiving 12.5 %. Using the information presented, we can assume the 12.5% profit share by the oil companies is a taxable income of US$246.5 million. If we use the 25% tax rate that applies to commercial activities in Guyana, the oil companies should have paid approximately US$62 million (25% times US$246.5 million) in taxes. This is revenue lost to Guyana with a long list of basic needs.
To put this income assignment in perspective, the average Guyanese pensioner receives about US$1,400 a year in old age pension. If we assume there are 59,000 pensioners in Guyana, then US$62 million would enable an additional payment of US$1,050 per pensioner. The pensioners during their working years contributed to building Guyana’s infrastructure by paying taxes that enabled the building of our roads and bridges, paying for the airports and other landing ports, etc. How do we explain to pensioners that the oil companies, who will make billions in US profits off oil, are allowed to use our airports, roads, wharves and other infrastructure and services for free? Pensioners who worked most of their lives to pay for Guyanese infrastructure should question this unfairness.
Guyana cannot afford to forgo US$62 million in taxes; this money is needed to cope with the added demand placed on its old social and economic infrastructures due to the addition of the oil industry to its economy.
If the oil companies’ intention is to use the tax receipt from the Government of Guyana for a foreign tax credit, the US tax laws were never intended to allow the oil corporations to double-dip. This is a very serious matter under the US tax code, section 482.
Yours faithfully
Dr. Ganga Ramdas,
OGGN,
Retired Professor of
Business & Economics
at Lincoln University,
USA
The oil deal was designed to cater for the nature of the industry
June 3 ,2021
Dear Editor,
Please permit me to respond to retired professor, Dr. Ganga Ramdas, who wrote a letter in the print media on June 2, 2021 that appeared in the Kaieteur News with the caption… “How much taxes should Exxon and the oil companies have paid?”
The retired professor’s analysis is unfortunately inherently weak with very poor analogies to substantiate the learned professor’s argument. Dr. Ramdas failed to acknowledge that the fiscal regime which Exxon enjoys, inter alia, the Production Sharing Agreement (PSA) – though outside of the normal (national) fiscal regime which other companies are subjected to – is so designed to cater for the nature of the industry. That is to say, it is a new industry for Guyana, one that is highly capital intensive, the scale of investment activities is many times larger than Guyana’s GDP: wherein, for example, Exxon’s projections for Guyana is US$60 billion over a period of 30 years – which is equivalent to 8.5 times 2020 GDP (inclusive of the oil economy) and 15 times Guyana’s non-oil GDP using 2018 real GDP.
Dr. Ramdas argued that should Exxon pay taxes on its share of profit oil – by applying the tax rate to companies involved in commercial activities of 25%, “the oil companies should have paid approximately $62 million in taxes” contending that this is a revenue loss for Guyana. To put his argument into perspective, he implicitly argued that the taxes paid by pensioners and other companies subject to the normal income taxes applied to commercial and non-commercial firms in Guyana, contributes towards building the infrastructure that exist such as airports, roads, hospitals etc., which everyone utilizes and that effectively, the oil companies are using our airports and roads etc., for free by virtue of being exempted from paying corporate taxes. This is a very misleading and non-contextual reasoning by Dr. Ramdas, to say the least. To support this view, let’s understand the PSA and Guyana’s true potential profit share during cost recovery and post cost recovery.
Having said that, let’s look at some analysis using Liza Phase 1 project alone. Liza phase 1 has a production capacity of 120,000 barrels per day, total investment cost of US$4.3 billion, and comprise of 450 MMbl.
Dr. Ramdas does not seem to comprehend that because of the 75% cost recovery threshold, the recovery period for these investments will be very short. Liza phase 1 in the above illustration for example, using an average price per barrel of US$45 at an annual production capacity of 43.8 million barrels of crude, the investment cost of US$4.3 billion will be recovered within 3 years using the payback method. With the Net Present Value (NPV) investment appraisal method and a discount rate of 10%, the investment can be recovered within 4 years. As such, from the Liza 1 alone Guyana can earn over US$2 billion in the first five years and up to US$6 billion within ten years – taking the post recovery period into the equation. In other words, Guyana’s projected earnings from the Liza 1 development alone over the first decade is equivalent to 120% of current GDP; 3.5 times current level of total public debt and 5 times Government’s revenue using 2019 figures.
The highest cost is usually the development cost and, therefore, when the development cost is recovered, the operating cost is typically minimal since the infrastructure to extract the crude is already in place. To substantiate this view with reasonable certainty, a perusal of Exxon’s 2018 annual report confirmed that total operating cost was just about 27% of total revenue. Hence, this means that in the post recovery period profit share will be greater assuming for example, that operating cost will be 30% of total revenue, then effectively there will be 70% of revenue for profit share of which 50% is Guyana’s share. Consequently, Guyana’s profit share can be as much as 35% post recovery period + 2% royalty resulting in a total take of 37%; up from 14.5% during the recovery period in the first three to four years for Liza Phase 1 development alone; and greater than the 25% corporate tax applicable to companies involved in commercial activities. Then there is Liza phase 2 and many other FPSOs and development fields that will be operationalized over the decade.
Dr. Ramdas is also incorrect to assert that the oil companies are using the existing infrastructure for free given the aforementioned analysis. Further to note, the revenues earned from Guyana’s oil resources will in fact be utilized to propel Guyana’s transformational development and in particular – infrastructure and education as alluded to by the President. It should be noted as well that the Administration of the day is keen on implementing a strong local content policy which will ensure that Guyanese firms, professionals and the people at large – are given maximum benefit in the sector as well as the opportunity to participate in the emerging sectors. When more local firms participate in the sector, capitalizing on the emerging opportunities as well as in the value chain and other sectors, the firms perform better – enjoy increase profits and in turn pay more taxes – to put this simply. It is against these backgrounds, that the analysis put forward by Dr. Ramdas is far from being credibly sound and robust – ignoring the ‘country and global contexts’ altogether.
Sincerely,
J.C Bhagwandin
Financial & Economic Analyst
Adjunct Professor, Texila American University,
By not paying taxes the Oil Companies are getting a free ride
Dear Editor,
Distinguished Retired Economics and Business Professor Dr. Ganga Ramdas’ of the Oil and Gas Governance Network (OGGN), asserts that Guyana is losing an approximate US$62 million annually due to Exxon not paying taxes, as other companies do. Many newspapers and commentators such as Guyana icon Christopher Ram have lamented this sad state of affairs of Exxon not actually paying taxes but receiving a Tax Certificate from Government that they have paid taxes. In response, Mr. JC Bhagwandin, a Financial & Economic Analyst and Adjunct Instructor at Texila American University, says, “The oil deal was designed to cater for the nature of the industry.” This argument evades the issue of oil companies not paying taxes. Also, this is an unusual oil deal not common in the oil industry anywhere in the world. This deal came about because we have dullards in successive governments in Guyana.
Mr. Bhagwandin does not disagree with Dr. Ramdas’s assertion on the tax loss to Guyana. Rather than providing a sensible refutation of what amount is being lost, the financial analyst appears to have chosen to be an apologist and apparent spokesman for the Oil Companies and Guyana Government unwilling to renegotiate the oil contract. Notice that Exxon never says anything in its defence, that it is always the Government or folks aligned with the Government who make excuses and act as PR spokesmen for the oil companies. By not paying taxes, the Oil Companies are getting a free ride on the backs of other businesses and taxpayers who have to pay taxes as they go. Business taxes pay for much of our infrastructure and government services which are used by the Oil Companies. There is no doubt about that. Mr. Bhagwandin’s angle is similar to the Government’s argument that Guyana will make lots of money in the long run if we will “drill baby drill” and to hell with environmental concerns. What’s a little flaring, don’t bother that the contract is the worst in the world, don’t try to renegotiate, we got it good! That’s what they say.
Tell that to the poor people in our poor country now reeling from devastating floods. Our current flood disasters make the case that we need the oil money to build massive sea defence and infrastructure to avoid being drowned by unusual flooding as we are facing now. Most of our streets in Guyana need paving. The mud roads have been washed away. Every type of infrastructure need modernization and we need expansion of services – water, electricity, Internet services, hospitals, roads, ferries, schools, canals need to be dug and kept maintained on a sustainable basis, etc. Everything needs fixing and modernization, and we need lots of money to do it. We cannot continue to be a rich nation of poor people as President Ali said. Mr. Bhgawandin would do a service to the poor, huddled masses yearning to be rich if he is on the side of the working poor, rather than being a point man for the oil interests and a Government unwilling to renegotiate the oil contact as was promised during the election. That’s a “promise made, promise not kept.” The potential to make money in the future, providing there is no oil spill or other oil related disaster, does not negate Dr. Ramdas’ article that Oil Companies are not paying taxes on the billions of US dollars that they make in Guyana due to an unfair contract. We must change this! We must renegotiate now!
Sincerely,
Dr. Jerry Jailall
