The petroleum sector’s complexity

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…from the lenses of a tax officer

In Ghana, the petroleum sector’s contribution to GDP growth has been enormous since the discovery of oil in large quantities in 2007. Data released by the Finance Ministry show that in 2019 GH¢13.45billion was added to the GDP by that sector alone.

The hybrid system has made it attractive for entities to invest, and gains made over the years have been impressive for both government and the private sector. As much as there are enormous potentials, caution is needed before policies are implemented due to the volatility of prices on the international market.



The quantity of crude oil and/or natural gas drilled and exported from the fields is heavily monitored by the Petroleum Commission and GNPC, as well as other state agencies. In this regard, the gross revenue derived by each offshore company is reported by the finance minister as stipulated in the Petroleum Revenue Management Act, 2011 (Act 815). Since these figures are also audited by PIAC, there is little tax dispute on the gross production revenue declared by these companies operating in the sector during tax audits.

Aside from the gross production revenue, Ghana Revenue Authority (GRA) also required them to add to their receipt of, if any; compensation derived in respect of loss or destruction of petroleum from the petroleum agreement area; an amount derived in respect of the sale of information pertaining to the operations or petroleum reserves; a gain from the assignment or disposal of an interest in the petroleum right; excess amount in decommissioning fund; an amount received by a sole risk party after production commenced as reimbursement; and any other amount incidental to the operation during the year of assessment.

The most contentious parts in auditing the petroleum sector are the operating expenses, administrative expenses, carry-over losses, limit on deduction of a financial costs, amortisation of debts, disposal of petroleum rights, depreciation/capital allowance computation, withholding taxes and transfer pricing.

As the general rule of the Income Tax Act, 2015 (Act 896) stipulates, all expenses must be those which are wholly, exclusively and necessarily incurred in production of the income (i.e., in asset acquisition or improvement and acquiring services or facilities).

  1. Operating expenses

These constitute the cost of annual rental charges and royalties; contribution to and other expenses incurred in respect of a decommissioning fund; expenses incurred in the course of closure of the petroleum operation where funds in the relevant decommissioning fund are not yet available or are inadequate; and any other amount incurred directly in the course of the petroleum operation.

  1. Capital allowance/depreciation

They include cost of capital expenditure incurred during production, cost of petroleum right, the balance in the pool of exploration and development expenditure at time production commences, research and development, bonus payment in respect of granting petroleum rights. The excess of repairs and maintenance (after the 5 percent cap is exceeded) is also added to the pool. The capital allowance with respect to each year shall be 20 percent using the straight-line method.

  1. Administrative expenses

The most critical part of this expenditure is staff cost. The staff must be segregated in terms of (non-)resident, contract, casual, permanent (junior/senior). All payments made in respect to these must be line with Act 896 and L.I. 2244. Any other expenses must satisfy the wholly exclusive and necessary concept enshrined in the Act.

  1. Limit on deduction of financial costs

A financial cost shall be allowed deduction to the extent there is a financial gain based on the formula: Financial gain + 50 percent of chargeable income calculated without including either financial gain or financial loss. The financial loss shall be limited to the amount from the formula. The excess amount disallowed shall be carried forward to the next period, as stated in section 16 of Act 896.

  1. Foreign currency and financial instruments

Determination of the time at which an amount is to be included or deducted, the quantum of the amount and character of the amount shall be in accordance with the generally accepted accounting principles. Foreign currency exchange loss other than those of capital nature incurred in the production of income shall be deducted by the person. An unrealised foreign exchange loss shall not be allowed as a deduction. A foreign exchange loss arising from a transaction between two resident persons shall not be allowed as deduction.

  1. Carry-over losses

An unrelieved loss from the separate petroleum operation during the year shall carry forward the loss to five years subject to the following: it shall be deducted in the order in which the loss is incurred, and be deducted only in calculating future income from that operation and not income of other activity.

  1. Amortisation of debts

All interest payments in respect of debt obligation are allowable deductions when ascertaining the income of a person from a separate petroleum operation. However, the thin capitalisation principle will be tested to ensure debt to equity does not exceed the three-to-one ratio.

  1. Disposal of petroleum rights

Where the underlying ownership of an entity that holds a petroleum right changes by 5 percent or more, the entity is considered to have disposed of a proportionate interest in its petroleum right and immediately re-acquired that interest by incurring an expenditure that is equal to the amount received for the right disposed of and  received for the disposal consideration equal to the amount received or receivable as consideration or the market value of the proportion of the right treated as disposed of (whichever is higher).

An entity that changes ownership in the manner above shall not deduct financial costs carried forward that were incurred by the entity before the change, and carry-over loss that was incurred by the entity before the change.

  1. Withholding taxes

Dividends paid to shareholders by a company that conducts or has conducted a petroleum operation or a partner in a partnership that conducts or has conducted a petroleum operation are subjected a withholding tax at a rate of 8 percent. No exemption is granted from payment of dividends to resident companies paying dividends to another resident company that controls at least 25 percent of the underlying ownership.

Amounts due to contractors or subcontractors shall be subject to a withholding tax at the appropriate rate specified in the Act. A tax withheld in the case of a non-resident person is a final tax.

  1. Transfer pricing

The crux of auditing a petroleum entity by GRA is the application of Arm’s length standard in all their transactions with associated entities. The arm’s length principle according to section 31 of Act 896 require persons who are in a controlled relationship to quantify, characterise, apportion and allocate amounts to be included in or deducted from income to reflect an arrangement that would have been made between independent persons. In this regard, the Commissioner-General has the power to re-characterise such transactions, including debt financing, as equity financing.

>>>the writer is a member of CITG. He has an Advanced Diploma in Transfer Pricing*, Certificate in Forensic & Investigative Accounting & Auditing, CISA trained and a staff of GRA

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