Ring-Fence Petroleum Production Areas

The 2010/2011report on the Aggregation and Reconciliation of Oil and Gas sector payments and receipts by the Ghana Extractive Industry Transparency Initiative (GHEITI) has underscored the need for government to introduce ring-fencing legislation in the petroleum industry to ensure early corporate tax receipts.

The report says, currently, the petroleum industries apply ring-fencing to contracts -- which it argues give contractors the luxury to set off expenses that are exclusive to a production area against income from another production area. This, according to GHEITI, may delay the receipts of corporate tax revenues to government.

Ring-fencing refers to the limitation on consolidation of income and deductions from tax purposes by the same taxpayer for different projects or activities. Ring-fencing legislation has been passed under the Internal Revenue (Amendment) Act, 2012, Act 839, to prohibit the deduction of expenses exclusively incurred in a mining area against revenue derived from another mining area belonging to the same taxpayer or company.

GHEITI has therefore recommended that legislation similar to the ring-fencing provisions in the mining sector should be introduced in the petroleum industry. “Limitation to production areas should be considered as many fields commence production to ensure early corporate tax receipts,” it said.

This, it however noted, should be viewed against the need to encourage exploration companies to make investment to obtain more geological data from greenfields.

The report further uncovered some discrepancies in the allocation of petroleum funds to the Annual Budget Funding Amount (ABFA), as well as the Ghana Stabilisation and Heritage Funds, and called for disbursements of funds in compliance with provisions of the Petroleum Revenue Management Act, 2011 (Act 815).

“The projected ABFA was GH¢646,412,601 whereas the actual realised amount as at the end of December 2011 stood at GH¢250,432,600 -- representing 71.4% of the net revenue of GH¢350,796,387.”

“The allocation of GH¢250,432,600 to the ABFA as at 31st December 2011 represented 71.4% of net revenue, which is slightly higher than the stipulated 70% in the Petroleum Revenue Management Act (PRMA), Act 815. The Act requires that allocation to the Heritage Fund shall not be less than 30% of the excess revenues over the Annual Budget Funding Amount, but 18.3% was allocated to the Heritage Fund and 81.7% to the Stabilisation Fund,” it said.

It was also revealed that there is no provision in the Petroleum Income Tax Law (PITL) that relates to excessive interest charges covering thin capitalisation,which states that interest expense is generally deductible in determining the chargeable income for corporate tax purposes. The findings explained that the risk taxpayers may use unlimited interest payments to strip profits, resulting in lower corporate tax payments is inevitable.

Section 41 of the PITL, 1987 provides that without the express exemption of a contractor from taxation, the general law or provisions thereof relating to taxation may apply. This provision according to the GRA ensures that provisions on limitations in interest deductions in Act592 (2000), the Internal Revenue Act, is applicable in the petroleum sector. It therefore recommended that relevant provisions in the PITL and the Internal Revenue Act be harmonised to avert any imminent tax evasion.