An Examination of Oil and Gas Taxation and Revenue Management in Ghana

Table of Contents

Acknowledgement v
Summary vii
List of Tables xvii
List of Figures xix
List of Acronyms xxi
1 INTRODUCTION 1
1.1.Background………………………………………………………………………………. 1
1.2. Statement the Problem………………………………………………………….. 5
1.3. Research Objectives and Questions…………………………………………… 8
1.4. Methodology…………………………………………………………………………….. 8
1.5. Structure of the Thesis………………………………………………………………. 9
2 LITER ATURE REVIEW 11
2.1. Introduction……………………………………………………………………………. 11
2.2. Taxation and Its Classification…………………………………………………. 11
2.2.1. What is Taxation and what is a Tax?…………………………………. 12
2.2.2. Classification of Taxes………………………………………………………. 14
2.2.2.1. Classification of Taxes according to Tax Base………….. 14

2.2.2.2. Classification of Taxes by Nominal Source
of Taxation……………………………………………………………… 15
2.2.2.3. Classification of Taxes according to Incidence………… 16
2.3. Attributes of a Good Tax System……………………………………………… 17
2.3.1. Equity ………………………………………………………………………………. 17
2.3.2. Certainty………………………………………………………………………….. 18
2.3.3. Convenience…………………………………………………………………….. 18
2.3.4. Economy………………………………………………………………………….. 19
2.4. Tax Policy ……………………………………………………………………………….. 19
2.5. Challenges of Tax Policy Makers……………………………………………… 23
2.5.1. Dealing with Cross-cutting Structural Bottlenecks…………… 23
2.5.2. Narrow Tax Base………………………………………………………………. 23
2.5.3. Unbalanced Tax Policy Mix ……………………………………………… 24
2.6. Designing Tax Policy for the Oil and Gas Sector……………………… 24
2.6.1. Royalties…………………………………………………………………………… 34
2.6.2. Resource Rent Tax ……………………………………………………………. 35
2.6.3. Tax/Royalty Regimes………………………………………………………… 38
2.6.4. Income Tax ………………………………………………………………………. 39
2.6.5. Production Sharing …………………………………………………………. 40
2.6.6. Choice between Tax/Royalty and Production-Sharing
Regimes……………………………………………………………………………. 42
2.6.7. Risk Service Contracts……………………………………………………… 42
2.6.8. State Equity………………………………………………………………………. 42
2.6.9. Additional Payments and Measures………………………………….. 44
2.6.10. Indirect Taxes…………………………………………………………………. 44
2.6.10.1. Value Added Tax (VAT)………………………………………… 44
2.6.10.2. Export Duty …………………………………………………………. 46
2.7. Fiscal Regimes in the Oil and Gas Sector ……………………………….. 47
2.7.1. Concessionary Systems…………………………………………………….. 48
2.7.2. Contractual Regimes………………………………………………………… 48
2.8. Assignment of Oil Revenue and Fiscal Federalism ………………….. 49

2.8.1. Country Experiences and Issues……………………………………….. 52
2.8.1.1. Unitary States…………………………………………………………. 52
2.8.1.2. Federal Countries…………………………………………………… 53
2.9. Oil and Gas Revenue Management………………………………………….. 54
2.9.1. The Resource Curse Hypothesis …………………………………… 55
2.9.2. Genesis of the Resource Curse ………………………………………… 57
2.9.3. The Resource Curse and the Transmission Mechanisms…… 57
2.9.4. How the Resource Curse Might Be Avoided –The Theory and
the Practise ……………………………………………………………………… 61
2.9.5. The Macroeconomic Approach ……………………………………….. 61
2.9.6. Revenue Sterilization ………………………………………………………. 61
2.9.7. Economic Diversification ………………………………………………… 62
2.9.8. Stabilization and Oil Funds ……………………………………………… 62
2.9.9. Investment Policy ……………………………………………………………. 64
2.9.10. “Leave It in the Ground or Develop It Slowly” ……………….. 64
2.9.11. Political Reform/Transparency Approach ……………………… 65
2.10. National Oil Companies: Evolution, Issues, Outlook …………….. 67
2.10.1. Commercial Efficiency …………………………………………………… 68
2.10.2. Non-Commercial Objectives………………………………………….. 69
2.10.3. Governance ……………………………………………………………………. 69
2.10.4. Cash Requirements………………………………………………………… 70
2.10.5. Conflict of Interest …………………………………………………………. 70
2.11. Conclusions ………………………………………………………………………….. 70
3 TAX POLICY AND TAX ADMINISTRATION IN THE OIL
AND GAS SECTOR IN GHANA 75
3.1. Introduction……………………………………………………………………………. 75
3.2. Taxation in Ghana…………………………………………………………………… 75
3.3. Attributes of Ghana’s Tax System …………………………………………….. 78
3.3.1. Equity ………………………………………………………………………………. 78
3.3.2. Certainty………………………………………………………………………….. 78

3.3.3. Convenience…………………………………………………………………….. 79
3.3.4. Economy………………………………………………………………………….. 80
3.3.5. Simplicity…………………………………………………………………………. 81
3.4. Ghana’s Tax Policy …………………………………………………………………. 81
3.4.1. Stages in Tax Policy Making in Ghana ……………………………… 83
3.4.2. General Challenges for Tax Policy Makers in Ghana ………… 84
3.4.2.1. Dealing with the Large Informal Sector………………….. 84
3.4.2.2. Resolving the Narrow Tax Base ………………………………. 85
3.4.2.3. Averting Overreliance on Taxing the Oil and
Gas Sector………………………………………………………………. 85
3.5. Legal Framework for the Taxation of Oil and Gas……………………. 86
3.6. Analysis of the Legal Framework in the Oil and Gas Sector…….. 88
3.6.1. Ascertainment of Chargeable Income ………………………………. 88
3.6.2. Transfer Pricing in the Oil and Gas Sector ……………………….. 90
3.6.3. Benchmark for Determining Transfer Pricing under
Ghanaian Transfer Pricing Rules………………………………………. 91
3.6.4. Alternative to Arm’s Length Principle ………………………………. 94
3.6.5. Determination of Services………………………………………………… 95
3.6.6. Corporate Tax and Withholding Tax ……………………………….. 98
3.6.7. Taxation of Proceeds from the Assignment of an Interest .100
3.7. Stabilization Provisions in International
Petroleum Agreements ………………………………………………………….103
3.7.1. Efficacy of Stabilization Clauses in Guaranteeing Stability of
International Petroleum Agreements in Ghana ……………….108
3.7.2. Internationalisation of Petroleum Laws ………………………….109
3.7.3. International Arbitration…………………………………………………109
3.7.4. Force Majeure …………………………………………………………………110
3.8. Governance Structure of Tax Policy and Tax Administration …111
3.8.1. The Petroleum Units in the Large Taxpayers Office (LTO)/
Domestic Taxpayers Revenue Division and Customs
Division of Ghana Revenue Authority …………………………….112
contents . xiii
3.8.2. The Petroleum Unit of the Customs Division of the Ghana
Revenue Authority…………………………………………………………..115
3.8.3. Energy, Oil & Gas Unit of the Real Sector Division of the
Ministry of Finance…………………………………………………………115
3.8.4. The Tax Policy Unit in the Revenue Policy Division of the
Ministry of Finance…………………………………………………………118
3.8.5. Reporting Stream and Administration of Petroleum Revenue
in Ghana …………………………………………………………………………119
3.9. Ghana’s Tax Administration in the Oil and Gas Sector……………121
3.9.1. Administrative Functions and Procedures in Oil and
Gas Tax Administration…………………………………………………..121
3.9.1.1. Self-Assessment …………………………………………………….121
3.9.1.2. Routine Tax Administration Functions in
respect of the Oil and Gas Sector…………………………..122
3.10. Challenges of Oil and Gas Tax Administration in Ghana ……..123
3.10.1. Management and Control of Tax Assessments and Payments
of Royalties and Taxes……………………………………………………123
3.10.2. Information Technology and Integration of Management
Information Systems……………………………………………………..123
3.10.3. Management of Risk of Late Tax Payment……………………..124
3.10.4. Capacity Needs of Staff of the Units/Division of the Ministry
of Finance and the Ghana Revenue Authority ……………….124
3.11. Conclusions………………………………………………………………………….125
4 THE FISCAL REGIME AND REVENUE MANAGEMENT OF
OIL AND GAS IN GHANA 127
4.1. Introduction…………………………………………………………………………..127
4.2. The Fiscal Regime of Oil and Gas in Ghana……………………………127
4.2.1. Fiscal Provisions in the Legislation on Oil and Gas………….128
4.2.1.1. Deductions Allowed in Ascertaining Chargeable
Income (Petroleum Income Tax Act, 1987)……………128

4.2.1.2. Deductions not allowed in Ascertaining
Chargeable Income………………………………………………..132
4.2.1.3. Capital Allowance Regime for the
Petroleum Sector…………………………………………………..134
4.2.1.4. Fiscal Provisions in the Internal Revenue Act, 2000
(Act 592)……………………………………………………………….134
4.2.1.5. Fiscal Provisions in the Income Tax Act, 2015
(Act 896)……………………………………………………………….135
4.2.1.6. Fiscal Provisions in the Petroleum (Exploration and
Production) Act, 2016 (Act 919)……………………………136
4.3. Fiscal Provisions In Selected Petroleum Agreements ……………..137
4.3.1. Corporate Tax, Tax upon Assignment of Interest and
Rental Payments on Petroleum Operations……………………..138
4.3.2. Withholding Tax upon Petroleum Operations…………………140
4.3.3. Indirect Taxes upon Petroleum Operations……………………..141
4.3.4. Taxation of Employees in Petroleum Operations……………..142
4.3.5. Contributions to a Decommissioning Fund…………………….143
4.4. Revenue from Oil and Gas in Ghana………………………………………143
4.4.1. Royalty on Gross Production of Crude Oil………………………143
4.4.2. Carried Interest or State Initial Interest……………………………144
4.4.3. State Additional Interest………………………………………………….144
4.4.4. Petroleum Income Tax…………………………………………………….144
4.4.5. Additional Oil Entitlement ……………………………………………..144
4.4.6. Surface Rental …………………………………………………………………145
4.4.7. Other Rentals………………………………………………………………….145
4.5. Government of Ghana’s Share of Oil and Gas Revenues …………145
4.6. Assessment of the Management of Revenue Sources in Ghana.148
4.6.1. Managing the Oil and Gas Revenue in Ghana …………………148
4.6.2. Challenges of Oil Revenue Management …………………………151
4.7. Ghana’s Legislation Regarding Petroleum
Revenue Management ……………………………………………………………152
4.7.1. Governance and Institutional Framework of the Petroleum

Revenue Management Act, 2011 …………………………………..152
4.7.2. Petroleum Holding Fund…………………………………………………156
4.8. A Synthesis of the Piac and Other Reports:
Petroleum Revenues ………………………………………………………………158
4.8.1. Public Interest and Accountability Committee Reports …..158
4.8.2. Other Reports …………………………………………………………………173
4.9. Conclusions……………………………………………………………………………175
5 COMPARATIVE FISCAL REGIMES AND REVENUE
MANAGEMENT OF SELECTED OIL AND GAS PRODUCING
COUNTRIES 177
5.1. Introduction…………………………………………………………………………..177
5.2. The United Kingdom ……………………………………………………………..178
5.2.1. Fiscal Regime ………………………………………………………………….179
5.2.2. Revenue Management……………………………………………………..184
5.3. Norway ………………………………………………………………………………….184
5.3.1. Fiscal Regime ………………………………………………………………….184
5.3.2. Revenue Management……………………………………………………..186
5.3.3. Assessment of Norway’s Petroleum Fiscal Regime ………….187
5.4. Canada…………………………………………………………………………………..189
5.4.1. Fiscal Regime ………………………………………………………………….189
5.4.2. Revenue Management……………………………………………………..192
5.4.3. Assessment of Canada’s Petroleum Fiscal Regime ……………193
5.5. Nigeria …………………………………………………………………………………..194
5.5.1. Fiscal Regime ………………………………………………………………….194
5.5.2. Revenue Management……………………………………………………..199
5.5.3. Assessment of Nigeria’s Petroleum Fiscal Regime ……………202
5.6. Synthesis of Key Fiscal Regimes of the Countries Examined…..203
5.6.1. Evolution and Development Policies ………………………………208

5.6.2. Institutional Framework………………………………………………….208
5.6.3. Legal and Regulatory Framework ……………………………………209
5.6.4. Fiscal Instruments ………………………………………………………….210
5.6.5. Revenue Management……………………………………………………..211
5.7. Conclusion …………………………………………………………………………….212
6 CONCLUSIONS AND RECOMMENDATIONS 213
6.1. Introduction…………………………………………………………………………..213
6.2. Conclusions……………………………………………………………………………213
6.3. Problems Identified………………………………………………………………..215
6.3.1. The Tax Legislation on Oil and Gas in Ghana ………………….216
6.3.2. The Difference in Oil and Gas Taxation Practices between
Ghana and Selected Countries…………………………………………216
6.3.3. The Adequacy or Otherwise of Provisions in the Petroleum
Revenue Management Act for Ghana’s Oil Revenue
Management……………………………………………………………………217
6.3.4. The Difference in Ghana’s Fiscal Regime on Oil and Gas
Compared to that of Selected Oil and Gas Producing
Countries………………………………………………………………………..219
6.4. Recommendations …………………………………………………………………220
6.4.1. Oil Revenue Management……………………………………………….221
6.4.2. Protection of Investments in the Oil and Gas Sector………..221
6.4.3. Reforming and Revising the Tax Legislation in the Oil and
Gas Sector……………………………………………………………………….222
6.4.4. Adhering to the Provisions of the Petroleum Revenue
Management Act……………………………………………………………..224
6.4.5. Securing Expeditious Reconciliation of Records……………..225
6.4.6. Improving Information and Communication Technology to
Monitor Oil and Gas Revenues………………………………………..225
6.4.7. Recommendations for Future Research …………………………..226

LIST OF TABLES

Table 2.1 Selected examples of resource rent taxes ……………………35
Table 2.2 Details of resource rent taxes in selected countries…………………… 38
Table 2.3 State participation in petroleum-rich countries ……………………43
Table 4.1 Surface rental charges for an oil block in Ghana ……………………145
Table 4.2 Projections of oil output, gross revenue and government revenues from Jubilee Oilfields for
Ghana ……………………146
Table 4.3 Analysis of petroleum receipts, 2016 – 2017 ……………………147
Table 4.4 Allocation/Disbursement of petroleum receipts, January – September, 2014……………………159
Table 4.5 7 Year Slump in the agricultural sector’s contribution
to Ghana’s GDP…………………..160
Table 4.6 Disbursements of excess amount in Ghana
Stabilization Fund…………………..161
Table 4.7 Total projected petroleum receipts for 2015 in USD …………………..161
Table 4.8 Allocation/Disbursement of petroleum receipts projected for 2015…………………..162
Table 4.9 Allocation/Disbursement of petroleum receipts for 2013………………….164
Table 4.10 Application of the ABFA by the Government of Ghana: 2011-2013…………………165
Table 4.11 Distribution of 2016 petroleum receipts………………..166
Table 4.12 Disbursement of ABFA in 2016………………..166
Table 4.13 Medium term petroleum receipts………………..167
Table 4.14 Distribution of January – September 2018 petroleum ………………..168
Table 4.15 receipts …………………………………169
Table 5.1 2018 ABFA utilization by priority area
Key regimes of the selected countries………………..204