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

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The tax and revenue management policies and regulations of a number of oil-rich countries were briefly reviewed and compared to Ghana’s oil and gas taxation and revenue management legislation. A key finding is the noncompliance of the Government of Ghana with the provisions in the Petroleum Revenue Management Act (PRMA), which potentially makes the occurrence of the “oil curse” in Ghana more likely. The research recommends that the Government of Ghana put in place adequate measures, underpinned by appropriate legislation, to enable the retention and investment of its share of oil revenues, and also deal with oil revenue volatility. The Government of Ghana should design a long-term fiscal strategy, based upon high quality, long-term economic and revenue projections, which includes a sensitivity analysis. The PRMA requires amendment in the areas of accounting for the oil and gas revenues, setting up safeguards for the use of the revenues accrued from the oil and gas sector, as well as adhering strictly to the priority areas determined for the allocation of the petroleum revenues. This will allow for robust provisions and safety nets to be enshrined in oil and gas taxation and revenue management laws, to safeguard the revenue inflows for development.

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Author

ISBN

Publication Date

September 19, 2023
No. of Pages

268
Size

Binding

Paperback

About the author

Abdallah Ali-Nakyea, PH.D is a Senior Lecturer at the University of Ghana School of Law, University of Ghana, Legon, Accra, Ghana.
His research interests are in Law of Taxation, Fiscal Dimensions of Oil and Gas and Administrative Law.

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 of the Problem………………………………………………………….. 5

1.3. Research Objectives and Questions …………………………………………… 8

1.4.  Methodology …………………………………………………………………………… 8

1.5. Structure of the Thesis ……………………………………………………………… 9

2. LITERATURE 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 Sterilisation ………………………………………………………. 61
  • 2.9.7.  Economic Diversification ………………………………………………… 62
  • 2.9.8.  Stabilisation 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. Stabilisation Provisions in International
Petroleum Agreements …………………………………………………………. 103

  • 3.7.1.  Efficacy of Stabilisation 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
  • 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,             159

                  January – September, 2014

Table 4.5   7 Year Slump in the agricultural sector’s contribution    160

                   to Ghana’s GDP

Table 4.6   Disbursements of excess amount in Ghana                     161

                   Stabilisation Fund

Table 4.7   Total projected petroleum receipts for 2015 in USD        161

Table 4.8   Allocation/Disbursement of petroleum receipts               162

                   projected for 2015

Table 4.9   Allocation/Disbursement of petroleum receipts for         164

                    2013

Table 4.10  Application of the ABFA by the Government of               165

                    Ghana: 2011-2013

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