Oil & Gas Matters March 2013

Transcription

1 Oil & Gas Matters March 2013

2 2 PwC

3 Contents Foreword 4 Local content in Ghana Distant future or current reality 5 Sustainability and Corporate Reporting 7 IFRS First time adoption consideration for Oil and Gas entities 9 Transfer Pricing What this means for the Oil & Gas Industry 12 Value Added Tax Cash is King 14 Oil & Gas Matters 3

4 Foreword It is with great pleasure that we present you with the second edition of our publication, oil and gas matters. In this publication, we provide an overview of key issues affecting the oil and gas industry ranging from Local content in Ghana to Value Added Tax and its impact on cash flow. I hope that you find this general overview useful and informative. I do encourage you to respond to me or to my colleagues mentioned in the contacts page, with your comments and queries. darcy.white@gh.pwc.com For more than 100 years, PwC has served the petroleum industry all over the world. Our aim is to continue this service here in Ghana, at the highest standards. Darcy White Energy and Mining Leader, Ghana and Africa Energy and Mining Leader, Tax. 4 PwC

5 Dzidzedze Fiadjoe, Manager, Tax Services Local content in Ghana Distant future or current reality Local content policies have been at the forefront of political and economic discussions in many emerging economies in recent years including Ghana. In March 2012, the Minerals and Mining (General) Regulations,2012, L.I. 2173, which contain detailed local content provisions and requirements for the Ghanaian mining Sector, became effective. Soon afterwards, discussions around the proposed local content regulations for the petroleum sector were accelerated with draft legislation being submitted to parliament during September The ripple effect of these developments has continued with the promotion of local content in the power utilities and telecommunications sectors of Ghana, and with President John Mahama stating local content as one of the areas of focus in his manifesto, when he came to power after the sudden death of President John Ata Mills in July This article focuses on the draft Petroleum (Local content and Local Participation in Petroleum Activities) Regulations, 2012, (the Regulations) and we share our views on some key provisions as follows: Purpose of the Regulations The purpose of the Regulations is: To provide for the development of Ghana content in the Ghanaian petroleum industry; To provide for the Ghana Content Plans and a mechanism for coordination and monitoring of Ghanaian content. In essence, the regulations were designed to ensure the coordinated and extensive use of Ghanaian goods and services as a means of increasing the rate of Ghanaian participation in the petroleum industry in order to maximise its full benefits to Ghana. Key provisions Equity participation of indigenous Ghanaian companies The Regulations seek to encourage the participation of Ghanaian citizens in the petroleum industry and as a requirement, its provisions prescribe that a petroleum agreement or license holder should have at least 5% equity participation of an indigenous Ghanaian company in its ownership. It is interesting to note however that the Minister of Energy has the power to waive this requirement. In a similar manner, non-indigenous service companies to the key players in the industry (operators, licensees, subcontractors, and the Ghana National Petroleum Corporation [GNPC]) are required to have joint venture arrangements with indigenous Ghanaian companies that provide them with an equity participation of at least 10%. To further support the need for inflow of economic benefits to Ghanaians (and to guard against the mere use of Ghanaian companies as fronts), the Regulations give the Petroleum Commission (the Commission) the power to investigate participating companies to ensure that the Ghanaian company participation is genuine. Definition of an indigenous Ghanaian company An indigenous Ghanaian company is a company incorporated under the Companies Act of Ghana (i) Having at least 51% of its equity owned by a citizen or citizens of Ghana; and (ii) Where practical, Ghanaian citizens holding at least 80% of senior management positions and 100% of non-managerial and other positions. With Ghana being a country with quite substantial foreign investment, one can argue that a significant number of Ghanaian registered oil and gas companies may not satisfy the requirement of criteria (i) but may fulfil criteria (ii). An important question here may be: do we exclude such companies on the basis of equity even though their economic contribution to Ghana by way of employment, purchases and other factors are significant to the economy? Oil & Gas Matters 5

6 Ghanaian content planning The Regulations emphasise the need for players in the petroleum sector to have an approved Ghana content plan. The proposed rules set the Local Content Committee (to be established under the provisions of the Petroleum Commission Act, 2012) as the body to oversee matters under these regulations. This Committee is charged with a number of responsibilities including reviewing Ghana content plans lodged with the Commission for approval. Regarding its coverage, the Ghana content plan is expected to cover areas of employment and training, research and development, technology transfer, local insurance services, local legal services and local financial services. The Regulations provide details of the minimum Ghana content required in goods and services in the petroleum industry, and this serves as a guide for the development of Ghana content plans. The Common Qualification System which will be established by the Commission and administered by the Committee, could be a source of information regarding availability of Ghana content. The Regulations insist on the operation of the qualification system which shall serve as an industry data bank of available capabilities and the sole system for the registration and pre-qualification of Ghanaian content in the petroleum industry. Ghanaian content performance reporting Industry players are required to report, in a prescribed format, the Annual Ghanaian Content Performance in all areas of their projects. The Commission is required to assess and review such reports to ensure compliance. The regulations give right to the Commission to visit companies and corroborate any information provided. Besides the annual reports, there are provisions that require petroleum industry players to notify the Commission of any sole-sourced contracts, or contracts that would be sourced by a competitive bid, estimated to be in excess of US$100,000. The aim may be to make information available to the Commission to determine whether such contracts could alternatively be sourced from Ghana. To emphasise the reporting requirements, the Regulations insist that licensees, contractors and subcontractors ensure that their partners and other allied entities are also contractually bound to report themselves to the Commission. One approach to ensuring this could be to include this as part of standard contracting terms. Ghanaian content monitoring The Commission is charged with the responsibility of issuing guidelines and procedures for effective implementation of the Regulations and also monitoring compliance. The Regulations give power to the Commission to apply penalties for non-compliance where necessary. As a start, the Regulations prescribe a penalty amounting to a fine of 50,000 penalty units (GH 600,000) and/or imprisonment for 5 years. The Regulations further give the Commission the power to impose and gazette additional pecuniary penalties for contravening the regulations. Looking ahead Every government should ensure that its citizens obtain maximum benefit from its resources and this is the intent behind the formulation of the Regulations. We do however foresee some challenges with its implementation and highlight the following areas and recommendations to be noted: Local content targets may be difficult to achieve due to lack of qualified local staff (Ghana is relatively new to the oil and gas industry). Companies may have to embark on rigorous recruitment drives of Ghanaians both in Ghana and worldwide in order to meet the prescribed quotas. Another alternative may be for companies to institute intensive in-house training programs to grow their own talent ; Where local ownership is a requirement, companies should be involved in the partner selection process to ensure appropriate candidates are short-listed and selected. Effective due diligence exercises should be conducted in order to select good quality candidates; Companies may have to consider committing significant amounts of time and resources to monitoring their contribution to the country s local content objectives either directly or indirectly. Economic benefit studies for example may show the company s utilisation of local services in the overall value chain over and above the number of locals employed. Key to this approach is the measurement and recording of the company s contributions as this information can flow into the Ghana content plans and the Annual Ghanaian Content Performance report required by the Regulations. 6 PwC

7 Ruka O Sanusi Senior Manager, Advisory ruka.o.sanusi@gh.pwc.com Sustainability and Corporate Reporting Introduction and Background World issues have now become business issues, spreading calls for a new way of operating in the global economy. Companies are recognising that more stakeholders in more places are looking for businesses to bring value to their societies. This is being brought into sharper focus by the growing influence of emerging economies. Increasingly, business leaders are convinced of the need to integrate environmental, social and corporate governance issues into their core business, as the imperative to act has moved from a moral to a business case. In the weeks running up to the recently held UN Rio+20 Earth Summit, 141 CEOs from 29 countries responded to PwC s call for business leaders to have their say on the issues being discussed by world leaders what do they think are the current and future issues and how much progress do they think will be achieved at the conference. Survey results informed that 93% of CEOs believe that sustainability issues will be critical to the future success of their business and all but a few are integrating these issues into their strategy and operations. Half of the CEOs polled in the survey say they are making changes to improve corporate reputations and rebuild public trust. As sustainability becomes the corporate agenda, it is being integrated into corporate level strategic planning, supply chain management, and corporate due diligence. A sound sustainability strategy protects a company s reputation, drives innovation, demonstrates compliance and leads to market differentiation all ingredients for long-term growth and profitability. The Business of Sustainability One of the most notable aspects of the UN Rio+20 Earth Summit was the level of private sector involvement and commitment at the Summit. There were more business representatives than delegates from any other stakeholder group, with the private sector sending very senior and reputable representatives to the summit and stepping up to the challenge. Increasingly, the business sector is driving the global sustainability policy agenda. Rio+20 outcomes signal increased global focus on integrating sustainability into the core of global economic policy making including through trade, taxation, reporting and other policy areas. Assurance and Reporting: the Environmental P&L One of the prominent corporations at the UN Rio+20 Summit was Puma, the sports-goods manufacturer. Last year Puma and its parent group PPR (which owns luxury brands such as Gucci, Yves Saint Laurent and Balenciaga) launched a pioneering initiative which puts an economic value on the eco services it uses across its production line - essentially accounting for its use of natural resources. Puma published an economic valuation of the environmental impacts caused by greenhouse gas emissions (GHGs) and water consumption along its entire supply chain, and the group has committed to implementing an Environmental Profit & Loss Account (using more sustainable materials, as well as ensuring its suppliers develop more sustainable materials and products) within four years. The methodology for the new Environmental Profit and Loss account was developed by PwC and Trucost, with the analysis examining impacts ranging from raw material production, such as cotton farming and oil drilling, to processing, involving leather tanneries, the chemical industry and oil refining. Clearly, business leaders now regard the parallel importance of setting bold sustainability metrics and making sure that open and timely reporting accurately reflects progress made. More than ever, stakeholders want to know about an organisation s sustainability performance and how it is accurately reporting on its corporate activities to support climate change, resource scarcity and socially responsible investing. Without doubt, assurance from a trusted business adviser further earns - and keeps - stakeholders trust. Oil & Gas Matters 7

8 Country-by-country reporting - enhanced disclosure on payments to governments by EU-listed or large private companies in the oil, gas, mining and logging industries The European Commission s original proposals for improved corporate responsibility reporting included a requirement for enhanced disclosure on payments to governments by EU-listed or private companies in the oil, gas, mining and logging industries. However, the European Parliament has broadened the scope of the proposals so that all companies with consolidated turnover over Euros500m would prepare a country-by-country report, rather than limiting it to the extractive and logging industries. The parliament wants the disclosure to be part of the annual financial statements, rather than presented in a separate report. This is being done under the transparency drive, to make large businesses more accountable for their actions, and how they use scarce natural resources. It is also intended to shed light on how governments account for related tax payments. The current proposed date for it to come into national law is 1 July The EU move echoes the Dodd-Frank Act, which requires SEC registrants in the extractive industries to disclose, inter alia, payments made to the US and foreign governments together with details of the projects involved. Concerns have been raised over the level of detail required under these proposals and the possibility that it may be extended to all multinational corporations. Mandatory carbon reporting for London Stock Exchange listed companies The UK Government has announced that from April 2013 all companies listed on the Main Market of the London Stock Exchange will be required to publicly report on their GHG. The UK government s decision to mandate GHG emissions reporting for listed companies has given a boost to the theme of natural capital accounting. The Government has also already committed to incorporating natural capital within the government s system of national accounts by 2020, and the establishment of a Natural Capital Committee. Under the mandatory carbon reporting requirement: (1) Companies must present the GHG Report in the Directors Report within the Annual Report. (2) Companies must report their current year GHG emissions from a comparative base year of their choice, and must present GHG emissions in total and as an intensity ratio (for example GHG emissions per unit of production). (3) Where a company is unable to report on all emissions within their organisational boundary, it must explain the extent of reporting presented. What is the impact of all of this on the reporting company? We believe this will be fourfold (1) There will be increased scrutiny on reported non-financial information, reinforcing the direction of travel in wider corporate reporting. (2) Increased accountability pressures through the requirement for the GHG Report to be presented in the Directors Report. (3) If a company is reporting GHG emissions already but not seeking assurance, the company will need to consider if it has sufficient comfort on the reliability of the reported GHG emissions (4) If a company is not reporting GHG emissions, significant new reporting requirement is coming soon. In addition, auditors will have responsibility for checking consistency of information presented within the Directors Report with the Financial statements. For example considering if the GHG emissions information presented on the same organisational boundary basis as the financial account. Typico plc PwC s framework for carbon emissions reporting Typico is a ground-breaking carbon emissions reporting model that provides an illustrative example for business on climate change and greenhouse gas emissions reporting. It was developed by PwC to help companies interpret carbon reporting guidelines and can be used to meet the new mandatory carbon reporting requirement. It was the first report of its kind to demonstrate how reporting on emissions connects financial and non-financial data to see the value and impact of carbon emissions on a business. Information presented in this context will more accurately reflect the real risks and opportunities that climate change presents. It is available on our website 8 PwC

9 Richard Ansong Manager, Assurance IFRS first time adoption Considerations for Oil and Gas entities International Financial Reporting Standards (IFRS) provide the basis for company reporting in an increasing number of countries around the world. Today, over 100 countries either already use or are in the process of adopting IFRS reporting. All public interest entities including banks and companies listed on the Ghana Stock Exchange were made to comply with IFRS effective 1 January Effective 2013, the Ghana National Accounting Standards (GNAS), as we currently know them, will cease to apply and all entities in Ghana will be required to file their financial statements according to IFRS or IFRS for Small and Medium Enterprises (SMEs). IFRS 1 First time adoption of International Financial Reporting Standards provides transition relief and guidance for entities adopting IFRS, however, this is regularly updated and amended by the International Accounting Standards Board (IASB). The amendments either update IFRS 1 for new standards and interpretations or address newly identified issues. Due to the frequency of these updates and amendments, keeping abreast of them can be challenging. Entities in the oil and gas industry face many of the same transition issues as entities in other industries as well as their own industry specific issues. This publication focuses on the specific transition issues and reliefs provided by IFRS 1 that are of particular importance to the oil and gas industry. 1 Deemed cost Many upstream oil and gas companies used a variant of the full cost method of accounting under local Generally Accepted Accounting Principles (GAAP) and will therefore need to make some changes under IFRS. Successful efforts accounting or a field by field based approach is required under IFRS and needs more detailed information. Entities using the full cost accounting method may not have maintained the detailed records to allow reconstruction of historical cost carrying amounts. IFRS1 contains specific relief for entities who have previously used full cost accounting. The relief enables a first time adopter to measure oil and gas assets at the date of transition to IFRS at a deemed cost basis. Exploration and evaluation assets are measured at the carrying value determined under the entity s previous GAAP, and this becomes deemed cost for IFRS purposes. The full cost pools are adjusted for the specific allocation of exploration and evaluation. The adjusted cost is then allocated across producing assets and assets under development based on a reasonable method. The assets are then tested for impairment at the date of transition. Oil & Gas Matters 9

10 This relief applies only to assets used in the exploration, evaluation, development or production of oil and gas. There is a broader deemed cost exemption which can be applied on an asset by asset basis to all tangible assets. The broader exemption allows an entity to assess the deemed cost as being: the fair value of the asset; or a previous GAAP revaluation as deemed cost if the revaluation was broadly comparable to fair value, or to the IFRS cost or depreciated cost adjusted to reflect changes in a price index. Few first-time adopters have chosen to use the fair value approach. Those that have used it have done so selectively as permitted under the standard. Fair value, similar to deemed cost, often results in a significant increase in carrying value with the corresponding credit adjusting retained earnings. There is also a higher depreciation charge in subsequent years. There is also an exemption that allows the use of fair value for intangible assets at transition to IFRS. However, it requires there to be an active market in the intangible assets as defined in IAS 38. This criterion is not met for common intangibles in the oil and gas industry such as licenses and patents. 2 Componentisation IFRS requires that major assets are depreciated using a componentisation approach. The requirement for component depreciation is the major reason that full cost pools must be allocated to field size groups of assets. Component deprecation may represent a significant change from practice under national GAAP for oil and gas companies for both upstream and downstream assets. Refineries are a particular downstream asset where implementing the component approach creates challenges. These are large, complex assets and if detailed asset records had not previously been maintained, it can be a major exercise to try to recreate this information. Entities can use the deemed cost exemption previously described if a fair value for the refinery can be determined. It may also be possible to identify the significant components that will require replacement or renewal through reviewing capital budgets and planned replacements. The depreciated carrying amount at transition to IFRS could be estimated through considering replacement cost and timing and making appropriate adjustments. The deemed cost exemption is only available on initial transition. Subsequent acquisitions will need to follow the componentisation rules prospectively. 3 Decommissioning provisions Decommissioning provisions are recognised at the present value of expected future cash flows, discounted using a pre-tax discount rate. The discount rate should be updated at each balance sheet date if necessary and should reflect the risks inherent in the asset. The requirements for a pre-tax rate and periodic updating can also result in differences upon adoption of IFRS. An entity s previous GAAP may not have required an obligation to be recognised, allowed a choice of rate or not required the rate to be updated. Changes in a decommissioning liability are added to or deducted from the cost of the related asset under IFRIC 1. There is an optional short cut method for recognition of decommissioning obligations and the related asset at the date of first time adoption. The entity calculates the liability in accordance with IAS 37 as of the date of transition (the opening balance sheet date). The related asset is derived by discounting the liability back to the date of installation of the asset from the opening balance sheet date. This estimated asset amount at initial recognition is then depreciated to the date of transition using the appropriate method. Use of the full cost exemption described in section 6.1 means that the IFRIC 1 exemption cannot be used. The entity must measure the decommissioning liability at the date of transition to IFRS and recognise any difference from the carrying amount under previous GAAP as an adjustment to retained earnings. 4 Functional currency IFRS distinguishes between the functional currency and the presentation currency. An entity can choose to present its financial statements in any currency, however, the functional currency is that of the primary economic environment in which an entity operates. Functional currency must be determined for each entity in the group by the denomination of revenue and costs in the regulatory and economic environment that has the most significant impact on the entity. A first-time adopter must determine the functional currency for each entity in the group. Changes of functional currency on adoption of IFRS are not unusual as previous GAAP may have required the use of the domestic currency or allowed a free choice of functional currency. This can result in a significant amount of work in determining the opening balance sheet amounts for all non-monetary assets. An entity needs to determine the historical purchase price in functional currency for all non-monetary assets. These amounts may have been recorded in US dollars, for example. There is no exemption in IFRS 1 for this situation although use of the fair value as deemed cost exemption may prove less complex and time consuming than reconstruction of historical cost. Other common foreign currency challenges for oil and gas entities on adoption of IFRS include the impact of hyper-inflation, revaluations of fixed assets in a currency other than the functional currency and the impact on hedging strategies. These can involve considerable time and effort to address and need to be considered early during the planning process for transition to IFRS. 10 PwC

11 IFRS 1 does provide an exemption that allows all cumulative translation differences in equity for all foreign operations to be reset to nil at the date of transition. This exemption is used by virtually all entities on transition to IFRS as the alternative is to recast the results for all foreign operations under IFRS for the history of the entity. 5 Assets and liabilities of subsidiaries, associates and joint ventures A parent or group may well adopt IFRS at a different date from its subsidiaries, associates and joint ventures. Adopting IFRS for the group consolidated financial statements means that the results of the group are presented under IFRS even if the underlying accounting records are maintained under national GAAP, perhaps for statutory or tax reporting purposes. IFRS 1 provides guidance on a parent adopting IFRS after one or more of its subsidiaries and for subsidiaries adopting IFRS after the group. When a parent adopts IFRS after one or more subsidiaries, the assets and liabilities of the subsidiary are measured at the same carrying value as in the IFRS financial statements of the subsidiaries after appropriate consolidation and equity accounting adjustments. A subsidiary that adopts IFRS after the group can choose to measure its assets and liabilities at the carrying amounts in the group consolidated financial statements as if no consolidation adjustments (excludes purchase accounting adjustments) were made, or as if the subsidiary was adopting IFRS independently. 6 Disclosure requirements A first-time adopter is required to present disclosures that explain how the entity s financial statements were affected by the transition from previous GAAP to IFRS. These include: An opening balance sheet, prepared as at the transition date, with related footnote disclosure; Reconciliation of equity reported in accordance with previous GAAP to equity in accordance with IFRS; Reconciliation of total comprehensive income in accordance with IFRSs to the latest period in the entity s most recent annual financial statements; Sufficient disclosure to explain the nature of the main adjustments that would make it comply with IFRS; If the entity used the deemed cost exemption, the aggregate of the fair values used and aggregate adjustment to the carrying amounts reported under previous GAAP; and IAS 36 disclosures if impairment losses are recognised in the opening balance sheet. Some common adjustments applicable to first-time adopters of the oil and gas industry are: Use of deemed cost as fair value for assets; Depletion for oil and gas properties on UOP method under IFRS; Reversal of impairment losses recognised under previous GAAP; Componentisation approach for major refineries based on the capitalisation criteria of major turnarounds under IFRS; Derivative contracts that do not qualify for hedging under IFRS; Downstream petroleum product inventory valued using FIFO or weighted average method as opposed to LIFO; and Consequential adjustments to deferred tax under IFRS produced by some of the previous adjustments. Oil & Gas Matters 11

12 Kwabena Boamah Consultant, Tax Services Transfer Pricing What this means for the Oil & Gas Industry Overview Transfer pricing (TP) refers to the setting, analysis, documentation, and adjustment of charges made between related parties for goods, services, or use of property (including intangible property). The Organisation for Economic Co-operation and Development s (OECD) Transfer Pricing Guidelines state, Transfer prices are significant for both taxpayers and tax administrations because they determine in large part the income and expenses, and therefore taxable profits, of associated enterprises in different tax jurisdictions. Transfer pricing operates based on the arm s length principle defined as a valuation principle commonly applied to commercial and financial transactions between related companies. The key principle is that transactions should be valued as if they had been carried out between unrelated parties, acting in their own best interest -(OECD, 2006, Annual Report on the OECD Guidelines for Multinational Enterprises). Ghana has recently passed Transfer Pricing Regulation, 2012 LI 2188 (TP Regulations) to provide more clarity and expand on the existing general provisions in the Internal Revenue Act 2000 (Act 592) as amended (IRA) regarding the requirement for transactions between persons in a controlled relationship to be at arm s length. The passage of the TP Regulations in Ghana is consistent with the current trend in most sub-saharan African countries with the common aim of strengthening their tax systems and increasing domestic tax revenues. It is estimated that two-thirds of the world s transactions are between persons in a controlled relationship (usually multinational organisations) and are not conducted at arm s length. The TP Regulations aim to examine these transactions in detail and apply the necessary taxes. TP Regulations in perspective Definitions The TP Regulations define a controlled relationship as a relationship between one person and another person, by the terms of which the relationship is able to influence the transfer price set in a transaction and in which that other person is: an associate of the first person; a relative of the first person; a person in a trust relationship with that first person; a holding company, a subsidiary or a subsidiary of a holding company to which that person is a subsidiary; a member of a closed corporation together with that first person; and a relative of a person who is a member of a closed corporation together with that first person. Major Transactions Management, technical and other intra group services According to the TP Regulations, a service between persons in a controlled relationship may be deemed to be consistent with the arm s length principle if: it is a charge for a service that was actually rendered; the service provides economic or commercial value to the recipient; and an independent person in a comparable circumstance will pay that charge for the service. On the other hand, a service charge will be deemed to be inconsistent with the arms length principle if it is paid by a person: for a service rendered in relation to the juridical structure of the parent company of the person; rendered in 12 PwC

13 relation to reporting requirements of the parent company of the person; and a service rendered in relation to the raising of funds for the acquisition of participation, except where the participation is directly or indirectly acquired by the person and the acquisition benefits or is expected to benefit the person due to the ownership interest of the shareholder of the person in one or more companies of the group. Further, the Commissioner General (C-G) is empowered to use a reasonable allocation criterion to allocate the total charge for a service rendered by one person in a group to other persons in the group where the specific services rendered to each member of the group are not easily identifiable. The allocation criterion will be deemed to be reasonable if they are based on certain prescribed variables. Transactions involving intangible property Intangible property is defined to include licenses and the sale and transfer of intangible property. The C-G shall consider the following in determining the arms length conditions between parties in a controlled relationship who are engaging in transactions involving intangible property: price to be paid by a comparable independent person will be considered together with other factors from the perspective of both parties; and usefulness of the intangible property to the business of the transferee. The comparability principle will be applied after the consideration of certain pre-determined factors such as expected benefit from the intangible property, geographical limitation, character of the right transferred (inclusive or non inclusive) and whether or not the transferee has a right to participate in a further development made by the transferor. Transfer Pricing Methods The TP Regulations mandate every person to choose one of the following transfer pricing methods in its transactions with persons in a controlled relationship: The comparable uncontrolled price method; Resale price method; Cost plus method; Transactional net margin method; and Transactional profit split method In addition, a person who intends to enter into a transaction whose arm s length price cannot be determined by the methods as stated above can apply to the C-G for approval for a separate method. However, the person is expected to prove that none of the existing methods can be reasonably applied and also the proposed method will result in a price that will be considered to be at arm s length. Compliance The TP Regulations require persons who engage in transactions with controlled parties to maintain documentation of the transaction for that period. In addition to this, a return should be filed in accordance with section 72 of the IRA which provides the following additional information: The arms length range as determined by the person under examination and the rational for the use of that range; Details of transactions between the person and other associated persons; Information on the principal activities of each person in the group and the business relationships existing amongst the associated persons; The consolidated financial statements of the group; Information on each associated party including business related information and functions, risks and assets employed by that associated person; and Any other information the C-G considers relevant. How TP Regulations with impact the oil and gas industry The oil and gas industry is characterised by numerous transactions with related parties especially in instances where portions of large contracts (for example EPC contracts) are subcontracted to various affiliates and related organisations within the larger group structure. Other examples of such transactions include bareboat and time charters and also well testing and drilling services. Transactions involving payments in respect of management fees, royalties and other payments for the use of intellectual property are common place within the industry and are usually the focus of TP regulations in most tax jurisdictions including Ghana. It is also worthy to note that local content regulations often require that companies with local ownership are established by foreign parent companies for the execution of contracts. These arrangements may further add to the existing layers of related party transactions. Significant resources will need to be committed to the development and maintenance of TP documentation to support the prices which are charged for these related party transactions. In most instances, TP policies and documentation may already exist within the group and will just need to be customized for the Ghanaian TP environment. From the above, it is fair to conclude that compliance with the TP Regulations will create a large administrative burden for affected companies and proper planning in the areas of staffing and time investment will be required. Oil & Gas Matters 13

14 Ayesha Bedwei Tax Director Value Added Tax Cash is King Background Value Added Tax (VAT) was first introduced in Ghana in 1995 and was met with much resistance from the general public which resulted in it being repealed just 3 months after its introduction. In 1998 however, the Government of Ghana successfully re-introduced VAT through the Value Added Tax Act, 1998 (Act 546). Rates and application As provided in Act 546, VAT shall be charged on the following at the applicable rates of 15% (made up of 12.5% VAT and 2.5% National Health Insurance Levy) and o% ( in the case of exports): Every supply of goods and services made in Ghana; Every importation of goods; and Supply of any imported service. In order to expand the taxpayer base, the VAT Flat Rate Scheme (VFRS) was introduced at the rate of 3% applicable to retailers and denying them the right to claim any input VAT unlike their standard rated counterparts who charge VAT at 15%. A further amendment in 2011 extended the VFRS to all taxpayers with turnover between GHS 10,000 and GHS 90,000 thus expanding its remit to cover all qualifying businesses. Industry specific nuances The nature of the oil and gas industry The oil and gas industry is made of Contractors (signatories to Petroleum Agreements) and their Subcontractors (entities providing works and services to Contractors). The Model Petroleum Agreement (MPA) on which all the Petroleum Agreements (PA) are based, states that a Contractor and its Subcontractors and Affiliates are not subject to any other taxes including VAT, aside those specified in the PA. Operationally, this exemption is dealt with by the issuance of VAT Relief Purchase Orders (VRPOs). VRPOs: What they are and who gets them VRPOs are documents which are issued to persons who make relieved supplies. VRPOs are issued by the Ghana Revenue Authority (GRA) and come in booklet form along with a VRPO authority letter which details the items the VRPO can be issued for. Once a booklet is fully utilised, it is submitted to the GRA for inspection (to ensure it was used correctly) and then a replacement booklet issued. Incorrect usage of the VRPOs could lead to the VAT relieved becoming chargeable on the issuer or in extreme cases, the VRPOs withdrawn altogether. 14 PwC

15 Permission to issue VRPOs is generally granted to taxpayers who provide relieved supplies or to those who operate in industries where the GRA determines that the taxpayers are likely to be in perpetual refund positions. The VRPOs thus act as a measure to stem the flow of unnecessary tax leakages which will eventually be recouped from the Government. The current situation Oil and gas Contractors have been granted permission to issue VRPOs, hence when their Subcontractors and suppliers charge them VAT for any petroleum related activities (as detailed in the VRPO authority letter), they will issue VRPOs to them to account for the VAT charged. Thus no cash outflow will occur in respect of VAT. It should be noted that Subcontractors and other suppliers are required to charge the Contractors VAT on any invoices they issue to them and this should be in the prescribed format. We stress this point because there is a commonly held belief that VAT should not be considered when dealing with Contractors, and this has led to various issues with the tax authorities. Subcontractors do not have the authority to issue VAT Relief Purchase Orders (VRPOs) and as such incur VAT on any invoices which their suppliers charge them. The combined effect of incurring VAT without any corresponding output VAT payable (since this is relieved by VRPOs issued by the Contractors), is a perpetual VAT refund position. This issue is compounded by the fact that the VAT Act requires taxpayers to account for VAT on any imported services. The imported services VAT mechanism effectively requires a taxpayer to calculate VAT on any invoices for imported services incurred (examples of imported services are management fees, consultancy fees, lease rentals and royalties), pay these amounts over to the GRA via an imported services form, and then reclaim the same amount as a refund at a later date. Since imported service amounts tend to be significant, the resultant VAT due is equally large resulting in even larger amounts due as refundable VAT. The VAT refund application process although straightforward, can take some time to conclude hence further prolonging the payment of the VAT refund due. We also cannot underestimate the impact of currency losses on this whole process. Due to currency fluctuations between the time of incurring VAT and the date of receiving payment (for entities whose functional currency is not the Ghana Cedi), the taxpayer may end up with far less in value than they initially paid. Finally, when all is said and done, the payment of a VAT refund is dependent on availability of Government funds hence making timing of repayments difficult to predict. Recommendations The current situation creates a serious cash flow problem for Subcontractors in the oil and gas industry with the average VAT refund amount due ranging between US$5,000,000 to US$8,000 per Subcontractor. The following are suggested ways based on our experience to better manage the VAT and cash flow process: If imported service amounts are anticipated to be large and numerous, it may be worthwhile negotiating with the tax authorities in order to account for VAT as opposed to paying it in cash only to reclaim the same amount at a later date; Apply for VAT refunds on a timely basis, for example every 3 months to forestall any delays. It should be noted that the tax authorities conduct verification audits before recommending an amount to be paid as a refund; and Engage the tax authorities as much as possible in a bid to make them aware of industry specific issues such as these and the impact on the industry as whole. Oil & Gas Matters 15

16 Our people working alongside you Felix Addo Country Senior Partner Climate Change, Fraud Risk and Anti-Bribery Vish Ashiagbor Partner People and Change Darcy White Partner Oil & Gas Tax Francis Adiasani Tax Director Immigration and registration Ruka O Sanusi Senior Manager Sustainability, Climate Change and Strategy ruka.o.sanusi@gh.pwc.com Kingsford Arthur Senior Manager Fraud Risk and Anti-Bribery kingsford.arthur@gh.pwc.com Ayesha Bedwei Tax Director ayesha.a.bedwei@gh.pwc.com Lydia Pwadura Senior Manager lydia.pwadura@gh.pwc.com George Arhin Assurance Director george.k.arhin@gh.pwc.com Contact us PricewaterhouseCoopers (Ghana) Limited No. 12 Airport City, UNA Home, 3rd Floor PMB CT42, Cantonments, Accra, Ghana. Tel: +233 (302) Fax: +233 (302) pwc.ghana@gh.pwc.com Takoradi office Plot No. 51 Airport Ridge Takoradi, Ghana Tel: +233 (0) / pwc.ghana@gh.pwc.com Website: Sierra Leone PricewaterhouseCoopers (Ghana) Limited No. 2 MIK Drive Off Barracks Road, Murray Town Freetown, Sierra Leone Tel: +232 (0) Website: PricewaterhouseCoopers (Ghana) Limited. All rights reserved. In this document, PwC refers to PricewaterhouseCoopers (Ghana) Limited which is a member fi rm of PricewaterhouseCoopers International Limited, each member fi rm of which is a separate legal entity.