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Abusive Transfer Pricing Threatens Oil Sector

  • SOURCE: | qwesa2big
  • oil dollarGhana’s budding oil and gas industry is harbouring potential avenues for illicit financial outflows, The New Crusading Guide can confirm.

    Gaps in the country’s fiscal regime coupled with the veiled ownership structure of multinational oil companies working in the oil sector pose risk of trade abuses, according to several economic experts and legal analysts.

    Abusive transfer pricing, which is one of the commonest of these trade malpractices, occurs when a company transacts business with a related party at a price which is in variance with the internationally-accepted market price in order to push profits offshore and reduce its tax bill.
    Ghana’s fiscal regime is deficient in dealing with this potential threat.

    Section 27 of the Petroleum Income Tax Law (PITL), 1987 for instance, states that withholding taxes “may be waived…where the subcontractor is an affiliate of the contractor whose services are charged to the contractor at cost”.

    This provision, some experts maintain, opens the floodgate for abuse.

    “Surely, this is an invitation for abusive transfer pricing because it is difficult to determine whether a related company is providing services, especially management related expenses, at cost”, Joe Amoako-Tuffour, a Professor of Economics at St. Francis Xavier University in Canada and Joyce Owusu- Anim, an Economist with GTZ in Ghana, analysed in their report on Ghana’s fiscal regime.

    Again, the PITL does not contain explicit provisions to check transfer pricing. The Petroleum Law (PNDCL 84) seeks to address this setback, but its provisions are weak as it states that transactions on petroleum operations “shall be on the basis of prevailing international competitive prices and such other terms that would be fair and reasonable”.

    To be sure, the Internal Revenue Act (Act 592), of 2000 empowers the Ghana Revenue Authority (GRA) to combat abusive transfer pricing. But the capacity of the GRA to effectively enforce its powers has also come under scrutiny from Civil Society Organizations (CSOs).

    The issue of abusive transfer pricing has been a global challenge over the years. A study conducted by Global Financial Integrity, a United States-based Non-profit Research and Advisory Organization, reveals that developing and emerging economies lost about US$6.6 trillion in illicit flows from 2002 to 2011.

    The study estimates that Ghana lost tax revenue of about US$ 3.86 billion during that period due to trade misinvoincing alone, or about 11 per cent of the government’s total revenue.
    However, efforts are being made both globally and locally to stem the trend.

    The Organization for Economic Cooperation and Development (OECD) has developed guidelines on transfer pricing for multinationals while the Extractive Industry Transparency Initiative (EITI), a body in charge of promoting global standard of accountability and transparency in the extractive sector, has issued new guidelines encouraging companies in the extractive sector to disclose their beneficial owners.

    On the national front, the GRA has set up a Transfer Pricing Audit Unit to examine possible transfer pricing abuse.
    A source close to the GRA say the unit detected transfer pricing abuse in a recent audit of some selected sectors, including the extractive sector, and it ordered companies found guilty of abusive pricing to refund the difference. Companies obliged without any hesitation, the source said.

    The GRA has not made the audit report public and it would neither confirm nor deny that abuse had been found or that companies had repaid funds. “We’ve conducted a number of audits and we will continue to conduct more. That’s all I can say”, an official of the Transfer Pricing Audit Unit told this reporter.
    The opaque ownership structure of multinational oil companies also remains a challenge.

    Tullow Ghana Limited and Kosmos Energy Ghana, the two major players in Ghana’s oil sector, are registered in Jersey and Cayman Island respectively, jurisdictions where beneficial ownership of companies and other vital company information are shrouded in secrecy.

    Although the two companies are listed on the London and New York Stock Exchange respectively, a senior legal analyst with the New York-based Natural Resource Governance Institute (NRGI), Mr. Amir Shafaie, believes these listings do not cure the problem.
    He said registering in secret jurisdictions deprives the host country of vital information about the company which could be used to check trade abuses including transfer mispricing.
    “Besides, listing on stock markets discloses only the majority shareholders of the company”, he said.

    But, the Commercial Director of Kosmos Energy Ghana, Mr. Philip Liverpool, disputes this.

    According to him, listing on such stock markets was an enough disclosure on the company’s beneficial ownership and operations.
    Liverpool explained that Kosmos decided to register in the Cayman Islands in order to protect its profits, since such jurisdictions were tax havens which could allow the Group Company to retain enough profit to defray losses incurred by other subsidiaries.
    The External Communication Advisor of Tullow Ghana Limited, Akua Twumasi, declined commenting on the matter. She said: “Tullow has been transparent in all its dealings”.

    But, the issue goes beyond these two players as Ghana continues to sign agreements with multinationals with even more secretive and opaque ownership structure.

    A classic example is AGM Petroleum Ghana. Although AGM Petroleum Ghana is registered in Ghana, it is 100 per cent owned by AGM Gibraltar which is registered in Gibraltar, another highly secret jurisdiction.

    Further checks by this paper into AGM Gibraltar revealed that though AGM Gibraltar is about 50 per cent owned by AGR Norway which is listed on the Oslo Stock Exchange, the remaining 50 per cent is owned by Med Songhai and Minexco OGG, both registered in Gibraltar and not listed on any stock market across the world.
    Executive Director of African Center for Energy Policy (ACEP), Dr. Mohammed Amin Adam, believes signing a deal with a company with such a structure should be a worry for all well meaning Ghanaians since it poses a potential for abuse.
    “It is very worrying because it’s difficult to trace the real beneficial owners of that company”, he said.

    “This should be of great concern to all citizens”, he underscored.
    Several efforts to reach AGM Petroleum Ghana on the issue proved futile.

    CSOs in Ghana believe the streamlining of the country’s fiscal regime and the building of capacity of state regulators must be the focus in dealing with transfer pricing abuses.

    “For now, we are pushing for the inculcation of full beneficial ownership disclosure provisions in the Petroleum Exploration and Production Bill which is currently before parliament. That is the first step. Without that, all other efforts will amount to nothing”, said Solomon Kusi-Ampofo, Project Officer at Friends of the Nation (FoN), an NGO which focuses on governance and social accountability.

    Source: New Crusading Guide

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