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Lesson 6 Tax On Natural Resources
Lesson 6 Tax On Natural Resources
College of Humanities
University of Ghana Business School
Department of Accounting
S
Session Overview
Lesson Objectives:
▪ By the end of this session you should be able to
• understand the Income Tax Regimes of Petroleum Operations in Ghana
• explain the tax revenue streams from the upstream petroleum industry.
• understand the various legal provisions governing petroleum activities in
Ghana.
• identify allowable and disallowable expenses in upstream Petroleum
Operations
• treat Financial Cost under Separate Mineral Operation
• compute royalty payable
• describe the treatment of losses and the concept of adjusted profit
Session Outline
▪ The key topics to be covered in this session are as follows:
• Taxation of Petroleum Operations
• Deductions for Petroleum Operations
• Disallowable Deductions
• Separate Petroleum Operation under the Income Tax Act, 2015
(ACT 896)
• Withholding Tax for Petroleum Operations
• Taxation of Mineral and Mining Operations
• Withholding Tax for Minerals and Mining Operations
Reading List
▪ Amidu, M. (2019), Principles and Practice of Taxation, First
Edition, Digibooks, Accra. Ghana Chapter 13, (pages 423-
44)
▪ Ali-Nakyea A. (2016), Taxation in Ghana-Principles, Practice
& Planning, Black Mask Ltd., 3rd Edition. Chapter 12, (pages
253-269)
▪ Income Tax ACT, 2015 (ACT 896), Ghana Publishing
Company Limited, (Assembly Press), Accra, Ghana, Sections
77-86
Topic One
HISTORICAL PERSPECTIVE OF
PETROLEUM
Petroleum Operations
Introduction
▪ The exploration of Oil and gas in Ghana began in 1886 in Tano
Basin (onshore) in the Western Region.
▪ In between 1966 and 1972, the first offshore well was drilled in
the Saltpond basin.
▪ The process of facilitating the research for oil and gas in
commercial quantities was intensified during the 4th republic.
▪ In 2004 Ghana entered into agreement with Komos and EO
Group and this agreement resulted in the find of commercial oil
in 2007.
Petroleum Operations
Revenue Types
Royalties
▪ A contractor of oil and gas agreement is entitled to pay royalty at
rates ranging from 4% to 12.5% of the gross production of crude oil
to the Government of Ghana.
▪ Other petroleum agreement contracts have rates such as (5%, 7.5%,
10% etc).
▪ Also, royalties paid are tax deductible in determining the chargeable
income of the Contractors.
Petroleum Operations
Revenue Types
Carried Interest
▪ The Government of Ghana through the Petroleum Agreement is
entitled to a share of the oil produced without making financial
contribution towards exploration and development costs.
▪ The carried interest ranges between 7.5% and 15% in most oil
producing countries.
▪ In Ghana, Ghana National Petroleum Commission (GNPC)
represents the country by taking up 10% carried interest of any
distribution of petroleum or revenue in any petroleum operation for
which GNPC does not pay exploration and production expenses
Petroleum Operations
Revenue Types
Additional Carried Interest
▪ After discovery of petroleum in commercial quantities, Ghana has
the option to take up additional interest but the state would be
required to pay an agreed percentage of the development and
production cost to acquire additional interest in any petroleum
operations.
▪ However, the state will not pay for the exploration and appraisal
cost.
▪ The current Petroleum Agreements stipulate that the country can
acquire up to 5% in any commercial discovery subject to petroleum
agreement.
Petroleum Operations
Revenue Types
Additional Oil Entitlement
▪ Additional oil entitlement is also called tax on super normal profit.
▪ This tax is levied on windfall profit, where the contractor’s rate of
return exceeds the target rate of return.
▪ It is used to evaluate the profitability of the venture during
negotiation.
▪ The additional oil entitlement is meant to ensure that the State
shares in excess profit accruing to Contractors.
Petroleum Operations
Revenue Types
Surface Rental
▪ Rental is revenue charged by government per square kilometre
in respect of a block given to a contractor for petroleum
operations.
▪ The contractors pay these monies into the petroleum holding
fund.
▪ The standard surface rental charges payable are:
Phase of Operation Surface Rentals p.a.
• Initial exploration period US$30 per sq. Km
• 1st Extension Period US$50 per sq. Km
• 2nd Extension Period US$75 per sq. Km
• Development and Production Area US$100 per sq. Km
Petroleum Operations
Tax Revenue Types
Petroleum/Oil Taxation
• The Income Tax Act 2015 provides for petroleum income tax rate at
35% for Contractors effective 1st January 2016.
• In Ghana, most of the Petroleum Agreements apply a corporate tax
rate of 35%.
• The withholding tax rate for payments from Contractors to
Subcontractors was 5% but it has been increased to 7.5% for
resident entities and 15% for non-resident entities.
Petroleum Operations
Tax Revenue Types
Contribution to Local Content Fund
▪ The contractors are required to make contribution to the Local
Content Fund.
▪ The contractors’ contribution is stipulated in the PA
▪ The sub-contractor is also expected to pay 1% of the total revenue
from contractor or licensee for every contract.
▪ The fund is used to provide financial resources for indigenous
Ghanaian firms and the citizens who are engaged in oil and gas
activities.
▪ In summary, the fund is spent on education, research and
development, training etc.
Petroleum Operations
Tax Revenue Types
Capital Gains Tax
• In determining the assessable income of the contractor, capital gains
from the sale or transfer of assets used for petroleum operations are
included and taxed at the corporate tax rate of 35%.
• In addition, in a situation where the underlying ownership changes
by more than 50% at any time within three years, the assets and the
liabilities of the firm will be regarded to have been realized.
Petroleum Operations
Tax Revenue Types
Illustration 13.1
• The following data is relevant to the upstream petroleum operations of
Lanandam Ltd for 2017 year of assessment.
– 200,000 barrels of oil sold internationally at $68 per barrel
– An asset bought at the inception of petroleum operations was sold
for $1,000,000 in 2017 year of assessment
– 50,000 barrels lifted and sold to its Parent company in the United
States at an agreed price of $56/barrel. The price ruling on the
international market on the day of lifting the oil for the Parent
Company was $60/barrel.
Required:
• Compute the revenue from the above and comment on the treatment of
the sale of the petroleum assets as indicated above.
Petroleum Operations
Tax Revenue Types
Suggested Solution to illustration 13.1
Lanandam Ltd
Computation of Revenue
Year of Assessment-2017
Basis Period January 1-December 31, 2017
US$
200,000 barrels of oil @ 68 13,600,000
50,000 barrels of oil @60 3,000,000
16,600,000
Add Proceeds from sale of assets 1,000,000
Total Revenue 17,600,000
Required:
Show the tax treatment of the relevant financial cost and the relevant
financial gain in respect of the derivative instrument, and determine the
chargeable income of the company from petroleum operations.
(Credit: Practice Note - Income Tax Act, 2015 (ACT 896))
Petroleum Operation
Relevant Financial Cost
Required:
Compute tax payable.
Comment on the deductibility of financial cost in petroleum operations.
(Credit: ICA, November 2018)
Petroleum Operation
Relevant Financial Cost
Suggested Solution to illustration 13.5
AB Limited
Computation of tax payable
Y/A 2017
Basis Period 1/1/2017 -31/12/2017
$ $
Profit as per accounts 20,000,000
Commentary
• The company deducting the financial cost of $1,200,000 from the income is not
permissible according to the law. The company can only deduct an amount that is equal
to the financial gain of $1,000,000 as expense.
• The excess cost of $200,000 is then carried forward as unrealized financial cost which
is recoupable within the next five years from the date the cost was incurred. If after five
years no financial gain is realized, the unrealized financial cost expires.
Petroleum Operation
Capital Allowance
• Capital allowances are granted to Contractors from the year of
commercial production on petroleum property, plant and equipment
(capital expenditure) relating to petroleum operations at a rate of
20% on a straight line basis.
Petroleum Operation
Withholding Tax: Petroleum Contractors
Payment
Resident Persons Rate %
Payment to Subcontractors for works and service for or in connection
with a petroleum agreement. 7.5
Management, consulting and technical service fees and endorsement
fees. 7.5
Royalties, natural resources payments and rents. 15
Payment to Subcontractors for works and services (Including rental of
tools and equipment). 15 final WHT
Royalties, natural resources payments and rents. 15
Management, consulting and technical service fees and endorsement
fees. 20
Petroleum Operation
Withholding Tax by Contractors
Compliance
Petroleum Income Tax Return 30 April
Annual Transfer Pricing Return 30 April
Quarterly Petroleum Income Tax Return and quarterly 30 April, 30 July,
tax payments 30 October, 30
Monthly VAT Returns (For those who have registered for End of following
VAT) month
15th of following
Monthly Payroll Return month
15th of following
Monthly WHT Return month
Annual Payroll Return 30 April
Petroleum Operation
Withholding Tax by Subcontractors
Payment
Resident Persons Rate %
Interest (excluding individuals & resident financial institutions) 8
Dividend 8
Rent on residential properties to individuals and artificial persons 8
Rent on non-residential properties to individuals and artificial persons 15
Supply of goods exceeding GH¢ 2,000 per annum 3
Supply of services exceeding GH¢ 2,000 per annum 7.5
Supply of works exceeding GH¢ 2,000 per annum 5
Payment
Non-Resident Persons Rate %
Dividend 8
Royalties, natural resources payments and rents 15
Management, consulting and technical service fees and endorsement fees 20
Payment to petroleum Subcontractors 15
Mineral and Mining Operations
Mineral Royalties
According to the Income Tax Act 2015, Act 896, the mineral
royalty rate is 5% of the total revenue earned from mineral
obtained from mining operations by a holder of a mining lease.
Mineral and Mining Operations
Illustration 13.6
AB Limited is a mining company and has the following set of information relating to 2016
year of assessment. GH¢
Revenue 5,000,000
Cost of operation 3,000,000
Chargeable income 2,000,000
From the above, the following came to light:
1. Capital allowance of GH¢500,000 was added to cost.
2. Penalty of GH¢100,000 was imposed by the Mineral Commission for failure to follow
standard operating guidelines.
3. Loss from operation amounting to GH¢50,000 recorded in 2010 was added to the cost
above. According to the accountant, the company is entitled to carryover its losses.
Required:
i. Calculate the royalty payable if any.
ii. Compute the corporate tax payable by AB limited.
(Credit: ICA, November 2016
Mineral and Mining Operations
Suggested to illustration Solution 13.6
i. Royalty payable = 5% of Total Value of Mineral Won or Revenue
5% x GH¢5,000,000 = GH¢250,000
ii. AB Ltd
Computation of Tax Payable
Year of assessment 2016
GH¢ GH¢
Chargeable Income (given) 2,000,000
Add the following:
Penalty 100,000
Loss from operation 50,000 150,000
Recomputed chargeable income 2,150,000
– Manla Ltd received a net dividend from a company based in the USA of
the equivalent of GH¢9,500 after 5% tax was deducted and the net income
was added to chargeable income above.
– A powerful shareholder was granted items worth GH¢60,000 which was
adjusted in arriving at the chargeable income to neutralize the
shareholder’s influence at Annual General Meeting.
(Note: Manla Ltd has a basis period from January to December)
Required:
i. Compute the taxes payable by Manla Ltd.
ii. Comment on the treatment of investment loss of GH¢700,000.
• (Credit: ICA, November 2018)
Summary
▪ Currently, the taxation of Petroleum Operations are regulated by Petroleum Income
Tax Law, 1987 (PNDCL 188), Income Tax Act, 2015 (Act 896) and the Petroleum
Agreements.
▪ The applicable royalty rate for a contractor is based on the provisions of the
petroleum agreement of the Contractor. Other petroleum agreement contracts have
rates such as (5%, 7.5%, 10% etc).
▪ Also, royalties paid are tax deductible in determining the chargeable income of the
Contractors.
▪ In Ghana, most of the Petroleum Agreements apply a corporate tax rate of 35%.
▪ The withholding tax rate for payments from Contractors to Subcontractors was 5%
but it has been increased to 7.5% for resident entities and 15 for non-resident
entities.
▪ Mineral royalty rate is 5% of the total revenue earned from mineral obtained from
mining operations by a holder of a mining lease.
Thank you