MSAF 606

TAXES & BUSINESS STRATEGY

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
Regulatory  Framework
These include:
§ Ghana National Petroleum Corporation Law, 1983 (P.N.D.C.L 64)
§ Petroleum Exploration & Production Act (2016)
§ The Petroleum Revenue Management Act, 2011 (Act 815) –
Amended in 2015
§ Petroleum Commission Act, 2011 (ACT 821)
§ The Petroleum (Local Content and local participation) Regulation
2013, L.I 2204
Petroleum  Operations
Income  Tax  Regimes
Petroleum income tax regimes include:
§ Petroleum Income Tax Law, 1987 (PNDCL 188);
§ Income Tax Act, 2015 (Act 896);
§ Petroleum Agreements (PA);
§ 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.
 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 2015.
• 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
Gas Taxation
§ The Income Tax Act 2015, Act 896 did not specify any separate
regime for taxation of gas.
Liquefied Natural Gas (LNG)
§ The Income Tax Act 2015, Act 896 did not specify any separate
regime for taxation of natural gas.
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

• Comments: Sale of assets after commencement shall be added to revenue.

 Petroleum  Operation  
Allowable  Deductions
§ According to Section 67 Income Tax Act, 2016 (Act 896),
“allowable expenses are those incurred wholly, exclusively and
necessarily in petroleum operations” and generally include:
• Capital allowance;
• Tax losses brought forward from previous years;
• Royalties;
• Contribution to a pension or provident fund to the extent that the total
contribution by both the employer and the employee does not exceed
25% of the total remuneration of the employee;
• Training and education of Ghana citizens and nationals in approved
institutions;
• Any other amount incurred directly by the Contractors in the course of
the petroleum operation.
Petroleum Operation
Disallowable Deductions
§ Expenses not allowed under Section 67 include:
• Research and development expenditure;
• Expenditure wholly, exclusively and necessarily incurred in the
acquisition or improvement of a valuable asset used in the
operation;
• Expenditure that contravenes the arm’s length rules;
• Capital expenditure;
• Repair or improvement of a depreciable asset limited to 5% of
written down value of pool of asset;
Petroleum Operation
Disallowable Deductions
§ Bonus payment made in respect of the grant of the petroleum
right;
§ Expenditure incurred as a consequence of a breach of a petroleum
agreement;
§ Personal, domestic or excluded expenditure;
§ Financial cost up to a calculated limit; and
§ Depreciation.
• Readers should note that by legislative instrument or through
enactment of new regulation the Minister may prescribe other
allowable deductions in calculating the income of a contractor
from oil and gas operations.
 Petroleum Operation
Separate Petroleum Operation
Separate Petroleum Operation as an Independent Business
§ According to section 64 of the Income Tax Act 2015, Act 896, each
separate petroleum operation is to be treated as an independent
business.
§ This means that the chargeable income of each petroleum operation
is to be determined separately.
§ Therefore, it is required that any person engaged in petroleum
operations to keep separate books of accounts
§ Tax returns must be file for each separate petroleum operation.
Petroleum Operations
Arms-length Principle
§ The arms-length principle is also applicable in transactions between
two or more separate petroleum operations of a person.
§ This suggests that transaction between two separate petroleum
operations should be arranged as if they were independents firms.
Petroleum Operation
Relevant Financial Cost
Illustration 13.4
The profit of a company from a Separate Petroleum Operation is
GH¢2,000,000.00. An amount of GH¢420,000.00 and GH¢200,000.00 in
respect of relevant financial cost and relevant financial gain respectively
were reckoned in determining profit from the Separate Petroleum
Operation.

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

Computation of Chargeable Income

GH¢ GH¢
Profit 2,000,000
Add back excess cost:
Financial Cost 420,000
Less Allowable Cost (limited to Financial Gain) 200,000 220,000
Chargeable Income (Petroleum Operations) 2,220,000

Financial Cost carried forward as loss GH¢220,000

Petroleum  Operation  
Relevant  Financial  Cost
Illustration 13.5
The following is relevant for the operation of AB Ltd, operating in the upstream
petroleum sector for 2017 year of assessment.
$
Revenue 100,000,000
Cost 80,000,000
Profit 20,000,000
The following additional information forms part of the above:
1. The revenue above includes financial gain from swaps of $1,000,000
2. The financial cost of $1,200,000 was added to cost
3. The cost includes a depreciation of $200,000
4. Research and development of $100,000 incurred was added to the cost of
operation
 Petroleum  Operation  
Relevant  Financial  Cost
Revenue on 20,000 barrels of oil sold was added to revenue. It came to
light that the disputed price used on the 20,000 barrels was $70 in its tax
returns. What has finally been agreed now is put at $67 and this has been
certified by the Petroleum Unit of the Ghana Revenue Authority.
Written down value as of 31/12/2017 was $1,800,000 after granting capital
allowance the second time as of 2017 year end. This information is yet to
be adjusted.

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

Deduct: Revenue from Swaps 1,000,000

Revenue Dispute (70-67) X (20,000) 60,000 1,060,000

18,940,000
Add back:
Financial cost 1,200,000
Depreciation 200,000
Research and Development 100,000 1,500,000
Adjusted Profit 20,440,000
Capital Allowance (1,800,000/3) 600,000
Chargeable Income 19,840,000
Tax Charged @ 35% 6,944,000
 Petroleum  Operation  
Relevant  Financial  Cost
Suggested Solution to illustration 13.5
i) Treatment of Financial Cost:
Computation of Financial Cost to be carried forward:
$
Financial Gain 1,000,000
Less Financial Cost 1,200,000
Unutilized Financial Cost carried forward 200 ,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
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

Tax Charged @ 35% 752,500

 Mineral and Mining Operations
Commentary to the suggested solution to illustration 13.6 in (ii) above:
§ The accountant added the capital allowance to the Cost of operation to
reduce the chargeable income of the company which is allowable by the
law.
§ Penalty is a disallowable expense because it is an infraction. However,
this was expense added to the cost of operation by the accountant.
§ The carry over losses of 2010 charged before ascertaining the chargeable
income in 2016 is not appropriate.
§ Both the old and the new Act permit a person to carry forward loss up to
five years. The deduction of the loss expires if it was not entirely
deducted within the five years.
 Mineral and Mining Operations
• Illustration 13.7
Compute the Royalty payable on the operation of Go-Get Mining Company from the
second quarter of its operations in 2015 from the following financial data:
GH¢
Revenue 100,000
Cost of operation 65,000
Capital allowance agreed 15,000
Royalty (first quarter) 60,000
(Credit: ICA, November 2016)
 Mineral and Mining Operations
Suggested Solution to illustration 13.7
According to the Act 2010, Act 794, the Royalty Rate is 5%
Revenue = GH¢100,000
Royalty Computation =5/100* 100,000 =GH¢5,000
Royalty payable = GH¢5,000
 Discussion Questions and Problems
Exercise 6.1
AB ltd is a mining company operating at Kyebi in the Eastern Region.
The following data is relevant for the last quarter of 2017 year of
assessment.
GH¢
Revenue 20,000,000
Cost of operation including expenses 14,000,000
Margin 6,000,000
The following additional information is relevant:
– Royalty has not been computed and paid on the above yet.
– Depreciation of an amount of GH¢1,000,000 was part of the
cost of operation above.
Discussion Questions and Problems
– Proceeds from sale of depreciable assets amounting to
GH¢500,000 were added to revenue above.
– Capital allowance agreed with the Mining Unit of Ghana
Revenue Authority was agreed to be GH¢800,000.
Required:
Compute the taxes payable by AB Ltd to Ghana Revenue
Authority and comment on any TWO items as to why you
allowed or disallowed it in the tax computation.
(Credit: ICA, May 2018)
 Discussion Questions and Problems
Exercise 6.2
Manla Ltd since its incorporation has been providing Mining Support Services
(MSS) in line with its mandate and the following is relevant to its operations for
2017 year of assessment.
Chargeable income GH¢ 240,000,000
The following is relevant:
– Loss from investment deducted in arriving at the chargeable income GH¢
700,000.
– Dividend (gross) received from A Ltd, a mining company, where Manla Ltd
has 26% voting power in A Ltd amounting to GH¢ 20,000 and this amount
was added in arriving at the chargeable income above.
– A provision for bad debts amounting to GH¢400,000 was written off as part
of chargeable income.
– Manla Ltd had a tax loss of GH¢20,000 from 2014 year of assessment which
it deducted in arriving at the chargeable income above.
Discussion Questions and Problems.

– 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