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Tax Issues in Oil & Gas Acquisitions and Joint Ventures

2019 Local Content Conference and

Exhibition - Takoradi

November 20-22, 2019

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1. Tax Regime

2. Tax Practice - Acquisition

3. Transfer Pricing Rules

Agenda

Page 3

Tax Regime

Tax Issues in Oil & Gas Acquisitions and Joint VenturesPage 4

Taxation regime

The Ghana Revenue Authority (GRA) is the authority in charge of the administration of the tax laws


COMMISSIONER -GENERAL (CG)

COMMISSIONER DOMESTIC TAX

REVENUE DIVISION

COMMISSIONER CUSTOMS DIVISION

COMMISSIONER SUPPORT SERVICES

DIVISION

The tax statutes administered by the GRA relating to the upstream sector include:

Taxation regime


1. Petroleum Agreements (PAs) signed by the Government of Ghana, GNPC and the petroleum contractors – administered in part by the GRA

2. Laws with consequential effect on taxation – Petroleum (Production & Exploration Act, 2016, Act 919)

Revenue Administration Act, 2016, Act 915

Income Tax Act, 2015, Act 896 (as amended) and its Related Regulations

Value Added Tax Act, 2013, Act 870 (as amended)

Customs Act, 2015, Act 891 (as amended)

Petroleum Income Tax Act, 1987, PNDCL 188

► Repealed and saved (with modifications) under the Income Tax Act, 2015, Act 896 (as amended); and

► Repealed by Revenue Administration Act, 2016, Act 915

Tax Practice -Acquisition


Acquisitions and other arrangements


► By a Contractor

► Acquisition of Petroleum Interest

► Acquisition of shares

► Direct

► Indirect

► By a Subcontractor

► Joint Venture Arrangements

| 9

Contractor


ContractorAcquisitions of petroleum interestsCurrent holding structure New Partner

ABC Co XYZ

40% petroleum interest 25% petroleum interest

petroleum interest ABC – 40%; GNPC – 20%; MNO – 35%; IGC – 5%

► Farm-in and farm-out arrangement between ABC and XYZ

ABC 25% XYZ

Transfer of interest

40% NOTE: Subject to approval by sector Minister – Section 16 of Act 919


ContractorAcquisitions of petroleum interests

Farm-in and farm-out arrangement between ABC and XYZii. Apportionment of capital allowances

25% X Written Down Value at beginning of the year is transferred to XYZ

40%

iii. 15% X Written Down Value at beginning of the year is kept by ABC

40%

Tax effect on ABC

Consideration (market value) Written down value at beginning of year Gain


ContractorAcquisitions of petroleum interestsFarm-in and farm-out arrangement between ABC and XYZ

Tax effect on XYZ

Carries the received written down value at beginning

✓ New Petroleum interest holding

ABC XYZ GNPC MNO IGC

15% 25% 20% 35% 5%

Petroleum right



CrewCo (PH)

(Norway)

Ghana Co. Ltd.

(Ghana)

OilCo AS

(Norway)

100%

30% petroleum interest in DWT

100%

TSG

(Third party)

OilCo AS

(Norway)

20%80%

Current holding structure Transfer at parent level

Contractor - Acquisitions of shares (5% < x > 50%)


► Transaction took place at the parent level – Indirect transfer

► Third Party - TSG – introduced into the upstream petroleum sector

► Subject to prior approval by Sector Minister – S15 of Act 919

► 20% change falls within the 5% < x < 50% threshold

► Tax effect on Ghana Co. Ltd – deemed disposal of petroleum interest

► Notification of CG – within 30 days

➢ Gain @ 35%

➢ Higher of consideration or market value attributable to the 20%; less

➢ WDV*20% shareholding transferred

► WDV increases by the market value or consideration used in computing gain (above)

► Net position – immediate tax cost – but – recovered though capital allowance

► Tax effect on TSG - Obtains 20% of WDV @ start

Contractor - Regulatory and Tax Effect of shares change - (5% < x > 50%)


CrewCo (PH)

(Norway)

Ghana Co. Ltd.

(Ghana)

OilCo AS

(Norway)

100%

30% petroleum interest in DWT

100%

CrewCo (PH)

(Norway)

Ghana Co. Ltd.

(Ghana)

TSG

(Third party)

OilCo AS

(Norway)

100%

20%80%

100%

Previous holding structure New holding structure

Contractor – Transaction effect – New shareholding & Petroleum Interest

24% petroleum interest in DWT 6% petroleum interest in DWT


Indirect transfer – 100% share - hive off of operations

Vatopia Square(NL)

Accra(NL)

Accra Square Two (NL)

40.94%

ABC Square(NL)

XYZ Square(NL)

12.33%

OM SA (South Africa)

Worldwide LLC (US)

2.99%

47.19%

Research and Marketing (Mauritius)

RMS Cote D’Ivoire Sarl

(Cote D’Ivoire)

RMS East Africa^ (Kenya)

RMS Nigeria (Nigeria)

RMS Senegal SA (Senegal)

RMS Cameroun (Cameroon)

Research and Marketing (Ghana)

100%

Contractor - Acquisitions of shares (> 50%)


► Occurrence within a 3-year period

► Sector Minister approval

► CG notification

► Two Tax effects

►A - Deemed disposal of petroleum interest – same as slide 10

►B - Deemed disposal of assets and liabilities

► Gain taxes @ 35% - tax burden on entity in Ghana

► Buyer beware – transaction value

► Unutilised financial costs incurred before the change shall not be deductible

► Tax loss incurred before the change shall not be deductible

► Bad debts incurred before the change shall not be deductible

❑ Strict Position of Law – Both A and B can occur at the same time

❑ EY Point of View

❑ Potential double taxation

Contractor – hive off - > 50% shares

| 18

Subcontractor



40.94%2.99%

Subcontractor -Joint venture arrangement

Foreign GH. CoSPV1, sub of XYZ

OperatorJV

IGC/Foreign GH Co

Vessel

SPV2, sub of XYZ

Time CharterOperations &

Maintenance

Foreign Crew Services Contract

Marine Support Services(IGC)

Ghanaian Crew (IGC)

Hiring of personnel

GHANAOutside Ghana

Outside Ghana

Vessel

XYX, Norway

IGC

Foreign Crew Services Contract GHANA(SPV)

✓ Foreign Co can only partake in service operation through a JV arrangement

✓ Fronting barred

✓ 10% equity of JV - Held by IGC

✓ Foreign partner – invest min. $200k –works or services activities

✓ PC registrations required

✓ JV to hold contract right (legal and economic) in the petroleum services with Contractor

❑ Services providers from outside Ghana

❖ Only holding company of the JV and its subsidiaries permitted

❑ Penalty by PC for non-compliance


❖ Corporate income tax

❖ >50 change in underlying ownership rule discussed applicable to all petroleum service providers

➢ Notification of PC is an additional requirement

❖ JV Taxed @ 25% on CI unless permitted otherwise by PA –PS: PITA repealed by Act 915

❖ WHT suffered by JV serves as tax credit

❖ File self-ass and annual returns

❖ Withholding tax

❖ JV informs CG of contracts with non-residents

❖ General principles

❖ 20% - works and services; mgt. & services - to NR

❖ 15% - rental; royalty – to NR

❖ 8% - dividends- to NR

❖ 0% - dividends to resident company (>=25%)

1

2

3

Joint ventures – Regulatory and tax effects

4

Transfer Pricing


Draft Transfer Pricing Regulations 2018

Master File Local File

Country-by-Country report (CbCR)

Annual Transfer

Pricing Return

Updated comparability and substance requirements

► Three-tiered standardized approach to transfer pricing documentation

► Updated comparability and substance requirements in accordance with OECD TP Guidelines, 2017

The new TP Regulations focuses on ‘substance’ in conducting transfer pricing analysis

New six-step analytical framework for analysing risks

Identify economically significant risks with specificity1

Determine contractual risk allocation 2

Determine how the associated enterprises operate in relation to assumption and management of risks, in particular control functions and financial capacity to assume the risk3

Where the party assuming risk does not control the risk or does not have the financial capacity to assume the risk, apply specific guidance on allocating risk

Interpret the outcome of step 1-3 and determine whether the contractual assumption of risk is consistent with actual conduct

5

The transaction as accurately delineated should be priced, appropriately compensating risk management functions6

4

General high-level checklist for assessing risk► Do you have cross border intercompany transactions?

► Are you in receipt of tax incentives or have IC dealings with tax havens

► Are the intercompany transactions large or complex?

► Are there other dealings that are not charged?

► Do you have secondments of senior management to or from Ghana?

► Do you have local entities with operating losses for 2 years or more?

► Have you failed to prepare local transfer pricing documentation for the FY?

► Have you failed to submit a TP return?

► Were there transactions in FY not reported in the TP documentation or TP return?

Yes No

Yes No

Yes No

Yes No

Yes No

Yes No

Yes No

Yes No

The key risk is economic double taxation due to a transfer pricing adjustment!

Yes No

What should you do now?

Local file documentation: what should you do now?

2017 OECD Transfer Pricing Guidelines

Chapter 1: The arm’s length principle

Chapter 2: Transfer pricing methods

Chapter 3: Comparability analysis

Chapter 4: Administrative approaches to avoiding and resolving transfer pricing disputes

Chapter 5: Documentation

Chapter 6: Special considerations for intangible property

Chapter 7: Special considerations for intra-group services

Chapter 8: Cost contribution arrangements

Chapter 9: Transfer pricing aspects of business restructurings

Overall, the Ghanaian Practice Notes on the Transfer Pricing Regulations endorse the recommendations in the OECD Transfer Pricing Guidelines

+ ++++ =

Industryanalysis

Businessoverview

Functionalanalysis

Methodselection

Economicanalysis

Conclusions

Industry

Analysis

Business

Overview

Functional Analysis

Method

Selection

Economic Analysis

Conclusions Transfer Pricing Document

THANK YOU


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This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.

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