Eliminating Transfer Pricing Arrangements in JV Companies Lessons for Enhancing Local Content November 2018

Contents Introduction Transfer pricing in the O&G industry Transfer pricing regime in Ghana Way forward Conclusion

Introduction

Introduction Definition Transfer Pricing is usually defined as “…the prices at which an enterprise transfers physical goods and intangible property or provides services to associated enterprises…” Principal Objective The principal objective of transfer pricing is to ensure no jurisdiction is shortchanged in the allocation of profits. It simply looks at the pricing of tangible and intangible property, services, financial transactions etc. among related parties.

Transfer Pricing in the O&G Industry The Oil and Gas industry is a globally interconnected industry with several MNE players from IOCs to oilfield services providers. The O&G value chain involves a plethora of inter-company transactions: 1 The purchase and sale of crude oil 2 Engineering/ Construction Services 3 Technology, Trademarks, Trade names, Processes 4 Shareholder loan interest 5 Equipment Rentals 5 Financial and Performance Guarantees

Transfer Pricing in the Oil & Gas Industry So long as Ghana is a part of the global O&G industry, we will have transfer pricing But where is the concern?

Transfer Pricing in the Oil & Gas Industry Transfer Mispricing The tendency for abuse of the pricing of inter-company transactions. A number of MNEs take advantage of their size and complexity of structure to influence and shift the tax base from where economic activities occur ostensibly to outwit the tax authority and other regulators. This deprives many developing nations tax revenues that could be used to advance their development agenda of accelerated and sustainable economic growth. Ghana for example is reported to have lost GBP 74 million between 2005 and 2007 to multinationals of US and EU residence (McNair & Hogg, 2009).

Transfer Pricing Regime in Ghana

Transfer Pricing Regime in Ghana Transfer Pricing Regulations (L.I. 2188) effective from September 2012 Income Tax Act, 2015 (Act 896) Legal Basis Revenue Administration Act, 2016 (Act 915) GRA Transfer Pricing Guidelines

Transfer Pricing Regime in Ghana Arm’s Length Standard The TP Regulations require taxpayers to demonstrate that all transactions between them and their related entities are carried out at arm's length. That is: the profits earned by each enterprise in a transaction among related enterprises are consistent with those which would have been earned by independent/unrelated entities under similar circumstances.

Transfer pricing Regime in Ghana Compliance Requirements Entities who have engaged in related party transactions are required to: 01 Demonstrate compliance with the arm's length principle by maintaining detailed contemporaneous documentation of the transactions for each tax year 02 File annual transfer pricing returns showing details of transactions and value.

The Way Forward

The Way Forward Despite the compliance requirements of the Transfer Pricing Regulations, abuses still exist. The solution to curbing the abuses surely does not lie in a separate set of transfer pricing rules for O&G JV Companies. The solution lies in: 1 2 3 Enhancement and enforcement of existing transfer pricing rules Collaboration between the Petroleum Commission and other regulatory bodies (GRA and GIPC) Reducing the burden of compliance with transfer pricing requirements

The Way Forward The Ghana Revenue Authority 1. Continuous investment in the GRA’s Transfer Pricing unit to enforce the provisions L.I. 2188 and other tax laws: Robust and timely tax (TP) audits; Enforcement of arms-length principles; and Regular tax education on TP; 2. Introduction of regulations which require Beneficial Ownership Disclosure (BOD) within the oil and gas sector. By requiring disclosure of beneficial owners, the GRA will be in a better position to determine related party arrangements, and limit the emerging practice of “round-tripping”. 3. GRA should look into reducing the burden of compliance with transfer pricing requirements Introduce the option for advanced pricing agreements (APAs) on TP among JV parties. Consider safe harbours rules for low value/routine transactions 4. Government should implement the Automatic Exchange of Information (AEOI) with various states and financial institutions. This will discourage MNE’s from engaging TP abuses.

The Way Forward The Petroleum Commission Petroleum Commission should continue various programmes to build local capacity of Ghanaian companies in service and industry to reduce the gap and need for external supplies. Petroleum Commission continue steps to discourage “shell” JV Companies- the local JVs should be appropriately resourced to undertake contracts locally. This means minimizing the administrative process for work permits for technical expatriate professionals to be recruited by the JV Companies versus foreign companies providing the service. Petroleum Commission should collaborate with the GRA to make returns and contracts of JV Companies also visible to the GRA in line with the Minister of Finance’s note that the GRA will work with other regulators to corroborate tax returns filed.

The Way Forward JV Companies (Taxpayer) Develop an appropriate TP policy which shall take into consideration: Implement the appropriate TP policies and sett up monitoring procedures to ensure full compliance the company's structure with respect to allocation of risks, functions and income amongst the relevant parties comparable TP transactions that may serve as industry benchmarks provisions of the applicable local laws and double tax agreements (such as requirements for documentation etc.)

Conclusion

Conclusion Transfer pricing can deprive governments of their fair share of taxes from multinational corporations. No country - poor, emerging or wealthy - wants its tax base to suffer because of transfer pricing. Developing local capacity will help reduce dependencies on foreign supplies and the potential for abuse of transfer pricing.

Thank You