Corporation tax (CT) due to the state is included in the state's share of oil profit, which implies that CT in Gabon is a notional concept, since it is not actually paid over to the state in cash, but assumed as part of the state's share of profit from oil.
To avoid double taxation in their home countries, oil companies must justify payment of this tax in Gabon (the host country). They are therefore required to provide evidence from the Gabonese government that their corporation tax has been paid.
Yet doing so is generally difficult, as the terms of the PSCs are at times unclear and ambiguous. PricewaterhouseCoopers (PwC) has pioneered interpretation guidelines and a method of calculating CT for PSCs. The company has been instrumental in advising multinational oil concerns, and convincing government of the merits of its groundbreaking methodology.
Petroleum agreements in Gabon have evolved from the fundamental principle that
all underground and natural resources belong by right to the state, which needs to authorise exploration of oil, gas and other reserves.
Corporate tax is paid in kind and is represented by a portion of the quantity of oil left to the state, after deduction by the contractor of the proportional mining royalty and the "costs oil". The quantity of oil received by the state also includes corporate tax due by the contractor.
Income tax is a function of the level of production and the petroleum costs, which are deducted from the net production to be shared.
PSC tax system
The PSC outlines a list of bonuses, royalties, taxes, fees and other payment obligations by the contractor, who is exempt from all other taxes arising from petroleum operations. Confusion is caused by the absence of an exact definition of what the tax authorities consider as included in the petroleum operations. Most PSCs suggests that taxes due in relation to the personal activity of
the employees or the executive managers of the contractor are not exempt.
The Gabonese PSCs provide that the contractor is liable for the following:
•Proportional mining royalty
•Annual surface royalty
•Import duties and taxes collected by the Customs Administration
•Tax on profit and income i.e. corporate income tax
•Annual contribution to the Hydrocarbon Support Fund
•Contribution to the training of Gabonese employees Local (city) taxes and duties.
The contractor is liable to pay amounts agreed with the state as bonuses, mainly on the effective date of the PSC and at various stages of production as specified in the agreement.
Import duties and other customs taxes
PSCs generally have a provision called a "customs system", incorporating two customs regimes:
•A temporary admission system for all equipment, materials, products, machines and tools that are not the property
of the state, and are required for the performance of petroleum operations. They must be imported by the contractor, or by third parties on its behalf or for subcontractors. Further, these goods are to be re-exported after they are used.
•A rate reduced by 5 percent for materials, products, equipment, machines and tools that do not fall within the above-mentioned categories, and which are necessary for the production of petroleum.
The custom administration thus forbids the benefits of the reduced rate regime for goods imported under the special temporary admission.
Recovery of petroleum costs through "cost oil" commences when production starts and ceases when production ends. In the determination of what qualifies as a fully recoverable petroleum cost, the following guidelines are applied:
•Costs must be determined on a cash basis, i.e. expenses actually paid.
Costs must be necessary business
PWC clarifies problem
The main difficulties lie in the ambiguity of the PSC contracts, the wording of which allows for different interpretations of the method of calculating the notional company income tax. The position of the tax authority of Gabon is clear: "there is only one company income tax rate in Gabon - 35 percent". However, all non-PSC oil concession agreements in Gabon have a corporation tax rate that ranges from 35 percent to 73 percent.
The complexity is exacerbated by the fact that the required certificate is delivered by a branch of the government within the Ministry of Finance, while matters of PSC negotiation and signature are dealt with by the Ministry of Oil.
In general, in accordance with the terms of PSCs, the company should first allocate petroleum mining royalties on total gross production. PwC has successfully argued that the tax due in respect of petroleum operations is actually company income tax and that it is part
of the state's share of "profit oil".
However, the dilemma of what tax rate applies still remains. PwC has successfully put forward the case that in the absence of a clear statement within the PSC, the appropriate rate of company income tax should be the rate as prescribed by the General Tax Code, namely 35 per cent.
The actual computation is quite straightforward. Thus:
•The company's share of profit oil is grossed up by 35 percent.
•The company income tax is then determined by subtracting the company's share of net profit oil from the amount that has been grossed up.
These calculations are explained and agreed with the authorities, who readily provide the required tax certificate showing the amount of the company income tax paid and the company income tax rate of 35 percent.
PwC has achieved much in helping to resolve the tax ambiguities that have hitherto plagued the taxation of petroleum products in Gabon. Much, however,
remains to be done. Our hope is that the issue will be addressed and solved once and for all by the authorities. After all, for some companies the relevant uncertainty could influence a company's decision on whether or not to invest in Gabon.
By Elias Pungong, a partner in the Oil and Gas Audit division of PricewaterhouseCoopers, Libreville, Gabon.
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