It is common for oil and gas companies to purchase goods such as equipment and machinery, from related parties. But quite often, these companies overstate such costs as a means of shifting profit out of the producing country to an affiliate, usually located in a low-tax-rate country. It is a practice that is referred to as transfer pricing.
To avoid this risk, Head of the Energy Department, Dr. Mark Bynoe indicated to the Guyana Standard that a strategy is already being devised.
He said, “We have been studying several strategies used by countries which have lost billions of dollars because of transfer pricing. In Ghana, for example, a company involved in the downstream sector was reported to have allegedly inflated the cost of the gas processing plant infrastructure it purchased from its affiliate in Dubai. The total project cost was approximately US$1 billion. But the company was able to get its affiliate to increase the price by US$140M…They were able to recover the money after a full-scale investigation was launched by the tax authorities.”
Dr. Bynoe added, “The long-term strategy in Ghana’s case was to apply the ‘arm’s-length principle’ which gives the government the right to adjust the value of a related-party transaction so that it accords with similar transactions carried out between independent parties. Guyana’s strategy will include this…We find that this is quite clever and useful.”
The Head of the Energy Department said that while the current international tax landscape demands detailed transfer-pricing rules, in many cases, developing countries like Guyana are unable to effectively implement them, particularly owing to problems of accessing appropriate data on comparable transactions. In light of this fact, Dr. Bynoe said that measures such as the arms-length principle and capping charges for administrative services would be preferable for Guyana.