Trinidad and Tobago could have lost as much as $17.5 billion in 2010 and 2018 period with the loss estimated $7 billion and $12 billion in 2018 alone according to a study by the Economic Commission for Latin America and the Caribbean (ECLAC).
According to its latest publication titled, “Navigating transfer pricing risk in the oil and gas sector. Essential elements of a policy framework for T&T Guyana,” under the current arrangement, T&T is not allowed to fetch higher natural gas prices in other markets when they fluctuate, subsequently resulting in a loss of potential revenue.
The publication noted that over 2010 to 2014 while the natural gas price was high, it is estimated that revenue collections by the Government could have been approximately five times higher.
In 2018, while prices were low, the Government could have received revenue that was approximately six times higher than actual receipts – amounting to an estimated US$2.6 billion in revenue loss from the natural gas sector alone, the publication highlighted.
“In 2018, the estimated revenue loss ranged from$7,855,851,899 (TTD) to $13,678,883,823 (TTD),” the report read.
It noted that the extra revenue could have had a significant positive impact on the country’s GDP growth rate, particularly as it seeks to quicken its post-COVID-19 economic recovery.
“This should also serve a cautionary tale for Guyana, as it navigates the development of the legislative and policy framework that will govern the development of its energy sector,” the study warned.
The publication explored the oil and gas value chain by first examining the oil and gas taxation framework and assessing the mechanics of the industry’s natural creation of opportunities for transfer pricing.
A transfer price is the price that one division of a company charges another division of the same company.
Transfer pricing can be applied for services, intellectual property, financing, interest, and the exchange of goods.
Transfer pricing risk represents the chance that the transfer prices do not reflect true market prices, resulting in the shifting of a company’s profit from one jurisdiction to another.
Simply put its a case where one company sells to another company within the same group a product for a particular price. That price may however be less than the actual market price, resulting in the taxes owed to the original jurisdiction being less then it should have received had that taxes been applied on the higher price that the product was eventually sold at.
ECLAC also noted that developing countries like T&T which lack the capacity to commercially produce and monetise their natural gas resources on their own tend to rely upon multinational energy companies.
However, there is a dilemma.
According to ECLAC the attraction of multinationals, perhaps through incentives, facilitates the earning of natural resource rents and encourages economic activity in countries.
However, doing business with large players with fragmented yet inter-connected global value chains, creates several opportunities for the erosion of taxable income, it said.
According to the publication, MECs operate in inter-connected global value chains in the process of bringing the hydrocarbons from the ground to the consumer in the final market.
It noted that since multinationals tend to be vertically integrated, they tend to have different subsidiaries and divisions operating in different segments of the global value chain, adding that these multinationals often conduct business with their different divisions.
“While business between the divisions is not a problem, the manipulation of costs can cause the shifting of profits along the value chain, resulting in the changing of taxpayers’ tax liability,” the publication explained.
It said transfer pricing risk is the chance that the transfer prices do not reflect true market prices, i.e. resulting in the shifting of a company’s profit from one jurisdiction to another thereby eroding the local tax base.
ECLAC said T&T like Guyana is among the Caribbean countries with commercial reserves of hydrocarbons, where transfer pricing risk has the potential to result in considerable revenue leakage.
“Ideally, both countries should seek to capture their fair share of the generated natural resource rents. However, MECs have greater institutional capacity than several developing country governments, and are able to reduce their tax liability through the use of transfer pricing.
“The prevailing problématique is whether or not oil and natural gas revenue has contributed to the economic growth of resource-rich Caribbean countries; and whether energy-rich Caribbean economies are vulnerable to transfer pricing risk, i.e. have incurred significant revenue leakage due to transfer pricing by MECs,” ECLAC explained.
The publication also indicated that the COVID-19 pandemic had pernicious multi-sectoral economic and financial impacts on the economies of the sub-region, considerably reducing fiscal revenues by as much as 75 per cent in some Caribbean economies.
It has also led to significant growth in fiscal spending.
ECLAC said this has dampened liquidity in many Caribbean countries, which were already challenged by high levels of public debt and fiscal deficits, both of which have worsened in 2020.
Hence, for sub-regional energy exporters, optimising natural resource rents has not surprisingly re-emerged as a leading short-term policy objective for the post-COVID-19 era, the publication said.
Transfer pricing legislation
Since transfer pricing risk is a common problem occurring in oil and gas industries, it would be logical for transfer pricing legislation to be introduced in Guyana and T&T, the publication recommended.
It said the revenue impact of transfer pricing has been noted by the authorities to exist in T&T.
However, it said neither Guyana nor T&T possess frameworks for addressing potential transfer pricing in their hydrocarbon industries.
ECLAC also advised that it is imperative that any framework to address potential transfer pricing in T&T should encourage, even require the conduct of transactions by multinationals using the arm’s length principle to address, inter alia, potential shifting in the destination markets for natural gas.
To this end, four essential elements are recommended framework.
Firstly, ECLAC said there should be a designate revenue authority to set a fair price for the hydrocarbons. From the outset, the publication said an entity should be designated with the responsibility to monitor the prices of crude oil, natural gas, and downstream products in various markets.
Section 6(A) of the Petroleum Taxes Act established the Permanent Petroleum Pricing Committee (PPPC) to determine a fair market price for the taxation petroleum.
In 2018 the Minister of Energy stated that the PPPC was reactivated, following several years of dormancy. The PPPC has the jurisdiction to determine the prices for petroleum.