Petroleum-producing countries have been urged to limit the risk of cost overstatement by multinational corporations (MNCs) through effective audit practices, a report released here late Wednesday by Oxfam, an international Non-Governmental Organization (NGO) says.
This the report says will ensure such countries capture an appropriate share of the value of their oil and gas if they are to meet domestic revenue mobilization (DRM targets.
The report titled: “Examining the Crude Details –Government Audit of Oil and Gas Project Costs to Maximize Revenue Collection” published in November 2018 did a study of how audits in the oil and gas sector are carried out by the governments of Ghana, Kenya and Peru.
According to the report, Ghana and Kenya were using their right to audit petroleum costs, although in some cases they have waited too long and the right to audit has expired while the situation in Peru was unclear owing to lack of information.
The report said, “While there are some quantitative data on audit outcomes for all three countries, it is not possible to say whether audits have been effective at protecting government revenues. Answering this question would require a multicountry dataset of audit results, disaggregated by sector, that does not exist in the public domain.”
Among the crude tactics that some MNCs use to outwit governments, the report emphasize says, “Inflated company expenditures are a major threat to government revenues from oil and gas. The more costs that companies report, the less profits there are to tax, which means less revenue for government. Developing countries stand to lose the most from cost overstatement given their outsized reliance on corporate income tax.
Companies may also deliberately evade or avoid paying taxes. Avoidance is the use of legal method (as opposed to illegal) methods to minimize the amount of income tax owned by a MNC.”
In order to avert the problem to ensure petroleum-producing countries maximize their revenue collection, Oxfam recommends that the various governments must review and strengthen legal controls on petroleum costs, clearly define agencies that are responsible for cost auditing as well as strengthen inter-agency coordination on petroleum revenue administration.
The report also urges governments in petroleum-producing countries to develop the technical expertise and sector-specific knowledge to detect and mitigate cost overstatement in the petroleum sector and take steps to increase the information available to verify and appraise petroleum costs.
Finally, the report suggests governments must ensure that audit time limits and record-keeping requirements are long enough and that costs are audited as soon as possible after they occur as well as publicly disclose audit activities and their results, strengthen the capacity of oversight actors to monitor government’s use of cost audit rights.
The petroleum sector offers governments of such resource-rich countries huge potential revenues that could be invested in poverty alleviation and inequality reduction, infrastructure investments, but those revenues must be collected.
Taxes are levied on profits, but companies may seek to reduce their taxes by deducting ineligible or exaggerated costs, often paid to related parties.
Governments’ essential tool to combat petroleum cost overstatement is the right to audit costs, but there is limited data on whether governments use this right effectively.
In many developing countries, however, despite the concerted effort, revenue mobilization and collection still remains low.
The African Development Bank says African countries will need to increase the average ratio of taxes to gross domestic product (GDP) to 25 percent, up from the current 19.2 percent if they are to finance the continent’s infrastructure and human development needs.