AN EXAMINATION OF OIL AND GAS TAXATION AND REVENUE MANAGEMENT IN GHANA by ABDALLAH ALI-NAKYEA (Student Number: 12384373) A thesis submitted in partial fulfilment of the requirement for the degree DOCTOR OF PHILOSOPHY IN TAX POLICY in the FACULTY OF ECONOMICS AND MANAGEMENT SCIENCES at the UNIVERSITY OF PRETORIA SUPERVISOR: PROF R.C.D. FRANZSEN CO-SUPERVISOR: PROF A.K. FOSU June 2019 © University of Pretoria University of Pretoria DECLARATION OF ORIGINALITY 1. I understand what plagiarism is and I am aware of the University’s policy in this regard. 2. I declare that this thesis is my own original work. Where other people’s work has been used (either from a printed source, the internet, or any other source), this has been properly acknowledged and referenced in accordance with university requirements. 3. I have not used work previously produced by another student or any other person to hand in as my own. 4. I have not allowed, and will not allow, anyone to copy my work with the intention of passing it off as his or her own work. _____________________________________ ABDALLAH ALI-NAKYEA i ACKNOWLEDGEMENT I owe gratitude to the Almighty Allah for providing me with the strength and knowledge to complete this study. Many individuals and institutions in various ways made valuable contributions to the development of this research. I give my heartfelt gratitude and appreciation to my supervisors Prof. Riël C.D. Franzsen and Prof. Augustin K. Fosu, for their comments, constructive criticism, suggestions, advice and the personal interest shown in the progress and completion of this study. Your guidance has made me a better researcher and academic, for which I remain entirely grateful. I thank my editors who had the patience to review and edit my research. My special thanks to my dear family for their support, encouragement and understanding throughout the period of my studies. My sincere appreciation and gratitude to all friends and colleagues who gave me the needed encouragement and support in the course of my research. To the directors, lawyers, consultants and staff of Ali-Nakyea & Associates, I say that without you this study would have come to a halt. May Allah richly bless you all for urging me to continue. I wish to thank the African Tax Institute (ATI), University of Pretoria, for the opportunity granted to me to undertake this research. I am indeed most grateful to all of the lecturers and staff of the ATI. ii SUMMARY Ghana’s discovery of oil and gas in commercial quantities, in 2007, triggered a sense of optimism about the prospects for accelerated development in the country. However, pessimism about oil and gas revenues set in when the country ran into a liquidity crisis and, in 2014, it had to implore the International Monetary Fund (IMF) for assistance. This development has spurred research interest into the taxation and management of revenue accruing from the oil and gas sector. However, to date most research on oil and gas taxation and revenues has been on economic development, with a dearth of focused studies in oil and gas taxation and revenue management from a legal perspective. This study fills this knowledge gap through an examination of oil and gas taxation and revenue management in Ghana. This thesis is qualitative by design, although quantitative data was used to highlight the revenue performance indicators from the oil and gas sector. The tax and revenue management policies and regulations of a number of oil-rich countries were briefly reviewed and compared to Ghana’s oil and gas taxation and revenue management legislation. For comparative purposes, relevant literature, fiscal legislation and data from four oil and gas producing countries - Nigeria, Norway, Canada and the United Kingdom – were also examined in some detail. A key finding is the noncompliance of the Government of Ghana with the provisions in the Petroleum Revenue Management Act (PRMA), which potentially makes the occurrence of the “oil curse” in Ghana more likely. A major concern in the findings of this research shows differences in fiscal regime in Ghana relative to the regimes in the countries used for comparative purposes (i.e. the United Kingdom, Norway, Canada and Nigeria). Ghana’s oil and gas tax legislation is currently contained in different laws. This constitutes an unnecessary complication. The research recommends that the Government of Ghana put in place adequate measures, underpinned by appropriate legislation, to enable the retention and investment of its share of oil revenues, and also deal with oil revenue volatility. The Government of Ghana should design a long-term fiscal strategy, based upon high quality, long-term economic and revenue projections, which includes a sensitivity analysis. I also recommend that watchdog entities in the oil and gas environment, such as the Public Interest and Accountability Committee (PIAC) and the Africa Centre for Energy Policy (ACEP), spearhead calls for amendments to the PRMA. These amendments should be in the areas of accounting for the oil and gas revenues, iii setting up safeguards for the use of the revenues accrued from the oil and gas sector, as well as adhering strictly to the priority areas determined for the allocation of the petroleum revenues. This will allow for robust provisions and safety nets to be enshrined in oil and gas taxation and revenue management laws, to safeguard the revenue inflows for development. This will also constitute a check on the Government of Ghana against increasing its spending of petroleum revenues meant to contribute to the Ghana Stabilization Fund. iv TABLE OF CONTENTS Declaration of originality ............................................................................................... i ACKNOWLEDGEMENT ............................................................................................ ii SUMMARY ................................................................................................................. iii LIST OF TABLES ..................................................................................................... xiv LIST OF FIGURES .....................................................................................................xv LIST OF ACRONYMS ............................................................................................. xvi CHAPTER 1 ..................................................................................................................1 INTRODUCTION .........................................................................................................1 1.1 BACKGROUND ...............................................................................................1 1.2 STATEMENT OF THE PROBLEM .................................................................5 1.3 RESEARCH OBJECTIVES AND QUESTIONS .............................................8 1.4 METHODOLOGY ............................................................................................8 1.5 STRUCTURE OF THE THESIS .......................................................................9 CHAPTER 2 ................................................................................................................10 LITERATURE REVIEW ............................................................................................10 2.1 INTRODUCTION ...........................................................................................10 2.2 TAXATION AND ITS CLASSIFICATION ...................................................10 2.2.1 What is Taxation and what is a Tax? ..............................................................10 2.2.2 Classification of Taxes .....................................................................................13 2.2.2.1 Classification of Taxes according to Tax Base ................................................13 2.2.2.2 Classification of Taxes by Nominal Source of Taxation .................................14 2.2.2.3 Classification of Taxes according to Incidence ...............................................15 2.3 ATTRIBUTES OF A GOOD TAX SYSTEM.................................................16 2.3.1 Equity ...............................................................................................................16 2.3.2 Certainty ...........................................................................................................17 v 2.3.3 Convenience .....................................................................................................17 2.3.4 Economy ..........................................................................................................17 2.4 TAX POLICY ..................................................................................................18 2.5 CHALLENGES OF TAX POLICY MAKERS ...............................................21 2.5.1 Dealing with Cross-cutting Structural Bottlenecks..........................................22 2.5.2 Narrow Tax Base .............................................................................................22 2.5.3 Unbalanced Tax Policy Mix ............................................................................23 2.6 DESIGNING TAX POLICY FOR THE OIL AND GAS SECTOR ...............23 2.6.1 Royalties ..........................................................................................................33 2.6.2 Resource Rent Tax ...........................................................................................34 2.6.3 Tax/Royalty Regimes.......................................................................................38