- 20 Marks
Question
Sapele Petroleum Ghana Ltd and Mahogany Production Incorporated are joint venture partners who have 45% and 35% interest respectively in the Upstream Fields in Ghana. They commenced exploration in 2011 and discovered hydrocarbons in commercial quantities in 2013.
The fiscal terms of the agreement between the joint venture partners and the Government of Ghana include Bonus of US$ 150 million, Royalty of 5%, Initial (Carried) Interest of 15%, Additional Participating Interest of 5%, Corporate Tax rate of 35% and Capital Allowance on straight line basis at a rate of 20%. Mahogany Production is the operator of the Upstream Fields. Production commenced in the Upstream Fields in 2019. Information available on the oil and gas exploration and production operations in the Upstream Fields are as follows:
| Up to 31/12/2017 | US$ |
|---|---|
| Exploration Costs | 250,000,000.00 |
| Development Costs | 2,000,000,000.00 |
| Bonus | 150,000,000.00 |
| As at 31/12/2018 | US$ |
|---|---|
| Exploration Costs | 100,000,000.00 |
| Development Costs | 1,500,000,000.00 |
| Interest on loan for installation of equipment & facilities | 100,000,000.00 |
NB. The loan was contracted by the operator on behalf of the parties that hold interest in the Upstream Fields
| As at 31/12/2019 | US$ |
|---|---|
| Exploration Costs | 40,000,000.00 |
| Development Costs | 400,000,000.00 |
| Average production cost per barrel | 15.00 |
| Average Price of crude oil per barrel | 40.00 |
| 2019 Production | 50,000,000 barrels |
You are required to compute the following, and also state the assumptions underlying your computations:
i. Capital allowance entitlements of Sapele Petroleum Ghana Ltd and Mahogany Production Incorporated.
ii. Distribution of crude oil.
iii. 2019 income tax liability of Sapele Petroleum Ghana Ltd and Mahogany Production Incorporated in accordance with the provisions of the Income Tax Act, 2015 (Act 896).
iv. Total revenue that will accrue to Government of Ghana.
Answer
i. Capital Allowance Entitlements
Under the terms of the agreement, Exploration Costs and Bonus are shared by Sapele Petroleum Ghana Ltd. and Mahogany Production Incorporated. They will therefore share the Exploration Cost according to the ratio 45:35 respectively. The Bonus is treated as Exploration Cost and will therefore be shared in the same ratio of 45:35.
Exploration Cost
| Year | US$ |
|---|---|
| 2017 | 250,000,000.00 |
| 2018 | 100,000,000.00 |
| 2019 | 40,000,000.00 |
| Bonus | 150,000,000.00 |
| Total | 540,000,000.00 |
Apportionment of Exploration Cost
| Entity | US$ |
|---|---|
| Sapele Petroleum Ghana Ltd (45/80) | 303,750,000.00 |
| Mahogany Production Incorporated (35/80) | 236,250,000.00 |
| Total | 540,000,000.00 |
Development Cost
Under terms of Ghana’s Petroleum Agreement, the State (GNPC) does not pay development cost in respect of the Initial Interest, but pays in respect of the Additional Participating Interest. Development cost is therefore payable by Sapele Petroleum Ghana Ltd., Mahogany Production Incorporated and the State (GNPC) in respect of the Additional Participating Interest and should therefore be shared according to the ratio 45:35:5. Interest was incurred for development and will therefore be treated as development cost.
| Year | US$ |
|---|---|
| 2017 | 2,000,000,000.00 |
| 2018 | 1,500,000,000.00 |
| 2019 | 400,000,000.00 |
| Interest | 100,000,000.00 |
| Total | 4,000,000,000.00 |
Apportionment of Development Cost
| Entity | US$ |
|---|---|
| Sapele Petroleum Ghana Ltd (45/85 x 4b) | 2,117,647,058.82 |
| Mahogany Production Incorporated (35/85 x 4b) | 1,647,058,823.53 |
| State (GNPC) (5/85 x 4b) | 235,294,117.65 |
| Total | 4,000,000,000.00 |
Cost Base for Capital Allowance Computation
| Entity | US$ |
|---|---|
| Sapele Petroleum Ghana Ltd (2,117,647,058.82 + 303,750,000.00) | 2,421,397,058.82 |
| Mahogany Production Incorporated (1,647,058,823.53 + 236,250,000.00) | 1,883,308,823.53 |
| State (GNPC) (235,294,117.65) | 235,294,117.65 |
| Total | 4,540,000,000.00 |
Capital Allowance Computation – Sapele Petroleum Ghana Ltd
| Year | Cost | Rate | Allowance | Written Down Value |
|---|---|---|---|---|
| 2019 | 2,421,397,058.82 | 20% | 484,279,411.76 | 1,937,117,647.06 |
Capital Allowance Computation – Mahogany Production Incorporated
| Year | Cost | Rate | Allowance | Written Down Value |
|---|---|---|---|---|
| 2019 | 1,883,308,823.53 | 20% | 376,661,764.71 | 1,506,647,058.82 |
ii. Distribution of Crude Oil – Gulf Fields
| Description | Barrels |
|---|---|
| Crude oil Produced | 50,000,000.00 |
| Royalty @ 5% | 2,500,000.00 |
| Net after Royalty | 47,500,000.00 |
| Initial Interest @ 15% of Net | 7,125,000.00 |
| Additional Participating Interest @ 5% of Net | 2,375,000.00 |
| Sapele Petroleum Ghana Ltd @ 45% of Net | 21,375,000.00 |
| Mahogany Production Incorporated @ 35% | 16,625,000.00 |
| Total | 47,500,000.00 |
iii. 2019 Income Tax Computation
Sapele Petroleum Ghana Ltd
| Description | US$ |
|---|---|
| Revenue (21,375,000 x 40) | 855,000,000.00 |
| Less: | |
| Production Cost (21,375,000 x 15) | 320,625,000.00 |
| Capital Allowance | 484,279,411.76 |
| Total Deductions | 804,904,411.76 |
| Chargeable Income | 50,095,588.24 |
| Tax @ 35% | 17,533,455.88 |
Mahogany Production Incorporated
| Description | US$ |
|---|---|
| Revenue (16,625,000 x 40) | 665,000,000.00 |
| Less: | |
| Production Cost (16,625,000 x 15) | 249,375,000.00 |
| Capital Allowance | 376,661,764.71 |
| Total Deductions | 626,036,764.71 |
| Chargeable Income | 38,963,235.29 |
| Tax @ 35% | 13,637,132.35 |
iv. Total Revenue of Government of Ghana
| Description | US$ |
|---|---|
| Bonus | 150,000,000.00 |
| Royalty (2,500,000 x 40) | 100,000,000.00 |
| Initial Interest (7,125,000 x 40) | 285,000,000.00 |
| Additional Participating Interest (2,375,000 x 40) | 95,000,000.00 |
| Income Tax – Sapele Petroleum Ghana Ltd. | 17,533,455.88 |
| Income Tax – Mahogany Production Inc. | 13,637,132.35 |
| Total Gov’t Revenue | 661,170,588.24 |
- Topic: Taxation of Revenue and Cost Streams
- Series: AUGUST 2020
- Uploader: Samuel Duah