- 20 Marks
OGMT – Aug 2020 – L1 – Q5 – Petroleum Taxation
Compute capital allowances, crude oil distribution, income tax, and government revenue for Sapele Petroleum and Mahogany Production in 2019.
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.
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