WHEN oil companies sell the oil and gas that they extract from Trinidad and Tobago (T&T), over 80% of the revenue is paid to third-party contractors for goods and services.
These contractors are often international companies that get paid in foreign currency which they take out of T&T. Many of these foreign companies pay little to no taxes. Meanwhile, local companies trying to compete are stuck paying a 25% corporate tax and other charges.
When you consider these costs, along with the companies’ own operating expenses (which take up more than 8% of revenue), the 50% Petroleum Profits Tax on the remaining 12% doesn’t seem as large as it first appears.
As much as the Government collects from taxes on oil and gas companies, it is nothing compared to what others are taking out. These expenses are necessary, but we should ensure that everyone is paying their fair share, not just homeowners and local businesses.
There is one action which, if taken by any petroleum minister since the Petroleum Regulations came into effect in 1971, could have prevented this situation. It’s not too late to act, but delaying action will continue to be costly. The importance of licensing
The Petroleum Act of 1969 (Article 6.1) says that ‘no person shall engage in petroleum operations on land or in the sea unless they first obtain a licence.’ Article 3 of the Petroleum Regulations declares that licences are needed for exploration, production, pipelines, refining, petrochemicals, and liquefaction, among other activities defined as ‘Petroleum Operations’. Yet, petrochemical plants at Pt Lisas remain unlicensed and the licensing of liquefaction facilities has been limited, resulting in preventable losses. Those are for another time.
Section 2 of Article 3 also requires that agents and contractors working for licensed oil companies must get their own licences. These contractors are the ones receiving 80% of the revenue from oil and gas production.
Licensing is important because it ensures that companies doing business in T&T register here, establish a local office, pay taxes, and keep records that can be audited by the Government. Without licences, these companies don’t have to pay taxes. At best, they might pay a withholding tax of 10%, or 0% if they set up a parent company in tax havens like Barbados or St Lucia, using loopholes in the Caricom Tax Treaty.
Meanwhile, local businesses are at a disadvantage because they pay a 25% tax rate and face additional charges. When they compete against foreign companies, they’re often considered overpriced, even though they’re paying their fair share of taxes. Foreign companies end up keeping both foreign currency and jobs out of T&T.
Why is it taking so long to fix this?
The country spends huge amounts of money on lawyers and advisors, yet we still haven’t updated petrochemical licences, natural gas regulations, or other laws that govern our most important economic sector and which are over 50 years old. We also haven’t issued an Order to prevent tax avoidance and transfer pricing by international contractors and agents.
I’m not a lawyer but it seems like it wouldn’t be too difficult to draft rules to fix these issues. For example, contractors should be required to get a licence if they meet one or more of the following conditions:
1. They make at least 50% of their revenue from oil and gas operations or from providing services to an oil company (whether directly or indirectly contracted by a licensee, to avoid fronting.) 2. Their annual revenue from oil and gas operations exceeds a certain amount (to avoid excessive bureaucracy). 3. They provide services to an oil company for at least 180 days in a year (to align with tax laws). 4. They are part of a group of companies owned by the same entity, whose affiliated parties together meet the above criteria (to avoid breaking up companies into smaller units to dodge the rules).
Similarly, introducing a Capital Gains Tax under the Petroleum Taxes Act, or using the authority of the Minister of Energy under the Petroleum Act, could help stop the losses from asset sales that are currently benefiting private companies much more than the public.
These suggestions involve amending or adding conditions to existing laws to bring them in line with modern industry practices. However, the real problem is not just outdated laws but a lack of diligence and accountability by regulators and, quite possibly, their lack of self-confidence. If we don’t fix this, T&T will continue to lose revenue and foreign currency, making it harder to save our economy for future generations.
Fixing these and other regulatory issues could lead to more investment, activity and jobs in the oil and gas industry, which could slow the economic decline and give us more time to prepare for a future beyond oil and gas.
These and other issues will be discussed at upcoming events hosted by the Lloyd Best Institute of the Caribbean. A more comprehensive version of this article is available on the Institute’s digital platform (www.thelloydbestinstitute. org/) Anthony Paul is an Energy Strategy and Policy Advisor, Chairman of the Lloyd Best Institute of the Caribbean and a Member of the Board of the Natural Resources Governance Institute and Chair of its Nominations & Governance Committee.