Growth and Sustainability Levy risks dampening petroleum upstream investments

The proposed Growth and Sustainability Levy has the potential to dampen investments into oil and gas exploration and trigger litigation, if approved, the Ghana Upstream Petroleum Chamber, has warned.

The levy, which is currently before Parliament, if approved, will impose a 1 percent tax on gross production for oil and gas companies and extractive companies, among others, as well as a 5 percent rate on profit before tax on the aforementioned businesses.

The move has, however, been described as ill-timed, harsh and one with the potential to erode the gains made toward making the domestic oil and gas industry an attractive investment destination by the Upstream Petroleum Chamber.

“The provision for a 1 percent tax on gross production for oil and gas companies, represents an increase in royalty to all intents and purposes. There is also a 5 percent tax on profit before tax that applies to the oil and gas service companies meaning taxes will be imposed irrespective of the financial performance of the target business,” it said in a statement.

It warned that introducing additional taxes at a period when the industry is already going through challenging times is rather unfortunate, anti-business, risks the collapse of indigenous oil service companies and could trigger disinvestment by international oil companies.

“This Growth and Sustainability Levy will damage investments”, says Joe Mensah, Senior Vice President of Kosmos Energy Ghana and Chairman of the Upstream Chamber.

The statement added that it considers the levy as the latest in a series of creeping taxation that is affecting the economic balance of petroleum agreements, citing the COVID-19 Recovery Levy, Ghana Education Trust Fund Levy, National Insurance Levy, the 1 percent local content fund levy and several others, as  examples of creeping taxation.

Rather than breach provisions of petroleum agreements to raise money from creeping taxation, which could trigger litigation, the chamber said: “We urge the government to pursue a path of reserves and revenue growth through expedited award of exploration blocks to prospective investors”.

On why the government should reconsider the levy, it said the new tax disregards the importance of the preservation of contract sanctity to the promotion of new investment. “Unpredictability of the fiscal terms of our petroleum agreements will disincentive new oil and gas investment at a time when financial institutions are curtailing investment in fossil fuels”.

“This new tax is an increase in royalties in disguise and an imposition that will inhibit further the growth of our service companies,” Chief Executive Officer of the Upstream Petroleum Chamber, David Ampofo, bemoaned.

Lack of predictability

The statement added that the lack of stability and predictability on a matter as important as tax, means businesses cannot even be sure what their investment returns are likely to be.

“It is in Ghana’s continued interest to encourage exploration and development of its hydrocarbon reserves by attracting foreign capital, but there are taxation impediments that need addressing, and creeping taxes such as this are an example. When creeping taxes and levies become the norm, tax avoidance and disinvestment become inevitable. We therefore urge government to reconsider the bill and send a positive signal to the market.

“Industry is ready to join hands with other affected parties to engage government on this matter,” the statement concluded.