Trinidad and To­ba­go could have lost as much as $17.5 bil­lion in 2010 and 2018 pe­ri­od with the loss es­ti­mat­ed $7 bil­lion and $12 bil­lion in 2018 alone ac­cord­ing to a study by the Eco­nom­ic Com­mis­sion for Latin Amer­i­ca and the Caribbean (ECLAC).

Ac­cord­ing to its lat­est pub­li­ca­tion ti­tled, “Nav­i­gat­ing trans­fer pric­ing risk in the oil and gas sec­tor. Es­sen­tial el­e­ments of a pol­i­cy frame­work for T&T Guyana,” un­der the cur­rent arrange­ment, T&T is not al­lowed to fetch high­er nat­ur­al gas prices in oth­er mar­kets when they fluc­tu­ate, sub­se­quent­ly re­sult­ing in a loss of po­ten­tial rev­enue.

The pub­li­ca­tion not­ed that over 2010 to 2014 while the nat­ur­al gas price was high, it is es­ti­mat­ed that rev­enue col­lec­tions by the Gov­ern­ment could have been ap­prox­i­mate­ly five times high­er.

In 2018, while prices were low, the Gov­ern­ment could have re­ceived rev­enue that was ap­prox­i­mate­ly six times high­er than ac­tu­al re­ceipts - amount­ing to an es­ti­mat­ed US$2.6 bil­lion in rev­enue loss from the nat­ur­al gas sec­tor alone, the pub­li­ca­tion high­light­ed.

“In 2018, the es­ti­mat­ed rev­enue loss ranged from$7,855,851,899 (TTD) to $13,678,883,823 (TTD),” the re­port read.

It not­ed that the ex­tra rev­enue could have had a sig­nif­i­cant pos­i­tive im­pact on the coun­try’s GDP growth rate, par­tic­u­lar­ly as it seeks to quick­en its post-COVID-19 eco­nom­ic re­cov­ery.

“This should al­so serve a cau­tion­ary tale for Guyana, as it nav­i­gates the de­vel­op­ment of the leg­isla­tive and pol­i­cy frame­work that will gov­ern the de­vel­op­ment of its en­er­gy sec­tor,” the study warned.

The pub­li­ca­tion ex­plored the oil and gas val­ue chain by first ex­am­in­ing the oil and gas tax­a­tion frame­work and as­sess­ing the me­chan­ics of the in­dus­try’s nat­ur­al cre­ation of op­por­tu­ni­ties for trans­fer pric­ing.

A trans­fer price is the price that one di­vi­sion of a com­pa­ny charges an­oth­er di­vi­sion of the same com­pa­ny.

Trans­fer pric­ing can be ap­plied for ser­vices, in­tel­lec­tu­al prop­er­ty, fi­nanc­ing, in­ter­est, and the ex­change of goods.

Trans­fer pric­ing risk rep­re­sents the chance that the trans­fer prices do not re­flect true mar­ket prices, re­sult­ing in the shift­ing of a com­pa­ny’s prof­it from one ju­ris­dic­tion to an­oth­er.

Sim­ply put its a case where one com­pa­ny sells to an­oth­er com­pa­ny with­in the same group a prod­uct for a par­tic­u­lar price. That price may how­ev­er be less than the ac­tu­al mar­ket price, re­sult­ing in the tax­es owed to the orig­i­nal ju­ris­dic­tion be­ing less then it should have re­ceived had that tax­es been ap­plied on the high­er price that the prod­uct was even­tu­al­ly sold at.

ECLAC al­so not­ed that de­vel­op­ing coun­tries like T&T which lack the ca­pac­i­ty to com­mer­cial­ly pro­duce and mon­e­tise their nat­ur­al gas re­sources on their own tend to re­ly up­on multi­na­tion­al en­er­gy com­pa­nies.

How­ev­er, there is a dilem­ma.

Ac­cord­ing to ECLAC the at­trac­tion of multi­na­tion­als, per­haps through in­cen­tives, fa­cil­i­tates the earn­ing of nat­ur­al re­source rents and en­cour­ages eco­nom­ic ac­tiv­i­ty in coun­tries.

How­ev­er, do­ing busi­ness with large play­ers with frag­ment­ed yet in­ter-con­nect­ed glob­al val­ue chains, cre­ates sev­er­al op­por­tu­ni­ties for the ero­sion of tax­able in­come, it said.

Ac­cord­ing to the pub­li­ca­tion, MECs op­er­ate in in­ter-con­nect­ed glob­al val­ue chains in the process of bring­ing the hy­dro­car­bons from the ground to the con­sumer in the fi­nal mar­ket.

It not­ed that since multi­na­tion­als tend to be ver­ti­cal­ly in­te­grat­ed, they tend to have dif­fer­ent sub­sidiaries and di­vi­sions op­er­at­ing in dif­fer­ent seg­ments of the glob­al val­ue chain, adding that these multi­na­tion­als of­ten con­duct busi­ness with their dif­fer­ent di­vi­sions.

“While busi­ness be­tween the di­vi­sions is not a prob­lem, the ma­nip­u­la­tion of costs can cause the shift­ing of prof­its along the val­ue chain, re­sult­ing in the chang­ing of tax­pay­ers’ tax li­a­bil­i­ty,” the pub­li­ca­tion ex­plained.

It said trans­fer pric­ing risk is the chance that the trans­fer prices do not re­flect true mar­ket prices, i.e. re­sult­ing in the shift­ing of a com­pa­ny’s prof­it from one ju­ris­dic­tion to an­oth­er there­by erod­ing the lo­cal tax base.

ECLAC said T&T like Guyana is among the Caribbean coun­tries with com­mer­cial re­serves of hy­dro­car­bons, where trans­fer pric­ing risk has the po­ten­tial to re­sult in con­sid­er­able rev­enue leak­age.

“Ide­al­ly, both coun­tries should seek to cap­ture their fair share of the gen­er­at­ed nat­ur­al re­source rents. How­ev­er, MECs have greater in­sti­tu­tion­al ca­pac­i­ty than sev­er­al de­vel­op­ing coun­try gov­ern­ments, and are able to re­duce their tax li­a­bil­i­ty through the use of trans­fer pric­ing.

“The pre­vail­ing prob­lé­ma­tique is whether or not oil and nat­ur­al gas rev­enue has con­tributed to the eco­nom­ic growth of re­source-rich Caribbean coun­tries; and whether en­er­gy-rich Caribbean economies are vul­ner­a­ble to trans­fer pric­ing risk, i.e. have in­curred sig­nif­i­cant rev­enue leak­age due to trans­fer pric­ing by MECs,” ECLAC ex­plained.

The pub­li­ca­tion al­so in­di­cat­ed that the COVID-19 pan­dem­ic had per­ni­cious mul­ti-sec­toral eco­nom­ic and fi­nan­cial im­pacts on the economies of the sub-re­gion, con­sid­er­ably re­duc­ing fis­cal rev­enues by as much as 75 per cent in some Caribbean economies.

It has al­so led to sig­nif­i­cant growth in fis­cal spend­ing.

ECLAC said this has damp­ened liq­uid­i­ty in many Caribbean coun­tries, which were al­ready chal­lenged by high lev­els of pub­lic debt and fis­cal deficits, both of which have wors­ened in 2020.

Hence, for sub-re­gion­al en­er­gy ex­porters, op­ti­mis­ing nat­ur­al re­source rents has not sur­pris­ing­ly re-emerged as a lead­ing short-term pol­i­cy ob­jec­tive for the post-COVID-19 era, the pub­li­ca­tion said.

Trans­fer pric­ing leg­is­la­tion

Since trans­fer pric­ing risk is a com­mon prob­lem oc­cur­ring in oil and gas in­dus­tries, it would be log­i­cal for trans­fer pric­ing leg­is­la­tion to be in­tro­duced in Guyana and T&T, the pub­li­ca­tion rec­om­mend­ed.

It said the rev­enue im­pact of trans­fer pric­ing has been not­ed by the au­thor­i­ties to ex­ist in T&T.

How­ev­er, it said nei­ther Guyana nor T&T pos­sess frame­works for ad­dress­ing po­ten­tial trans­fer pric­ing in their hy­dro­car­bon in­dus­tries.

ECLAC al­so ad­vised that it is im­per­a­tive that any frame­work to ad­dress po­ten­tial trans­fer pric­ing in T&T should en­cour­age, even re­quire the con­duct of trans­ac­tions by multi­na­tion­als us­ing the arm’s length prin­ci­ple to ad­dress, in­ter alia, po­ten­tial shift­ing in the des­ti­na­tion mar­kets for nat­ur­al gas.

To this end, four es­sen­tial el­e­ments are rec­om­mend­ed frame­work.

First­ly, ECLAC said there should be a des­ig­nate rev­enue au­thor­i­ty to set a fair price for the hy­dro­car­bons. From the out­set, the pub­li­ca­tion said an en­ti­ty should be des­ig­nat­ed with the re­spon­si­bil­i­ty to mon­i­tor the prices of crude oil, nat­ur­al gas, and down­stream prod­ucts in var­i­ous mar­kets.

Sec­tion 6(A) of the Pe­tro­le­um Tax­es Act es­tab­lished the Per­ma­nent Pe­tro­le­um Pric­ing Com­mit­tee (PP­PC) to de­ter­mine a fair mar­ket price for the tax­a­tion pe­tro­le­um.

In 2018 the Min­is­ter of En­er­gy stat­ed that the PP­PC was re­ac­ti­vat­ed, fol­low­ing sev­er­al years of dor­man­cy. The PP­PC has the ju­ris­dic­tion to de­ter­mine the prices for pe­tro­le­um.