China’s Sinopec International Petroleum Services Corporation (SIPSC), which is a subsidiary of the Sinopec Group and the contractor for the now-operational gas processing plant, has been found out for engaging in transfer pricing manipulation.
Consequently, the Transfer Pricing Unit of the Ghana Revenue Authority (GRA) has retrieved at least GHC15 million from the company for “overpricing” some materials it used in the construction of the gas processing plant.
Business Day Ghana understands that the investigations into the conduct of business by Sinopec began in 2016 and is continuing; therefore, the amount involved could rise.
The gas processing plant was financed from a $3bn Chinese Loan Facility (CBD loan approved by Parliament in 2011). The project, which was described as a turn-key project, was worth a total of $850m; comprising $750m gas infrastructure, $100m aerial surveillance equipment, and other local land acquisition costs funded by government (approximately $40m).
In a research conducted on “Transfer Pricing in Ghana’s Oil & Gas Sectors, Commodity Exports and Imports,” the Integrated Social Development Centre (ISODEC) reported that SINOPEC acted like a service company to Ghana Gas where they got paid on work by work basis. “The initial audit, therefore, reviewed operational costs, based on local expenses on SINOPEC where the Unit raised the margins and managed to retrieve over GHC10m as overpriced service.”
Subsequently, Business Day Ghana has learnt that the investigations, which are ongoing, have led to the discovery of a further abuse worth GHC5m, bringing the total funds recovered so far to GHC15m.
In October 2012, the Public Agenda newspaper published that China’s Sinopec International Petroleum Services Corporation (SIPSC) allegedly short-changed Ghana by a minimum of $140 million.
The amount represented how much SIPSC (a subsidiary of the Sinopec Group) purportedly overpriced components for the gas processing plant it was purchased to install at Atuabo for processing of gas from the Jubilee Field and losses from the first year of production.
On the issues of overpricing, Public Agenda reported that the 45-kilometer shallow water pipelines installed by SIPSC cost about $1.6 million more per kilometre than the deep water pipeline installed by the Ghana National Petroleum Corporation (GNPC) despite the shallow water pipelines not meeting the technical requirement of having an internal coating.
It was therefore suspected that SIPSC had overpriced the materials – both the power plant and pipes – by building hidden costs purportedly occasioned by an arrangement with SIPSC’s special purpose subsidiary offshore firm called SAF Petroleum Investments (FZE), which is registered in Dubai.
Business Day Ghana understands that under the arrangement, SAF made the initial procurement and resold the items to SIPSC. Meanwhile, the same person – Ms Yang Hua – served as Project Director for both SIPSC and SAF.
At the time, SIPSC, through Ghana National Gas Company (GNGC), denied the suggestion of engaging in over pricing through a subsidiary (transfer pricing manipulation).
But concerns over potential transfer pricing manipulation were further heightened by the fact that Ghana was losing an estimated $36 million annually in tax revenue from transfer pricing irregularities in the mining sector alone. And, according to finance sector documents, the influx of Multinational Enterprises (MNEs) into the country since 2007 when commercial quantities of oil were discovered on the west coast gave more reason for caution.
Ghana has also had its fair share of companies in the extractive sector, taking advantage of weaknesses in the country’s tax administration and tax laws to either avoid or evade taxes. In August 2013, the Civil Society Platform on Oil and Gas (CSPOG) hosted by ISODEC, raised concern about the fact that Ghana has within a space of two years lost some US$70 million in potential capital gains tax.
According to research by Tax Justice Network-Africa, Ghana loses an estimated amount of GHS2.0 billion from Transfer Pricing abuses from the Extractive Sector.
But there is no available literature on how much Ghana could be losing through transfer pricing in the oil and gas sector specifically.
In the specific case of Sinopec, ISODEC’s study revealed that the GRA until 2014… did not have a file on Sinopec (the contractor). “Our checks indicate that the contract, which contained the fiscal terms, was not shared as a matter of routine with GRA. For this reason, the tax authority was oblivious of the tax implications of the contract throughout the contract period.
“In spite of CSOs’ promptings, GRA did not look into the affair until 2016, two clear years after the project had been completed.”
In the second quarter of this year when ISODEC first shared its study, it said some amount of progress had been made and so the GRA had “managed to retrieve over GHC10m as overpriced service.”
ISODEC stated that “Following up with the GRA on these matters, an official of its Transfer Pricing Unit confirmed that investigations initiated in 2016 have confirmed that indeed, there were some transfer pricing manipulations by Sinopec.
“The Transfer Pricing Unit disclosed that the allegations of overpriced Liquefied Petroleum Gas (LPG) processing plant installed at Atuabo for processing of gas from the Jubilee Field have been confirmed.
But ISODEC learned that the audit of the transactions proved difficult because of the absence of data. “We currently source our data from Thompson Reuters and ATAF but these are usually European-sourced data which gives us the challenge of comparability test, because it becomes difficult to know whether these are customised machines or otherwise,” ISODEC gathered from the Unit.
However, the Business Day Ghana understands that the TP Unit faces a major challenge in the transfer pricing audit because machinery for the project was imported in the name of Ghana Gas, which also raises the question as to whether they are required to pay tax at all.
SINOPEC, ISODEC was told, acted like a service company to Ghana Gas where they got paid on work by work basis. “The initial audit, therefore, reviewed operational costs, based on local expenses on SINOPEC where the Unit raised the margins and managed to retrieve over GHC10m as overpriced service.”