Royalty payable to Ghana Government by X ltd is calculated as follows:
Rate of Royalty = 5%
Production 100,000,000
Royalty Payable to Government:
5%x100,000,000 = 5,000,000 barrels
The Royalty of government is taken in kind and GNPC sells it on behalf of Government.  (3 marks)

Tax Implication of Production Cost on Royalty
As per the petroleum taxation, Government takes Royalty without paying anything towards any cost.
The Royalty of 5,000,000 in barrels are without any cost to Ghana Government.   (2 marks)

• Initial Interest of Government is the equity of government in the petroleum operations that entitles the government to the production of the oil. Government is being carried in this arrangement, meaning, government is carried through exploration and development costs. Government only pays in respect of production cost relative to its interest.
• The relevance of the initial interest is that if there is no production, government does not suffer anything as its payment is only in respect of production cost.
• Additionally, the greater part of the cost is from exploration to development, which government does not contribute towards. Getting in is therefore getting much with less cost.
  

Commentary:

• The deduction of the financial cost from the revenue was not correct as the provision of the law allows a unique treatment as demonstrated below.
• Financial cost incurred shall be deducted from financial gain. Any financial cost incurred which cannot be deducted from financial gain shall be carried forward for the next five (5) years. The amount of $ 200,000 shall be carried forward.
• It shall continue to be matched against financial gain if any. If for the next five years, there is no financial gain, it shall be abandoned and ignored.
• It is not used as an allowable deductions and financial gain is not added to income. They are both reversed.
  (Any 2 points for 1 mark)

Lanandam Ltd
Computation of Revenue
Year of Assessment-2017
Basis period Jan 1-Dec 31, 2017

Comment: Sale of assets after commencement shall be added to revenue.

Dividend shall be paid to Ghana Government under the following circumstances:

• Payment of dividend by National Oil Companies established by Government of Ghana to operate in the upstream.
• Government of Ghana holding shares in any company in petroleum operations.
  

Surface rental is revenue charged by government per square kilometre in respect of acreage of block given to a contractor for petroleum operations. It is paid at each anniversary. The amount paid depends on the stage of production. It is lower at exploration stage, it increases at development and production. The contractors pay these monies into the petroleum holding fund.

It is the interest of government that allows the state to a share of the oil produced without making a contribution towards exploration and development cost. The State, however, contributes towards production cost being its proportionate representation in the petroleum operations.

Carried interest entitles the State to a share of the oil produced without making financial contribution towards exploration and development costs. The State should contribute towards production cost being its proportionate representation. The carried interest ranges between 7.5% and 15% in most oil producing countries.

Additional carried interest is a paying interest that allows the State to pay the proportionate share of only the development and production cost. The state does not pay towards exploration and appraisal cost.
The State can acquire up to 5% in any commercial discovery subject to petroleum agreement.

Additional oil entitlement which is also called super normal profit tax. It is levied in case the windfall profit, where the venture’s rate of return exceeds the target rate of return used to evaluate the profitability of the venture during negotiation.
It is computed on the basis of the after-tax inflation adjusted rate of return that the contractor achieves with respect to each field.

Petroleum operations are described as exploration, development and or production of the product, the sale of the product and export without sale of the product.
The contractor is deemed to have sold its products when exports are done to their affiliates in this case its Parent Company and the revenue will be realized using the rate ruling internationally on the day the export is made.     (2 marks)
Conclusion:
Whether the Contractor will be liable or not depends on whether it has a chargeable income after all allowable deduction as prescribed by the tax provisions. Tax is payable if the allowable deduction is less than the assessable income. If the assessable income is less than the chargeable income, no tax will be payable.      (2 marks)

Carried Interest is in the case of the petroleum activities, allows the Host government to benefit from production of oil and only pay towards production cost. Government does not contribute towards the exploration and development costs.     (2 marks)
In the case of mining operations, government takes 10% carried interest free without any financial contribution from the government.        (2 marks)