International oil companies (IOCs) remain exempt from submitting tax return directly as the Prime Minister has overruled revenue authority's opinion for incorporating a compliance provision into the draft Production Sharing Contract (PSC), sources said.
This ruling from the highest government authority comes in order to attract foreign investment into much-needed oil and gas exploration, as Bangladesh gets increasingly dependent on expensive fuel imports.
Currently, the responsibility of paying taxes and submitting returns on behalf of IOCs lies with the state-owned Petrobangla. The IOCs submit tax returns to the Petrobangla and the latter submits those to the taxmen after scrutiny.
Seeking to finalise a new PSC, the energy ministry sought the opinion of the National Board of Revenue (NBR) regarding the proposed changes, which suggested that taxpayers should directly submit tax returns to the tax offices, said officials.
The energy ministry has found out that altering the tax-return submission method might lead to complexities in calculating taxes for IOCs, which are presently paid by Petrobangla on their behalf, they said.
They had said IOCs prefer the existing system as it has been functioning "smoothly so far".
Moreover, the sources noted, if the proposed changes were to be implemented, Petrobangla would no longer be able to examine the tax returns of IOCs, leaving them responsible for any mismatch between the tax paid and the statements in their tax returns.
To resolve the issue, the energy ministry forwarded both options - from the ministry and the revenue board - to the Prime Minister for her discretion. According to sources, the Prime Minister subsequently approved the energy ministry's proposal, maintaining the current tax-return-submission method.
The Bangladesh Offshore Model PSC-2023 is in its final stage under the Ministry of Energy and Mineral Resources. The government has taken the initiative to update the PSC-2019 and include competitive benefits to attract investments in oil-and gas exploration compared to competitor countries.
Tax officials said the scope for providing benefits to the IOCs remained open so that Petrobangla can reimburse the tax amount to the IOCs, if desired.
According to a senior tax official, IOC tax payments are necessary to maintain discipline in tax collection and adhere to taxation principles.
At present, IOCs are required to pay advance income tax (AIT) in case of importing machinery. At the year-end, the IOCs prepare their tax returns with the necessary documents and submit them to Petrobangla. The tax returns are then scrutinised by Petrobangla and the AIT of IOCs is adjusted to calculate taxes on the dividends. Subsequently, Petrobangla provides a tax-payment receipt to the IOCs.
The government's goal in updating the Offshore Model PSC-2019 is to ensure competitiveness with neighbouring countries and attract more investments from IOCs. In this context, officials from the Ministry of Energy and Mineral Resources held a meeting with NBR high-ups last week to discuss the issue, as per sources.
The revenue officials say as per the principles of tax law, taxpayers should be responsible for paying their taxes and submitting returns. From an income- tax perspective, it is considered "unjust" to collect taxes from entities other than the taxpayers themselves.
Energy experts say the government is offering benefits to attract foreign investors with attractive financial packages for gas exploration.
Earlier, the government's invitation for the 'offshore bidding round-2012' in 26 blocks of Bangladesh maritime territories to explore oil and gas did not yield a satisfactory response.
Petrobangla has drafted the PSC-2023 based on the report of international consultancy firms and sought NBR vetting to finalise the tax measures.
"All direct taxes shall be levied, charged, paid and shall be deducted at source in accordance with the Income Tax Law. The employer, acting as the specified person, shall also deduct/collect tax at source in accordance of the income tax law and the rules and orders made thereunder," the income-tax authority opined in its vetting.
"The contractor, subcontractors and employees shall comply with all statutory requirements and discharge all obligations as per income tax law and the rules and orders made thereunder," it added.
However, Petrobangla has retained the provision for the submission of tax returns on behalf of IOCs in the draft PSC-2023, article 19.1(b).
Energy-expert Dr Izaz Hossain said it would not be wise to cut existing benefits for IOCs as it may discourage them from investing in future.
"Exploration of gas is associated with high risk and there is a chance of failure," he adds.
He suggests that the government refrain from implementing any regressive measures at this critical time when the country requires more investment in gas exploration.
Existing IOCs, including Chevron, will continue to enjoy fiscal benefits as per their contract with the government signed in 1995, and these benefits will remain in effect until 2035.
A larger maritime area that Bangladesh won from Myanmar has remained unexplored since 2012 for a lack of an attractive model PSC for investors.
The government plans to invite bids after finalising the model PSC to appoint an IOC for gas exploration in the sea.
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