By Tanu Jalloh
The Petroleum Unit (PU), which falls under the control of the Trade and Industry ministry, is responsible for downstream petroleum activities—refining to marketing, although there is currently no refining. It is the regulatory body for the oil marketing companies (OMCs) who import and wholesale to distributors petrol, diesel, kerosene and heavy fuel (used for generating electricity).
In consort with the OMC, the PU develops the pricing framework, which may be adjusted at two week intervals using foreign exchange rates and global petroleum pricing indices. The retail price is adjusted when these factors affect the price by +/- 5% or more. A price subsidy mechanism prevents the retail price rising above Le 4,500 litre retail. The subsidy operates through the removal of a portion of the excise tax.
The OMCs import the petroleum products, which go first to a bonded warehouse. At the point when the OMC sells to distributors, the PU calculates the excise due and the required contribution to the road fund. The excise collections go into the Consolidated Fund and the road fund payment into the road fund account. No Goods and Services Tax (GST) is levied on the four petroleum products regulated by the PU.
Duty Assessment: The Authority assesses and collects import duties on petroleum products in a different manner than for other imported products. For petroleum products there is a complex web of third party and agency involvements which makes it difficult to ascertain the ownership and hence the obligation for the payment of import duties. This issue is particularly relevant to Safecon and the National Petroleum Company (NP) who appear not to import fuel directly but buy from intermediaries and third parties such as Petrol Leone and Ark Oil who are agents of principals based overseas.
System weaknesses: Currently when petroleum products are imported, no assessment is made of the duties payable on the quantity imported. Instead the fuel is collected from the tanker ships and delivered to a bonded warehouse from where it is distributed to retailers and some tax-exempt organisations like the United Nations.
At the warehouse, the National Revenue Authority (NRA) should have a representative responsible for recording all collections by retailers and other entities. The NRA representative is absent much of the time. In addition, he has no protective clothing to allow him to be fully involved in the process of measuring the quantity offuel being taken away and he is also untrained.
There are fundamental weaknesses over the control of taxable and non-taxable petroleum products.
The NRA has no system in place to confirm that collections on behalf of exempt organisations are delivered as intended. Import duties are only levied on the quantities declared by retailers on a form titled C27. Even when duties are levied by the Authority, in some instances they are not actually collected.
The practice of “bunkering” (refuelling a ship) prevails whereby a quantity of fuel is collected from the bonded warehouse to be delivered back to the tanker ship that originally brought in the consignment of fuel. This is also an exempt supply and the NRA has no mechanism or process in place to verify these deliveries.
Clearly, with such loose ways of levying and collecting taxes there is a high risk of collusion, corruption, mismanagement and incompetence with the result that significant customs revenue could be lost to the government.
Recommendation
It is recommended that the NRA and Ministry of Finance and Economic Development (MoFED) review the current system of taxing the importation of petroleum products and control over import duty revenue.
Officials’ Response: The points raised are well taken by the Authority. This will require the Ministry of Finance and Economic Development and the Authority to resolve the issues raised by the audit team. Issues relating to the capacity of Customs officers to be fully involved in the assessment and monitoring of petroleum products at the petroleum companies, Customs and Excise department will address the concerns raised.
Delays in MoFED Funding of NRA
Section 20 (a) and (b) of the National Revenue Act of 2002 states: The funds of the Authority shall consist of –a. three per cent of the actual revenue collected annually;b. a percentage to be specified from time to time by the Ministry with the approval of Parliament, of therevenue actually collected each year in excess of the estimated revenue in the estimates of Sierra Leonefor that year; …
The main source of revenue for the Authority is the three per cent commission that is paid by MoFED based on actual revenue collected by NRA. It was also observed that the Authority was struggling financially as MoFED was not making prompt quarterly payments. Table 7 shows the position for the financial year 2011 as at the 16th December 2011:
The lack of funds resulting from late or non-payment of commission by MoFED is crippling the Authority. It is a contributing factor to the Authority’s apparent inability to train and equip staff, introduce computerised systems and improve revenue collection.
Officials’ Response: The NRA Act 2002 is now overdue for review. Maybe during the review the payment of the 3% collection commission up front to the NRA account will be addressed.
Recommendation
It is recommended that MoFED, through the Accountant General’s Department, reconciles these amounts with the Authority and the outstanding commission arrived at be remitted to the NRA without delay.
The Tax Gap – Sources of Revenue Leakage
In any transaction between taxpayers who are associates, the Commissioner may distribute, apportion or allocate assessable income, deductions or credits between the taxpayers as is necessary to reflect the chargeable income the taxpayers would have realised in an arm’s length transaction.
The Commissioner may adjust the income arising in respect of any transfer or licence of intangible property between associates so that it is commensurate with the income attributable to the intangible property.
In making any adjustment under subsections (1) and (2), the Commissioner may characterise the source of income and the nature of any payment or loss as revenue, capital or otherwise. Transfer pricing refers to the setting, analysis, documentation, and adjustment of charges made between related parties for goods, services, or use of property (including intangible property) …
We have noted that some deficiencies in the current tax legislation cause revenue gaps with the result that revenue is lost to the Government of Sierra Leone (GoSL) Treasury. There are at least three missing elements in the tax regime that are found in most developed and developing jurisdictions. These relate to:
Rules for transfer pricing;’
Capital gains Tax; and
Property taxes
The addition of these areas, with effective administration and enforcement, would go a way towards closing areas where revenue leakage occurs at present and, in the case of property taxes, add another revenue stream.
