Transfer Pricing and Challenges of Accounting Oversight from a Tax Accounting Perspective: A Case Study of International Oil Companies Operating in Libya

Abstract

This study aims to analyze gaps in the implementation of Production Sharing Agreements between the Libyan state National Oil Corporation (NOC) and foreign oil companies operating in the oil sector from an accounting and auditing perspective. It focuses on the crude oil pricing mechanism used by foreign companies on one hand and its impact on state revenues on the other hand. A fundamental issue emerges regarding the use of unfair pricing mechanisms by number of companies researched, which would lead to the reduction in the taxes and royalties that the state should rightfully receive. This raises accounting and legal challenges that require thorough scrutiny.

The study is based on an accounting analysis of annual financial report data published in accordance with International Financial Reporting Standards (IFRS) by the Italian company ENI (ENI IM Equity – Company Financials) and the American company ConocoPhillips (COP US Equity – Company Financials), both of which have production sharing agreements with the NOC. The transfer price in the study was derived by multiplying the reported price in the financial statements by the reported daily production rate for their assets in Libya. Since there was no dedicated figure in the data showing Libya’s share, the declared income from Libya was calculated. Additionally, the presumed income was estimated by adjusting the Brent crude price to reflect the quality of Libyan crude and comparing it to the reported income. Mathematical equations were used to determine the discrepancy in U.S. dollars, enabling the detection of potential transfer pricing practices.

The study’s findings revealed a recurring pattern of deviations exceeding 3% in six out of nine years in the case of ENI, supporting the likelihood that transfer pricing mechanisms were employed to reduce the income declared from its operations in Libya. As for ConocoPhillips, although it recorded similar deviations in some years, they were not as consistent and ceased entirely in the last two years. This indicates that ConocoPhillips is likely engaging in less transfer pricing compared to ENI.