Fiscal Regimes For Extractive Industries

Better designed and implemented fiscal regimes for oil, gas, and mining can make a substantial contribution to the revenue needs of many developing countries while ensuring an attractive return for investors, according to a new policy paper from the International Monetary Fund. Revenues from extractive industries (EIs) have major macroeconomic implications. The EIs account for over half of government revenues in many petroleum-rich countries, and for over 20 percent in mining countries. About one-third of IMF member countries find (or could find) resource revenues “macro-critical” – especially with large numbers of recent new discoveries and planned oil, gas, and mining developments. IMF policy advice and technical assistance in the field has massively expanded in recent years – driven by demand from member countries and supported by increased donor finance. The paper sets out the analytical framework underpinning, and key elements of, the country-specific advice given. Also available in Arabic: ????? ??????? ?????? ???????? ???????????: ??????? ???????? Also available in French: Régimes fiscaux des industries extractives: conception et application Also available in Spanish: Regímenes fiscales de las industrias extractivas: Diseño y aplicación

Revenues from natural resources often pose unique challenges for tax administration. This Handbook is one of the first of its kind to focus attention on effectively administering revenues from extractive industries. It provides policymakers and officials in developing and emerging market economies with practical guidelines to establish a robust legal framework, organization, and procedures for administering revenue from these industries. It discusses transparency and how to promote it in the face of increasing demands for clarity and accountability in the administration of public revenues from extractive industries, and discusses how developing countries can strengthen their managerial and technical capacity to administer these revenues.

Mining and petroleum projects share characteristics distinguishing them from other sectors of the economy, which has led to the use of dedicated fiscal regimes for these projects. The IMF’s Fiscal Affairs Department uses fiscal modeling to evaluate extractive industry fiscal regimes for its member countries, and trains country officials on key modeling concepts. This paper outlines important preconditions needed for effective fiscal modeling, key evaluation metrics, and emphasizes the importance of transparent modeling practices. It then examines the modeling of commonly-used fiscal instruments and highligts where their economic impact differs, and how fiscal models can inform fiscal regime design.

This Technical Assistance Report discusses the advice provided by the IMF staff to the authorities of Uganda regarding extractive industry fiscal regimes. As Uganda’s portfolio of projects diversifies in the oil sector, the minimum take could be adjusted to allow for possible bonus bids, and for higher shares in the most successful projects. The royalty design also needs to take account of new provisions for distribution of a portion to local governments. The cost recovery limit could be set at 70 percent after deduction of royalty. In addition to work program, either a signature bonus or an upper tier of production sharing should form the bid variable in the licensing round, with all other items fixed and non-negotiable.

This Technical Assistance Report discusses the advice provided by the IMF staff to the authorities of Uganda regarding implementation of fiscal regimes for extractive industries. The report considers options on how to conduct future licensing rounds, including possible bid variables and bid evaluation methods. It provides detailed comments on the draft model Production Sharing Agreement, along with simulations of its fiscal terms. The report also explains how crude oil price into the refinery is likely to be a negotiated outcome using the pipeline tariff as a guide.

This paper provides a conceptual overview of economists’ attempts to learn about the effects of taxes on extractive resources. The emphasis is on research methods and techniques, with no attempt to provide a comprehensive tabulation of previous empirical results or policy conclusions regarding preferred tax instruments or systems. We argue, in fact, that the nature of such conclusions largely depends on the researcher’s choice of modeling framework. Many alternative frameworks and approaches have been developed in the literature. Our goal is to describe the differences among them and to note their strengths and limitations.

EXECUTIVE SUMMARY This report is provided to support the work of the ‘Sheshinski II’ committee in reviewing the fiscal regime for mining. Mining is, and will remain, relatively minor both as a source of government revenue and within the wider economy. Nonetheless, it is important that the fiscal regime deliver to the public an appropriate share of the return to the exploitation of resources that they own while also providing investors with a sufficiently attractive and stable environment. To that end, this report reviews principles, experience and tools in mining taxation, bringing them to bear on the analysis of, and suggesting potential improvements to, the current regime. The current use of royalties as the sole and in some cases quite burdensome special fiscal instrument for mining is problematic. One of the primary benefits of royalties—that they ensure some revenue from the start of production—is of limited relevance in Israel, where production is highly mature and exploration minimal. More to the fore is their ineffectiveness in achieving one of the primary goals that warrants a special fiscal regime in the extractive industries: the prospect of designing a charge on rents—returns, that is, in excess of the minimum required by the investor—that can raise revenue without distorting commercial decisions. Their insensitivity to profitability means that royalties not only fail to do this, but, perversely, imply that the government actually takes a smaller share of rents when commodity prices are high; and, conversely, that the company faces a very high effective tax on its profits when those profits are low. Simulations reported here show that these undesirable effects are very marked under the current fiscal regimes. Indeed cutting top marginal royalties-even in the absence of any other reform—would in some cases almost certainly increase both government revenue and after-tax profits. Alternative fiscal regimes—combining a modest mineral-specific royalty with a common profit-based tax—would resolve this structural weakness. The focus of the report is not on the level of the ‘government take’ from minerals—ultimately a political choice—but on how that take varies with the profitability of the underlying investment. To that end, it reports illustrative simulations (for a hypothetical but not unrealistic project) of alternative fiscal regimes that imply the same government take in a benchmark case but respond very different to project profitability. These alternatives combine a relatively low royalty—which may have some merit in protecting the base against tax avoidance through cost manipulation—with four alternative forms of profit-based tax (retaining, in all but one, the current corporate income tax); and consider too the possibility of converting the royalty into, in effect, prepayment of a profit-based tax. These options differ in important ways—in the required statutory rate of the profit tax, transitional issues, and the time path of government revenues. But they all address the key structural problem, providing structures in which the effective tax rate is lower, not higher, for less profitable outcomes. Fiscal regimes of broadly this kind are (increasingly) commonplace in mining, including in major mineral producing countries. The treatment they provide would be similar to, but could be simpler than, that adopted for oil and gas following ‘Sheshinski I.’