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Fiscal Regimes for Extractive Industries (EI): Objectives, Tools and Design Principles

OANA LUCA (IMF/FAD)

BANGKOK

DECEMBER 7, 2016

EI provide a key revenue source

for (increasingly) many countries… … including in the Asia-Pacific region.

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Why distinct fiscal regimes for EI?

Substantial rents

Pervasive uncertainty ….

Asymmetric information

High sunk costs, long production periods

Extensive involvement of multinationals in some countries…

….. and of State-Owned Enterprises in others

While few of these considerations are unique to resources, they are just bigger. What is unique is Exhaustibility — recognize revenues as transformation of finite assets in the ground into other assets.

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25

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65

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105

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2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

US$

per

bar

rel

WEO Oil Price Forecasts 2002-2019(Monthly prices, 2014 U.S. Dollar per Barrel)

Sep 2004

Sep 2011

Oct 2008

Oct 2009

Oct 2007

Sep 2006

Sep 2005

Oct 2012

Sep 2013

Oct 2014

Oct 2010

Jan 2015

Oil price forecasts and outturns

Central objectives for EI fiscal regimes

Ensure State as resource owner gets an ‘appropriate’ share

Fiscal terms must be robust in the face of changing circumstances

Consistent with countries of similar prospectivity

Encourage development of all viable discoveries

Easy administration (for authorities) and compliance (for taxpayers)

Establish by law… minimize discretionary and negotiated elements

Stability and credibility

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Main fiscal schemes

Contractual, including production sharing or service contracts

Tax and royalty, with licensing of areas

State ownership or participation

These schemes are sometimes blended in practice…

… can be made fiscally equivalent

… and designed to achieve efficiency and transparency in each case.

Fiscal instruments for EI

The fiscal regime consists of a combination of such instruments.

• Land rental / surface fees• Bonuses (signature or production)Fixed payments

• RoyaltiesProduction/turnover - based

• Corporate income tax• Explicit rent tax / additional profit taxes• Profit sharing

Profit/rent - based

• Full / carried participationState participation

• Dividend and interest withholding taxes• Indirect taxesOthers

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Fiscal regime design: recommended approaches

Country circumstances require tailored advice, but generally within a framework that combines

A royalty on gross revenue

A tax targeted explicitly on rents (and thus on the achieved results of extraction)

Together with normal corporate income tax

Bonus-bidding may have a role in promising environments

Such regime ensures revenue from day one and that government revenue rises as rents increase.

Evaluation is essential…

An often-used approach is scenario analysis.

The IMF Fiscal Analysis of Resource Industries

(FARI) modeling system

Uses indicators related to objectives and criteria, such

as average effective tax rate (AETR) and

progressivity.

http://www.imf.org/external/np/fad/fari/

- 20% 40% 60% 80% 100% 120%

RussiaArgentina

Indonesia ; 2011 DWColombia: Roy + Tax

Sri Lanka ; Mannar basinNorway ; Offshore

Vietnam ; 2010 incentive 0%…Azerbaijan

Timor-Leste ; TL_BUUK 2011

Peru : 1993 -1995Malaysia ; Deep Water + 20%…

Nigeria PSCThailand ; TH_III (excl. SRB)

Australia ; PRRTUSA : OCS

Brazil: OnshoreMexico ; Special regime

POLAND ; Current Regime

Average Effective Tax Rate (AETR)

Marg

inal

No

t viab

le

Field: Oil field

Size: 809 MMBOE

Costs: $26.1 BOE

Oilprice: $100 Bbl

IRR pre tax: 30%

Project Description

Discount Rate: 10.0%

Oil regimes: fiscal comparison

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… as is administration and transparency.

Administration

EI tax administration should not be hard in principle

Nonetheless, often both difficult and badly done

Claims that administration of profit/rent-based EI taxes is too hard, and that countries should rely on royalties, are misplaced

Principles of effective modern tax administration are equally relevant to EI

Transparency

Transparency in fiscal regime design and implementation is vital but often lacking

IMF Guide on Resource Revenue Transparency, Extractive Industries Transparency Initiative (EITI)

IMF (FAD) TA actively engaged and research-based

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Thank you