Philip Daniel Fiscal Affairs Department International Monetary Fund Taxation of Natural Resource Rents: Questions, Approaches, Challenges IMF Natural Resources Consultation Session on Taxation and Wealth Management Washington DC, April 18, 2012
There are few areas of economic policymaking in which the returns to good decisions are so high and the punishment of bad decisions so cruel as in the management of natural resource wealth Preface Dominique Strauss-Kahn Managing Director, IMF 2
Agenda The background Wide volatility in commodity prices around a strong upward shift Potential for new transformative projects - for example in Africa Oil: Ghana, Uganda, Niger, Sierra Leone? Liberia? Gas: Mozambique, Namibia, Tanzania? Iron Ore: Guinea, Liberia; Tanzania? Nickel: Tanzania, Burundi Uranium: Niger, Tanzania, Namibia, Malawi Today s meeting What s special about resources (and extractive industries)? Questions for consultation What approaches have we (FAD) taken to date? What challenges arise in our country work? 3
What s so special about resources? Size of sector (even individual projects) relative to the economy Tax revenue is the central benefit to host country Promoting linked economic development a continuing challenge High sunk costs, long production periods Create time consistency problem Substantial rents The ideal of a non-distorting, immobile tax base! International considerations loom large Foreign tax rules matter Tax competition
What else? Uncertainty From geology, technology, price volatility and political risk Asymmetric information Few of these are unique to resources they re just bigger. What is unique is: Exhaustibility Opportunity cost of extraction includes future extraction forgone Views differ on how important this is in practice Recognize revenues as transformation of finite asset in the ground into financial asset
The questions What key characteristics of EI sectors have an important bearing on suitable tax design? What key principles should guide public policy on EI tax design, taking account of varying circumstances? Are rents in EI sectors appropriately taxed at present? Over-taxed? Undertaxed? Are there significant (or relevant) profitability and risk differences between mining and petroleum sectors? What is the appropriate mix between royalty-type and rent-based taxes, and how does it depend on a country s circumstances?
The questions Is administration of tax in EI sectors difficult (for companies or governments)? Is it made difficult by exceptional ways EI sectors are sometimes taxed? Do auctions and bonus-bidding have a role in mining or petroleum fiscal regimes? Are regimes set out in general legislation preferable to imposition by contract? When are bilateral negotiations and renegotiations warranted? How should we assess the appropriateness of taxation in different country contexts?
Economic rent P 1 Not viable Viable Production costs/pr rice Rent Project A Project B Project C D E F Cumulative production Prod 2
FAD approach to date (1) Fiscal terms must be robust in the face of changing circumstances. Should provide government with a revenue stream in all production periods, but also with an increase share of revenues as profitability increases (progressivity). Establish by law, or published contracts. Minimize discretionary and negotiated elements. Promote transparency. Specialized incentives should be avoided. Promote stability and credibility.
FAD approach to date (2) Tax and royalty, production sharing, and state equity can all be made fiscally equivalent. Different contract structures can apportion risks differently, and affect stability and credibility. Need to make data for key assessments in the regime observable and/or verifiable. Opportunities for aggressive tax planning should be minimized. Overall fiscal regime must take account of relative capacity to bear risk.
So multiple instruments needed Rent taxation is most efficient in principle Royalties distort extraction and exploration But royalties may still have an important role, to: Assure some revenue from day 1 of production Set the pace of extraction (implicit depletion policy) Problems of regular corporate income tax But, usually included to create creditable tax and consistent treatment with other sectors So: (1) Royalty + (2) CIT + (3) rent capture mechanism
Challenges arising in our advisory work How far should resource taxes be progressive? What are tolerable top marginal rates in a well-structured system? General terms or case-by-case negotiation? Distinctions among mining, oil and gas. Design of resource rent taxes. State equity (or venture interest) participation. Administration how tough can it be? Transfer pricing (1) OECD rules? Can we borrow industry-specific practices?
Challenges arising in our advisory work Transfer pricing (2): pricing of services of ancillary or downstream infrastructure. Taxation of capital gains on transfers of interest or shares in companies holding interests. Attracting investment and achieving credibility stability or incentives? International and treaty issues: border withholding, source and deductibility.
Thank you!