Surrey Energy Economics Centre Mining And Petroleum Taxation: Principles And Practice Carole Nakhle Revenue Mobilization and Development IMF, DC, 2011 1
Economic Contribution in 52 Developing Countries 90 %GDP %Revenues %Exports 80 70 60 50 40 30 20 10 0 Low Income Lower Middle Income Upper Middle Income High Income Source: IMF, 2010 2
Growing Potential Africa Proved Oil Reserves West Africa Oil Exports 2009 erves n s Barrels Proved Rese Thousands Million 140.00 120.0 100.0 80.00 60.0 40.0 20.00 0.0 1989 1999 2009 Europe, 22% China, 19% India, 8% US, 36% S. & C. America, 7% Other, 7.5% o Developing countries produce 70% of the world s minerals Only 20% of Africa s natural resources discovered so far (Collier, 2010) o Fiscal and regulatory regimes - major factors in whether the potential is realised Source: BP Statistical Review, 2010 3
Extractive Industries - Distinctive Features Large up-front capital requirements and long lead times between initial investment and first revenues generated Difficulty in obtaining external funding Late payback Geological uncertainty Exploration - speculative activity, many failures Only when the deposit is exhausted do you know precisely what the reserve was (Andrews-Speed, 1998, p.6) Wide range of technical, commercial and political risks 4
Market Uncertainties 12,000.00 Zinc Copper 10,000.00 60,000.00 50,000.00 Nickel 8,000.00 40,000.00 6,000.00 30,000.00 4,000.00 20,000.00 2,000.00 10,000.00 000 0.00 May-05 Oct-06 Feb-08 Jul-09 Nov-10 Apr-12 0.00 May-05 Oct-06 Feb-08 Jul-09 Nov-10 Apr-12 5 year Prices (US Dollars per Metric Ton) Source: Index Mundi, 2011 5
Other Distinctive Features Environmental concerns CO2 emissions, disruptions to land, wastes, pollutants Non-renewable natural resources Potential for economic rent The value of a resource at the point of production less all prior costs incurred, including a suitable return on investment (Watkins, 2001) Desirable tax base In general, state ownership of the resources Resolution of the UN General Assembly on Permanent Sovereignty over Natural Resources (A/1803 (XVIII), December 14, 1962. Access to resources 6
Special Treatment for Special Industry Common approach - a combination of royalty and income tax Royalty Compensation for the reward of ownership Per-unit tax (levied on output) or ad-valorem tax (levied on the value of the output) Source of early revenues Profitability-based Tax Mainly income tax at higher rates, occasionally additional special taxes Economic rent = higher taxable capacity Other possible payments: bonuses... 7
The Oil Industry: Even More Distinctive Risks and costs greater than in mining (offshore oil/gas) More capital, less labour intensive Cost of drilling of one oil well exceeds that of a diamond drill hole by a factor of 10 to 20 times on a per metre basis Well depths: 1,000 and 5,000m compared to typically less than 500m for a diamond drill hole Oil - a valuable source of energy, with no close substitute Energy enters directly or indirectly all economic activities Oil has wider applications than any single mineral Transport, power generation and petrochemicals 8
Oil vs. Mining Greater concentration of (low cost) reserves 63% in the Middle East Security of Supply Access to oil resources is more limited Fierce competition among oil companies to obtain acreage Market structure less competitive OPEC cartel controlling the largest and lowest cost reserves Output restriction raises the price above the competitive level More visible public ownership and greater state participation Higher economic rent 9
Economic Rent: Market vs. Cartel 10
More Elaborate Fiscal Arrangements Petroleum Fiscal Regimes Concessionary Regimes (Royalty, Income Tax, Special Resources Rent Tax...) Contractual Regimes (Companies = contractors) o Production Sharing Agreements (Payment a share of production) Risk Service Contracts (Payment a fixed fee) 11
Mining and Petroleum Taxation Mining Petroleum R&T R&T Contractual Royalty - Unit Based Rare Rare Rare - Ad Valorem Common Common Occasional Income Tax Common Common Common Special Tax Rare Common Rare Bonuses Rare Occasional Common DMO Rare Rare Common State Participation Occasional Occasional Common Top Marginal Rates 40-60% 60-85% 60-90% 12
What The Theory Tells Us An ideal tax is: Neutral does not distort t investment t decisions i Fair Firms that exploit more valuable resources have greater ability to pay and so their tax liabilities can be greater Risk-sharing, progressive tax? Clear and simple Administrative efficiency - Easy to understand and to administer Stable Continuous tinkering increases the fiscal risk and negatively affects investors confidence... among others 13
In Practice - No Ideal Tax Economic rent most desirable tax base: How to determine them? Profit-based taxes not always simple Late revenues to Government Royalty: Early source of revenues Up-front effect kicks in as soon as production starts and irrespective of the size of the field; equivalent to an increase in the resource extraction cost Ideal taxes exist just in theory; in practice, a combination of several tax instruments is advisable 14
The UK Experience: Chasing the Oil Price 120.00 Oil Price 100.00 80.00 ST @ 32% 60.00 40.00 20.00 SPD abolished, replaced by APRT 20%, PRT 75% SPD introduced PRT 70% APRT abolished PRT 60% Royalty abolished on new fields ST @20% ST introduced @10% Royalty abolished PRT 50% abolished on new fields 0.00 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Nominal terms 15
Getting The Balance Right Commonly stated objective: To generate a fair share of revenues to the Government while sustaining investment What is fair? Misguided judgements based on: The type of regime in place and the rates imposed Details matter! Embracing blindly: others have done it, we should follow Fiscal terms tailored to investment opportunities in the country: Balancing the need to have an internationally competitive regime with government policies that reflect the nation s unique priorities 16
Taxation One Of Several Pillars 17