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Fiscal Regimes for Extractive Industries: Old and New Challenges
The document discusses fiscal regimes for extractive industries, highlighting factors such as substantial rents, uncertainty, and the need for distinctive frameworks to maximize government revenues. It outlines various fiscal instruments and emphasizes the importance of transparency and tailored approaches in developing effective tax systems for petroleum and mining sectors. Additionally, it addresses the implications of international taxation, environmental considerations, and the necessity for adaptability in response to changing market conditions.
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Fiscal Regimes for Extractive Industries: Old and New Challenges
- 1. 1 Fiscal Regimes forExtractive Industries – Old and New Challenges Philip Daniel IDS, Sussex 5 April 2017
- 2. A key revenuesource during the boom years… Source: IMF (2012)
- 3. Why distinct fiscalregimes for EI? Substantial rents Pervasive uncertainty 3
- 4. Oil price forecastsand outturns 4 15 25 35 45 55 65 75 85 95 105 115 125 135 145 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 US$perbarrel WEO Oil Price Forecasts 2002-2019 (Monthly prices, 2013 U.S. Dollar per Barrel) Oct 2010 Sep 2004 Sep 2011 Oct 2008 Oct 2009 Oct 2007 Sep 2006 Sep 2005 Oct 2012 Sep 2013 Apr 2014
- 5. 15 25 35 45 55 65 75 85 95 105 115 125 135 145 2002 2003 20042005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 US$perbarrel WEO (IMF) Oil Price Forecasts 2002-2021 (Monthly prices, 2016 U.S. Dollar per Barrel) Sep 2004 Sep 2011 Oct 2008 Oct 2009 Oct 2007 Sep 2006 Sep 2005 Oct 2012 Sep 2013 Oct 2014Oct 2010 Apr 2015 Oct 2015 Apr 2016
- 6. Volatility in costs 6 UpstreamCapital Cost Index Upstream Operating cost Index Source: IHS Energy
- 7. Why distinct fiscalregimes 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 7
- 8. Why distinct fiscalregimes for EI? (2) Few of these considerations are unique to resources—they’re just bigger. What is unique is: Exhaustibility —Recognize revenues as transformation of finite assets in the ground into other assets —Possible cost of extracting now rather than in future 8
- 9. Central objectives Maximize PVof net government revenues Timing of receipts “Progressivity” – taxing rents Ease of administration (for authorities) and compliance (for taxpayers) 9
- 10. Three main fiscalschemes (sometimes blended)… Contractual, including production sharing or service contracts Tax and royalty, with licensing of areas State ownership or participation These can be made fiscally equivalent Design to achieve efficiency and transparency in each case 10
- 11. Fiscal Instruments forEI Bonuses (with bidding) Royalty Corporate income tax Explicit rent taxes (and alternative forms) State participation 11
- 12. Evaluation is essential… Twoapproaches: Model effects on exploration, development, and extraction Scenario analysis – the FARI modeling system Use indicators related to objectives and criteria, e.g. —Average effective tax rate —Progressivity in prices 12
- 13.
- 14. 14 North American shalegas - 20% 40% 60% 80% 100% 120% Oklahoma; Conventional Texas; Conventional Texas; Unconventional Oklahoma; Unconventional North Dakota; Conventional North Dakota; Unconventional Pennsylvania; Unconventional Pennsylvania; Conventional Alberta; Conventional Saskatchewan; Conventional Saskatchewan; Unconventional Alberta; Unconventional Average Effective Tax Rate Average Effective Tax Rate NPV0 Average Effective Tax Rate NPV0 Average Effective Tax Rate NPV10 Maginal Notviable Size: 1 Tcf Costs: $2.1 BOE Oil price: $80 Gas price: $4 Mcf Project Field : Shale Gas North America IRR pre tax: 34%
- 15. 15 Europe: marginal taxand hurdle price 11.4 9.5 7.7 7.1 6.5 6.4 6.3 6.3 - 2.0 4.0 6.0 8.0 10.0 12.0 14.0 0% 10% 20% 30% 40% 50% 60% 70% Algeria:Conventional(Area C) China:PSCOnshore; Conventional Algeria:Unconventional China:PSCOnshore; Unconventional Poland:FutureRegime; Conventional Poland:FutureRegime; Unconventional UK:Conventional UK:Unconventional HurdleOilPrice$Mcf METR METR and Hurdle Gas Price METR METR Gas price required for hurdle rate (right axis) Hurdlerate: 12.5% IRRpretax: 26%Field: ShaleGasEurope
- 16. Where does itall lead?(1) Fiscal regimes for EI vary greatly Simulations for mining suggest government shares of 40-60 percent—but collection data suggest lower in practice For petroleum the simulated shares are higher: 65 to 85 percent Achieved shares below these ranges are cause for concern, or regret 16
- 17. Where does itall lead?(2) 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 17
- 18. And what willthat do? Such a regime: Ensures revenue from day one Also that government’s revenue rises as rents increase – whether from rising prices or from favorable geological or cost conditions Transparent rules and contracts promote stability and credibility Inclusion of rent taxes reduces pressures to renegotiate or unilaterally change the rules But processes to allow review and revision may be needed 18
- 19. Different for unconventionaloil/gas? Justification for concessions to shale/tight oil and gas is not obvious Concessions made have a fiscal cost Concessions and incentives are perverse in the face of potential environmental costs Fiscally neutral taxation of unconventionals would be the starting point for suitable environmental taxation. 19
- 20. EI fiscal regimes…andenvironment Changing patterns of tax Saturation of labor tax and consumption tax Costs – evolution in high and low prices Elasticity of cost response to prices Effects of carbon tax – is it just more royalty? External costs of resource extraction Royalty? Additional charge? Bonuses? Abandonment and reclamation 20
- 21. Administration EI taxadministration should not in principle be hard Nonetheless, often both difficult and badly done Administration of profit/rent-based EI taxes is possible, impose royalties for policy reasons, not administration Principles of effective modern tax administration are equally relevant to EI 21
- 22. International tax issuescentral because… Multinationals’ central role means full set of tax avoidance issues arises Tax competition may erode revenues 50 55 60 65 70 75 80 85 90 95 100 Petroleum Mining Petroleum Mining Petroleum Mining Petroleum Petroleum Mining Petroleum Petroleum Mining Petroleum Afghanistan (2011) Ghana (2014) Liberia (2013) Nigeria* (2012) Peru* (2012) Trinidad (2013) Tanzania (2014) Yemen (2011) PercentPaidbyMNE's
- 23. …and • Deposits may crossnational borders or lie in disputed areas • Cross-border infrastructure may be essential
- 24. Responses to commodityprice falls A flexible regime should require little change, BUT: UK has cut oil taxes Mexico reduced tax in its privatised sector Argentina cut taxes at both central and provincial levels China reduced taxes on iron ore Egypt reduce its share of profit oil to zero in a large contract Iraq is renegotiating RSCs to reduce government exposure to oil prices
- 25. Some governments holdfirm Peru ruled out tax cuts (though a new government may change that) Norway faced huge losses of savings and oil investments, but kept to its tax regime, including reduced allowances of 2013. Nevertheless: Some are reviewing long term reform – Indonesia, Nigeria, Trinidad and Tobago, South Africa (for example) The reviews may not increase taxes, simply make regimes more flexible.
- 26. Energy and commodityoutlook Responses to climate change essential but may add to costs in the short run (carbon tax, for example) Long term scenarios (IEA, BP, Exxon, for example) show continued importance of hydrocarbons in energy mix, along with growth of renewables Important to have fiscal schemes that deal adequately with gas Outlook does not, at the moment, call for changes to principles and frameworks set out here.
- 27. Transparency EITI, IMFGuide on Resource Revenue Transparency, Natural Resource Charter… Transparency in fiscal regime design and implementation is vital but often lacking Transparency for environmental protection Obligations on companies? Obligations on governments Educated and informed citizenry. Draft IMF “4th Pillar” 27
- 28.
Editor's Notes
- #2 How best to realize the revenue potential of extractive industries (EI-oil, gas, and mining) particularly in developing countries.
- #3 Data for 57 countries , source IMF (2012). Implies that resource revenues are or could be macro-critical for about one-third of countries– petroleum is dominant
- #4 Rents in the sense of a surplus over all necessary costs of production, including the minimum required return to capital. An attractive tax base on equity and efficiency grounds. Fiscal revenues likely to be the main benefit Pervasive uncertainty: Price volatility and unpredictability; geology; input costs; political risks… For example…
- #5 We are familiar with the volatility of oil prices…but less so with how inaccurate forecasts tend to be. LATEST VERSION – sent to Vitor – April?
- #6 We are familiar with the volatility of oil prices…but less so with how inaccurate forecasts tend to be.
- #8 Asymmetric Information: - Investors likely to know more technical and commercial information at the outset High sunk costs…long production periods – the paper, illustrates, for example, potential gas projects in Mozambique and Tanzania costing $20 to 30 billion with a life of 30 years or more. Together create the “time-consistency” problem – it may seem welfare-enhancing to grant generous terms to attract investment but to renege on them once investment is sunk. Extensive involvement of multinationals in some countries: Complex international tax issues -national sensitivity in sharing benefits from natural resources ….and of State-owned enterprises in others - may ease asymmetry of information - but raises possible concerns on efficiency and on allocation of taxing powers All are key political economy issues.
- #9 CHANGE NOTE ON EXHAUSTIBILITY
- #10 Although countries have other objectives in managing natural resource wealth – for example, environmental protection, we are concerned here with the central revenue objective. Maximize PV of net government revenues from EI: Best served by using an explicit tax on rents as part of the regime Timing of receipts: Limited access to credit markets, an undiversified project portfolio, or political myopia favor early revenues -willingness to defer may reduce perceived investor risk, expand tax base, and maximize PV of rent taxation. Progressivity: (in the sense of a rising government share as rate of return and pre-tax PV rise) Less desirable where countries cannot manage risk …but limiting progressivity will conflict with desire for revenues to increase with prices. Progressive tax in a sense is substitute for tax rent properly – note that Norwegian, UK or Australan systems not really “progressive” Ease of administration and compliance
- #12 Bonuses – single payment, often with bidding – less common in mining Royalty – now usually a percentage of production/turnover CIT – ensures equity income is not favorably treated, and for FTC reasons Explicit rent taxes State participation
- #13 Framework developed analyzing the behavioral impact of tax design in a coherent framework capturing the full life-cycle of EI activities. The Fiscal Analysis of Resource industries (FARI) system for scenario analysis was developed in FAD for use in TA and country work. It estimates and compares fiscal regime indicators for regimes applied to different projects, with different price estimates The AETR is the “government share” of present value in a profitable project. Progressivity in prices is illustrated by the tax share of “total benefits”– the revenues left after deduction of current operating costs and sustaining capital expenditure. This a substitute for taxing rent properly
- #14 AETR at 10% discount rate for 300 mm bbl field at oil price of $60 per barrel. Note range of roughly 65 to 85% not much changed. We haven’t changed costs in this example.
- #17 PUT IN SHALE GAS POINTS?
- #18 As text
- #19 As text
- #20 As text
- #22 DO WITHOUT THIS ONE?? EI tax administration should not in principle be difficult – observable prices and few companies. Financial sector, for example, inherently tougher Nonetheless, often both difficult and badly performed Unnecessarily complex fiscal regimes Fragmented administration (notably for royalties) Claims that administration of profit/rent-based EI taxes is too hard, and that countries should rely on royalties, are misplaced Royalties are not always as easy to administer as is sometimes claimed… …and profit/rent-based taxes are not necessarily as hard Principles of effective modern tax administration are equally relevant to EI But too often not applied in practice
- #23 MNEs have long played a central role because of mismatch between where resources are and where demand for them is located —figure shows EI revenues from MNEs as share EI revenue (from EITI). (Red is mining, blue is petroleum) Potentially in elevated form because high tax rates raise the stakes. Some of earliest MNEs were in resources – Standard Oil, RD Shell Considerable recent attention to avoidance activities of MNEs, under heading of ‘Base Erosion and Profit Shifting’ (BEPS). These arise in EIs as in other sectors, and can sometimes be even more to the fore because high tax rates –whether from rent taxes, royalties, or high CIT rates can amplify incentives into low or no-taxed forms.
- #24 Map shows Joint Petroleum Development Area (JPDA) between Timor Leste and Australia- which have no final maritime boundary. Just one of the “interim arrangements” in this area (see Chapter 11 of book)
- #28 IMF Guide on Resource Revenue Transparency [4TH PILLAR] Transparency in fiscal regime design and implementation is vital but often lacking Confidential agreements make the law opaque Multiple taxes; incoherent filing and payment procedures; fragmented responsibilities The Extractive Industries Transparency Initiative (EITI) has successes. Other important initiatives include NR Charter and EI Sourcebook. POINTS FROM NRGI? But many underlying issues still not tackled Publication of contracts Poor government accounting for EI revenues