This document discusses taxation of extractive industries in 3 paragraphs: 1) Extractive industries provide significant revenues for many countries. There are various fiscal instruments like royalties, corporate taxes, bonuses and others that countries use to tax extractive projects. Effective tax systems balance compensation for resource use with investor returns and ensure stable, predictable revenues. 2) Different regimes like licensing, production sharing or contracts are used. Special features of extractives include large upfront costs, unpredictable revenues, economic rents, and base erosion through transfer pricing. Countries must consider administration capacity when designing their tax system. 3) The right fiscal system balances early revenues with long-term investment while providing reliable streams. It also considers progressivity

1. Revenue from Taxable
Sources
Steve Macey
Manager – Revenue and Extractives
Adam Smith International
CPA, London, December 2015

2. “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”
Dominique Strauss-Kahn
CPA, London, December 2015

3. CPA, London, December 2015
Importance of EI revenues
0% 10% 20% 30% 40% 50% 60% 70%
Nigeria
Zambia
Cameroon
Tanzania
PNG

4. CPA, London, December 2015
Objectives of Extractive Industry Taxation
• Compensation for use of resource
• Compensation for Investor
• Ensure early revenues
• Increasing share of profitable projects
(progressivity)
• Minimise distortions (neutrality)
• Robust to changing circumstances
• Easy Administration and Compliance

5. CPA, London, December 2015
Taxation not in a vacuum

6. Nature of Industry
Assets: Exhaustible and Immobile,
Projects: High sunk costs and uncertain returns
Actors: Large integrated MNE’s, Overseas Trade
Nature of Revenues
Timing: Unpredictability and Volatility
Size: Major contributor to budgets
Type: Economic Rent
CPA, London, December 2015
Special Features of Extractive Industries

7. Licensing Regime
• Revenues due from royalty and corporate income tax
Production Sharing
• More common in oil
• States get a direct share in the oil produced, normally
in addition to corporate tax and royalty
• ‘cost oil’ and ‘profit oil’
CPA, London December 2015
Types of Regime

8. Non – Tax Revenues
Profit Taxes
Other Taxes non-specific to extractives
CPA, December 2015
Fiscal Instruments
Custom
Duties
Bonuses Royalties
Corporate
Profit Tax
Rent Taxes
State
Participation
VAT
Licenses
Personal
Income Tax
Withholding
Tax

9. Licensing Regime and Payments
Purpose – Allocate licenses in efficient way
Good Practice - Simplicity + Transparency
Bonus Payments
Purpose – Early revenues
- Easy to collect
Good Practice – Consider long-term trade-offs and discount rates
Licenses and Bonuses
CPA, December 2015

10. Purpose
• Compensate owner of resource
• Ensure early revenues
• Ensure revenues in all periods of production
Good Practice
• Simple
• Minimise distortions
Royalties
CPA, December 2015

11. Purpose: Tax on ‘Profits’ (revenue – costs)
Like every tax, has a base and a rate
Problem of defining and enforcing ‘tax base’ for Corporate tax (Revenue – Costs)
Revenue: Value x Volume
Costs: Huge up front capital outlays
Loss carry forward provisions
Accelerated depreciation of capital investments
Interest deductions
Ring fencing
Corporate Profit Tax
CPA, December 2015

12. What is it?
Steps to reduce reported taxable income in-country (i.e. erode the base and shift
profits, generally to low tax jurisdictions)
How is it done?
• Transfer Pricing – vertically integrated firms, international,
• Thin Capitalisation
• Secrecy
Base Erosion and Profit Shifting (BEPS)
CPA, December 2015

13. Governments want a share of super-profitable projects and various
mechanisms can be used to achieve this:
Resource Rent Tax – Extra tax applied to profits after certain rate of
return is achieved
Recent attempts unsuccessful – Australia, Zambia and Mongolia
Variable Rate Income Tax – rate of tax adjusts to profit-to-sales ratio
Sliding Scale Royalty – Royalty adjusts to price
Progressive Fiscal Instruments
CPA, December 2015

14. • State Participation
• Capital Gains Tax
• Dividend and Interest Withholding Taxes
• Customs Duties
• VAT
• Personal Income Taxes
Other Fiscal Instruments
CPA, December 2015

15. Trade offs
Early revenues vs Long-Term Investment
Reliable revenue streams v Progressivity (risk)
Country Specific Factors
• Geology
• Infrastructure
• Political Risk
Fiscal Stability
Contracts v Legislation
The Right Fiscal ‘Package’
CPA, December 2015

16. • Importance overlooked - ‘Rates are over-rated’
• Consider capacity when designing regime
• Consider Technical Assistance
Issues to consider
• Early auditing of costs
• Co-ordination between agencies – institutional responsibilities (regulatory
agency, tax and customs)
• Information Exchange
• Within countries
• Between countries
Revenue Administration
CPA, December 2015

17. Thank You
Steve Macey
Manager
Revenue and Extractives
Adam Smith International
CPA, London, December 2015