Revenue from Taxable Sources

Steve Macey

Manager – Revenue and Extractives

Adam Smith International

CPA, London, December 2015

“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

CPA, London, December 2015

Importance of EI revenues

Nigeria

Zambia

Cameroon

Tanzania

PNG

0% 10% 20% 30% 40% 50% 60% 70%

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

CPA, London, December 2015

Taxation not in a vacuum

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

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

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

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

Purpose

• Compensate owner of resource

• Ensure early revenues

• Ensure revenues in all periods of production

Good Practice

• Simple

• Minimise distortions

Royalties

CPA, December 2015

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

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

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

• State Participation

• Capital Gains Tax

• Dividend and Interest Withholding Taxes

• Customs Duties

• VAT

• Personal Income Taxes

Other Fiscal Instruments

CPA, December 2015

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

• 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

Thank You

Steve Macey

Manager

Revenue and Extractives

Adam Smith International

CPA, London, December 2015