The Taxation of Petroleum and Minerals There are few areas of economic policy- making 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. Rich endowments of oil, gas and minerals have set some coun- tries on courses of sustained and robust prosperity; but they have left others riddled with corruption and persistent poverty, with little of lasting value to show for squandered wealth. And amongst the most important of these decisions are those relating to the tax treatment of oil, gas and minerals. This book provides a comprehensive and accessible account of the main issues – drawing lessons from theory, describing the main features of current practice in each of these areas, and addressing the practicalities of administration – in taxing these resources. What share of the proceeds from the extraction of these resources should governments take? How can investors be given the assurances in relation to tax treatment they require if they are to be willing to invest billions of dollars in projects that will last decades? To what extent, and how, should government’s tax take be sensitive to commodity prices? How can governments evaluate alternative possible tax regimes? Can, and should, auc- tions play a greater role in these sectors? What is the experience with, and potential of, innovative forms of corporate taxation in this area? Should government participate directly in exploration and extraction? These and many other key questions receive thor- ough attention. The contributions in this book – by widely- respected experts drawn from the interna- tional institutions, academe and the private sector – provide a guide to past experiences and current thinking, as well as some new ideas on prots tax design, that is not only readable, but detailed enough to inform practical decision- making and to bring research- ers to the frontiers of the topic. This book will be of interest to economics postgraduates and researchers working on resource issues, as well as professionals working on taxation of oil, gas and minerals/mining. Philip Daniel is Deputy Head, Tax Policy Division, in the Fiscal Affairs Department of the International Monetary Fund. Michael Keen is Assistant Director in the Fiscal Affairs Department of the International Monetary Fund, where he was previously head of the Tax Policy and Tax Coordination divisions. Charles McPherson is Technical Assistance Adviser in the Fiscal Affairs Department of the International Monetary Fund with par- ticular responsibilities for scal and nancial policies in resource rich countries. The Taxation of Petroleum and Minerals Principles, problems and practice Edited by Philip Daniel, Michael Keen and Charles McPherson First published 2010 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN Simultaneously published in the USA and Canada by Routledge 270 Madison Avenue, New York, NY 10016 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2010 International Monetary Fund Nothing contained in this book should be reported as representing the views of the IMF, its Executive Board, member governments, or any other entity mentioned herein. The views expressed in this book belong solely to the authors. Typeset in Times by Wearset Ltd, Boldon, Tyne and Wear Printed and bound in Great Britain by Antony Rowe Ltd, Chippenham, Wiltshire All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data The taxation of petroleum and minerals: principles, problems and practice/ edited by Philip Daniel, Michael Keen and Charles McPherson. p. cm. Includes bibliographical references and index. Petroleum–Taxation. 2. Mines and mineral resources–Taxation. 3. Mining leases. I. Daniel, Philip. II. Keen, Michael. III. McPherson, Charles P., 1944– HD9560.8.A1T39 2010 336.2′66553–dc22 2009047902 ISBN13: 978-0-415-56921-7 (hbk) ISBN13: 978-0-415-78138-1 (pbk) ISBN13: 978-0-203-85108-1 (ebk) This edition published in the Taylor & Francis e-Library, 2010. To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk. ISBN 0-203-85108-0 Master e-book ISBN Contents List of gures vii List of tables ix Notes on contributors xi Preface xiv DOMINIQUE STRAUSS- KAHN 1 Introduction 1 PHILIP DANIEL, MICHAEL KEEN, AND CHARLES Mc PHERSON PART I Conceptual overview 11 2 Theoretical perspectives on resource tax design 13 ROBIN BOADWAY AND MICHAEL KEEN 3 Principles of resource taxation for low- income countries 75 PAUL COLLIER PART II Sectoral experiences and issues 87   4  Petroleum scal regimes: evolution and challenges  89 CAROLE NAKHLE   5  International mineral taxation: experience and issues  122 LINDSAY HOGAN AND BRENTON GOLDSWORTHY   6  Natural gas: experience and issues  163 GRAHAM KELLAS vi Contents PART III Special topics 185   7  Evaluating scal regimes for resource projects: an example  from oil development 187 P H I L I P D A N I E L , B R E N T O N G O L D S W O R T H Y , W O J C I E C H M A L I S Z E W S K I , D I E G O M E S A P U Y O , AND ALISTAIR WATSON   8  Resource rent taxes: a re- appraisal  241 BRYAN C. LAND   9  State participation in the natural resource sectors: evolution,  issues and outlook 263 CHARLES Mc PHERSON 10 How best to auction natural resources 289 PETER CRAMTON PART IV Implementation 317 11  Resource tax administration: the implications of alternative  policy choices 319 JACK CALDER 12  Resource tax administration: functions, procedures and  institutions 340 JACK CALDER 13 International tax issues for the resources sector 378 PETER MULLINS PART V Stability and credibility 403 14  Contractual assurances of scal stability  405 PHILIP DANIEL AND EMIL M. SUNLEY 15  Time consistency in petroleum taxation: lessons from Norway  425 PETTER OSMUNDSEN Index 445 Figures 2.1 Resource price movements 20 4.1 Evolution of the UKCS petroleum scal regime and oil price 110 5.1 Mineral prices 124 5.2 Illustrative economic rent in the minerals industry (supernormal prot or excess prot) 136 5.3 Illustrative industry impact of a Brown tax, risk neutral investors 137 5.4 Illustrative industry impact of an ad valorem royalty, risk neutral investors 140 5.5 Illustrative industry impact of a mixed system, risk neutral investors 143 6.1 Global natural gas supply 2000–2020 164 6.2 Global LNG supply 2000–2020 164 6.3 Global natural gas reserves and consumption 165 6.4 Natural gas value chain 166 6.5 Schematic examples of segmented and integrated LNG projects 168 6.6 Upstream vs midstream taxation 169 6.7 Total government take under different transfer pricing policies 170 6.8 Australia’s residual price methodology to establish transfer prices in LNG projects 171 6.9 Total country take under different transfer pricing policies 172 6.10 Oil vs gas prices 177 6.11 Oil eld vs gas eld production proles 178 7.1 Uncertainty in prices and price forecasts 188 7.2 WEO oil price projection (as of February 2009) 205 7.3 Time path of gross revenues and government revenues under “current terms” 209 7.4 AETR over a range of pre- tax cash ows discounted at 15 percent 211 7.5 R- factor and cumulative IRR to the investor for the deep water oil project 212 7.6 Government revenues: alternative package vs “current terms” 213 7.7 Government share of total benets over a range of pre- tax IRR 216 7.8 Cumulative probabilities of post- tax NPV, discounted at 15 percent 219 viii Figures 7.9 AETR and breakeven price 221 8.1 Resource rent 245 8.2 Rent potential of a hypothetical resource base 246 8.3 Progressive and regressive scal regimes 246 9.1 Competing budgetary allocations in Nigeria, FYs 2005–2007 270 9.2 Tax revenues and equity returns 271 9.3 Government take from oil and mining projects compared 272 9.4 Impact of project delays on state revenues, Angola 273 12.1 Separation of roles 367 Tables 2.1 Receipts from hydrocarbons and minerals in percent of government revenue 18 4.1 Angola’s prot oil splits 107 5.1 World exports for selected mineral commodities, 2006 123 5.2 Mining corporate income tax rates 128 5.3 Fiscal instruments 130 5.4 Key results for illustrative resource projects 146–147 5.5 Summary of mineral taxation in selected developed countries 150–153 5.6 Summary of mineral taxation in selected other countries 154–159 7.1 Evaluation criteria and indicators 204 7.2 Project examples 205 7.3 Simulated “current terms” 207 7.4 Summary results for the “current terms” 208 7.5 Alternative package 210 7.6 AETR, breakeven price, and METR 214 7.7 Mean government NPV, CV, and early share of total benets 217 7.8 Mean expected post- tax IRR and CV 218 7.9 Comparator countries for analysis 220 7.10 Index of revenue stability and yield, with expected risk index 222 7.11 Mean expected post- tax IRR, CV, and probability of returns below 15 percent 223 7.12 Prospectivity gap 224 7.13 Summary of scal regimes 230–231 7.14 AETR, breakeven price and METR, at various discount rates 232–233 7.15 Government NPV, CV and early share of total benets 233–234 7.16 Mean expected post- tax IRR, CV, and probability of returns below 10 and 20 percent 235 8.1 Some examples of resource rent taxes 243 8.2 The basic calculation of a resource rent tax 248 8.3 Comparison of resource rent tax with other taxes on prots 250 8.4 Details of resource rent taxes in selected countries 259 9.1 State participation in petroleum- rich countries 265 9.2 State participation in minerals- rich countries 266 [...]... President of the International Institute of Public Finance and past Editor of the Journal of Public Economics Jack Calder is a freelance oil tax administration consultant He previously worked for the UK Inland Revenue, latterly as a Deputy Director of the Oil Taxation Office Paul Collier is Professor of Economics and Director of the Centre for the Study of African Economies at Oxford University, and former... confirmed the growing interest in these issues, and the importance of both experience-­ haring and analytical work in addressing s them Preface   xv The purpose of the book is thus to provide policymakers, practitioners, civil society, academics and others working on the taxation of oil, gas, and minerals with a comprehensive but accessible account of the core issues in the area – which range from the conceptual... development, and extraction (One could add fourth and fifth phases, those of processing the extracted ore and of cleanup and shutdown of the mine, though these would not affect the current discussion) The first two phases will involve substantial investment costs, and in the case of exploration some uncertainty about the size of resource deposit found At the end of the first phase, exploration costs are sunk and. .. many of the more applied contributions in this book They bring to the central challenges of resource taxation a perspective drawn from the wider public finance tradition, pointing out that literatures on resource taxation, on the one hand, and on general business and commodity taxation, on the other, have evolved largely distinct from each other, with much for each strand to learn from the other They... (iii) specify the auction process well in advance of the tender – the bottleneck is usually the administrative process, rather than technical auction design and implementation He goes on to examine the role of bidder preferences, and then alternative forms of auction The best auction format will depend on the particular setting, especially the structure of bidder preferences and the degree of Introduction  ... Some of these are indeed quite radical departures from current recommendations, and are likely to receive closer attention in the coming years The second part of the book turns to the particularities of practice and experience in the three sectors with which it is concerned: oil, minerals, and gas, One of the central issues in the oil sector, reviewed by Carole Nakhle, is the choice between tax and. .. establish the objectives of the auction (he assumes this will usually be revenue maximization, but in any case stresses that there must be a clear and unambiguous way to translate bids into winners and terms); (ii) define the product – specify what is being sold; for oil, gas, and minerals this means the terms of the license or contract, including the biddable terms, and the geographic scope of the lots; and. .. required by investors, and the ultimate exhaustibility of deposits All but the last of these are present in other activities too But in the resource sector they are center-­ tage rather than – as in most of the literature on business taxas tion – minor players It is the conjunction of massive practical importance and distinctive conceptual and practical difficulty that is at the heart of this book Specifically,... ensure their right to tax rents yet limit the potential for double taxation of profits derived by multinational firms Mullins examines transfer pricing and thin capitalization problems, advance pricing agreements and the potential pitfalls and uses of double taxation agreements He sees scope for regional cooperation and information exchange The last part of the book deals with the issue of stability and. .. Director of Development Research at the World Bank He is the author of many influential articles and books, including the best-­ elling The Bottom Billion s Peter Cramton is Professor of Economics at the University of Maryland Since 1983, he has conducted research on auction theory and practice On the practical side, he is Chairman of Market Design Inc., an economics consultancy focusing on the design of . The Taxation of Petroleum and Minerals There are few areas of economic policy- making in which the returns to good decisions are so high – and the. worked for the UK Inland Revenue, latterly as a Deputy Director of the Oil Taxation Of ce. Paul Collier is Professor of Economics and Director of the Centre