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 profits 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 fiscal and financial 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 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. © 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 ISBN 0-203-85108-0 Master e-book ISBN ISBN13: 978-0-415-56921-7 (hbk) ISBN13: 978-0-415-78138-1 (pbk) ISBN13: 978-0-203-85108-1 (ebk) Contents List of figures 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 fiscal 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 fiscal regimes for resource projects: an example from oil development 187 P hilip D aniel , B renton G oldsworthy , W O J ciech M alis Z ewski , D iego M esa P uyo , 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 fiscal 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 fiscal regime and oil price 110 5.1 Mineral prices 124 5.2 Illustrative economic rent in the minerals industry (supernormal profit or excess profit) 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 field vs gas field production profiles 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 flows 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 benefits 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 fiscal 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 profit 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 benefits 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 fiscal 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 benefits 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 profits 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 x Tables 10.1 Alternative auction approaches 313 13.1 International tax systems for dividends received by corporate taxpayers, 2008 385 Contributors Robin Boadway is David Chadwick Smith Chair in Economics at Queen’s University in Canada.