- Jack Calder
- Published Date:
- July 2014
©2014 International Monetary Fund
Second printing, with revision: August 2014
Cover design: IMF Multimedia Services Division.
Joint Bank-Fund Library
Calder, Jack, 1948–
Administering fiscal regimes for extractive industries: a handbook / Jack Calder.— Washington, D.C :
International Monetary Fund, 2014.
p. ; cm.
Includes bibliographic references and index.
1. Revenue administration—Handbook, manuals, etc. 2. Natural resources—Taxation—Handbooks, manuals, etc. I. International Monetary Fund. II. Title.
Disclaimer: The views expressed in this book are those of the authors and should not be reported as or attributed to the International Monetary Fund, its Executive Board, or the governments of any of its member countries.
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- Introduction and Overview
- Abbreviations and Acronyms
- CHAPTER 1 WHAT’S SPECIAL ABOUT NATURAL RESOURCE REVENUE ADMINISTRATION?
- What’s Special about Natural Resources?
- A Simple Business?
- Varied Scale and Profitability
- Rent-Generating Potential
- Uncertainty and Risk
- Need for Substantial Capital Investment and Technological Expertise
- Long Development and Operating Periods; High Sunk Costs and Abandonment Costs
- Geographic Concentration
- High Level of Exports and Imports
- Distinctive Commercial Risk-Sharing Arrangements
- Transfers of Natural Resource License Interests
- State Control and Ownership
- Poor Governance
- Consequences for Natural Resource Revenue Administration
- Logical Framework for Evaluating and Strengthening Natural Resource Revenue Administration
- What’s Special about Natural Resources?
- CHAPTER 2 POLICY AND LEGAL FRAMEWORK
- Accessibility of Natural Resource Taxation Law
- Tax Administration and Tax Policy
- Implementation and Design of Natural Resource Taxes
- Nontax Revenues
- CHAPTER 3 ORGANIZATION AND COOPERATION
- Organization of Natural Resource Revenue Administration between Agencies
- Integrated Administration by Tax Department
- Fragmented Administration
- Integrated Administration by Natural Resource Department or National Resource Company
- Transfer of Responsibilities to Tax Department
- Organization of Natural Resource Revenue Administration within the Tax Department
- Cooperation and Exchange of Information
- Obstacles to Integrated Administration and Second Best Options
- CHAPTER 4 PROCEDURES
- Tax Procedure Codes
- Routine Functions
- Nonroutine Functions
- CHAPTER 5 GOVERNANCE AND TRANSPARENCY
- CHAPTER 6 ADMINISTRATIVE CAPACITY
- APPENDIX 1 SPECIAL NATURAL RESOURCE TAX PROVISIONS
- Natural Resource Valuation and Transfer Pricing
- Financing Costs
- General Conditions for Tax Deductibility of Costs
- Ring-Fencing of Costs
- Tax Holidays
- Capital Expenditure
- Social Infrastructure Costs
- License Transfers
- Unitizations and Redeterminations
- Withholding Taxes and Double Tax Agreements
- VAT and Customs Import Exemptions
- Domestic Processing and Consumption Incentives
- APPENDIX 2 ILLUSTRATIVE HARMONIZED ADMINISTRATIVE FRAMEWORK FOR NATURAL RESOURCE TAXATION
- APPENDIX 3 THE ROLE OF ECONOMIC MODELING
- APPENDIX 4 SAMPLE ANNUAL REPORT ON NATURAL RESOURCE REVENUES
Administering government revenues from extraction of nonrenewable natural resources (NR)—oil, gas, coal, and other minerals—presents special difficulties. At one level one could ask: how hard can it be to collect taxes from firms that are basically digging holes, taking material out of the ground, and transporting it to the point of export or to a domestic refinery, especially as it can be physically measured, weighed, and controlled? But this is not the whole story.
The NR industry has a number of special features that generally result in its being taxed differently from other industries, creating special challenges for administration. These features include nonrenewability; a huge variation in scale and profitability (this can reflect differences in industry size, for example, artisanal mining activity vs. that of multinational enterprises, or variations in profitability over time); exceptional rent-generating potential; high uncertainty and risk; substantial capital investment; long development and operating periods; high export and import levels; distinctive commercial risk-sharing arrangements; frequent transfers of ownership; a high level of state control and ownership. Large resource revenues frequently lead to poor governance. Many of these special features and difficulties are especially prominent in developing countries. In addition, contractual agreements (including production sharing agreements) and state participation commonly play a more important role in some of those countries than in developed economies.
The special features and perceived difficulties of NR revenue administration can all too easily mean that it gets less attention than it deserves. Administrative reform, and technical assistance to support it, may focus on general rather than NR tax administration—even where general taxation produces much less government revenue than NR taxation (for example Nigeria, where non-hydrocarbon revenues account for only around 25 percent of total government revenues), or may ignore NR revenues (from royalties, for example, or even state production shares) that are not seen or classified as normal taxes—even though they may be the most important sources of government revenue.
This Handbook, which is a joint IMF and World Bank publication, is one of the first of its kind to focus attention on effectively administering revenues from natural resources. It provides policymakers and officials in developing and emerging market countries with practical guidelines to establish a robust legal framework, organization, and procedures for administering natural resource revenue. It discusses transparency and how to promote it in the face of ever-increasing demands from both domestic and international constituencies for clarity and accountability in the administration of public revenues from natural resources. And it discusses how developing countries can strengthen their managerial and technical capacity to administer these revenues.
We would like to acknowledge the Managing Natural Resources Wealth Topical Trust Fund and the generosity of the governments that contribute to it for funding this work. Jack Calder, as principal author, has supplied a wealth of expertise and experience. We would also like to thank IMF and World Bank staff and experts who reviewed and commented on previous drafts of the Handbook and helped it become a reality, including Katherine Baer, Boubacar Bocoum, Philip Daniel, Paulo de Sa, Andrea Lemgruber, Peter Mullins, Andrew Okello, Enrique Rojas, and Peter van der Veen.
Deputy Managing Director International Monetary Fund
Sri Mulyani Indrawati
Managing Director and Chief Operating Officer The World Bank
This publication has been made possible thanks to the generous support of the Managing Natural Resources Wealth Topical Trust Fund. The donor governments and organizations that contribute to this Fund are listed below.
Introduction and Overview
Natural resource wealth is an opportunity for many developing economies that may never be repeated, but too often they fail to take advantage of it. Converting natural resource wealth into sustained economic development requires:
- Good management to ensure efficient and effective exploitation;
- Good tax design to ensure appropriate government revenue and adequate incentives for investors;
- Good revenue administration to ensure that revenue is collected in practice; and
- Good public expenditure management to ensure that volatile and temporary natural resource revenue translates to permanent benefits for the nation and to manage the risk resource wealth poses to the wider economy.
These requirements present major challenges to capacity and governance, which countries often fail to meet.
This handbook is concerned with natural resource revenue administration. This may not be the most important link in the value chain that transforms natural resource wealth into sustained development, but it is a vital link all the same, and one that often gets less attention than it deserves. Although, in principle, natural resource revenue administration should be relatively straightforward—the natural resource industry is not exceptionally complex—it is often a weak link in the chain.
The natural resource industry has a number of distinctive features. These include nonrenewability, a huge range of scale and profitability, exceptional rent-generating potential, high uncertainty and risk, substantial capital investment, long development and operating periods, geographic concentration, high export and import levels, distinctive commercial risk-sharing arrangements, frequent transfers of ownership, a high level of state control and ownership, and a tendency to undermine governance.
These features generally lead to natural resource taxation that differs from that of other industries, which means special administration challenges. Chapter 1 explains how the industry’s features affect its taxation and ensuing unique administrative issues, which involve:
- Legal questions;
- Transparency; and
- Capacity building.
The remaining chapters look at each of these aspects of natural resource taxation.
Policy and Legal Issues
Natural resource fiscal regimes often present special legal administration problems. 1Chapter 2 considers the relationship between natural resource tax policy and administration. This topic is often discussed simplistically in terms of a choice between output-based royalties, which are perceived as easy to administer, and profit-based taxes, which are perceived as hard to administer. There are valid policy arguments for including royalties in a natural resource fiscal regime, but these should be considered on their own merits rather than with a view that royalties are the only natural resource tax that can be administered effectively. In practice, developing economies generally impose corporate income tax as well as output-based royalties, which in combination are minimally progressive, and countries may need to impose additional taxes to obtain a greater share of upside potential. Countries that try to do so through some form of graduated royalty often end up with a fiscal regime that is far from simple to administer: they have more complex royalties, but they still have income tax. Resource rent tax, on the other hand, is sometimes considered particularly challenging to administer, but can be designed around the same (or even less) data as income tax, which avoids significantly more complicated administration.
A major challenge to administration is often the complex variety of the natural resource fiscal regime. In many developing economies one-time deals are negotiated for each project or license area, so that each has its own tax regime. Chapter 2 discusses steps that can and should be taken to minimize this complexity.
In addition, there are often gaps and weaknesses in legislative provisions (for example, in relation to transfer pricing) that make them difficult to administer and may present opportunities for evasion. Appendix 1 considers many natural resource taxation technical issues and discusses approaches to achieve simpler, clearer, and stronger laws.
Natural resource revenue administration is often fragmented among different government agencies. This can seriously weaken administration, since it results in complexity; additional taxpayer burdens; duplication of functions; lack of clarity about responsibilities; lack of accountability; uncoordinated management, systems, and procedures; lack of an overarching compliance strategy; and thinly spread capacity. The establishment of a national resource company (NRC) is often seen as necessary to give the government an inside understanding of the industry, but its involvement in administration often causes fundamental conflicts of interest. Chapter 3 discusses the advantages of integrated function-based revenue administration in which revenue departments handle revenue administration, natural resource industry departments regulate operations, and NRCs are responsible for commercial participation.
There are often strong political and practical obstacles to integration of natural resource tax administration within tax departments. Second-best options should be considered: clarifying the fiscal roles of various agencies and improving cooperation between them and, at a minimum, centralizing accounting and reporting responsibilities within the finance ministry.
Even with integrated revenue administration, cooperation between tax administrations and natural resource regulatory agencies remains vital, but is often poor. Chapter 3 discusses how it might be improved.
Internally, administration should reflect the principles of taxpayer segmentation and sectoral specialization. The former is becoming more common, but greater specialization is often needed.
The design of administrative procedures for natural resource revenues can be complex and incoherent. Where, as is common, a few large companies pay the vast bulk of revenues, they may comply with routine obligations to file returns and make payments, but procedural complexity often makes it difficult for developing economies to report and account for revenues. Countries may fail to apply a self-assessment regime backed up with comprehensive taxpayer services; selective, risk-based audits; and rigorous enforcement, which is recognized as the most effective and efficient model for administration. Chapter 4 discusses development of a more coherent and effective self-assessment-based procedural framework for natural resource revenue administration, although fragmented administration may make this difficult in practice. In-kind payment of petroleum revenues presents particular problems for administration, and the chapter discusses how in-kind revenues can be brought within that common framework.
At least as important as design of administrative procedures is their execution, which is often poor. Chapter 4 considers practical natural resource procedural issues, including routine registration and return and payment processing functions, as well as nonroutine risk assessment, taxpayer service, enforcement, physical audit and benchmark pricing, audits, and appeals and dispute resolution.
Resource wealth has a widely recognized tendency to undermine governance; transparency of natural resource revenue administration is therefore vital, but often lacking. Chapter 5 discusses administrative transparency, drawing on the principles set out in the IMF Guide to Resource Revenue Transparency. One-time confidential agreements make the law opaque, and the negotiation process is open to abuse. Government accounting for natural resource revenue is often poor and unreliable. When revenue is largely collected from a few companies, as is common, accounting should be straightforward. But governments often do everything possible to make it difficult: multiple taxes; complicated, inefficient, and incoherent payment and filing procedures; responsibility for returns and payments fragmented across agencies with different banking arrangements and separate accounting and information technology (IT) systems; collection of revenues in-kind; and no single department in charge of accounting for assessment and collection. All those features, administratively undesirable in their own right, are major barriers to transparency.
The Extractive Industries Transparency Initiative (EITI) and other international initiatives have done much to improve transparency, but many countries still fail to tackle the underlying issues. The EITI has promoted, among other actions, more transparent and more rigorous information on natural resource revenues, multistakeholder supervision, and dissemination and discussion of in-country reports—which is a welcome initiative. However, in some countries, results have been mixed. For example, some publish one-off tax agreements but do not tax companies on the basis of published legislation. These countries may publish natural resource revenues, but do not address the problems that make accounting difficult to begin with. Chapter 5 discusses ways to present a more comprehensive and informative picture.
Natural resource revenue administration does not impose greater demands on capacity than taxation of other major industries, but creating strong capacity in this area is exceptionally important for many developing economies, and they often fail to recognize and respond to this. Many countries do not take the steps needed to ensure that staff in key operational roles are of the caliber required and are adequately qualified and trained. Fragmented and incoherent administration often hinders effective capacity building and development of suitable IT support. In some cases, countries have decided to outsource administrative functions, perhaps on a temporary basis, to fill gaps in capacity (but outsourcing may come with risks). Chapter 6 discusses these and other issues relating to capacity building.
Abbreviations and Acronyms
costs and freight
costs, insurance, and freight
corporate income tax
Extractive Industries Transparency Initiative
free on board
Guide to Resource Revenue Transparency
International Monetary Fund
integrated tax administration system
key performance indicator
liquefied natural gas
large taxpayer office
national resource company
net smelter return
Organization for Economic Cooperation and Development
production sharing agreement
resource rent tax
tax procedure code