Structural Characteristics

Natural resource extraction provides a desirable tax base from both an efficiency and equity perspective. Notable features of natural resources relevant for tax policy formulation include the following:

• Location-specific rents that reflect the fixed supply of nonrenewable resources: When producers are awarded the exclusive right to extract resources, they are often able to sell those resources above their cost of extraction (including a normal return on the investment). The associated economic rents can be taxed, in principle, without distorting investment decisions.

• High-risk/reward: Exploration is highly uncertain and may not necessarily lead to commercially viable discoveries. In return for carrying this risk, the investor would expect a higher return. Fiscal regimes that provide for fiscal certainty and a relatively faster investment recovery reduce investor risk.

• Substantial capital outlays: The costs of developing a resource and bringing it to production are large, and the investment recovery period can be long. This implies that revenue from profit-based taxes tend to be more back loaded.

• Cyclicality and the sensitivity of project profits to prices: The economic rents can vary considerably over the life of a project as commodity prices and other parameters change. This means government revenues can also fluctuate significantly over time.

To realize the potential benefits from extracting mineral and hydrocarbon assets, developing countries frequently seek the technical expertise and financial investment capital of multinational enterprises. This generally allows for the most efficient development of the natural resources. These companies allocate business functions to achieve the most efficient and financially advantageous corporate structures (for example, marketing functions can be located closer to customers and borrowing sourced where there are more efficient capital markets), but these structures can also facilitate profit shifting.

Fiscal Regimes for Extractive Industries

The main economic motivation for having a special fiscal regime for extractive industries is to tax potential economic rents. The fiscal regime, therefore, is the main tool for sharing risk and reward between government and investors. Host governments must consider three aspects when designing these regimes:

• Type of fiscal regime: For mining, usually countries use a combination of tax and royalty. For petroleum, some countries use a tax– royalty combination, whereas others have a contractual production-sharing regime. Hybrid fiscal regimes that combine production sharing with tax and royalty are also common, while many countries also include direct state participation in projects.

• Legislative and contractual arrangements: Some countries include fiscal terms as part of project-specific contracts with resource companies, others in generally applicable legislation. To reduce the risk associated with their large upfront investments, many investors seek protections against future tax changes.⁵ Policymakers need to avoid unduly limiting the room for subsequent policy adjustments. A more flexible fiscal regime that ensures the government take adapts automatically to different profitability outturns will provide more predictability and hence reduce the need for explicit stability provisions.

• Fiscal instruments: These range from royalties imposed on the value of production, specialized resource rent taxes that are usually assessed on a cash-flow basis for each project, and corporate income tax that is often (but not always) levied on consolidated corporate income rather than ring-fenced within a project or license area. In production-sharing contracts, the profit oil is also calculated on a cash-flow basis. It is common to have withholding taxes on outbound payments (for example, interest, dividends, and subcontractor service payments).

The current international tax architecture gives producing countries a mandate to tax resource extraction. Producing countries (that is, the source countries) effectively have the right to tax resource extraction, with the mine or well constituting a fixed place of business. This is recognized in UN and OECD model tax treaties by including mines and wells in the definition of permanent establishment.⁶ But residence-country tax arrangements are also important: this is because they impact the final tax burden imposed on a project. As more countries move their corporate income tax toward a territorial basis, this is diminishing as an issue, but may strengthen the pressures for tax competition.

Revenue from Extractive Industries in Developing Countries

Resource revenues collections vary across developing countries. Countries with petroleum have generally higher revenue collections than those with mining, and middle-income countries, which tend to have higher capacity in policy and administration, are faring better than low-income countries (see Figure 15.1):

• Low-income economies: Countries with mining receive relatively little resource revenue; most are below 3 percent of GDP. Countries with petroleum production are generally collecting more resource revenue (around 9 percent of GDP or higher). This pattern is reflected in a lower resource revenue share in total revenue in mining (most countries at 13 percent or lower) relative to petroleum (most above 50 percent of total revenue).

• Middle-income economies: With one exception (Botswana), countries with mining receive no more than approximately 3 percent of GDP in resource revenues. Again, those countries with petroleum generally fare better—some have very low revenue (9 of 20 countries at less than 5 percent of GDP), but others are higher (4 countries at 20 percent or more). As a percentage of total revenue, countries with mining are receiving at most 11 percent of total revenue (Botswana again is the exception), while for petroleum producers, revenues make a larger contribution to the budget with 13 countries at 20 percent of total revenue or higher.

Number of Countries Sorted by Resource Revenue Collections in Percent of GDP and of Total Revenue (Percent of GDP and of total revenue)

Source: IMF based on forthcoming dataset.

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Number of Countries Sorted by Resource Revenue Collections in Percent of GDP and of Total Revenue (Percent of GDP and of total revenue)

Source: IMF based on forthcoming dataset.

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Number of Countries Sorted by Resource Revenue Collections in Percent of GDP and of Total Revenue (Percent of GDP and of total revenue)

Source: IMF based on forthcoming dataset.

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The different revenue patterns of countries with mining and petroleum sectors may be explained by several factors. Effective tax rates for petroleum are generally higher than for mining,⁷ perhaps reflecting an expectation of lower economic rents and more employment and other non-fiscal benefits from the latter.⁸ Mispricing of oil products may be harder than for many mineral products, given their transparent international markets; the use of norm pricing to determine the value for tax purposes; and, because upon exiting the upstream, petroleum products often do not require much additional spending on transformation (for example, refining) as a proportion of their final price.⁹ Some also argue that the greater prevalence of joint-venture arrangements in petroleum, whereby joint-venture partners monitor each other closely, indirectly assists revenue authorities.¹⁰

Profit Shifting

Profit shifting can occur through the mis-pricing of transactions between related parties (that is, vertically integrated entities within the same corporate structure or with shared ownership). Companies can transfer profits to low-tax jurisdictions in order to avoid the typically higher tax burden imposed by the source country in the upstream (where the extraction of the commodity takes place). The three common channels for transfer pricing are to lower the valuation of commodities extracted, inflate costs incurred, or charge excessive financing costs.

Protecting Source Country Taxing Rights

Source countries often do not effectively protect taxing rights in double tax treaties. Countries primarily negotiate tax treaties to promote crossborder investment, but sometimes also for political or diplomatic reasons (see also Chapter 8). Treaties that reduce withholding taxes (sometimes set to zero), remove an important backstop to the corporate income tax, an outcome hard to rationalize for mainly capital-importing countries. Developing countries may not effectively analyze the relative strengths of different treaty models, inadvertently leading to a greater allocation of taxing rights to residence countries, or omit safeguards such as on treaty shopping.²³ There may also be unanticipated interactions with contractual stability obligations, as Mongolia experienced (see Box 15.1).

Transfers of interests in mining and petroleum agreements have international tax implications. Following a significant natural resource discovery, there may be subsequent changes in ownership of the right to exploit those resources. Exploration companies may sell their interests, or smaller companies may bring in other partners with capital and technical expertise to develop the resources. The original owners of the resource rights may realize significant capital gains which, if the transaction occurs offshore or if it involves changes higher up in the ownership structure, can be hard for the source country to detect and to tax.²⁴ Model tax treaties recognize that source countries have taxing rights over gains from direct and indirect transfers of immovable property, including interests in mining or petroleum rights (in Article 13(1) and 13(4)). The key to effectively exercise this taxing right is to ensure these clauses are included in treaties, and that domestic tax legislation is carefully designed by determining the scope of taxation of the associated capital gains.²⁵

Base Erosion and Tax Competition

Adding to these potential profit-shifting revenue losses are policy decisions related to tax competition. Many developing countries continue to offer tax incentives and tax holidays, perhaps responding to pressure from investors and with an eye on regional developments. These incentives can come at a direct cost to revenue, but they can also inadvertently weaken the domestic tax system. The incentives can extend to reduce or completely remove withholding taxes either in extractive industries contracts or in treaty negotiations.

Responding to these (self-inflicted) revenue losses, some countries attempt to claw back revenue in ways that may harm the overall fiscal regime. This may be through imposing other levies on the project or by delays in processing VAT refunds to exporters. These measures, however, can have unintended effects, adding to project costs and worsening the investment climate.

Stabilization provisions benefiting investments can also unintentionally hinder tax system improvements. Given the substantial investments required, long repayment period, and risk involved, it is understandable why investors might seek assurances against unforeseen changes to the tax system. But these stabilization provisions, if written broadly, can limit the ability of countries to update their legislation in benign ways (for example, in line with international peers such as under the BEPS process, or to correct legislative errors) (Readhead 2018). They can also complicate a tax system transition, since typically, the country must either attempt a renegotiation or wait for the clause to expire.

Gaps in Local Capacity

Lower than expected revenue collections can be attributed to several causes, but a lack of capacity is common. Many developing countries struggle to implement and administer fiscal regimes that could limit both base erosion and profit shifting.

Countries may have deficiencies in the fiscal regime that applies to resource extraction. A legislative framework that is piecemeal or poorly drafted opens opportunities for multinational enterprises to find legal loopholes to exploit. This risk may be further exacerbated in countries with contractually agreed, project-specific fiscal terms that can introduce additional loopholes (while recognizing that these agreements, if well designed, can also close them and provide certainty for both taxpayers and tax authorities). Legislative gaps can also extend to measures such as those that help ensure taxpayer compliance (for example, to encourage information provision).²⁶

Countries also often lack capacity in revenue administration to gauge and prioritize revenue risks, detect profit shifting, and audit multinational enterprises. Tax authorities often have highly constrained budgets, leading to a shortfall of officers allocated to audit roles,²⁷ and often those auditors lack the skills and time needed to review the complex structures and contracts that multinational enterprises may adopt. In addition, lengthy court cases to challenge profit shifting may constrain available resources of many authorities, even where there is a reasonable prospect of success. There are also cases where contracts limit audit rights more than is permitted under the general tax legislation. Underlying this is a difficult trade-off: ensuring tax compliance of an extractive industries project requires auditing expenditures from the start of the development phase before a project is profitable for tax purposes; while the overall revenue implications may be large in the longer run, for a cash-constrained government it may be more appealing to focus audit resources on activities with more immediate revenue benefits.

Another difficulty is keeping track of subcontractors for income tax purposes. Companies may bring in expertise employed by another arm of the business abroad. Depending on the length of stay, it may be legally possible to connect the income of these subcontractors to the source country, but it can be difficult to keep track of these employees and time intensive for tax authorities to review their activities and apply domestic income tax law.²⁸

A New Fiscal Regime for R esource-Rich Countries

For the taxation of upstream production (i.e., the extraction of commodities at source), a fiscal regime package could combine several elements:

• Royalty on the value of mining and petroleum production, providing a minimum revenue share from the start of production, or, under a petroleum production sharing fiscal regime, a cost recovery limit having a similar effect.

• Resource rent tax targeted at project cash flows with appropriate ring fencing arrangements; importantly, with the cash flow base providing for immediate expensing of capital expenditure, there would be no basis for allowing interest deductions. The cash flow tax could also be implemented through an equivalent production sharing arrangement.

• Either replacing the corporate income tax entirely from mining and petroleum activities in the source country by the resource rent tax or applying the resource rent tax to the cash flow after the corporate income tax payment.

• Norm pricing for valuing production for royalty and tax calculations based on international price indices or independent analysis for product sales to related and unrelated parties.

• Withholding taxes on dividends, interest, and service payments to nonresidents, and management fees and other intracompany payments.

Benefits from this proposal are as follows:

• The fiscal regime can be designed to ensure that the resource rent tax provides a higher share of rents from more profitable projects, offsetting the regressive impact of the royalty, and vice versa for less profitable ones; as a rule of thumb, the higher the royalty rate, the more progressive the resource rent tax structure needs to be to ensure that the government take of rents is broadly the same across a range of pre-tax project profitability levels.²⁹

• The fiscal regime would ensure a reasonable minimum tax payment, from the start of production, providing a bulwark against tax avoidance and evasion. This would be by either a royalty or, in a production sharing arrangement, a ceiling on cost recovery in each period with any excess costs carried forward.³⁰ The minimum tax payment reduces the political economy risk a government may face if extraction takes place from a low profitability project with no revenue payable and serves as a minimum “reserve price” on the option of keeping the resources in the ground.³¹ On the other hand, if the royalty rate is set too high, this would lead to earlier shutdown of extraction.

• The regime would be attractive to investors by providing immediate expensing of capital expenditure, facilitating a faster investment recovery and less distortive impact of the tax regime.

• An important vulnerability to profit shifting would be eliminated by removing the interest deductibility or cost recoverability, although the risk of financing costs being embedded in financing leases would remain (Annex 15.2 examines impact of debt on different regimes).³²

• The regime would be simpler to administer by having fewer tax instruments, which could all be managed by the revenue authority (collaborating as needed with the sector regulator). Moreover, increased use of benchmark pricing and safe harbor limits on certain deductions should also lessen the compliance burden on authorities by reducing the number of related-party transactions.

Design and Implementation Issues

Compared to current fiscal regimes for extractives, the proposed reform package could be made broadly revenue neutral in terms of the overall government take. That said, the time profile of profit-based revenue could change; in particular, the resource rent tax may be more “back loaded” relative to corporate income tax because the latter limits the deduction of investment expenses (that is, capital equipment is depreciated). In countries with accelerated depreciation, this timing difference would be less significant. The removal of interest deductions would broaden the base for the resource rent tax. The overall timing effect on revenue could be counterbalanced by adjusting the royalty rate.

The royalty will play an important role by ensuring that there is a minimum tax payment due from the start of production. In addition to the usual interpretation of the royalty as a compensatory payment to the resource owner for the right to extract the resource (usually the government), it provides a minimum tax on inbound investment. To provide such a safeguard, the tax base for the royalty should be as broad as possible, minimizing any deductions of expenses. If combined with price benchmarking, this may be best achieved by assessing the royalty on the gross value of production at the point when the commodity changes ownership (usually the free-on-board value of exports excluding freight and insurance costs). If the royalty is instead imposed on a net basis (for example, on the mine-head or well-head value), it is important that the netback calculation is aligned with the fiscal valuation point and the ring fence. If the price used for the royalty calculation is determined by an international price index, a comparable netback mechanism would allow deductions for transportation and other operating expenses incurred beyond the fiscal ring fence. However, this runs the risk that the benefits from using benchmark pricing be undone by inflated costs claimed through the netback mechanism.³³

The design of the resource rent tax is crucial, and it must be robust to international profit-shifting strategies. The cash-flow base simplifies the tax calculation by allowing immediate expensing of capital expenditure rather than applying depreciation allowances. Correspondingly, this removes the justification for providing deductions for interest expenses, directly removing incentives for profit shifting by intracompany financing.

An essential policy design matter is whether to apply an uplift on the negative cash flow, and, if so, at what rate. The theoretically first best option is to apply an uplift on negative cumulative cash flow at the rate of the investor “normal investment return,” ensuring that the tax will only apply on economic rents.³⁴ The challenge is, however, that the normal return is not observable. If the uplift is set too high, the tax will rarely, if at all, apply. In practice, countries that have introduced rate-of-return-based rent taxes often set the uplift quite high, which, in turn, may explain the disappointing experience with rate-of-return-based rent taxes from a revenue perspective.³⁵ This experience contrasts with profit oil calculations under production sharing contracts, which typically are cash flow based and in most cases without an uplift, without adverse implications on investments. A practical solution would be either not to provide an uplift on the balance of negative cash flows carried forward or to apply this at a suitably low rate (for example, a risk-free international interest rate with a reasonable country risk premium).

The cash flow tax would be underpinned by ring fencing at the project or license area, rather than allowing consolidation of activities at the corporate entity level. Ring fencing prevents a taxpayer from reducing tax paid on a producing mine or petroleum field by offsetting losses from other activities by the corporate entity (including other projects under development). While partly a timing issue, ring fencing plays a key role in preserving the economic rents at the upstream project level and ensuring the fiscal regime captures a fair share of that rent.³⁶ A well-designed ring fence is especially important if the tax rate is higher for upstream activities than for midstream or downstream activities. If the resource rent tax or profit oil sharing rates are progressive, consolidation across multiple projects may lower the overall revenue; if the rates are proportional (fixed), the impact of consolidation may be a deferral of revenue (reducing the value of revenue in discounted terms).

With a resource rent cash flow tax in place, it is not immediately obvious why a corporate income tax should also apply to upstream activities. The rent tax would target the location-specific rents more directly than a corporate income tax. One argument favoring retaining the corporate income tax is to tax the normal return on an investment in addition to the excess return. But especially with some rebalancing in the fiscal regime toward a higher contribution from royalty, the benefits from having two profit-based taxes are likely to be outweighed by the additional complexity and economic distortions.³⁷

Still, if policymakers are uncomfortable removing the corporate income tax on extractive industries, an alternative would be to rethink the interaction with the resource rent tax. To preserve the tax base for the source country, the resource rent tax should be applied on cash flows after deducting payments of the corporate income tax. This will help shield the taxation of rents against profit shifting through the corporate income tax: by applying the resource rent tax as a backstop on the cash flow after corporate income tax payments, any profit shifting that reduces corporate income tax liabilities will result in a larger tax base for the resource rent tax.

Some investors may have concerns that replacing the corporate income tax with a resource rent tax means they may not be able to receive tax credits in their residence country for the rent tax payments. Tax creditability may partly depend on whether the tax is comparable to the income tax in the residence country; uncertainty would be clarified by making it clear in tax treaties that such specialized resource rent taxes are covered.³⁸ Admittedly, with the general move globally toward territorial taxation, at least for active business income, this may become a lesser concern. But to the extent this remains an issue, this is another argument for sequencing the resource rent tax to be assessed on the post– corporate income tax cash flow. This would allow tax credits for corporate income tax payments while protecting the source-based taxation of rents on a post– corporate income tax basis. For production-sharing contracts, a pay-on-behalf scheme with a notional accounting of income tax paid out of the government’s share of profit oil would provide the basis for tax credits.

Withholding taxes would be needed on payments to nonresidents on dividends, interest, and subcontractor services. This may at first seem odd since the corporate income tax would not apply to the extraction activities. However, the withholding taxes are targeted at income that originates from the natural resource asset but is otherwise not taxed by the source country; moreover, withholding taxes also provide a crude safeguard against profit shifting. In setting the rate, it is important to take into account that the withholding taxes may be passed on to the project cost if contracts allow for grossing up of withholding taxes (as is very common in extractives projects).³⁹

Norm pricing would reduce the scope for profit shifting via price adjustments for associated party sales. This could be implemented through pricing formulas set by the authorities either through legislation or negotiation including by advance pricing agreements. For commodities with readily available benchmark price indices or limited downstream transformation of the commodity, this would be relatively simple to implement. For others, the design of an appropriate pricing formula would require expert advice. The norm pricing could be applied to all transactions or as a minimum price that authorities would accept for royalty and tax purposes.⁴⁰ It would need to be complemented by safeguards on associated party payments, such as fees or commissions to related parties. Norm pricing is not without its own complexities, however, and requires specialist expertise and transparency in both design and implementation to retain the confidence of taxpayers.

Despite the potential advantages of the proposed fiscal regime, some challenges would remain. Profit shifting could still take place, particularly via inflated costs through related-party provision of goods and services for the project. This is of particular concern if the cash-flow nature of the resource rent tax (with an uplift) incentivizes excessive investment. Interest charges could also pose a risk if embedded into purchases or financing lease arrangements for equipment. This is a reminder that there is no shortcut escaping the need to build capacity to effectively identify revenue leakage risks and to challenge these through regulatory oversight and risk-based audits.

There may be a need for additional ad hoc safeguards against profit shifting. An example is safe harbor limits on expenditure deductions (for example, on overhead payments to parent companies) with a general starting point that the onus is on companies to demonstrate their compliance with the safe harbor. Another necessary protection would be that the legal entity concerned could not earn income from other activities that would typically be subject to corporate income taxes.

Country Practice

The reform proposal entails changes compared to the fiscal regime for extractive industries currently in place in many countries. The most noticeable difference would be the replacement of the corporate income tax by a combination of royalty and cash-flow-based resource rent tax; countries that already have these two fiscal instruments could simply adjust the rates and base to offset the repeal of the corporate income tax. Generally speaking, to yield similar revenue the resource rent tax rate would be higher if the corporate income tax were replaced than in an alternative regime where both the corporate income tax and the resource rent tax were to apply.

Even in countries that may not be ready to pursue more ambitious reforms, there is scope to reduce vulnerabilities moving in the direction of the fiscal regime reforms advocated. This would include removing interest deductibility from existing cash flow-based taxes and applying these on the cash flows after deducting corporate income tax payments. In practice, of course, contractual stability clauses may reduce the room for maneuver, especially regarding the application of reform changes to existing extractive projects.

A closer look at structural features of the fiscal regime for main petroleum producers provides the following insights (see Table 15.1):

• For countries with a production sharing fiscal regime, it is common that profit oil is calculated before the corporate income tax (so called, pre-tax production sharing); this forgoes the potential safeguard from the profit oil share acting as a backstop against profit shifting in the corporate income tax by applying production sharing on a post-tax basis.

• Most petroleum fiscal regimes ensure early revenue through a royalty. In some countries without an explicit royalty, the similar impact is achieved by a cost recovery limit providing minimum government share of production (when the limit on cost recovery is binding).

• In a small number of countries, profit oil is calculated on a post-tax basis by having the corporate income tax paid out of the government share of profit oil under a “ paid-on-behalf” production sharing (profit shifting through the corporate income tax therefore has no material impact on government revenue).

• Most production-sharing fiscal regimes calculate profit oil on a cash flow basis with immediate expensing of capital expenditure and no interest deduction. However, a few fiscal regimes in addition also redundantly allow cost recovery of interest expenses, providing a debt bias.

• For tax-royalty countries with a resource rent tax, it is common to have this apply to pre-corporate income tax cash flow, again not benefiting from the safeguard against corporate income tax profit shifting that the resource rent tax can provide. This risk is further accentuated by providing for reduced interest withholding rates.

^{Table 15.1.}

Selected Petroleum Fiscal Regimes, Key Structural Features

Source: FARI Fiscal Regime Library and Sub-ModelsNotes: DROP (daily rate of production), ROR (rate of return), POB (pay on behalf), SL (straight line depreciation), DB (declining balance depreciation), SPT (Special Petroleum Tax)

^{Table 15.1.}

Selected Petroleum Fiscal Regimes, Key Structural Features

	Royalty	Profit oil sharing						Resource rent tax					Corporate income tax
	Rate (percent)	Profit oil sharing	Rate (percent)	Cost recovery limit	Capex	Interest cost recoverable	Interaction with CIT	RRTtype	Tax rate (percent) Capex	Interest cost recoverable	Interaction with CIT	Tax rate (percent)	Capex	Interest cost deductible
Angola	n/a	ROR	30–90	50	Expensing	No	Post-tax	n/a				50	SL, 4-yr	Yes
Australia	n/a	n/a						ROR	40 Expensing	No	Pre-tax	30	SL, 15-yr	Yes
Azerbaijan	n/a	R-factor	40–90	100	Expensing	No	POB	n/a					DB	Yes
Bolivia
Brazil	10	n/a						DROP	10^10 SL, 10-yr	No	Pre-tax	34	SL, 10-yr	Yes
Canada (Alberta)	10–40	n/a						Price-based royalty				27	DB
Congo, Rep. of	15	DROP	40–60	60	Expensing	No	POB	n/a
Egypt	n/a	DROP, Price	75–90	40	5L, 5-yr	Yes	POB	n/a
Equatorial Guinea	13	DROP	10–70	70	Expensing	No	Pre-tax	n/a				35	SL, 5-yr	Yes
Gabon	Variable	DROP	50–63	65–80	Expensing	No	Pre-tax	n/a				0	SL, 5-yr	Yes
Ghana	5–12.5	n/a						ROR	15–25 Expensing	No	Post-tax	35	SL, 5-yr	Yes
Guyana	2	Fixed	50	75	Expensing	Yes	POB	n/a
Kazakhstan	5–18	n/a						Excess profi	10–60 SL, 5-yr	Yes	Post-tax	32	SL, 5-year	Yes
Kenya		R-factor	50–75	60	5L, 5-yr	No	POB	n/a
Indonesia (pre-2017)	20	Fixed		100	DB	No	Pre-tax	n/a				25	SL, 4-yr	Yes
Iraq	10	R-factor	65–84	45	Expensing	No	Pre-tax	n/a				35	SL, 5-yr	Yes
Israel	12.5	n/a						R-factor	20–50 Expensing	No	Pre-tax	26.5	SL, 7-yr	Yes
Lebanon	5–12	R-factor	30–55	60–65	Expensing	No	Pre-tax	n/a				15	SL, 5-yr	Yes
Liberia	5	DROP	40–60	70	Expensing	Yes	Pre-tax	n/a				30	SL, 5-yr	Yes
Malaysia	10	DROP	30–60	70–75	Expensing	No	Pre-tax	n/a				38	SL, 5-yr	Yes
Mauritania	n/a	R-factor	31–42	55	Expensing	Yes	Pre-tax	n/a					SL, 5-yr	Yes
Mexico (Entitlement)	Variable	Fixed	65	60	SL, 4-yr			n/a		n/a	n/a	Pre-tax	30	SL, 4-yr	Yes
Mexico (PSC)	Variable	ROR	Biddable	60	Expensing	No		n/a					30	SL, 4-yr	Yes
Mongolia	12.5	DROP	44–64	40	Expensing	No	POB	n/a
Mozambique (EPCC Area 1	3	R-factor	10–60	65	SL, 4-yr	Yes	Pre-tax	n/a					32	SL, 4-yr	Yes
Mozambique	10	R-factor	15–60	60	SL, 4-yr	No	Pre-tax	n/a					32	SL, 4-yr	Yes
Myanmar	12.5	DROP	60–85	60	SL, 4-yr	Yes	Pre-tax	n/a					25	SL, 4-yr	Yes
Nigeria JV	20	n/a						n/a					85	SL, 5-yr	Yes
Nigeria PSC (1993)	Variable	Cumulative	20–60	100	SL, 5-yr	Yes	POB	n/a					50	SL, 5-yr	Yes
Norway	n/a							SPT	55	Uplift	Yes	Post-tax	23	SL, 6-yr	Yes
Papua New Guinea	2	n/a						ROR	30	Expensing	No	Post-tax	30	SL, 10-yr	Yes
Russia								Export duty	0–45				20	SL, 5-yr	Yes
Saudi Arabia (2018 regime)	20–50												50–85	SL (b), 20 years	Yes
Senegal		DROP	15–40	75	SL, 5-yr	No	Pre-tax	n/a					25	SL, 5-yr	Yes
Timor Leste	5	DROP	50–70	100	Expensing	No	Pre-tax	ROR	32.1	Expensing	No	Pre-tax	30	SL, 5-yr	Yes
Trinidad & Tobago	12.5	n/a						Price-based	0–55	n/a	n/a	Pre-tax	50	DB	Yes
Trinidad & Tobago PSC	0	DROP			Expensing	No	POB	n/a
Uganda	5–12.5	DROP	45–68	60	Expensing	Yes	Pre-tax	n/a					30	SL, 6-yr	Yes
United Kingdom	n/a	n/a						Cashflow w	32	Expensing + No		Post-tax	30	Expensed	Yes

Source: FARI Fiscal Regime Library and Sub-ModelsNotes: DROP (daily rate of production), ROR (rate of return), POB (pay on behalf), SL (straight line depreciation), DB (declining balance depreciation), SPT (Special Petroleum Tax)

View Table

^{Table 15.1.}

Selected Petroleum Fiscal Regimes, Key Structural Features

	Royalty	Profit oil sharing						Resource rent tax					Corporate income tax
	Rate (percent)	Profit oil sharing	Rate (percent)	Cost recovery limit	Capex	Interest cost recoverable	Interaction with CIT	RRTtype	Tax rate (percent) Capex	Interest cost recoverable	Interaction with CIT	Tax rate (percent)	Capex	Interest cost deductible
Angola	n/a	ROR	30–90	50	Expensing	No	Post-tax	n/a				50	SL, 4-yr	Yes
Australia	n/a	n/a						ROR	40 Expensing	No	Pre-tax	30	SL, 15-yr	Yes
Azerbaijan	n/a	R-factor	40–90	100	Expensing	No	POB	n/a					DB	Yes
Bolivia
Brazil	10	n/a						DROP	10^10 SL, 10-yr	No	Pre-tax	34	SL, 10-yr	Yes
Canada (Alberta)	10–40	n/a						Price-based royalty				27	DB
Congo, Rep. of	15	DROP	40–60	60	Expensing	No	POB	n/a
Egypt	n/a	DROP, Price	75–90	40	5L, 5-yr	Yes	POB	n/a
Equatorial Guinea	13	DROP	10–70	70	Expensing	No	Pre-tax	n/a				35	SL, 5-yr	Yes
Gabon	Variable	DROP	50–63	65–80	Expensing	No	Pre-tax	n/a				0	SL, 5-yr	Yes
Ghana	5–12.5	n/a						ROR	15–25 Expensing	No	Post-tax	35	SL, 5-yr	Yes
Guyana	2	Fixed	50	75	Expensing	Yes	POB	n/a
Kazakhstan	5–18	n/a						Excess profi	10–60 SL, 5-yr	Yes	Post-tax	32	SL, 5-year	Yes
Kenya		R-factor	50–75	60	5L, 5-yr	No	POB	n/a
Indonesia (pre-2017)	20	Fixed		100	DB	No	Pre-tax	n/a				25	SL, 4-yr	Yes
Iraq	10	R-factor	65–84	45	Expensing	No	Pre-tax	n/a				35	SL, 5-yr	Yes
Israel	12.5	n/a						R-factor	20–50 Expensing	No	Pre-tax	26.5	SL, 7-yr	Yes
Lebanon	5–12	R-factor	30–55	60–65	Expensing	No	Pre-tax	n/a				15	SL, 5-yr	Yes
Liberia	5	DROP	40–60	70	Expensing	Yes	Pre-tax	n/a				30	SL, 5-yr	Yes
Malaysia	10	DROP	30–60	70–75	Expensing	No	Pre-tax	n/a				38	SL, 5-yr	Yes
Mauritania	n/a	R-factor	31–42	55	Expensing	Yes	Pre-tax	n/a					SL, 5-yr	Yes
Mexico (Entitlement)	Variable	Fixed	65	60	SL, 4-yr			n/a		n/a	n/a	Pre-tax	30	SL, 4-yr	Yes
Mexico (PSC)	Variable	ROR	Biddable	60	Expensing	No		n/a					30	SL, 4-yr	Yes
Mongolia	12.5	DROP	44–64	40	Expensing	No	POB	n/a
Mozambique (EPCC Area 1	3	R-factor	10–60	65	SL, 4-yr	Yes	Pre-tax	n/a					32	SL, 4-yr	Yes
Mozambique	10	R-factor	15–60	60	SL, 4-yr	No	Pre-tax	n/a					32	SL, 4-yr	Yes
Myanmar	12.5	DROP	60–85	60	SL, 4-yr	Yes	Pre-tax	n/a					25	SL, 4-yr	Yes
Nigeria JV	20	n/a						n/a					85	SL, 5-yr	Yes
Nigeria PSC (1993)	Variable	Cumulative	20–60	100	SL, 5-yr	Yes	POB	n/a					50	SL, 5-yr	Yes
Norway	n/a							SPT	55	Uplift	Yes	Post-tax	23	SL, 6-yr	Yes
Papua New Guinea	2	n/a						ROR	30	Expensing	No	Post-tax	30	SL, 10-yr	Yes
Russia								Export duty	0–45				20	SL, 5-yr	Yes
Saudi Arabia (2018 regime)	20–50												50–85	SL (b), 20 years	Yes
Senegal		DROP	15–40	75	SL, 5-yr	No	Pre-tax	n/a					25	SL, 5-yr	Yes
Timor Leste	5	DROP	50–70	100	Expensing	No	Pre-tax	ROR	32.1	Expensing	No	Pre-tax	30	SL, 5-yr	Yes
Trinidad & Tobago	12.5	n/a						Price-based	0–55	n/a	n/a	Pre-tax	50	DB	Yes
Trinidad & Tobago PSC	0	DROP			Expensing	No	POB	n/a
Uganda	5–12.5	DROP	45–68	60	Expensing	Yes	Pre-tax	n/a					30	SL, 6-yr	Yes
United Kingdom	n/a	n/a						Cashflow w	32	Expensing + No		Post-tax	30	Expensed	Yes

Source: FARI Fiscal Regime Library and Sub-ModelsNotes: DROP (daily rate of production), ROR (rate of return), POB (pay on behalf), SL (straight line depreciation), DB (declining balance depreciation), SPT (Special Petroleum Tax)

Table 15.2 summarizes structural features of the fiscal regime in major mining countries. Countries with a resource rent tax are about evenly split between having this applied to the pre-and post-corporate income tax cash flows. Some countries also allow interest deductibility under the resource rent tax despite providing for expensing of capital expenditure. Moreover, a number of countries only apply the corporate income tax which allows for interest deductions, without a tax targeted at resource rents.

Countries with extractive industries are also vulnerable to profit shifting through reduced withholding tax rates. For the majority of countries, the tax treaty network provides withholding tax rates significantly below the generally applicable ones, in many cases with the rates at least in some treaties reduced to zero (see Annex 15.3).

^{Table 15.2.}

Selected Mining Fiscal Regimes, Key Structural Features

Source: FARI Fiscal Regime Library and Sub-ModelsNotes: SL (straight line depreciation), DB (declining balance depreciation). Net (gross value exlcuding transportation, refining and processing cost)

^{Table 15.2.}

Selected Mining Fiscal Regimes, Key Structural Features

	Royalty		Resource rent tax					Corporate income tax
	Rate (percent)	Base	RRTtype	Tax rate (percent)	Capex	Interest cost recoverable	Interaction with CIT	Tax rate (percent)	Capex	Interest cost deductible
Argentina	3	Net	n/a					35	SL, 5-yr	Yes
Australia	Variable	Net						30	SL, 10–15-yr	Yes
Bolivia	Sliding scale	Gross	Mining surtax	25	SL, 8-yr	Yes	Post-tax	25	SL, 8-yr	Yes
Botswana	3–10	Net	Variable income tax	22–70	Expensing	Yes	n/a	n/a	n/a	n/a
Brazil	1–3.5	Gross	n/a					34	SL, 5–10-yr	Yes
Burkina Faso	Price-based	Gross	n/a					17.5	SL, 10-yr	Yes
Canada	n/a		Provincial mining tax	Varies	Expensing	No	Pre-tax	15 + 12	DB, 25%	Yes
Chile	n/a		Specific mining tax	5–34.5	SL, 9-yr	No	Pre-tax	27	SL, 9-yr	Yes
China	2.5–10	Net	n/a					25	SL, 10-yr	Yes
Colombia	4–10	Net	Rate of return	25	Expensing	No	Post-tax	27	SL, 5-yr	Yes
Congo, DR	1–3.5	Net	n/a					30	DB, 25%	Yes
Cote d’lvoire	3.5	Gross	n/a					25	SL, 5-yr	Yes
Ghana	5	Net	Rate of return	10	Expensed	No	Pre-tax	25	SL, 5-yr	Yes
Guinea	3–5	Gross	n/a					30	SL, 3-yr	Yes
India	2–15	Gross	CIT surcharge	5–10				30	SL, 5-yr	Yes
Indonesia	3–10	Net	n/a					25	SL,5–16-yr	Yes
Lesotho	7–10	Net	n/a					25	DB	Yes
Liberia	4.5	Gross	Rate of return	20	Expensed	No	Pre-tax	30	Expensed	Yes
Mali	3	Gross	n/a					25	SL, 3-yr	Yes
Mauritania	Price-based	Gross	n/a					25	SL, 3-yr	Yes
Mexico	n/a		Special mining right	7.5	SL, 10-yr	No	Post-tax	30	SL, 10-yr	Yes
Mongolia	5	Gross	Price-based royalty	Variable	n/a	n/a	Deductible	25	SL, 10-yr	Yes
Mozambique	3–6	Gross	n/a					32	SL, 7-yr	Yes
Namibia	3–10	Gross	n/a					37.5	Expensed	Yes
Niger	Variable	Gross	n/a					30	SL, 5-yr	Yes
Papua New Guinea	2.25	Gross	Rate of return	30	Expensed	No	Post-tax	30	SL, 10-yr, DB	Yes
Peru	1–12	Oper. income	Special mining tax	2–8.4	Expensed	No	Pre-tax	29.5	Expensed	Yes
Philippines	5	Net	Additional govt share			Yes		30	SL, 5-yr	Yes
Sierra Leone	4–7.5	Gross						30	DB	Yes
Solomon Islands	3	Gross	Rate of return	20	Expensed	No	Post-tax	35	Expensed, DB	Yes
South Africa	5–7	Gross	Variable income tax	0–32	Expensed	Yes			n/a	n/a
Tanzania	3–5	Gross	n/a					30	SL, 5-yr	Yes
Zambia	5–6	Gross	Export duty					30	SL, 4-yr	Yes
Zimbabwe	1–15	Net	Rate of return	28–31	Expensed	No	Post-tax	15	Expensed	Yes

Source: FARI Fiscal Regime Library and Sub-ModelsNotes: SL (straight line depreciation), DB (declining balance depreciation). Net (gross value exlcuding transportation, refining and processing cost)

View Table

^{Table 15.2.}

Selected Mining Fiscal Regimes, Key Structural Features

	Royalty		Resource rent tax					Corporate income tax
	Rate (percent)	Base	RRTtype	Tax rate (percent)	Capex	Interest cost recoverable	Interaction with CIT	Tax rate (percent)	Capex	Interest cost deductible
Argentina	3	Net	n/a					35	SL, 5-yr	Yes
Australia	Variable	Net						30	SL, 10–15-yr	Yes
Bolivia	Sliding scale	Gross	Mining surtax	25	SL, 8-yr	Yes	Post-tax	25	SL, 8-yr	Yes
Botswana	3–10	Net	Variable income tax	22–70	Expensing	Yes	n/a	n/a	n/a	n/a
Brazil	1–3.5	Gross	n/a					34	SL, 5–10-yr	Yes
Burkina Faso	Price-based	Gross	n/a					17.5	SL, 10-yr	Yes
Canada	n/a		Provincial mining tax	Varies	Expensing	No	Pre-tax	15 + 12	DB, 25%	Yes
Chile	n/a		Specific mining tax	5–34.5	SL, 9-yr	No	Pre-tax	27	SL, 9-yr	Yes
China	2.5–10	Net	n/a					25	SL, 10-yr	Yes
Colombia	4–10	Net	Rate of return	25	Expensing	No	Post-tax	27	SL, 5-yr	Yes
Congo, DR	1–3.5	Net	n/a					30	DB, 25%	Yes
Cote d’lvoire	3.5	Gross	n/a					25	SL, 5-yr	Yes
Ghana	5	Net	Rate of return	10	Expensed	No	Pre-tax	25	SL, 5-yr	Yes
Guinea	3–5	Gross	n/a					30	SL, 3-yr	Yes
India	2–15	Gross	CIT surcharge	5–10				30	SL, 5-yr	Yes
Indonesia	3–10	Net	n/a					25	SL,5–16-yr	Yes
Lesotho	7–10	Net	n/a					25	DB	Yes
Liberia	4.5	Gross	Rate of return	20	Expensed	No	Pre-tax	30	Expensed	Yes
Mali	3	Gross	n/a					25	SL, 3-yr	Yes
Mauritania	Price-based	Gross	n/a					25	SL, 3-yr	Yes
Mexico	n/a		Special mining right	7.5	SL, 10-yr	No	Post-tax	30	SL, 10-yr	Yes
Mongolia	5	Gross	Price-based royalty	Variable	n/a	n/a	Deductible	25	SL, 10-yr	Yes
Mozambique	3–6	Gross	n/a					32	SL, 7-yr	Yes
Namibia	3–10	Gross	n/a					37.5	Expensed	Yes
Niger	Variable	Gross	n/a					30	SL, 5-yr	Yes
Papua New Guinea	2.25	Gross	Rate of return	30	Expensed	No	Post-tax	30	SL, 10-yr, DB	Yes
Peru	1–12	Oper. income	Special mining tax	2–8.4	Expensed	No	Pre-tax	29.5	Expensed	Yes
Philippines	5	Net	Additional govt share			Yes		30	SL, 5-yr	Yes
Sierra Leone	4–7.5	Gross						30	DB	Yes
Solomon Islands	3	Gross	Rate of return	20	Expensed	No	Post-tax	35	Expensed, DB	Yes
South Africa	5–7	Gross	Variable income tax	0–32	Expensed	Yes			n/a	n/a
Tanzania	3–5	Gross	n/a					30	SL, 5-yr	Yes
Zambia	5–6	Gross	Export duty					30	SL, 4-yr	Yes
Zimbabwe	1–15	Net	Rate of return	28–31	Expensed	No	Post-tax	15	Expensed	Yes

Source: FARI Fiscal Regime Library and Sub-ModelsNotes: SL (straight line depreciation), DB (declining balance depreciation). Net (gross value exlcuding transportation, refining and processing cost)