Opportunities for Country Revenue Through Taxing National Resources

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Fiscal Regimes for Minerals and Petroleum:

Issues and Current TrendsPhilip Daniel

Fiscal Affairs Department

International Monetary Fund

International Consortium on Governmental FinancialManagement

Washington DC

November 5, 2008

The views in this presentation are those of the author and should not be attributed to the International MonetaryFund, its Executive Board, or its management.


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Purpose and Outline

Challenges for fiscal regime design Main fiscal regime types

Design principles

Comparisons Fiscal regime changes

Issues in home countries

Mining issues

Taxation and transparencyMain focus is on petroleum, with special issues for mining


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Rent, Uncertainty and Instability

Resource Rent:value minus all necessary costs

Uncertaintyabout value of resource and timing of

revenues

Instabilitycaused by volatility of oil prices

Fiscal regime should respond robustly to realizedoutcomes


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444

0

50

100

150

200

250

300

350

400

450

500

550

1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 2013

Crude Oil

Gold

Aluminum

Copper

Projection

Source: World Economic Outlook and IMF Staff Estimates

Commodity Prices in Real Terms(Index deflated by US CPI, avg 1965-2008 = 100)


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555

Crude Oil Spot Prices 1

A Roller Coaster Ride

Sources: IMF World Economic Outlook and staff estimates

1/ simple average of Dated Brent, West Texas Intermediate, and the Dubai Fateh. Real oil prices deflated by US CPI (September 2008=100)

0

10

20

30

40

50

60

70

80

90

100

110

120

130

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

U.S

dolla

rperbarrel

Real oil prices

Nominal oil prices


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666

Two Oil Price Booms

Oil Prices: Spot and Projections

Sources: U.S. Department of Energy Outlook (1982,1985,1991, 1995, 2000 and 2004); and IMF World Economic Outlook

(2003,2004,2005,2006,2007, and 2008). After Ossowski et. al. (2008)

Note: Solid lines on the left chart are spot WTI oil prices, on the right chart are WEO average of WTI, and Fateh. The dashed linesare price projections.

U.S. Department of Energy Annual Energy Outlooks (AEO) 1982-2004

(2006 U.S. Dollar per Barrel) 1/2/

0

10

20

30

40

50

60

70

80

90

100

1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003

U

S$p

erbar

AEO 1982

AEO 1991

AEO 1985

AEO 2000AEO 1995

AEO 2004

WEO Oil price Forecasts, 2003-2008

15

25

35

45

55

65

75

85

95

105

115

125

135

145

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

US$

/bbl

Apr 03

Apr 04

Sep 03

Apr 05

Apr 06Apr 07

Apr 08

Oct 07

Sep 04

Sep 05

Jun 08

Sep 06

Oct 08


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777

Main Types of Petroleum Fiscal Regime(with private investment)

Tax and royalty (with or without state participation)

Normal CIT with royalty for rent

Normal CIT with RRT or progressive tax

Petroleum profits tax

Production Sharing(with or without state participation)

Proxies for profit (cumulative production, daily

production, price cap or matrix)

Rate of return or R-Factor

Not common in mining


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Fiscal Schemes Beyond Tax/Royalty &Production Sharing

About 40% world oil output (33 mm bpd) is subject

to other arrangements

Mid-East OPEC countries plus China, Libya, Nigeria,Venezuela, Mexico (mixed schemes in some)

State ownership plus international companyinvolvement through service contracts, risk servicecontracts, buy back schemes

Need to analyse fiscal equivalence of governmenttake

For transparency in-country

To promote wider international knowledge of the price for

international company services


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Governments Share

of Profit Oil

Contractors Share of

Profit Oil

Royalty

Production

Profit OilCost Oil

Contractors Oil

=

Gross Income for Income Tax Governments Oil

Allowable Income Tax

Deductions

Taxable Income

Income Tax

Total Government Revenue

X%

IncomeT

axCalculatio

ns

PSA

Calculations

Production Sharing Scheme


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Mining: Additional TaxationResource rent tax Taxes cash flows above a specified rate of return in a life of project calculation

Efficient especially where costs of failed exploration can also be recouped

Variable income tax or profit-related royalty Rate of CIT, or royalty, varies with ratio of taxable income to total revenues

May be risk-reducing for investors

Ghanas variable royalty scheme; elective scheme for gold mines in SouthAfrica; mining tax regimes in Botswana and Uganda

Price participation arrangements or windfall taxes Change the sharing of proceeds when threshold prices for commodities are

exceeded; Blunt instrument that does not (usually) take account of grades or costs;

Exists in Zambia and in Mongolia, and voluntary contributions in Peru

Profit Sharing Formula (diamonds in Botswana and Namibia)


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Fiscal Regime Design (1)

Concept of Rent Value minus all necessary costs

Tax neutrality

Conditional payments

Tax System Design Incentive to explore and invest

Fair share of revenues for

public use

Three Principles Comparable with countries of

similar prospectivity

Government can tax more if the

structure of tax reduces investorrisks

Tax neutrality does not mean

tax rates identical to other

sectors


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Fiscal Regime Design (2)

Tax Share & Tax Structure

Overall impact is more important than individual

instruments

Tax Share average state share over the life of resource

Tax Structure path over time of the tax share

Balancing a Petroleum Tax System

Minimize investors risk of loss Create stability of fiscal terms

Sufficient share of high rents for the state


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Present value to equalize PV of negative returns

Present value to equalize mean PV to investorProspectivity Gap

Compare expected yield index with expected risk indexRelating Revenue Yield to

Investor Risk

Cumulative probability distribution of outcomes

Value of negative returns

Probability of below-target returns

Dispersion of expected IRR (Coefficient of variation of IRR)Investor Perceptions of Risk

Proportion of revenues in first n years

Variance of NPV of revenues (coefficient of variation)Risk to Government

Tax share of total benefitsAdaptability / Progressivity

Share of rent to government

Time profile of revenueRevenue Raising Capacity

Breakeven price

METR (wedge between pre and post-tax IRR, as % of pre-tax)

AETR (government take in a profitable case)Neutrality

Key IndicatorsEvaluation Criterion


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WEO Price Forecast, October 08

0

15

30

45

60

75

90

105

120

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

years

US$/bblnominal

Projection


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Time Profile of Revenue: Deep Water Project(WEO Prices) (example from Wood Mackenzie)

-2,000

-1,000

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31

years

$mmreal


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AETR at 15% (WEO Prices)Average Effective Tax Rate Discounted at 15 Percent (WEO Prices)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Angola

Norway

Colombi

a

M

adagascar

Namibia

Tim

orLeste

Mozambi

que

Libe

ria

Mauritania

Nigeria

Australia

Argentin

a

US(OCS)

Sierra

Leone

Brazil

UK

AETR,at15%d

iscountrate

.


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Breakeven price for 15% Post-Tax IRR

Price Required to Achieve 15 Percent After-Tax Real Rate of Return

0

510

15

20

25

30

35

40

45

50

55

60

65

M

adagascar

Colombia

Angola

Norway

Mozambi

que

Libe

ria

Mauritania

Argentin

a

Sierra

Leone

Australia

US(OCS)

UK

Nigeria

Namibia

Tim

orLeste

Brazil

US$/b

bl


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Government Share of Total Benefits for

Range of Pre-Tax IRR (Deep Water Project)

30%

35%

40%

45%

50%

55%

60%

65%

70%

75%

80%

35% 40% 45% 50% 55% 60% 65% 70% 75%

Pre-tax IRR

Governmentshareoftotalbenefitsdiscountedat

15%

Mozambique Brazil Angola Timor Leste Australia US (OCS) result at WEO


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Revenue Yield and Investor Risk Indexes

8082110Angola57174112Madagascar

64135109Colombia

7695104Norway

70100100Mozambique

6910198Liberia

767594Mauritania

885095Namibia

5614990Argentina

755983Australia

922687Timor Leste

5913288US (OCS)

647780Sierra Leone

844581Nigeria

676571UK

718370Brazil

%Mozambique =100as % of Mozambique

Coefficient of variation

of government

receipts

Investor expected risk index(at 15% discount rate)

Expected government receiptsdiscounted at 15%Deep Water

Project


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Fiscal Responses by Producers (1)

More than 30 countries have adjusted terms since 2000.

Majority in favor of government, but some haveprovided incentives (mature, consumers, deep water etc)

Important distinction among those who actedunilaterally, those who secured more by voluntarymeans (bidding), and changes for individual projects

Some achieved more by simple operation of progressiveterms (Angola, Australia PRRT, Azerbaijan PSA,Nigeria tax system, Timor-Leste PSA & APT)


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Fiscal Responses by Producers (2)

US (royalty increase) and UK (income tax surcharge)

both applied general change

New fiscal measures: Algeria petroleum windfall tax,also Colombia, Ecuador, Bolivia, Venezuela

Revised project terms: Kazakhstan (Kashagan), Russia(Sakhalin)

Libya (EPSA IV bidding); Angola deep offshoreRoR scheme, bidding


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Fiscal Responses by Consumers & HomeCountries

Recent pressures for additional taxes on oil companiesin consumer countries, or countries where oilcompanies are based (e.g.,USA, France, Italy)

Reflect ex postrates of return thought extremelyimprobable when the investments were made

Emphasizes governments somewhere will try to tax

high rents

Producers with progressive tax systems (such as rateof return schemes) will get there first.


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Current Mineral Tax Issues

Lack of responsiveness of fiscal systems to changes incommodity price environment

Special agreements made post conflict, or in distressprivatizations

Legislated regimes ignored when under pressure for adesirable investment

Relationship of fiscal stability assurances to the tax system

Reliance on CIT system, and thus exposure to excessivedebt interest

Transfer pricing, assessment and audit problems generally

Use of EPZ schemes to locate processing, or even mining

Mining tax regimes appear less efficient than most of thepetroleum regimes


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Taxation and Transparency (1) Extractive Industries Transparency Initiative

(EITI)

Starts from reconciliation of payments and revenues

20 + implementing governments

IMF Guide on Resource Revenue Transparency Part of Fiscal ROSC process a voluntary engagement

Full public presentation of legal basis for taxation orproduction sharing

Encourages publication of mineral agreements coveringfiscal terms


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Taxation and Transparency (2)

Contract publication issues Production sharing agreement is a taxing instrument

Disclosure sometimes difficult where case-by-casenegotiations occur

Trend to bidding encourages publication of model, andbid criteria for blocks (e.g., Angola)

Publication of PSA is compatible with confidentiality

of commercial agreements (e.g., gas sales)

Opportunities for Country Revenue Through Taxing National Resources

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