Date post: | 27-Jun-2015 |
Category: |
Economy & Finance |
Upload: | esther-petrilli-massey |
View: | 453 times |
Download: | 1 times |
Petroleum Tax Administration
Regional Petroleum Seminar
Libreville
April 28 to 30, 2008
Charles McPherson
IMF Fiscal Affairs Department
Outline of Presentation
Relevance Special features of the petroleum sector Tax design and tax administration Routine functions Non-routine functions Non-core activities Organisation
Outline of Presentation (cont’d)
Building capacity National Oil Companies Transparency Political economy considerations
Relevance of Petroleum Tax Administration
Transformation of oil wealth to development depends on:
• Sector management
• Tax design
• Tax administration
• Revenue management
• Expenditure management Tax administration is just one factor among several,
but it is significant… And a difficult challenge….
Significance:A Prussian Parable
One of the most delightful stories in the entire history of taxation came from Frederick's troubled times. During one of his cabinet meetings Frederick asked his finance minister why his treasury was so low when his subjects were paying so much tax. Where was all the money going? To explain the problem, the finance minister asked for a piece of ice. He handed it to the minister farthest from the king and told him to pass it to the next person, on up to the king. By the time the ice reached Frederick all he received was a wet hand. The lesson the finance minister taught the king ranks in wisdom with the parables of the Bible. Most taxes are consumed by the bureaucracies of the government. It is a wonder Frederick even received a wet hand.
Challenge:Tax Administration under
Ivan the Terrible
Special Features of the Petroleum Sector
Scale (tax revenues, macro impacts…) Complexity (operational, legal, contractual) Volatility (revenue, regime changes) Integrated value chain (fiscal reference
points) International industry (transfer prices,
withholding) Asymmetries (expertise)
Tax Design and Tax Administration
Sophistication vs. capacity Taxes on production vs. income taxes Production sharing vs. tax/royalty regimes
Routine Functions
Registering taxpayers Processing returns Assessing tax Collecting tax Accounting standards (IAS, GAAP) Currency of account
Procedural Steps
ProvisionalTax
Declaration
Oil Valuation
Payment ofTax
FinalDeclaration& Payment
TaxAudit
FixationCommission
RevisionCommission
Before tax year
During tax year
After tax year
AmendedProvisional
Declarations
Informational Requirements
Taxpayer requirements:• Clear, accessible legislation/regulations
• Explanatory materials/advice
Tax collector requirements:• Operational information
• Contractual agreements and JOAs
• Operator and JOA Audits
• Prices
• Costs
Problems Encountered in Routine Administration
Multiplicity of taxes Multiplicity of agencies Weak filing/payment procedures Poor accounting systems Weak or absent IT
THE IDEAL APPROACH…….
TAXES PAID
TAXES RECEIVED
TAX PAYERMIN.FIN. & TREASURY
A B
A=B=C
C
TAXES DUE
TAX PAYER
PETROLEUM REVENUE REPORTING
Reconciliation Issues
Off-sets/QFAs Direct payments to sub-national governments US dollar accounting vs. local currency Payment timing in context of depreciating
currency and inflation Cash vs. accrual accounting Inter-agency reconciliation
Non-routine Functions
Volume determination Price determination Cost determination Audits Appeals
Volume Determination
Metering Quality analysis Adjustments Monitoring
Price Determination
Market value as a goal…. Arms-length prices Reference prices Integrated operations Transfer prices In kind revenues
Cost Determination
Cost categories Cost control Ring fencing Finance costs Transfer prices Environmental and abandonment costs
Ring Fencing Separation of taxable projects for purpose of
calculation of tax liability Licence-by-licence or project-by-project Pros:
• Avoids deferral of revenue• Levels playing field for new entrants• Avoids administrative complexity where multiple tax
regimes Cons:
• Limits incentive to invest in new activities• Additional demands on cost control
Finance Costs
Project financed oil developments often highly leveraged (heavy use of debt)
Interest is typically deductible in determining taxable profits, but
Many countries have provisions to protect their tax base vs excessive interest payments
A typical rule might limit allowable debt/equity ratio to 3:1
Interest charged should be arms-length
Transfer Pricing
Investor allocation of revenues and costs across countries to lower taxable income
Legislation/regulations should provide for: • Adjustments to ensure arms-length pricing
• Adoption of OECD Guidelines
• Disclosure of related party transactions
• Documentation on determination of transfer prices Cooperation with tax authorities in investor
home countries can help
Illustrative Transfer Pricing Mechanisms
Mechanisms used to lower revenue:• Sales below market to affiliates
• Price hedging Mechanisms used to increase deductions:
• Debt finance at above market rates
• Excessive management, HQ and consultancy fees
• Provision of goods at above market costs
Environmental and Field Abandonment Costs
Legislation or concessions usually contain requirements with regard to environmental protection and field abandonment
Funds may be placed in an escrow account for this purpose with tax deductions allowed
Alternatively, current expenditures may be deducted currently and deductions may be allowed currently for future expenditures, provided security is put in place to ensure those expenditures
Audits
Audit types (physical, cost, tax) Audit choices (full vs. selective etc.) In-house or out-sourced? Role of investor audits National oil company audits
Appeals
Disputes are inevitable… Informal vs. formal resolution Tax tribunals vs. courts In-house legal skills vs. out-sourced
Complementary Activities:Tax Policy and Forecasting
Tax policy capacity is a critical complement to tax administration
Tax modeling can be used for:• Longer term forecasting
• Improved planning for different scenarios
• Cross-check on audit results
• Evaluation of agreements
Organisation
Governance/accountability Separate unit? Where? Centralised vs. decentralised Inter-agency coordination
Analyst Analyst Analyst Analyst
Possible Institutional Structure
Monitoring filing and payments
Valuation & tax audits
Dispute resolution
Taxpayer advice &
policy
External Legal ServicesExternal Tax Audit
Consultants
Director NTD
Head NRT
Building Capacity
Staffing/skills mix Training Compensation Resources/facilities/IT Consultancies Funding
National Oil Companies
Fiscal treatment Fiscal administration roles Cost control Marketing of government production Quasi-fiscal activities (QFAs)
Transparency
Explicit legal basis Limits on discretion Easily understandable and accessed laws Tax manuals/taxpayer advice Public reporting Ethical code EITI and IMF Guide on Resource Revenue
Transparency
Political Economy
Long-standing recommendations Powerful entrenched interests Practice vs. policy What is the appropriate response?
Petroleum Tax Administration
Thank you.
Questions/comments?