21
NATURAL RESOURCE TAXATION Michael Keen IMF-Japan High Level Tax Seminar, Tokyo January 14, 2011
NATURAL RESOURCE TAXATION
Michael Keen
IMF-Japan High Level Tax Seminar, Tokyo January 14, 2011
“There are few areas of economic policymaking 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”
Dominique Strauss-Kahn
Managing Director, IMF
2
Outline
• What’s so special about resource taxation?
• Seven key issues
What’s so special about resource taxation?
• Tax revenue a/the central benefit to host country
– Especially, but not only, hydrocarbons
– With powerful implications for rest of tax system
0
10
20
30
40
50
60
70
80
90
100
Iraq
O
man
Ku
wai
t N
iger
ia
Equa
toria
l Gui
nea
Liby
a A
ngol
a Ba
hrai
n Co
ngo,
Rep
ublic
of
Saud
i Ara
bia
Yem
en
Alg
eria
Ti
mor
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Uni
ted
Ara
b Em
irate
s Q
atar
Ir
an
Aze
rbai
jan
Suda
n Ve
nezu
ela
Turk
men
ista
n Bo
tsw
ana
Syria
n A
rab
Repu
blic
Tr
inid
ad a
nd T
obag
o Sã
o To
mé
& P
rínci
pe
Mex
ico
Viet
nam
Ka
zakh
stan
Ch
ad
Cam
eroo
n In
done
sia
Nor
way
Ec
uado
r Bo
livia
Ru
ssia
Pa
pua
New
Gui
nea
Gui
nea
Chile
M
aurit
ania
Co
lom
bia
Gab
on
Mon
golia
Li
beria
N
amib
ia
Peru
So
uth
Afr
ica
Sier
ra L
eone
Jo
rdan
Receipts from petroleum and minerals in percent of government revenues (average 2000-2007)
• High sunk costs, long production periods
– Create a ‘time consistency’ (trust!) problem
• Substantial rents (i.e. returns above minimum required)
– The ideal of a non-distorting tax base!
• International considerations loom large
– Foreign tax rules matter;
– Tax competition
• Uncertainty – from technology, geology, with prices that are
volatile…
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 2010
$US
per
bar
rel
Crude oil (real 2010 prices)
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
11,000
12,000
13,000
14,000
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
$US
per
met
ric
tonn
e
Copper (real 2010 prices)
…and hard to predict:
And political risk too
0
10
20
30
40
50
60
70
80
90
100
US$
per
bar
rel
U.S. Department of Energy Annual Energy Outlooks (AEO) 1982-2004 (2006 U.S. Dollars per Barrel)
AEO 1982
AEO 1991
AEO 1985
AEO 2000AEO 1995
AEO 2004
• Asymmetric information
Few of these features are unique to resources—they’re just bigger. What is unique is:
• Exhaustibility
– Opportunity cost of extraction includes future extraction forgone
– Affects impact of taxation
– Views differ on how important this is in practice
SEVEN KEY ISSUES
1. Role and design of rent taxes
• Various possible forms, with differing revenue paths: —’Brown’ (=cash flow) tax —’Resource rent tax’: carry forward losses at interest —ACE (or allowance for corporate Capital)
• For neutrality, relief to be given for exploration costs (Norway)
• Australia proposals (ACC type) • Norway perhaps closest
2. Should resource taxes be progressive?
..in sense of government’s share being larger the higher are prices/profits/lifetime project return?
(e.g. price-sensitive royalties, additional tax on high returns…)
• Yes, if government better able to bear risk than
investor – But opposite likely true in many developing countries
• However: Political pressures may make progressive systems more robust and credible
3. Multiple instruments may be needed
• Rent taxation is most efficient in principle • Royalties distort extraction and exploration • But royalties may still have an important role, to:
– Assure some revenue from day 1 of production – Recognize that rents may be hard to observe perfectly – An implicit depletion policy: e.g. avoid over-extraction
when contract period short (implicit depletion policy)
• Problems of regular corporate income tax
4. Careful evaluation pays off
Four key indicators
• Average effective tax rate (AETR): the tax share of net cash flow discounted at a chosen rate
• Marginal effective tax rate (METR): the tax “wedge” between the pre- and post-tax rate of return
• Breakeven price: the output price required to yield a specified rate of return to capital
• Progressivity: E.g. variation of AETR with project return
For a simulated gold project (using FAD’s ‘FARI’): AETR
- 20% 40% 60% 80%
Mozambique
Indonesia
Suriname
Liberia
PNG
South Africa
Tanzania 2010
Tanzania 2004
Ghana
Sierra Leone
Australia
Peru
AETR for Selected Regimes
AETR NPV0
AETR NPV10
Project: GoldGeneric
Size: 2.0 MM Oz
Total costs per Oz: $393
GoldPrice: WEO
IRR pre tax: 27.9%
Project Description
Disc. Rate: 10.0%
Project
• 2 million ounces gold produced over 12 years @ 200 thousand
oz. per year • Exploration and Development
costs $485 million • Operating costs $150 per ounce
Note:
• Outcome dependent on application of withholding taxes, that may be varied by treaties.
METR and breakeven price
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
-
200
400
600
800
1,000
1,200
MET
R
Gold
price
requ
ired f
or hu
rdle
rate
of 1
5%METR
METR (right axis) Gold price required for hurdle rate $Oz (left axis)
Progressivity: Variation in AETR
10%
15%
20%
25%
30%
35%
40%
45%
10% 15% 20% 25% 30% 35%
Pre Tax IRR
Australia
Ghana
Indonesia
Liberia
Mozambique
PNG
Peru
Sierra Leone
South Africa
Suriname
Tanzania 2004
Tanzania 2010
Government share of Total Benefits Discount rate 15
5. Merits and problems of auctioning
• Auctions can (a) allocate clear rights (b) to the most efficient producer (if well-designed), all (c) in a transparent way
• Design matters—including bid variables
• Why so little used for minerals?
• How many bidders is enough? Collier says four...
6. Administration—How tough can it be?
• Helps that commodity prices readily observable...
...but dealing with complex MNCs always hard
• Important to do the simple things right
• Royalties not as easy to administer as may seem...
...but rent taxes maybe not as hard
7. Achieving credibility—is hard
• Developed over years in Norway • Prospect of future discoveries may help • Fiscal stability agreements?
– Can be over-generous – Effectiveness unclear—renegotiation possible
• Some designs more credible than others
– Progressivity? – International agreements? (Maximum/Minimum
rates)
Concluding
