There are several principles to be considered when designing a fiscal regime for extractive industries. The International Monetary Fund (IMF) has pointed to 11 of the key principles.
These principles were reflected in a technical assistance report that the IMF handed to the Government late last year. The report was titled, “A Reform Agenda for Petroleum Taxation and Revenue Management.”
Of the 11 principles highlighted by the Fund, only one is identifiable as being fully secured by Guyana.
The first principle highlighted by IMF was, “The state, as resource owner, should receive an appropriate share of the economic rent.”
Expounding on this principle, the IMF said that natural resources are valuable but scarce assets owned by the nation, “and therefore, the state should receive an appropriate share of the economic rent resulting from the extraction of non-renewable resources such as minerals which can only be exploited once.”
IMF then noted that there should be a flexible and progressive regime that yields a larger government share in highly profitable projects, but imposes a lower tax burden on lower profitability ones—that is, it can easily adjust to variations in circumstances such as price and cost fluctuations.
IMF said that this flexibility will reduce the need for project specific negotiations in response to unforeseen developments.
IMF also said that there should be early and dependable revenues. “Especially at the start-up and as the sector develops, as in Guyana’s petroleum sector, governments may favor fiscal instruments that provide early and dependable revenue.
The international agency said that nations should ensure that there is cost containment. The Fund said that this is imperative as cost containment increases the size of shared profits, “and instruments that encourage it are prized.”
Further, IMF said that there should be a clear avoidance of tax leakage. The Fund said that fiscal provisions should prevent or discourage pricing or cost recovery provisions, which permit, or even encourage, erosion of the tax base.
Another good principle is international competitiveness. IMF said that tax regimes should be competitive with those of other countries in attracting investment, taking account of the country conditions and the relative stage of exploration and discoveries and their expected characteristics.
While Guyana’s tax regime makes it advantageous for oil companies to operate here, it is not “competitive” as even IMF has pointed out that the regime is weak.
The need for administrative simplicity and enforcement was also highlighted. IMF said that to the maximum extent possible, given other objectives, fiscal instruments or regimes should be simple for taxpayers to comply with and the revenue authority to administer. Once established, the laws must be adequately administered otherwise expected tax revenues will not be received.
There should also be Consistency and transparency in fiscal arrangements (level playing field). IMF said the tax rules applying to the extractive industries should be set out clearly in legislation, preferably the tax laws.
The authorities should also avoid negotiating project-specific fiscal arrangements, with the negotiation of project agreements focusing mainly on non-fiscal terms (such as work programs). “This will help ensure transparency and equity through consistent treatment of taxpayers.”
Stability of fiscal arrangements is also important. IMF said that frequent changes in the tax treatment of investment may cause investments to be delayed in the expectation of future incentives or discouraged by fear that future competitors will be able to receive more favorable treatment. “An extractive industry fiscal regime should offer a reasonable assurance of fiscal stability.”
IMF said that there should be clear institutional framework for setting fiscal policy. “The lead department in setting fiscal policy in relation to extractive industries should be the Ministry of Finance in consultation with the departments responsible for those sectors,” the Fund noted.
Guyana does not seem to have been able to cover any of the aforementioned principles highlighted by the IMF. The only principle that the country seem to have covered is, neutral and non-distortionary taxation.
IMF said, “As much as possible, fiscal instruments should not distort investment decisions. The litmus test for neutrality is the extent to which the fiscal instrument does not influence the ranking of projects selected for investment nor affect the pace of extraction or the decision to abandon a field.”
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