The IMF report on petroleum taxation and revenue management (Part III)

Artisanal miners pay a flat rate of five percent on the gross value of gold production, while for large scale miners the royalty is on a per ounce basis using the world market price for gold - five percent under US$1,000 and eight percent above US$1,000. The current royalty system ignores the profitability of individual mines. A preferred option is a combination of royalty and a mining rent tax. The latter is based on an additional tax on profitability beyond a prescribed threshold. In addition, mining businesses that obtain tariff and Value Added Tax (VAT) exemptions on imports favour foreign suppliers over domestic ones, thereby creating competitive imbalances and administrative complexities. Companies also experience significant delays in the processing of their annual investment development agreements to import equipment under contractually granted exemption.

The IMF team believes that a comprehensive review of the mining tax regime would provide a good basis for introducing a generally applicable fiscal regime for future investments in mining.

Petroleum revenue administration

The exploration and development phase of petroleum extraction typically covers a time-span of five or more years. Since the related expenditures will be charged against future revenue, the tax authorities need to start monitoring and auditing these expenditures. It is not so much about the number of staff but more the particular skills needed to undertake these activities. ExxonMobil estimates the cost to develop phase 1 of the Liza field at US$4.4 billion.

The Minister responsible for petroleum is responsible for preparing and filing the tax returns of the contractor. However, guidance is needed on how to calculate the tax liability of a company holding an interest in Production Sharing Agreement (PSA). In addition, plans to establish a petroleum industry taxpayer unit attached to the Guyana Revenue Authority should be prioritized.

The IMF team has made the following recommendations:

(a) Draft a practice note on the implementation of the “pay-on-behalf’ scheme in consultation with existing PSA holders;

(b) Establish formal and structured working relationships on responsibilities between agencies having a regulatory responsibility for the petroleum sector; and

(c) Appoint the GRA as the single collection agency for PSA, royalty, and petroleum tax revenue; and

(d) Continue to build capacity in petroleum tax administration.

Macro-fiscal framework

Several specific challenges relating to revenue management in extractive industries have been identified. These include:

(a) Revenue can be potentially large but temporary, given the exhaustibility of the natural resources; (b) Revenue can be volatile and uncertain; (c) Government spending is often procyclical, that is, it increases in lock-step with the extractive in-dustry revenue;

(d) There is often the pressure to increase government spending upfront, sometimes by borrowing against future expected revenue; and

(e) These spending pressures often arise from elevated expectations from citizens as to the benefits from extractive industries projects.

The above challenges can be addressed by designing a fiscal policy framework that reflects a balance between increasing investments in development projects on the one hand, and the need to set aside funds for stabilization and future generations, on the other. The first step is to calculate the total government wealth derived from oil. The Liza field assumes that 450 barrels of oil will be extracted over a 20-year period, estimated to generate government revenue of US$4.561 billion in real terms and taking account time value of money. Given the