Broadway and Keen - Theoretical perspectives on Resource Taxation Design
Boadway, R., Keen, M., Theoretical perspectives on resource taxation design, in The Taxation of petroleum and Minerals: Principles, Problems and Practice (Daniel, P., Keen, M., McPherson, C., (eds.) Oxon, United Kingdom: Routledge, 2010)
The authors start their discussion by highlighting specific hallmarks that make the resource sector taxation special: high costs, prospect of substantial rents, source of government’s revenue, uncertainty, asymmetric information, exhaustibility of the resources. They note that of tax and tax-related instruments are designed to respond to such features, and they can take following forms: a) royalties (specific or advalorem), b)rent taxes (Hotelling rent and Ricardian rent), c) profit-based taxes; d) production sharing, e) equity participation; f)auctions, g) sector-specific charges: bonuses, export charges; h) standard taxes: corporate income tax, import duties and value added tax(VAT).
It is observed that an understanding of the impact of these instruments on government revenue and on the firms’ profitability and decision making, requires looking at how effective the tax rates, evaluating thereby the resource tax regimes. It is mentioned that this exercise can be done by analysing the following rates: a) the average effective rate (AETR), which is the proportion of the present value of the income generated by some hypothetical project that is taken in tax;b) marginal effective tax rates (METRs), which are meant to capture the extent to which the tax system distorts firms’ decision. It is also noted that AETR and METR have important implication in designing a progressive tax regime, thought to fulfil the interests of both the investor and the host government.
Further, the authors point out that challenges posed by the resource sector - due to its special features - can be overcome by setting optimal discount rates and an optimal tax regime that balances the risks between the government and the investor and that is capable of dealing with information asymmetries and with time consistency. Thus, a fiscal regime tailored in that way is likely to be neutral and effective, capable of rendering revenues to the government without impacting the business profitability.
Meanwhile, it is recognised that there is no single tax regime that will suit all countries and circumstances. A tax regime must be designed in attention to the characteristics of a particular country. Due to the challenges of the resource sector, it is important that the governments should not rely on a single tax instrument. In this case, mixing the instruments available would yield better result.