Oil & Gas Specifics

ITIC

The EI Source Book refers to these principles for investments with permission by ITIC in December 2015. For references in more detail on these principles, click on the ITIC logo to contact the ITIC directly. 

We are very pleased to showcase the paper authored by the Karl Schmalz, senior adviser to ITIC in Washington DC, dated October 2016: Capital Gains Issues in the Extractive Industries. An abstract of this paper reads as follows: "In this article, the author discusses some of the issues for a country to consider in determining whether, and to what extent, it should tax natural resource-related capital gains. Before making this determination, each country should consider the tax policy it wishes to adopt regarding capital gains for taxpayers across all industries, not just the extractive sector."

Principles for Developing Country Hydrocarbon Investment Policies:

Specific proposals and policies, including structure and administration of taxation, other government take, and legal requirements, should be tested in terms of whether they further the above general principles. The overall fiscal and regulatory structure should begin with an alignment on valuing and recovering resources in a manner consistent with the country's framework for economic development. It should:

  • Create the greatest overall value from the country’s resources by generating:     
    • Value through maximum life-cycle economic recovery of resources consistent with the most efficient, safe and environmentally sound development and decommissioning/restoration
    • Growth in local economies as part of value creation via development of local infrastructure, industries, jobs and training
    • Revenues for country (including all governmental stakeholders) to reinvest               
  • Be equitable both to government and investors:            
    • Ensure the government, as ultimate steward of the resources, receives for the country an equitable share of the benefit from its resources
    • Provide that investors receive a share reflecting all of their contributions and commensurate with the overall risks they bear
  • Align government and investing companies through project life:                   
    • The regime should be responsive such that equitable sharing of value is realized through all stages of project life-cycle and across ranges of outcomes and market conditions
    • Recognize that projects and relationships are long-term and seek ways to promote partnership and mutual trust
  • Promote a stable and sustainable business environment:              
    • Country and investors should be able to plan ahead and rely on terms agreed upon
    • Investors should be willing to manage and accept business risks (e.g., exploration, technical, project execution and operation, and market conditions—price and costs) and country should seek to provide maximum possible certainty on rights and economic terms (e.g., rule of law, contract terms, legal framework, and fiscal terms)
    • Country and investors should operate in good faith to solve potential disputes quickly and efficiently and adopt mutually agreed dispute resolution procedures, such as mediation and/or arbitration practices, which lead to principles-based, timely resolved and satisfied, outcomes
  • Be administratively simple:
    • Provide a clear, practical, enforceable, and non-discriminatory framework for administration of laws, regulations, and agreements
    • Adopt programs promoting cooperation and trust between tax administrators and taxpayer
  • Be competitive:
    • Should be competitive with other countries given relative attractiveness and risks of resource development
    • Should attract widest range of potential investors to ensure country maximizes competition for its resources

 

EISB


ITIC Principles through a "Challenges/ Opportunities" lens: personal reflections of an EI Source Book team member

Daniel Gilbert

Daniel Gilbert, EI Source Book's Knowledge Exchange Coordinator (2011 - to date); MSc alumnus of CEPMLP (2015), offers his personal reflections ITIC's principles, as seen through the lens of "challenges/ opportunities": 

"A resource-rich nation's hydrocarbon endowment presents key challenges as much as opportunities, including the: management of expectations held by varying parties, not least the public;  balancing act  of policy-makers in ensuring that foreign investment to extract these resources is not taxed too high, or else investors will allocate these funds elsewhere in what is a competitive marketplace for foreign direct investment, nor too low, resulting in the nation's resources not capturing the full equitable value of the production; appreciation of the cyclical nature of natural resources markets, such that countries will need to work in internationally fallow years much harder than in the boom years to attract investors.  In fact, in some instances, it may consider to defer offering investment opportunities in times of particularly low commodity prices, in the expectation/ hope that future years may offer better opportunities to secure high value from its resources; necessary work is done to maintain clear lines of communication between the parties, and mutual confidence that each will keep its promises, including over the often lengthy duration of resource investments; necessary work is done to maintain win-win outcomes for the different parties that are perceived to be fair and stable, in order to maintain an sustainable commitment of either government or the investors to the full life time of the projects; and need for fiscal arrangements to be practical, straightforward and amenable to transparency, effectively balancing the interest  for  theoretically optimum fiscal outcomes against what can be realistically achieved in a given investment climate. This contest can be seen through the contrast of administratively simple, but potentially distortive Royalties versus the theoretically "best" policy of finely calibrated Resource-rent taxation.

Even this partial selection of challenges can be tough to meet. The ITIC principles are an example how wide and considered consultation can help to  offer practical and responsible guidance for  countries and investors seeking to achieve long-term shared value through such investing for inclusive, profitable, stable, sustainable and equitable development."

 

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