EI Sourcebook | 7. Fiscal Design and Administration

7. Fiscal Design and Administration

The effectiveness of an EI sector fiscal regime depends on the objectives established for that regime, on the fiscal instruments selected to achieve those objectives, and on the quality of fiscal administration. Both the design and implementation of EI sector fiscal regimes are complex, requiring appropriate expertise.

While all links in the EI value chain are critical to overall success in the management of the EI sectors, the applicable fiscal regime attracts perhaps more attention than most. The effectiveness of any EI fiscal regime depends on three factors: (1) its objectives; (2) the fiscal instruments it comprises; and (3) its practical administration. Governments provide mineral and hydrocarbon rights to private sector companies with the expectation that the nation will subsequently benefit from tax payments which can then be used for social services and economic growth (i.e., converting a resource in the ground into both social and economic capital).^[1] Correspondingly, private companies invest with the expectation of making a profit commensurate with the risks involved and their cost of capital. For both parties there are potential risks and rewards and the balancing of those risks and rewards will ultimately determine what oil, gas and mining development takes place and how beneficial it is to the government, the investor and the local community.^[2] The fiscal regime is a key determinant of how oil, gas and mining income is shared between the investor and the government.

Additional Reading:

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); link to summary document;

Daniel, P., Keen, M., McPherson, C., (eds.) The Taxation of petroleum and Minerals: Principles, Problems and Practice (Oxon, United Kingdom: Routledge, 2010); link to summary document;

Dietsche, E., et al, The Challenge of Mineral Wealth: Using Resource Endowments to Foster Sustainable Development, in Minerals Taxation Regimes, a Review of Issues and Challenges in their Design and Application: Analysis and Observations, International Council on Mining and Metals (ICMM) Report 2009; link to summary document;

Johnston, D., International Petroleum Fiscal Systems and Production Sharing Contracts (Tulsa: PennWell Publishing Company, 1994); link to summary document;

Johnston, D., How to Evaluate the Fiscal Terms of Oil Contracts in Escaping the Resource Curse, Humphreys, M., Sachs, J.D., Stiglitz, J.E., eds. (New York, Columbia University Press, 2007); link to summary document;

Naito, K., Remy, F., and Williams, J., Review of Legal and Fiscal Frameworks for Exploration and Mining (London, UK: World Bank Group Mining Department, Mining Journal Books Ltd, 2001); link to summary document;

Otto, J., Fiscal Decentralization and Mining Taxation, (The World Bank Group Mining Department March 2001); link to summary document; and

Tordo, S., Fiscal systems for hydrocarbons: design issues (Washington D.C., USA: World Bank, 2007); link to summary document.

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roberto agostini: In terms of extractive industries the basic rules of good fiscal practice and economics should apply as much as to any other sector. The fact is that annually balanced budgets tend to foster instability. So, instead and off the back of strong… read more