Good Administration of Oil and Mining Revenues is Vital
August 6, 2014
- Extractive industries warrant special attention from taxation policymakers
- Management of government revenues from extractive industries important to overall budget
- Developing countries can strengthen managerial capacity to administer revenues
Effective administration of public revenues derived from the petroleum and mining industries gets a boost with the release of a new IMF handbook. Policymakers and government officials in charge of administering oil, gas and mining revenues will now have practical guidelines to establish strong legal frameworks, modern procedures, and more effective management for administering these revenues.
The new handbook, Administering Fiscal Regimes for Extractive Industries, is a joint IMF and World Bank publication and is one of the first of its kind to focus attention on effectively administering revenues from the extractive industries, which includes petroleum, natural gas, and an array of minerals.
“Getting hold of the potential revenues from the extractive industries in a fair, effective and transparent way is critical to achieving the wider objectives of economic development and macroeconomic stability that we are all looking for,” said Michael Keen, Deputy Director in the IMF’s Fiscal Affairs Department. “Effective revenue administration covering the extractive industries has become an important topic of IMF policy advice and technical assistance, with recent discoveries in many developing countries lending it a new urgency.”
A difficult reality
Administering government revenues from extraction of nonrenewable natural resources, such as oil, gas, coal and other minerals, presents special difficulties. On one hand, how hard can it be to collect taxes from firms that are basically digging holes, taking material out of the ground, and transporting it to the point of export or to a domestic refinery, especially when it can be physically measured, weighed, and controlled? But this is not the whole story. The petroleum and mining sectors have a number of special features that generally result in their being taxed differently from other sectors, creating special challenges for administration:
• a huge variation in scale and profitability (this can reflect differences in industry size, for example, artisanal mining activity vs. that of multinational enterprises, or variations in profitability over time);
• exceptional rent-generating potential;
• high uncertainty and risk; substantial capital investment;
• long development and operating periods; high export and import levels;
• distinctive commercial risk-sharing arrangements;
• frequent transfers of ownership;
• a high level of state control and ownership.
Large resource revenues frequently lead to poor governance. Many of these special features and difficulties are especially prominent in developing countries. In addition, contractual agreements (including production-sharing agreements) and state participation commonly play a more important role in some of those countries than in developed economies.
Collecting a fair share
The special features and perceived difficulties of extractive industries’ revenue administration can all too easily mean that it gets less attention than it deserves. Without proper administration, the resource-rich developing countries may not collect their fair share of the proceeds from non-renewable resources, and miss out on mobilizing the internal revenues necessary for vital public spending, ranging from poverty reduction to basic infrastructure.
Administrative reform, and technical assistance to support it, may focus on general revenue administration rather than one designed with the extractive industries in mind. These industries are, in many instances, the most important sources of government revenue— general taxation often produces much less government revenue than taxation designed specifically for the extractive industries and may ignore extractive-industry revenues (from royalties, for example) that are not classified as normal taxes.
Representatives of civil society and the oil and gas industry welcomed the book, and commented that it fills an important gap in the literature on revenue administration. In many instances, the material in the book isn’t covered elsewhere and breaks new ground in setting out the best practices for revenue collection and administration policies related to the extractive industries.
Funding for the book came from the Managing Natural Resources Wealth Topical Trust Fund and the donors that contribute to it, including the governments of Australia, Kuwait, the Netherlands, Norway, Oman, and Switzerland, and the European Union.