## The Value Added Tax in the Extractive Industries — Working Paper (selected chapters)

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### Role of VAT and main objective
- VAT is a general tax on final consumption; oil and mining companies should be treated like other businesses for VAT purposes.
- Practical VAT regimes for extractive industries (EI) often depart from standard design due to tax administration and cash management weaknesses, especially in timely approval and payment of excess VAT credits.
- Paper objective:
  - Identify, analyze, and offer solutions to common VAT issues in EI.
  - Focus on impact of VAT schemes introduced to address VAT refund payment challenges and the cost of refund delays.
  - Establish which special VAT schemes are the least distortive as second-best solutions, using qualitative analysis and the Fiscal Analysis for Resource Industries (FARI) modelling framework.

### Core features of extractive industries and VAT implications
- Long investment periods; no output VAT during exploration and development → risk: deterred or reduced investment.
- High share of exports; zero-rating of exports → EI companies rely on refunds to recover input VAT.
- Capital intensity: capital costs ≈ 80 percent of total costs; average sanctioned oil and gas project in Africa: USD 150 million; many exceed USD 1 billion.
- Direct labor share ≈ 10 percent; subcontractors can account for 75 to 90 percent of total oil and gas costs.
- Cross-border supply chains, use of foreign currency, EEZ operations, multinational procurement, and contractual stability clauses all create specific VAT risks:
  - Exchange rate losses when refunds delayed and local currency depreciates.
  - Bias toward imports and non-resident suppliers if import exemptions used.
  - Political economy: large multinationals have leverage to obtain contractual VAT reliefs.

### Key problems and consequences
- Common trigger for special VAT regimes: failure to manage and pay VAT refunds.
- Refund delays and VAT concessions can:
  - burden investment;
  - impose large administration and compliance costs;
  - lead to revenue leakage.
- When VAT regimes are not neutral, EI investors oppose VAT and governments often offer concessions.

### Challenges in input VAT recovery
- Deferred VAT registration:
  - Denial or delay of registration during pre-production results in EI firms effectively treated as final consumers and unable to claim VAT credits.
  - Some countries allow bringing pre-registration input VAT into the VAT account upon registration, but actual recovery often occurs only after several years.
- Indefinite carry-forward of excess credits:
  - Common in some countries; implies input VAT may never be recovered unless substantial domestic sales exist.
  - Simulation thresholds:
    - 50 percent domestic sales needed to recover input VAT incurred during production in first 5 years.
    - 60 percent domestic sales needed to recover input VAT incurred during pre-production in first 5 years.
    - For a capital-intensive stylized oil project, 75 percent domestic sales required to recover pre-production input VAT in first 5 production years.
  - Limited carry-forward viable only if domestic market exists and period is short—ideally not more than 6 months.
- Delayed VAT refunds:
  - Verified/unrefunded claims can reach large shares of GDP (example: Zambia 1.5 percent of GDP in 2018).
  - Refund delays reduce investor post-tax IRR and raise METR.
  - Compensation via interest on delayed refunds is recommended but seldom practiced; appropriate interest choice matters (ideally equal to company hurdle rate).
  - Interest payments do not protect against exchange rate fluctuations.
- Alternative recovery mechanisms:
  - Offsetting refunds against other tax liabilities can be effective if company has tax liabilities to offset; risks include uneven playing field and governance issues.
  - VAT grouping can enable internal absorption of refund positions but requires related entities with positive VAT liabilities.

### Common VAT schemes applied to EI (schemes and economic consequences)
- Standard VAT with immediate refunds:
  - Neutral for investor if refunds timely.
  - As refund delays increase: investor post-tax IRR falls; METR rises.
  - Base case: 3-year refund delay → investor post-tax IRR falls by 6 percentage points; METR increases from 29 to 41 percent. Equivalent to increasing royalty by 8 p.p. or CIT by 22 p.p.
  - No-refund extreme: stylized project IRR = 7 percent; METR = 53 percent; VAT increases costs by VAT rate × share of inputs subject to VAT (example: 13.5 percent increases in costs or USD 5.3 per barrel in base case).
- Imports exempt; domestic supplies taxable:
  - Reduces impact of delayed refunds when costs are largely imported.
  - Example: 3-year refund delay and 50 percent domestic supplies → investor IRR decreases by 3 p.p.; METR increases by 6 p.p.
  - Creates bias against domestic firms and disincentivizes domestic industry development.
- Imports exempt; domestic supplies zero-rated or exempt:
  - Investor does not pay input VAT → VAT neutral for investor.
  - Zero-rating places domestic suppliers in refund position; shifts burden to domestic suppliers and can harm local value addition.
  - Exempting both imports and domestic supplies is neutral for investor but harms domestic suppliers' cashflows.
- Partial deeming / withholding:
  - Investor withholds a portion of input VAT; remainder goes to supplier enabling supplier to offset input VAT.
  - Economically equivalent to a reduced VAT rate equal to standard rate × (1 − withholding rate).
  - Box 1 example specifics:
    - VAT rate 10 percent; supplier inputs 100; supplier value-added 100 percent; withholding rate 25 percent.
    - Supplier pays 10 VAT on inputs; charges output VAT 20 on sale at 220; investor withholds 5; supplier retains 15, credits input VAT 10 against 15, remits 5 to government; investor refund request = 15.
    - Reduced rate equivalence: 7.5 percent (75 percent × 10 percent).
  - Withholding rate design trade-offs:
    - Higher withholding rate favors investor; lower rate protects suppliers from refund positions.
    - Benchmarks: ~50 percent withholding may be relevant where suppliers to EI do not supply other sectors; >70 percent would allow average supplier to reclaim input VAT in all countries analyzed.
  - Impact on returns:
    - With a 3-year delay and 50 percent domestic supplies:
      - Withholding rate 33 percent → investor post-tax IRR increases by 2 p.p. relative to fully taxing domestic supplies.
      - Withholding rate 50 percent → investor post-tax IRR increases by 3 p.p.
      - METR decreases by 2 to 4 p.p. with withholding rates of 33 to 50 percent.
- Exterritorial / no-VAT zones:
  - Deemed outside customs/VAT territory; domestic supplies deemed exported and zero-rated.
  - Economically equivalent to a fully working VAT with timely refunds; reduces refund demand but increases fraud/enforcement risks.
  - Plausible where strong tax administration, high exports, and geographic concentration of EI operations exist.
- VAT deferral at importation, reverse charge, deemed VAT, and deduction against income are other variants with specific administrative and distributional effects.

### Evaluation methodology and key model assumptions
- Method: IMF FARI discounted cash-flow model applied to a stylized medium-sized oil project; all non-VAT fiscal parameters held constant.
- Project and fiscal assumptions (selected, preserved exactly):
  - Proportion of costs domestic vs foreign: 25 percent domestic, 75 percent foreign.
  - Proportion of costs subject to VAT: 90 percent (only non-labor supplies subject to VAT).
  - Proportion of output exported: 100 percent.
  - VAT rate: 15 percent.
  - Government take target: 75 (discounted at 10 percent).
  - Project life: 28 years; Production period: 22 years.
  - Pre-tax rate of return %: 26.1 %
  - Oil production: USD mm 375
  - Oil price: USD mm 55; Per bbl 55.0
  - Oil revenue: USD mm 20,625
  - Exploration costs: USD mm 269
  - Development costs: USD mm 4,945
  - Operating costs: USD mm 6,715
  - Decommissioning costs: USD mm 597
  - Project costs: USD mm 12,526
  - Pre-tax cash flow: USD mm 8,099
  - Financing: development costs (debt) %: 70.0%; interest rate %: 5.5%; grace period years: 2; debt repayment years: 7.
  - Fiscal: Royalty rate %: 10%; Cost recovery limit %: 100%; CIT rate %: 30%.
  - Government share of profit petroleum: R-factor < 1 %: 20.0 %; R-factor 1 to 3 %: 20% to 70%; R-factor > 3 %: 70%.
- Sensitivity results (capital intensity):
  - Unit capital costs: USD 7 per BBL (low), USD 13 per BBL (medium, base case), USD 22 per BBL (high).
  - Royalty increases (to offset a 3-year refund delay): 7, 8, and 15 percentage points higher for low, medium, and high capital intensity projects, respectively.
  - CIT rate increases required: 7, 20, and 21 percentage points higher for low, medium, and high capital intensity projects, respectively.

### Conclusions and policy recommendations (high-level)
- First-best: apply standard VAT with timely refunds via reforming VAT refund mechanisms.
  - Timely refunds maintain VAT integrity and avoid burdening investors.
  - Equivalence: a 3-year refund delay ≈ 8 p.p. higher royalty or 22 p.p. higher CIT for investor indifference.
  - Reducing refund delay by 1 year raises investor IRR by ≈ 2 percentage points.
- Second-best choices depend on tax administration capacity and domestic supplier market structure:
  - High-capacity administrations: consider no-VAT zones where appropriate (strong administration, high exports, geographic concentration).
  - Low-capacity administrations: use zero-rating or exemptions:
    - Exemptions: lower administrative complexity and revenue leakage risk; less distortion to EI investment unless domestic input share and pass-through are high.
    - Zero-rating: better where domestic supplier sector is competitive and diversified; increases refund claims and administrative burden.
    - Partial deeming (withholding) can balance investor cash-flow relief and supplier protection but is administratively complex and requires careful withholding-rate design.
- Policies to avoid: disallowing registration prior to production and treating input VAT only as a tax-deductible cost—both are highly distortive and administratively difficult.
- Policy choice involves trade-offs among three stakeholders (domestic suppliers, EI companies, government); where possible, priority should be given to protecting domestic suppliers.

*Source: IMF Working Paper “The Value Added Tax in the Extractive Industries,” Working Paper No. WP/2023/221.*

### 1. Introduction ........................................................................................................

### 1. Introduction

### Role of VAT in extractive industries
- VAT is a general tax applicable to all sectors, including extractive industries (EI), and is a tax on final consumption rather than on firms’ profits.
- In principle, oil and mining companies should be treated as any other business for VAT purposes.
- In practice, VAT regimes applicable to extractive industries tend to depart from the standard design and vary significantly across countries.
- Variation and complexity of VAT EI regimes is largely driven by weaknesses in tax administration and cash management, especially challenges in timely approval and payment of excess VAT credits.

### Key problems and consequences
- Failure to manage and pay VAT refunds by tax administrations is the most common trigger for introducing special VAT regimes for extractive industries.
- Refund delays and VAT policy deviations can:
  - burden investment;
  - impose large administration and compliance costs;
  - lead to revenue leakage.
- When VAT regimes are not neutral to investors and their suppliers, EI investors tend to oppose VAT and seek alternative solutions; governments often comply.

### Literature and evidence gap
- Early and recent literature highlight weaknesses in refunding VAT and use of VAT concessions to ease administration of large refund positions, but systematic analysis is limited.
- Consensus in literature:
  - A well-functioning VAT should not tax firms, and the first-best solution is a broad-based VAT with timely payment of refunds.
  - Some concede that in light of administrative weaknesses, some VAT concessions may be unavoidable.
- There lacks systematic qualitative and quantitative analysis on which second-best VAT designs maximize government objectives when refund delays persist; this paper attempts to fill that gap.

### Objective and scope of the paper
- Overall objective: identify, analyze and offer solutions to the most common VAT issues arising in extractive industries.
- Focus:
  - Impact of various VAT schemes introduced in response to the challenge of paying VAT refunds, and the cost of VAT refund delays.
  - Establish which special VAT schemes are the least distortive and could be offered as a second-best solution to the general VAT regime, and which schemes should be avoided.
  - Use both qualitative and quantitative analysis, the latter based on the Fiscal Analysis for Resource Industries (FARI) modelling framework.
- Exclusions:
  - Does not offer a full account of issues faced by tax administrations in managing VAT in extractive industries.
  - Does not take up public financial management issues, including budget appropriations and escrow accounts.
  - Touches on some administrative solutions related to excess input VAT recovery, but the primary focus is on policy solutions.

### Structure of the paper (by section)
- Section 2: brief overview of features of extractive industries and link between VAT design and impact on EI investment and production decisions.
- Section 3: challenges EI companies face in VAT recovery and possible solutions.
- Section 4: various VAT schemes offered to EI companies to compensate for ill-functioning VAT refund management.
- Section 5: quantifies impact of common schemes and refund delays to measure distortions, bias against domestic suppliers, and revenue-raising impacts.
- Section 6: evaluates second-best policy options to qualify them depending on countries’ circumstances.

*Source: IMF Working Papers — The Value Added Tax in the Extractive Industries, 1. Introduction.*

### 2. What’s so special about extractive

### 2. What’s so special about extractive industries?

### Core challenges for VAT in extractive industries
- VAT is conceptually straightforward: businesses charge VAT on sales, take credit for tax paid on inputs and remit the difference; crediting prevents tax cascading and allows collection at each transaction including importation.
- For a “typical” domestic buy-and-sell business with sales and purchases subject to a uniform VAT rate and no output exported, the VAT requires no special design concessions and generates revenue with relatively low compliance and administrative costs.
- Extractive industries (EI) depart from the “typical” model: their investment profile, business structure, value/supply chain, and cross-border operations require a very robust VAT regime, a strong tax administration and an efficient cash management system.

### Select features of extractive industries and VAT implications (summary of Table 1)
- Long investment periods
  - Importance for VAT: No output VAT during exploration and development stage
  - Distortion (if inefficient VAT): Deterred or reduced investment
- High share of exports
  - Importance for VAT: No/very limited output VAT during production stage
  - Distortion: Bias towards domestic sales
- Capital intensity
  - Importance for VAT: High amounts of input VAT
  - Distortion: Reduced and lower quality investment
- Reliance on subcontractors (labor)
  - Importance for VAT: Higher input VAT/lower value-added
  - Distortion: Bias towards vertical integration
- Reliance on subcontractors (goods vs. services)
  - Importance for VAT: Variation in input VAT by input (if services taxed preferentially)
  - Distortion: Bias towards services; bundling provision of goods into services
- Reliance on subcontractors (supply chain)
  - Importance for VAT: Variation in input VAT depending on the tier of contractor (where VAT preferences are available to EI company and direct suppliers only)
  - Distortion: Flattening of supply chain; bias towards vertical integration
- Cross-border supply chains
  - Importance for VAT: High level of import VAT and pressure for border exemptions
  - Distortion: Bias against domestic supplies; reliance on imports and non-resident subcontractors (if import exemptions used)
- Use of foreign currency
  - Importance for VAT: Large share of costs (and input VAT) incurred in foreign currency while refunds paid in local currency—exchange rate losses (if refunds delayed and local currency depreciates)
  - Distortion: Deterred or reduced investment; use of (costly) hedging transactions
- Operations in exclusive economic zones
  - Importance for VAT: Operations are outside the scope of the VAT (territorial or exterritorial model)
  - Distortion: Bias towards offshore operations (territorial model)
- Multinational companies (supply chain)
  - Importance for VAT: High level of import VAT on supplies from affiliated businesses
  - Distortion: Bias against domestic supplies; ease of transfer pricing (especially if import exemptions used)
- Multinational companies (influence and power)
  - Importance for VAT: Negotiation leverage/lobbying pressure for VAT relief
  - Distortion: Ease of obtaining targeted VAT relief (often contractual)
- Contractual arrangements
  - Importance for VAT: Convenient vehicle for tailoring VAT design
  - Distortion: Ease of obtaining VAT reliefs and stability clauses
- Perception of high rents
  - Importance for VAT: “A bird in the hand” issue
  - Distortion: Reluctance to pay VAT refunds

### Export orientation and refund reliance
- In most resource rich countries, especially low-income countries, extracted minerals and hydrocarbons are predominately exported (Figure 1).
- Exports are zero-rated in line with the VAT’s destination principle; therefore:
  - Even in production stage EI projects often have no output VAT.
  - EI companies must rely on refund claims to recover input VAT when domestic sales are limited or absent.
- Without timely refunds, EI companies may:
  - Be compelled to sell domestically to obtain output VAT credits—potentially inefficient and profit-reducing if domestic net prices are lower than foreign buyers.
  - Reduce government revenues because lower profits reduce other tax bases, and marginal tax rates for extraction activities are generally high.

### Capital intensity, subcontracting, and input VAT
- EI projects are capital intensive; capital costs often far exceed labor cost:
  - Capital costs make up roughly 80 percent of total costs.
  - The average capital cost of a project is USD 150 million for sanctioned oil and gas projects in Africa, with many projects exceeding USD 1 billion (Rystad 2021).
- Direct labor cost share of production is roughly 10 percent (EIA 2016).
- EI companies heavily rely on subcontractors—subcontractors may make up 75 to 90 percent of total oil and gas costs (PWC 2016).
  - Work performed by subcontractors is billed as service and is therefore subject to VAT, increasing input VAT amounts.
  - Where VAT rates differ between goods and services, firms may structure purchases (e.g., hire contractors to install equipment, bundle goods into services, prefer operating leases) to lower VAT costs.
  - Project-specific VAT benefits limited to concession holders or first-tier contractors can push firms to restructure supply chains and undermine efficiency.

### Cross-border supply chains, foreign currency and exchange risk
- EI companies commonly use foreign currency (typically US dollars) for a large share of costs and keep accounts in foreign currency.
- When refunds are delayed and the local currency depreciates, refunds paid in local currency are worth less in foreign currency, creating effective partial refunds and increasing cost of doing business.
- Longer refund delays raise the risk of exchange rate losses and can incentivize reduced or deferred investment and costly hedging transactions.

### Territorial scope and exclusive economic zones
- Extractive operations may occur in exclusive economic zones (EEZ); VAT treatment can be:
  - Strictly territorial (territory and territorial waters only), or
  - Extended to the exclusive economic zone.
- Both models can be implemented but have different implications for input VAT payments, refund claims, and taxpayer management.
- Territorial VAT with weak refund mechanisms can bias investors towards offshore operations (e.g., deep offshore projects, floating LNG ships) because imports and domestic supplies in that model may not attract VAT.

### Multinationals, transfer pricing, and political economy
- Dominance by large multinationals leads to:
  - Incentives to procure from affiliated non-resident suppliers—creating import bias conducive to transfer pricing and higher reported input costs.
  - Lobbying leverage to secure VAT reliefs, often enshrined in petroleum or mining contracts rather than general legislation.
- Contractual fiscal stability clauses and project-specific VAT reliefs create multiple VAT regimes within a country, increasing administrative burden and advantaging large foreign investors over smaller domestic players and suppliers.

### Contractual complexity and joint ventures
- Extractive projects commonly operate through unincorporated joint ventures or partnerships with operating partners responsible for project operations and accounting.
- VAT design must consider whether VAT is applied at the joint venture level (with the operating partner responsible) or at each partner level, and how intra-project charges (e.g., cash calls) are treated.
- Contracts can modify legislated VAT provisions, provide VAT reliefs, or include stability clauses affecting VAT administration.

### Perception of rents and the “bird in the hand” problem
- Perception (or reality) of economic rents in EI projects can influence VAT policy:
  - Governments may adopt a “bird in the hand” approach—retaining input VAT rather than refunding it—viewing VAT as a tangible immediate revenue source when other taxes may not deliver expected results.
  - Lack of trust in investors and concerns about tax arbitrage practices contribute to reluctance to return excess input VAT.
  - The paper argues it is difficult to justify using VAT to capture profits or rents; VAT should not be used as a substitute for profit taxation even if perceived investor capacity to bear unrecovered VAT exists.

*IMF Working Paper — 2. What’s so special about extractive industries?*

### 3.  Challenges in input VAT recovery

### 3.  Challenges in input VAT recovery

### Overview
- A well designed and administered VAT can serve the extractive industry (EI) without special VAT schemes; examples cited include Australia, Canada, Norway, United Kingdom.
- Conditions for neutrality: EI companies can register as VAT payers, all purchases and sales are subject to VAT, and excess input tax credits are refunded promptly.
- If net VAT is collected only on domestic consumption of hydrocarbons or minerals, the tax falls on consumption rather than investment or production.
- Despite suitability of standard VAT frameworks, practice varies widely and is often linked to challenges of input VAT recovery: denial of VAT registration, lack of timely refunds, or mandated carry-forward of excess credits.
- Consequences of constrained refund access include higher cost of doing business, reduced investment and production, and distortions (bias towards import of service, self-supply and vertical integration, bias against exports, preference of offshore operations).

### Deferred VAT registration
- Typical VAT registration threshold rules create problems because EI companies often have no sales during the investment (pre-production) period.
- Some regimes link registration to expectation of future taxable sales; in some countries this is discretionary or narrowly interpreted (e.g., sales must occur within the year of registration), causing deferred registration. Examples given: Ghana and Uganda.
- If denied VAT registration:
  - The company cannot account for VAT, file VAT returns, or claim VAT refunds.
  - EI companies are effectively treated as final consumers or VAT-exempt businesses during pre-production and pay VAT on purchases without recovery through VAT credits.
  - Unrecoverable VAT may be partially and delayedly recovered through income taxes and/or production sharing, subject to effective income tax/production sharing rates and possible loss carry-forward limitations.
- Some countries allow bringing pre-registration accumulated input VAT into the VAT account upon registration, but actual recovery often occurs only after several years, reducing net present value (akin to long refund delays).
- Simulations indicate that companies may be better off with partial recovery via production sharing and income tax (deferred registration with no right to credit pre-registration input VAT) than waiting for full recovery through delayed VAT refunds.

### Indefinite carry of excess credits
- Approaches vary: immediate refunds, limited carry-forward, or indefinite carry-forward (no right to claim refund; must offset excess credits against output VAT).
- Indefinite carry-forward common in Latin America and used in Algeria, China, Madagascar, Vietnam (Pessoa et al., 2021); exceptions sometimes made for exporters, investors, or specific industries.
- For EI characteristics, indefinite carry implies input VAT can often never be recovered unless companies have substantial standard-rated domestic sales.
- Simulations cited:
  - Domestic sales need to reach 50 percent to recover input VAT incurred during production in the first 5 years of production.
  - Domestic sales need to reach 60 percent to recover input VAT incurred during the pre-production period in the first 5 years of production.
  - For a capital-intensive stylized oil project (see Annex), 75 percent of domestic sales required to recover pre-production input VAT in the first 5 production years.
- Indefinite carry policies create incentives to sell domestically (akin to export taxes) and drive firms to seek legislative carve-outs or contractual VAT concessions.
- To ensure unconstrained recovery, EI require an immediate refund system where investors can claim a refund at the end of the accounting period.
- A limited carry-forward can be viable only if a domestic market exists and the period is not excessive—ideally not more than 6 months.

### Delayed VAT refunds
- Immediate refund entitlement does not guarantee timely payments; delays can reach years and stocks of non-refunded VAT credits can exceed several percentage points of GDP.
  - Example: Zambia’s verified and unrefunded refund claims reached 1.5 percent of GDP in 2018.
- Causes of delays:
  - Poor risk management and fear of fraud leading to extensive evaluation and audits of refund claims.
  - Lack of cash to pay approved refund claims.
  - Problem exacerbated in EI by the large size of investments and refund claims relative to GDP (Mozambique cited as an example where delays became structural).
- Delays adversely affect cashflow and project profitability; compensation via interest on delayed refunds is recommended.
  - Paying interest on delayed refunds is seldom practiced in developing countries; even where law provides for interest, companies may not receive it.
  - Choice of interest rate matters: typically needs to be substantially higher than the headline penalty interest rate on tax arrears (which is typically just a few percentage points above the market interest rate).
  - An interest rate equal to the company’s hurdle rate in theory neutralizes the impact of refund delays on investment decisions; an interest rate above the government’s cost of capital incentivizes timely refund payments.
- Paying interest on delayed refunds does not protect against exchange rate fluctuation.

### Alternative recovery mechanisms and practical constraints
- Offsetting refundable excess input tax credits against other tax liabilities (e.g., income taxes) can safeguard cashflow and preserve refund value.
  - Effectiveness depends on whether the company has sufficient tax liabilities to offset; EI companies typically have low other tax liabilities in early stages.
  - Offsets may introduce complexity when different agencies collect different payments (e.g., royalties, production sharing).
  - Offsets can create an uneven playing field disadvantaging loss-making or newcomer firms and introduce governance risks if discretionary.
  - Experience example: in some countries (e.g., Zambia) offsetting refunds against other taxes is possible only at tax authority’s discretion; Mozambique allowed offsets during the Covid-19 pandemic only, often for small amounts.
  - Accounting complexity for offsets is challenging for tax administrations lacking sophisticated IT and procedures; this can blur tax collection transparency.
- VAT grouping allows corporate groups to register jointly and consolidate VAT accounts so entities with positive output VAT can absorb other entities’ refund positions.
  - VAT grouping can enable internal recovery without tax administration involvement and avoids ring-fencing used for profit taxes and production sharing.
  - For VAT grouping to help EI companies, related entities with positive VAT liability must exist, which may be uncommon in petroleum sectors dominated by international companies with limited presence in other sectors.
  - VAT grouping may be useful where midstream operations or projects in different license areas are organized as separate companies and one related company has positive output VAT.
- Governance, administrative capacity, and accounting requirements critically affect the feasibility and reliability of refunds, offsets, and grouping solutions.

*Source: Chapter 3, "Challenges in input VAT recovery", wpiea2023221-print-pdf.*

### 4. Common VAT schemes in extractive

### 4. Common VAT schemes in extractive

### Major challenge: input VAT recovery
- Difficulties in recovering input VAT are by far the major challenge for extractive industries in the realm of the VAT.
- Governments often seek substitute solutions that limit the amount of input VAT and reduce demand for refunds (e.g., VAT exemptions) or otherwise alleviate imperfect recovery (e.g., offsetting excess credits against other tax liabilities, partial VAT recovery through income taxes and/or production sharing).
- The argument that there is often no net VAT to be collected from the extractive industry (if all output is exported and all input VAT is refunded) weakens incentives for governments to administer VAT for the sector and encourages VAT concessions to investors.
- Some countries adopted VAT reliefs for the extractive sector a priori (e.g., Angola), while others resort to concessions after experiencing refund delays and investor pressure.

### Common VAT measures and economic consequences
- VAT concessions may be embodied in general VAT legislation, sectoral legislation, investment promotion legislation, or project-specific contracts (examples: Benin—no legislative reliefs but exemptions secured in contracts; Chad—blanket exemption specified in contracts).
- Concessions typically focus on the input side. Examples of measures:
  - VAT exemptions and VAT zero-rating of goods and services purchased by EI companies.
    - Both result in no input VAT for buyers, but different consequences for suppliers:
      - Zero-rating: suppliers can recover their input VAT.
      - Exemption: suppliers cannot receive credits for input VAT.
    - Exemptions can reduce domestic suppliers’ competitiveness versus imports (full pass-through raises domestic supply prices; no pass-through squeezes profit margins/wages), creating bias toward imports and reducing market growth opportunities.
  - VAT deferral at importation (example countries: Australia, Tanzania):
    - Importers are not required to pay VAT upon importation but account for VAT due and VAT recoverable in their next VAT return, implying no cash involvement.
    - Economically equivalent to import exemptions but more targeted, can be linked to taxpayer, and monitored through filing requirements.
    - VAT deferral cannot be applied to domestic supplies; a reverse charge can achieve similar results for domestic supplies.
  - Reverse charge (buyer accounts for VAT) and deemed VAT (full VAT withholding/withholding without remittance in practice):
    - Economically equivalent to VAT zero-rating for both buyers and suppliers: EI companies incur no input VAT and suppliers are in a refund position unless they have sufficient other taxable output.
    - Require subjective identification of eligible buyers and increase compliance costs and certification risk for suppliers compared to objective zero-rating.
    - Country examples of deemed VAT mechanisms: Uganda (simplest form), Ghana (VAT Relief Purchase Orders, VRPOs), Mozambique (Rationalization Notes).
      - VRPOs/Rationalization Notes serve certification purposes; suppliers cannot redeem them for cash and must seek refunds through standard refund systems if in refund position.
  - Partial withholding / partial deeming:
    - A partial withholding without remittance allows investors to reduce input VAT exposure and limit delayed refund risk.
    - Numeric example from the source:
      - If the supplier has inputs of USD 100 and outputs of USD 200, the VAT rate is 10 percent, and the withholding rate is 50 percent, then:
        - the investor is charged USD 20 in input VAT (i.e., USD 200 * 10 percent).
        - the investor withholds and retains USD 10 in input VAT (e.g., USD 20 * 50 percent).
        - the remaining USD 10 is paid to the domestic supplier and used to credit the supplier’s input VAT.
        - the investor uses the withheld USD 10 to partially offset its excess VAT credit.
        - In effect, no VAT is remitted to government.
    - Economically equivalent to a VAT reduced rate for supplies to investors, differing in implementation and risk distribution.
  - Exterritorial VAT / no VAT zone (example: Mozambique experimented):
    - EI companies designated as operators in a special economic zone or export processing zone are deemed outside customs/VAT territory; supplies to them by domestic businesses are deemed exported and zero-rated.
    - Supplies by non-residents are outside scope of VAT (deemed not imports).
    - Risks: similar abuse potential as subjective zero-rating; creates additional avenues for non-compliance and potential automatic conveyance of other tax privileges available in special economic zones.
  - Deduction against income (treating input VAT as cost for income tax purposes):
    - Where EI companies are VAT-exempt or non-registered, input VAT may be included as a cost and reduce taxable income, partially alleviating VAT burden.

### Design dimensions and heterogeneity of measures
- Temporal design:
  - Many measures are time-limited and stage-specific (e.g., exploration or development stage), or defined for a number of years (example: 5 years from issuance of exploration license in Mozambique).
  - In some countries measures may apply throughout project life, including production and decommissioning (examples: Azerbaijan, DRC, Zambia).
- Selectivity and scope:
  - Measures can be selective (specific categories of goods and services) using broad categories (e.g., goods, capital goods, machinery) or detailed item lists.
  - Measures can be applicable to imports only (exemptions, deferral), domestic purchases only (zero-rating, deeming), or both (exemptions, reverse charge).
- Vertical coverage:
  - Measures may be limited to license holders, extend to first-tier contractors, exclude subcontractors, or have no vertical limitation (examples: Azerbaijan limits coverage, Cameroon exempts any supplies in connection with EI contract/project, Gabon applies reliefs during exploration and development to a broader set but restricts during production).
- Subjectivity:
  - Many EI VAT measures are subjective (linked to entities or operations), often overlapping with general exporter reliefs (example: Cambodia).
  - Sectoral differences: measures may be available to petroleum but not mining (example: Ghana); upstream but not midstream.
- Administrative and compliance implications:
  - Subjective schemes (reverse charge, deemed VAT, exterritorial zones) increase compliance costs and require certification and monitoring.
  - Zero-rating increases risk of supplier non-compliance due to lack of additional verification.
  - Use of deemed schemes can spread beyond EI (example: Uganda’s deemed regime was requested by other sectors), potentially overwhelming tax authorities.

### Summary inventory of assessed VAT schemes (Table 2: VAT Schemes Evaluated)
- Standard VAT
  - Category: Standard VAT
  - Description: VAT, without adjustments
  - Input VAT: Yes
  - Treatment of excess input VAT: Refund
  - Country examples: Australia, Canada, Chile, South Africa, United Kingdom
- Policy solutions
  - Imports exempt; domestic supplies taxable
    - Input VAT: No for imports
    - Treatment of excess input VAT: Refund
    - Country examples: DRC, Ghana, Madagascar, Sierra Leone, Tanzania
  - Imports exempt; domestic supplies zero-rated (equivalent to a no VAT zone)
    - Input VAT: No
    - Treatment of excess input VAT: N/A—no input VAT paid
    - Country examples: Equatorial Guinea
  - Both imports and domestic supplies exempt
    - Input VAT: No
    - Treatment of excess input VAT: N/A—VAT embedded in input price added to costs
    - Country examples: Central African Republic
  - Partial deeming; imports exempt and domestic supplies taxable
    - Input VAT: No for imports
    - Treatment of excess input VAT: Investor withholds and retains a portion of input VAT; supplier receives residual
    - Country examples: (no specific country listed in table)
  - Cost recovery and tax deduction
    - Input VAT: Yes
    - Treatment of excess input VAT: Added to costs
    - Country examples: Mongolia
- Administrative solutions
  - Non-VAT tax liability offset
    - Input VAT: Yes
    - Treatment of excess input VAT: Offset against other payments
    - Country examples: Colombia, Ghana, Mongolia, Turkiye, Zambia
  - Interest on unrefunded input VAT
    - Input VAT: Yes
    - Treatment of excess input VAT: Refund with interest
    - Country examples: Botswana, Kazakhstan, Russia, South Africa

### Evaluation approach (methodology note)
- The VAT schemes are assessed using the IMF’s FARI methodology, which employs a discounted cash-flow model applied to a stylized oil project.
- The approach allocates an oil project’s pre-tax cash flow (revenues less costs) to investor and government according to tax and non-tax parameters, holding all non-VAT fiscal parameters constant across VAT designs to isolate VAT design impacts.

*IMF Working Paper — The Value Added Tax in the Extractive Industries*

### Appendix A-C for details, limitations, and assumptions.

### Appendix A-C for details, limitations, and assumptions.

### VAT regimes modelled
- The VAT regimes modelled include a broad-based VAT with immediate refunds and common alternatives applied in practice.
- Alternatives include:
  - Policy solutions: exemptions for imports and/or domestic supplies, zero-rating domestic supplies, and tax deductibility and cost recovery.
  - Administrative solutions: interest on non-refunded VAT and tax offsets.
- Analysis covers deferred VAT registration impact on investor outcomes and the relationship between VAT policy solutions and domestic suppliers’ profitability.
- Excluded policies: VAT grouping and limits on input VAT deductibility for specific cost categories (deemed rare, less material, or difficult to model at the project-level).
- Sensitivity analysis varies key parameters (e.g., exploration and development period length and underlying fiscal regime stringency) to illustrate impacts on projects resembling mining and liquefied natural gas projects; results considered generally applicable to non-oil projects, although mining and LNG projects were not explicitly modelled.

### Standard VAT and delayed refunds
- When refunds are provided immediately:
  - The VAT does not affect investor profitability, investment in marginal projects, or raise government revenue.
- As refund delays increase:
  - Investor post-tax IRR falls.
  - Marginal Effective Tax Rate (METR) rises.
- Adverse impacts of delayed refunds are reduced if:
  - More output is sold domestically (increases investor’s output VAT).
  - Labor costs make up a greater share of total costs (decreases investor’s input VAT).
- Even if all output is sold domestically, delays cannot be fully eliminated due to long production lead time and non-labor costs.
- Base case scenario (red line in Figure 2):
  - A VAT refund delay of 3 years reduces the investor’s post-tax IRR by 6 percentage points (p.p.).
  - METR increases from 29 to 41 percent.
  - Impact equivalent to increasing the royalty rate by 8 p.p. or the CIT rate by 22 p.p.
- VAT refund delays have a greater impact on profitability for more capital-intensive projects.
- No-refund (extreme) scenario:
  - Stylized project becomes likely unviable: investor IRR of 7 percent, METR of 53 percent, unless a large portion of output is sold domestically and/or labor costs are high.
  - VAT acts as a tax on non-labor inputs, increasing costs by the VAT rate multiplied by the share of inputs subject to VAT (13.5 percent increases in costs or USD 5.3 per barrel of production in the base case example).
- Note: In the stylized project, the marginal impact of increasing domestic sales disappears once output VAT on domestic sales equals input VAT; this point is reached at around 70 percent of output sold domestically.

### Policy solution 1: Exempt VAT on imports with domestic supply taxable
- Exempting imports while taxing domestic supplies reduces the impact of delayed refunds relative to a standard VAT but creates a bias against domestic firms.
- Effects:
  - As the share of domestic inputs increases, investor IRR falls and the fiscal regime becomes more distortive.
  - Example: With refunds delayed by 3 years and half of supplies from domestic companies:
    - Investor’s IRR decreases by 3 p.p.
    - METR increases by 6 p.p.
  - If all costs are imported, investor IRR and METR are unaffected by refund delays.
- This approach benefits investors when a high proportion of costs are imported but can disincentivize domestic industry development.

### Policy solutions: Exempt imports with domestic supplies zero-rated or exempt
- When imports are exempt and domestic supplies are zero-rated or exempt:
  - The investor does not pay input VAT; the VAT is neutral for the investor (assuming domestic suppliers cannot pass-on the cost of refund delays or unrecovered input VAT).
  - Investor and government outcomes are equivalent to a fiscal regime without a VAT or with immediately paid refunds, regardless of project characteristics.
- Zero-rating domestic supplies:
  - Favorable to investors but places domestic suppliers in a refund position (they have no output VAT to credit against input VAT if primarily supplying zero-rated extractive companies).
  - Shifts delayed refund burden onto domestic suppliers, burdening domestic industry and local value-addition.
  - Domestic firms often have a much higher cost of capital than multinational investors, increasing the overall cost of refund delays under certain assumptions.
- Exempting both imports and domestic supplies:
  - VAT neutral for the investor (investor pays no input VAT).
  - Aggravates domestic suppliers’ refund position, but does not create additional burden to investors assuming no pass-through.

### Policy solutions 1–3 with behavioral (pass-through) responses
- Prior results assume domestic suppliers cannot pass-through unrecoverable input VAT costs or expected refund delay costs to investors.
- Pass-through depends on availability of substitutes (domestic or foreign suppliers not subject to the same costs).
  - If no competitive foreign suppliers exist, domestic firms can charge higher prices (greater pass-through).
- Higher pass-through reduces suppliers’ profit impact but raises investor input costs, reducing investor post-tax profit.
- Investor outcomes and fiscal regime distortion are very sensitive to the pass-through assumption when the share of domestic costs is high.
  - Regardless of pass-through, zero-rating domestic supplies is typically preferred by both investor and domestic supplier relative to exemption (improved investor outcomes under zero-rating compared to exemption at any given pass-through assumption).
  - Rationale: Input VAT paid is identical under zero-rating and exemption, but zero-rating results in no net VAT collected by government in nominal terms; supplier’s only cost is net present value loss from refund delay. Under exemption, input VAT is never reclaimed, leading to positive nominal net VAT paid to government. If refunds are never paid, the two policies are equivalent.
- Zero-rating domestic suppliers decreases total VAT refund required relative to a standard VAT because domestic suppliers’ inputs are less than investor’s inputs; reduction in refund required equals domestic supplier’s value-added multiplied by the VAT rate.
- Qualitative and political considerations arise when shifting refund issues from investors to domestic suppliers; these are discussed elsewhere in the paper.
- Appendix E contains equations describing relationships between pass-through, exemptions, and zero-rating.

### Policy solution 4: Partial deeming
- Partial deeming: allow investors to withhold a portion of their input VAT, with the remainder available for the domestic supplier to recover its own input VAT and remit any excess output VAT to government at the end of the accounting period.
- Advantages:
  - Avoids putting the domestic supplier in a refund position if the withholding rate is low enough for sufficient VAT to be allocated to the supplier to offset its input VAT.
  - Reduces input VAT effectively paid by the investor, decreasing the cost of delayed VAT refunds.
- A numerical example illustrating partial deeming is provided in Box 1.

*Source: wpiea2023221-print-pdf - Appendix A-C for details, limitations, and assumptions.*

### Box 1: Numerical example of partial deeming

### Box 1: Numerical example of partial deeming

### Example setup and VAT cash flows
- Assumptions:
  - VAT rate is 10 percent.
  - Supplier inputs: 100.
  - Supplier value-added: 100 percent.
  - VAT withholding rate: 25 percent.
  - Single transaction during the VAT accounting period.
- Transaction and accounting:
  - Supplier pays 10 in VAT on its inputs.
  - Supplier sells to investor at 220 (inclusive of 20 in output VAT).
  - Investor withholds 5 in VAT (25 percent of 20 in suppliers’ output VAT).
  - Supplier retains remaining 15 until end of VAT accounting period.
  - At period end supplier credits input VAT of 10 against remaining 15 and remits 5 to government.
  - Investor requests a refund: 5 in withheld VAT minus 20 in input VAT equals 15 in VAT refund requested by the investor.
  - Example assumes investor has no output VAT during the period (production not begun or all production exported).

### Equivalence to a reduced VAT rate
- Economic equivalence:
  - Partial deeming is equivalent to a reduced VAT rate for the supply to the investor, with the reduced rate equal to the standard rate multiplied by 1 minus the withholding rate.
  - Numerical equivalence in the example:
    - Reduced rate = 75 percent * 10 percent = 7.5 percent.
    - Under 7.5 percent reduced rate: supplier pays input VAT of 10 (standard rate on purchases) and charges output VAT of 15 (7.5 percent * output of 200).
    - Supplier remits 5 to government (output VAT 15 minus input VAT 10).
    - Investor requests a refund on its input VAT of 15.
- Comparison to standard VAT:
  - Under a standard VAT the investor would have had excess VAT credit of 20 rather than 15.
  - Thus the investor’s refund request has fallen by 25 percent (the withholding rate).

### Withholding rate considerations and implications (Figure 5 insights)
- Key trade-offs:
  - Withholding rate affects extent to which suppliers and EI company require refunds.
  - The withholding rate needed for domestic suppliers to avoid refunds increases when:
    - (i) the share of sales to EI companies decreases (fewer sales with output VAT withheld), and
    - (ii) the supplier’s value-added increases (less input VAT relative to output VAT).
  - The EI investor prefers a larger withholding rate since it allows the investor to retain a greater portion of its input VAT and require a smaller refund.
- Practical design notes:
  - Ideally set at transaction- or supplier-level but administratively infeasible; single withholding rate likely needed.
  - Conservative low rate could avoid putting domestic suppliers with high share of supplies to extractive investors and low value-added into a refund position.
  - Example benchmarks:
    - A withholding rate of around 50 percent may be relevant where suppliers to extractive companies do not supply to other sectors or have low value-added.
    - A withholding rate above 70 percent would allow the average supplier to an extractive investor to reclaim their input VAT in all countries analyzed.

### Impact on investor returns and fiscal distortion (Figure 6)
- Assuming a fixed refund delay and policy comparisons:
  - Policy is preferred by the investor over a standard VAT and taxing domestic supplies with imports being exempt.
  - Investor post-tax IRR increases by 2 and 3 p.p. (relative to fully taxing domestic supplies) when:
    - withholding rate is 33 percent and domestic supplies make-up half of total costs: increase is 2 p.p.
    - withholding rate is 50 percent and domestic supplies make-up half of total costs: increase is 3 p.p.
  - The fiscal regime’s distortion on marginal project (METR) decreases by 2 to 4 p.p. with a withholding rate of 33 to 50 percent and half domestic supplies.
- Modeling assumption referenced:
  - All policies in the comparison assume a 3 year delay in paying refunds.

### Administrative feasibility and policy trade-offs
- Administrative constraints favor a single withholding rate despite suboptimality at micro level.
- Policy balances:
  - Partial deeming lowers investor cash-flow burden compared to delays in refunds but does not fully eliminate refunds or bias against domestic suppliers.
  - Choice of withholding rate is critical to balancing investor benefits and supplier refund positions.
  - Combining partial deeming with other administrative or policy measures can further balance objectives but may increase complexity and compliance costs.

*Source: Box 1: Numerical example of partial deeming, wpiea2023221-print-pdf*

### 7.  Conclusions

### 7. Conclusions

### First-best solution and central findings
- First best: countries should apply the standard VAT regime and pay timely refunds through reforming VAT refund mechanisms (Pessoa et al, 2021, van Oordt 2019).
- Benefits of timely refunds:
  - Maintains integrity of overall VAT system.
  - Avoids burdening the investor.
  - Provides space for the government to increase less-distortive fiscal mechanisms.
- Base case equivalence: an investor is indifferent between a three-year delay in VAT refunds and an 8 or 22 percentage point increase royalty or CIT rate, respectively.
- Even if refund delays cannot be eliminated, reductions in length materially improve project viability:
  - A one-year reduction in the delay increases investor IRR by around 2 percentage points (Figure 2).

### Second-best solutions: trade-offs and stakeholder tensions
- Any second-best solution must balance minimizing economic distortions and reducing administrative complexity.
- There is an inherent tension among:
  - EI investors (seek removal of input VAT on imports and domestic purchases),
  - Domestic suppliers (seek opportunities to transact with EI companies without being disadvantaged by margin suppression or unrecovered VAT),
  - Tax authorities (seek options that reduce administrative effort).
- Some policies should be avoided:
  - Disallowing registration prior to production and allowing for a tax deduction/cost recovery are highly distortive and difficult to administer.

### No-VAT zone (exterritorial VAT)
- Economically equivalent to a fully working VAT and could be deemed the best policy alternative.
- Materially reduces demand for VAT refunds but significantly increases risk of fraud and enforcement demands.
- Plausible for countries with:
  - Relatively strong tax administrations,
  - High level of exports,
  - Geographical concentration of EI operations.
- Costs to domestic suppliers:
  - Create relatively small distortions through delayed refunds and only for domestic suppliers that transact predominantly with EI companies; costs increase if domestic suppliers have a higher cost of capital and little market power (Figure 10).
- Not suitable when:
  - EI output is sold domestically (VAT should be imposed; fraud risk increases),
  - Operations are geographically dispersed (makes oversight of inbound/outbound movement of goods difficult).
- No-VAT zone is more appropriate where refund delays stem from deficiencies in cash appropriation (a PFM issue) rather than low tax administration capacity (risk management and VAT claims processing).

### Solutions for weak tax administrations: exemptions and subjective zero-rating
- Likely second-best solutions: combination of VAT exemptions and subjective domestic zero-ratings (or equivalents, such as reverse charge or VAT deeming).
- VAT exemptions:
  - Reduce administrative complexity and non-compliance (revenue leakage).
  - Cater well to the underlying problem of lack of capacity to pay VAT refunds.
  - Do not materially distort EI investment decisions unless a large portion of costs is supplied domestically and there is high pass-through to the investor.
- Zero-rating:
  - Increases number of refund requests (unless suppliers are diversified), potentially creating administrative difficulty and revenue leakage.
  - Creates bias against domestic suppliers; the size of bias depends on supplier structure.
  - Less bias when suppliers are diversified because they can recover input VAT against positive output VAT on non-EI sales.
- Where domestic suppliers are small businesses or service providers:
  - Cost of registering and complying with VAT (required under zero-rating) may outweigh unrecoverable input VAT; exemptions may be less distortive.
- Where domestic supplier sector is highly competitive and diversified:
  - Reliance on VAT zero-rating may be a better approach.
- Partial deeming:
  - May strike an optimal balance between avoiding bias against local industry and reducing burden of delayed refunds for investors.
  - It is a relatively complex solution and the withholding rate needs to be selected carefully.

### High-level recommendations
- High-capacity tax administrations: pursue no-VAT zones.
- Low-capacity tax administrations: use zero-rating or exemptions, with the preference depending on:
  - Domestic supplier market structure,
  - Weight given to the risk of revenue leakage,
  - Administrative simplicity (exemptions lower risk and enable simpler administration).
- In choosing second-best solutions, countries must decide which player in the triangle (domestic supplier, EI company, government) is most capable of bearing distortions and/or risks; where possible, priority should be given to protecting domestic suppliers.
- All second-best solutions will lead to some distortions and/or increase non-compliance risk, adding burden on tax administrations.

### Key project and modeling assumptions (Appendix A summary)
- Project: medium-sized stylized oil project.
- Cost sourcing and VAT applicability:
  - Proportion of costs provided by domestic vs. foreign supplies: 25 percent domestic, 75 percent foreign.
  - Proportion of costs subject to VAT: only non-labor supplies are subject to VAT, 90 percent.
  - Proportion of output exported: 100 percent.
- Fiscal regime: production sharing mechanisms common in petroleum and natural gas sector; fiscal regime stringency calibrated to approximate a common government take of 75 percent discounted (IMF 2012).
- VAT rate assumed: 15 percent.
- The average effective tax rate of the entire fiscal regime is 75 when discounted at 10 percent.
- Table A.1 key project assumptions (selected):
  - Project life: 28 years
  - Production period: 22 years
  - Pre-tax rate of return %: 26.1 %
  - Oil production: USD mm 375; Per bbl  (unit listed as blank for per bbl in source)
  - Oil price: USD mm 55; Per bbl  (unit listed as 55)
  - Oil revenue: USD mm 20,625; Per bbl 55.0
  - Exploration costs: USD mm 269; Per bbl 0.7
  - Development costs: USD mm 4,945; Per bbl 13.2
  - Operating costs: USD mm 6,715; Per bbl 17.9
  - Decommissioning costs: USD mm 597; Per bbl 1.6
  - Project costs: USD mm 12,526; Per bbl 33.4
  - Pre-tax cash flow: USD mm 8,099; Per bbl 21.6
- Financing assumptions:
  - Exploration costs (debt) %: 0.0%
  - Development costs (debt) %: 70.0%
  - Interest rate %: 5.5%
  - Grace period years: 2
  - Debt repayment years: 7
- Fiscal assumptions (selected):
  - VAT rate %: 15%
  - Royalty rate %: 10%
  - Cost recovery limit %: 100%
  - Depreciation years (cost recovery): 1
  - Government share of profit petroleum:
    - R-factor < 1 %: 20.0 %
    - R-factor 1 to 3 %: 20% to 70%
    - R-factor > 3 %: 70%
  - CIT rate %: 30%
  - Depreciation years (CIT): 5

### Robustness and sensitivity (Appendix D summary)
- Capital intensity sensitivity:
  - Unit capital costs used: USD 7 per BBL (low), USD 13 per BBL (medium, base case), USD 22 per BBL (high).
  - Oil price adjusted to USD 70 per BBL for all projects to ensure high capital intensity project profitability under no refund delay.
- Results:
  - Proportional changes in investor IRR and METR are similar across capital intensities.
  - The royalty and CIT increases (assuming no refund delay) that make the investor indifferent between no refund delay and a three-year delay:
    - Royalty: 7, 8, and 15 percentage points higher for the low, medium, and high capital intensity projects, respectively.
    - CIT rate: 7, 20, and 21 percentage points higher for the low, medium, and high capital intensity projects, respectively.
  - Larger changes are required for the high capital intensity project because VAT refunds represent a larger share of total costs and positive post-tax cash flow.

*Source: IMF Working Paper “The Value Added Tax in the Extractive Industries,” Working Paper No. WP/2023/221.*

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_Source: https://www.imf.org/-/media/files/publications/wp/2023/english/wpiea2023221-print-pdf.pdf_