## Box 1. Main Features of the NR Sector and their Impact on Revenue Administration ## Source details **Canonical URL:** [Box 1. Main Features of the NR Sector and their Impact on Revenue Administration](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/tnm/2014/_tnm1402.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/tnm/2014/_tnm1402.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/tnm/2014/_tnm1402.pdf.json) --- ### Main features of the NR sector and direct impacts on revenue administration - Non-renewability: Governments normally assert ownership of finite non-renewable NR and require payment for their extraction. Special NR taxes—for example, royalties and RTTs—depart from the regular tax system and are sometimes administered by non-tax departments, fragmenting the administration of the NR fiscal regime and posing challenges for interagency coordination. - Varied scale and profitability: Wide range of scale of operations can result in taxpayer segments with different tax regimes and different administrative challenges (for example, artisanal miners versus multinational companies). - Exceptional rent-generating potential: Governments normally charge higher-than-normal taxes on NR to capture resource rent. This creates exceptional transfer pricing (TP) risks, encouraging adoption of benchmark-based pricing and special ring-fencing tax rules so higher taxes on NR extraction are not reduced by extraneous costs; countries generally do not want those higher taxes to apply to NR processing. - High uncertainty and risk: Profit uncertainty can encourage reliance on ad valorem royalties that are not responsive to profitability; complexities are often introduced to improve responsiveness, complicating administration. Exceptional risk may require special tax rules for finance costs and hedging. Changing risks over time encourage negotiation of special tax deals rather than uniform application of tax law, proliferating special deals and NR fiscal regimes and complicating administration. - Substantial capital investment: Tax incentives to attract private investment can conflict with the desire for early revenue, creating complex tax rules for large-scale capital expenditure and administrative challenges. Tax holidays are often problematic; foreign tax credits for NR taxes may be important to attract foreign investors but can be lost through tax holidays. - Long development and operating periods: Delays in reaching profitability provide an incentive to impose royalties for early revenue. Special loss relief rules, special returns and audit procedures for pre-profit periods, and rules for abandonment reserves or funds are often needed. Governments commonly provide assurances of stability and negotiate special tax arrangements governed by contract law, which pose administrative challenges. - Geographic concentration of NR: May encourage specially negotiated tax regimes for different geographic areas and fiscal decentralization, complicating legal frameworks and requiring intergovernmental coordination. - High levels of exports and imports: Contribute to TP risks and require effective customs control, a robust VAT refund system, and sound exchange of information between tax and customs administrations. High levels of foreign payments make withholding taxes (WHT) important, and special rules may apply. - Price volatility and pro-cyclicality: From a macro-fiscal perspective, price volatility makes government revenues significantly pro-cyclical. Counteracting pro-cyclicality and planning for exhaustibility is relevant for these economies—meaning that non-oil taxes and their administration should not be neglected during NR boom years. ### NR fiscal regimes, common instruments, and fiscal design implications - NR fiscal regimes typically tax several bases through a combination of instruments to address sector specificities, including: - Transactions, such as license fees and signature/production bonuses. - Volume or value of production, such as royalties. - Consumption, such as the VAT and export duties. - Profits or gains, such as the corporate income taxes (CIT) and capital gains. - Excess profits, such as resource rent taxes (RRTs) and variable income taxes intended to capture rents. - Others, such as minor “nuisance taxes” and area rentals. - The broad choice of NR tax bases and rates is primarily a policy issue; ease of administration must be secondary but should be an important consideration in detailed tax design. - Concentration of revenues in one sector or a few companies can give rise to integrity and transparency issues. ### Administrative and legal challenges (summary of Box 2 and related points) - Valuation of NR sales: Point and method of valuation must be clearly defined. Valuation of minerals is often more problematic than oil. Some royalty valuation methods do not reflect arm’s length (AL) prices and are unsuitable for profit-based taxes, complicating overall administration. - Transfer pricing: Profit-shifting through TP presents major risks. General TP rules express the AL principle but often lack objective practical rules for non-arm’s length (NAL) transactions. Specific TP rules for NR are commonly needed; benchmarking has practical difficulties (manipulation of average prices, lack of benchmarks for some minerals, measurement of mineral quality). For most NR costs, benchmarking is not practicable; governments should build specific TP cost rules into legislation and agreements. Advance pricing agreements are an option. - Finance costs and thin capitalization: Companies may claim excessive finance costs; approaches to limiting deductible finance costs vary. Ministerial discretion lacks transparency. Disguised interest is a risk; restrictions on deductibility need to apply to all finance charges. - Hedging: Recognition of hedging gains and losses in taxing NR profits produces complex rules and avoidance risks; tax authorities may lack capacity to handle these issues. - Ring-fencing: Limitation on consolidation of income and deductions—ring-fencing individual projects or activities—adds administrative complexity and risk; workable cost allocation rules are needed. - Rules for NR capital expenditures: Need for simple categorization of tax depreciable costs. Investment allowances and credits are targets for tax planning/abuse. Rules for calculating depreciation can present major administrative challenges if poorly designed. Back-loaded costs for mine or well closure and environmental restoration should be recognized for tax purposes. - Social infrastructure costs: Law on deductibility for community investments (health care, education, infrastructure) often requires clarification. - Transfers of NR license interests: Considerable variation exists in taxation; interaction with depreciation rules can be complex. Indirect transfers or sales for non-cash consideration may be used to avoid tax. - Exemption of imports for NR operations from VAT and customs duties: Rules may be unclear or open to abuse and require consistent coordination between tax and customs administrations. - Administering departures from standard tax legislation requires significant specialization, including special taxes, contract-based regimes, and NR-related tax provisions (benchmark-based pricing, ring-fencing, cost recovery limits, deduction of abandonment reserves, investment incentives). - Dealing with variation in fiscal terminology and legal frameworks across projects and between petroleum and mining complicates administration. - Administering taxes subject to stability clauses can be unclear and make reform difficult. - A sound and simple legal framework is a key precondition for effective administration. Tax administrations should play a tax policy advisory role and assess administrative implications of laws before presentation to the legislature. - Sufficient time and resources should be allocated for personnel training and preparatory work (changes to IT systems, development of new tax forms). ### Organization and institutional arrangements for NR tax administration - NR tax administration occurs within a wider government policy and regulatory framework covering fiscal policy, NR management, industry policy and administration, and commercial participation. - Typical organizational frameworks (where the finance ministry is wholly responsible for NR fiscal policy) envisage: - Finance Ministry (policy execution / fiscal) - Tax and Customs Administrations - NR Ministry / NR Inspectorate (NR management/operations) - NR or Finance Ministry participation and natural resource company (commercial) - Variations in practice include: - Administration of all NR revenues by the tax administration: less common for petroleum than mining; more common in developed countries apart from those with significant fiscal decentralization. - Fragmentation of NR tax administration among different agencies: common in developing countries, particularly for petroleum. - Administration of all NR revenues by the NR department or NRC: rare, but may apply in petroleum production sharing regimes. - An integrated and functionally-based tax administration is essential; modern tax administrations are legally constituted bodies responsible for collecting all national taxes, based on integration of direct and indirect taxes. - NR tax administration reform requires organizational capacity, clear allocation of responsibilities, interagency coordination, and prioritized implementation of administrative simplifications where possible. ### Organizational models and fragmentation (Box 2 continued) - An integrated, functionally-based administration (taxpayer services, audit, appeals, enforcement collection) is recommended and “equally appropriate for administering NR revenue.” - Typical alternative: fragmented model where, for example, the Ministry of Natural Resources administers royalties and production sharing agreements. - Common reasons for fragmentation: political considerations, concerns about technical ability and integrity of the tax administration (especially in low-income countries). - Outcomes of fragmentation: - Weak administration and loss of taxpayer control. - Increased red tape and extra compliance burden on businesses. - Governments rarely possess the administrative sophistication required for the increased demands of cooperation. - Recommendation: integration within the tax administration is internationally accepted as the better option, though the tax administration should obtain input and assistance from the NR department for specialist knowledge. - Cooperation and information exchange needs: - Clarify and document each agency’s responsibilities (for example, via memoranda of understanding and exchange of information agreements specifying competencies, deadlines, and specifics such as “by whom, to whom, what type of information, and by when?”). - Put in place effective exchange-of-information procedures, ideally automatic and electronic. ### Organization at the revenue administration level - Specialist NR expertise is important and can be developed within a function-based organization by taxpayer segmentation. - Modern practice: an elite large taxpayer office (LTO) generally responsible for closely managing taxpayers that account, collectively, for about 60 percent or more of total revenue; NR companies typically belong in the large taxpayer segment. - Options for NR specialization within LTO: - A separate NR unit within the LTO, or - NR specialist jobs within the LTO’s functional divisions (audit, taxpayer service, risk assessment, legal and policy). - NR specialist roles may also exist at Headquarters (policy, strategy, planning, monitoring) to allow coordinated risk-based administration. - Risks of creating separate NR units outside LTO: - Duplication, increased administrative costs, inconsistent treatment across the tax base. - Creation of a “two-speed tax administration” which jeopardizes long-term institutional capacity if best practices are not shared. - Customs role: - Customs is important because NR sectors have high import (capital goods) and export (oil, minerals) levels. - Trade transactions affect domestic taxes (for example, VAT refunds related to zero rating exports; CIT cross-checks when exports are main reported income). - Recommendation: robust customs control + trade facilitation + systematic exchange of information with domestic tax department. ### Overall compliance strategy and operational recommendations - A coherent compliance strategy should: - Identify units involved, responsibilities, and goals. - Manage associated risks for tax compliance. - Include sub-strategies such as cooperation with other government agencies, a risk-management framework, and faster impartial dispute resolution. - Be operationalized with assigned responsibilities, implementation plans, and defined timeframes. - For administrations starting a NR tax unit from scratch (for example, after discovery of NR), recommendation: build on any existent LTO and develop a detailed strategy and action plan addressing: - Appointing head of unit and team members (internal and external selection possible). - Defining offices and facilities. - Designing NR-specific IT systems (for example, prices databases). - Signing memoranda of understanding with partner agencies prior to initiation of operations. - Investing in training and factoring in technical assistance requests. - Communicating the new approach to NR administration to taxpayers. ### Good-practice elements for procedures, routine and non-routine functions - Harmonized and streamlined legislation in a tax procedure code (TPC) covering registration, filing, payment, arrears enforcement, interest, penalties, audit, and dispute resolution. - Separation of functions where necessary to safeguard integrity. - Efficient routine processing of registration, filing and payment, with filing based on self-assessment. - Taxpayer service, audit and enforcement planned on the basis of risk management and taxpayer segmentation. - Comprehensive and targeted taxpayer service programs to foster voluntary compliance. - Active enforcement of registration, filing, payment, and arrears recovery. - Effective, fair and accessible dispute resolution. - Timely and accurate revenue reporting at the individual and aggregate levels. - Routine vs non-routine functions: - Routine: registration, returns and payments processing, assessment — mechanics of gathering taxes. - Non-routine (technical): taxpayer service, enforcement, physical audit, benchmark pricing, audit of returns, dispute resolution, policy advice — ensure tax is quantified correctly and address noncompliance. - Routine functions should be integrated into generic functional organization; non-routine functions require NR-industry expertise, ideally located in LTO and Headquarters functions. ### Returns, payments, penalties, refunds (routine functions) - Return submission: - Consolidated returns may simplify administration though separate returns are common. - Returns should be simple, clear, and support audit risk assessment (including information on international holdings and transactions). - Ideally, NR taxpayers should submit returns only in electronic format. - Consistent annual basis for taxes, where appropriate, would simplify administration. - Payment: - Cash payments should not be accepted in tax branches where a reliable financial sector exists; large taxpayers should pay via banks or electronically. - Integrated administration with common payment rules and payment coding systems improves allocation and reduces refund problems. - Variation exists in timing/frequency of in-year installments; installment approaches vary between provisional-result and estimate-based methods. - Payment in kind (petroleum) presents special administration challenges (storage and marketing competencies); practice deserves scrutiny though many countries continue it. - Consistency in foreign currency accounting/payment is important; for EITI simplification, it is best to require payment of all NR taxes in the same currency. - Penalties: - Penalties for late filing must be charged promptly and automatically; interest should be charged automatically on all late payments, without exception. - Refunds: - Large VAT refunds are common for NR companies due to export zero-rating. - Administrations need adequate procedures (risk-based audits) to deter abuse, and must honor refund payments—delays have huge negative effects on taxpayers’ cash liquidity. - Effective public financial management, including a modern cash management system, is needed to ensure sufficient funds in the Single Treasury Account to pay tax refunds timely. ### Non-routine functions: risk treatment, taxpayer service, audit, dispute resolution, research - Risk treatment: - Non-routine risks (transfer pricing, hedging, thin capitalization) can result in under-declaration of income or over-declaration of costs. - Tax authorities need systematic processes to identify, analyze, prioritize, and treat major compliance risks using internal and external data sources. - Risk profiling should be done at taxpayer level and category level (likelihood of noncompliance and revenue at risk). - Risk-treatment strategies may include marketing/education campaigns, explanatory products (fact sheets), audit components, and legal changes. - Taxpayer services: - Develop comprehensive NR-specific taxpayer service programs, targeting segments (for example, small miners vs large taxpayers). - For large taxpayers, deliver personalized service through a Key Client Manager (KCM) within the LTO/NR unit. - Regular consultation forums with key NR stakeholders are useful. - Payment enforcement: - Follow normal good practice; consider license termination for serious non-payment of NR revenues. - Audit: - Audit of NR tax returns is central and challenging; audit and information access powers must be adequate. - Develop clear strategic, operational, and case audit plans based on risk assessment reflecting industry characteristics and taxpayer segments. - Strengthen risk assessment and audit with NR databases and IT support; risk profiling should use core filters (for example, period since last audit), NR-inherent filters (for example, related party dealings, capital allowance claims, financing costs, mining company margin analysis), and operational filters (for example, sales variances from benchmark prices and stripping ratios). - Contract-based economic models can be useful for audit risk assessment. - Different audit types may be appropriate for different companies; integrate audits across NR revenues where possible. - Where production is valued on benchmark prices, clear procedures must exist for establishing and publishing those prices. - Effective physical audit is important; NR companies should have obligations to measure and record physical production for monitoring. - Dispute resolution: - Equitable, accessible, and timely dispute resolution is essential; many countries’ judicial institutions are weak and may focus on procedural rather than substantive issues. - Set up objection units separate from functional areas that identified/calculated assessments to ensure independent review. - Ideally have specialized tribunals and judges with knowledge of tax legislation and NR issues; identify and train specialized lawyers to defend cases in court. - Consider expert international arbitration in some cases, while building domestic capacity for NR dispute resolution. - Research and analysis: - Contract-based economic models are essential for tax policy development, contract negotiation, revenue forecasting, and expenditure management; initial responsibility should rest with the finance ministry. - Tax administrations need analytical capacity to understand sector performance, contribute to tax policy formulation, and support forecasting systems. ### Capacity concerns: staffing, salaries, recruitment, training, IT, funding - Staffing: - Adequately staff the LTO where most NR revenues are payable; allocation should be based on detailed assessment balancing audit and taxpayer service needs. - Staffing planning should consider: (1) size and complexity of NR sector (for example, only oil, or oil and mineral? size of production and revenues at stake?), (2) number of taxpayers, (3) complexity of tax law and administrative procedures, (4) information technology capacity. - Generally requires a critical mass of highly trained staff rather than large numbers. - Salaries: - Salaries must be adequate to attract/retain skilled staff and discourage corruption; NR specialist salaries should reflect private sector differentials as much as possible. - Better wages and employment terms, combined with performance management and promotion, strengthen capacity over time. - Recruitment and job descriptions: - Recruitment must be transparent, merit-based, and free from political influence; mix internal and external candidates may be useful. - Clear job descriptions clarify required skills and make hiring open and transparent. - Outsourcing should be analyzed from a long-term perspective; when used, private sector involvement should transfer knowledge and skills rather than delegate responsibility entirely. - Training: - Staff need training in general tax administration and specialist NR tax expertise covering (1) industry operations (general and country-specific), (2) industry accounting, (3) tax legislation and special issues, (4) benchmark-based pricing, (5) volume and quality measurement if applicable, (6) multinational tax planning techniques (transfer pricing, financing, treaty shopping). - Train staff in “soft skills” (negotiation, relationship building). - Exercise caution where NR companies facilitate training to avoid conflicts of interest. - Exposure to other countries’ experiences and technical assistance from international organizations (for example, the IMF) are useful. - Information technology: - Adequate hardware and software are required; off-the-shelf systems may be unsuitable for specific NR tax control. - Systems must support exchange of information among government agencies; fragmentation hampers effective IT development. - Budget and autonomy: - Tax administrations need adequate funding and reasonable operational autonomy (design internal structure, set staffing levels and remuneration, hire/fire staff, exercise discretion over capital and current expenditure) subject to proper audit/oversight. - Funding by retention of a proportion of revenues collected is particularly inappropriate for NR revenues due to size and volatility; it is not suitable for stable annual budgeting. ### Transparency and governance - Weak governance is a main explanation for the “resource curse”; transparency is vital for maximizing social and economic benefits. - Corruption risk is elevated in low-capacity administrations facing sudden/large revenue inflows; no simple measures exist, but a robust anti-corruption framework is necessary. - Measures to minimize corruption and address occurrences: - Effective leadership and management to define acceptable behavior and organization culture. - Clear and transparent documented processes to limit discretionary action. - Proper organizational design separating Headquarters functions from operational ones to assign clear responsibility. - Stable, integrated IT systems with logs and passwords to leave audit trails. - Payments through banks and automated systems to avoid cash handling in tax offices. - Robust human resources policy: open recruiting, adequate staffing and wages, systematic performance appraisal, good training, career perspectives. - Strong internal affairs function with independence and adequate powers to investigate and sanction corruption. - Appropriate division of duties and internal audit to test and evaluate control systems; a widely circulated Code of Ethics with disciplinary procedures. - Transparency initiatives: - IMF’s Guide on Resource Revenue Transparency (GRRT) is a benchmark tool for assessing transparency across the NR value chain. - Extractive Industries Transparency Initiative (EITI): global coalition launched in 2003; operates through a standard (last updated in July 2013) for disclosure of taxes and other payments by oil, gas, and mining companies; provides technical assistance to participating countries. *Source: Box 2. continued, Technical Notes and Manuals 14/02 | 2014* ### Box 1. Main Features of the NR Sector and their ### Box 1. Main Features of the NR Sector and their Impact on Revenue Administration ### Main features of the NR sector and direct impacts on revenue administration - Non-renewability: Governments normally assert ownership of finite non-renewable NR and require payment for their extraction. Special NR taxes—for example, royalties and RTTs—depart from the regular tax system and are sometimes administered by non-tax departments, fragmenting the administration of the NR fiscal regime and posing challenges for interagency coordination. - Varied scale and profitability: Wide range of scale of operations can result in taxpayer segments with different tax regimes and different administrative challenges (for example, artisanal miners versus multinational companies). - Exceptional rent-generating potential: Governments normally charge higher-than-normal taxes on NR to capture resource rent. This creates exceptional transfer pricing (TP) risks, encouraging adoption of benchmark-based pricing and special ring-fencing tax rules so higher taxes on NR extraction are not reduced by extraneous costs; countries generally do not want those higher taxes to apply to NR processing. - High uncertainty and risk: Profit uncertainty can encourage reliance on ad valorem royalties that are not responsive to profitability; complexities are often introduced to improve responsiveness, complicating administration. Exceptional risk may require special tax rules for finance costs and hedging. Changing risks over time encourage negotiation of special tax deals rather than uniform application of tax law, proliferating special deals and NR fiscal regimes and complicating administration. - Substantial capital investment: Tax incentives to attract private investment can conflict with the desire for early revenue, creating complex tax rules for large-scale capital expenditure and administrative challenges. Tax holidays are often problematic; foreign tax credits for NR taxes may be important to attract foreign investors but can be lost through tax holidays. - Long development and operating periods: Delays in reaching profitability provide an incentive to impose royalties for early revenue. Special loss relief rules, special returns and audit procedures for pre-profit periods, and rules for abandonment reserves or funds are often needed. Governments commonly provide assurances of stability and negotiate special tax arrangements governed by contract law, which pose administrative challenges. - Geographic concentration of NR: May encourage specially negotiated tax regimes for different geographic areas and fiscal decentralization, complicating legal frameworks and requiring intergovernmental coordination. - High levels of exports and imports: Contribute to TP risks and require effective customs control, a robust VAT refund system, and sound exchange of information between tax and customs administrations. High levels of foreign payments make withholding taxes (WHT) important, and special rules may apply. - Price volatility and pro-cyclicality: From a macro-fiscal perspective, price volatility makes government revenues significantly pro-cyclical. Counteracting pro-cyclicality and planning for exhaustibility is relevant for these economies—meaning that non-oil taxes and their administration should not be neglected during NR boom years. ### NR fiscal regimes, common instruments, and fiscal design implications - NR fiscal regimes typically tax several bases through a combination of instruments to address sector specificities, including: - Transactions, such as license fees and signature/production bonuses. - Volume or value of production, such as royalties. - Consumption, such as the VAT and export duties. - Profits or gains, such as the corporate income taxes (CIT) and capital gains. - Excess profits, such as resource rent taxes (RRTs) and variable income taxes intended to capture rents. - Others, such as minor “nuisance taxes” and area rentals. - The broad choice of NR tax bases and rates is primarily a policy issue; ease of administration must be secondary but should be an important consideration in detailed tax design. - Concentration of revenues in one sector or a few companies can give rise to integrity and transparency issues. ### Administrative and legal challenges (summary of Box 2 and related points) - Valuation of NR sales: Point and method of valuation must be clearly defined. Valuation of minerals is often more problematic than oil. Some royalty valuation methods do not reflect arm’s length (AL) prices and are unsuitable for profit-based taxes, complicating overall administration. - Transfer pricing: Profit-shifting through TP presents major risks. General TP rules express the AL principle but often lack objective practical rules for non-arm’s length (NAL) transactions. Specific TP rules for NR are commonly needed; benchmarking has practical difficulties (manipulation of average prices, lack of benchmarks for some minerals, measurement of mineral quality). For most NR costs, benchmarking is not practicable; governments should build specific TP cost rules into legislation and agreements. Advance pricing agreements are an option. - Finance costs and thin capitalization: Companies may claim excessive finance costs; approaches to limiting deductible finance costs vary. Ministerial discretion lacks transparency. Disguised interest is a risk; restrictions on deductibility need to apply to all finance charges. - Hedging: Recognition of hedging gains and losses in taxing NR profits produces complex rules and avoidance risks; tax authorities may lack capacity to handle these issues. - Ring-fencing: Limitation on consolidation of income and deductions—ring-fencing individual projects or activities—adds administrative complexity and risk; workable cost allocation rules are needed. - Rules for NR capital expenditures: Need for simple categorization of tax depreciable costs. Investment allowances and credits are targets for tax planning/abuse. Rules for calculating depreciation can present major administrative challenges if poorly designed. Back-loaded costs for mine or well closure and environmental restoration should be recognized for tax purposes. - Social infrastructure costs: Law on deductibility for community investments (health care, education, infrastructure) often requires clarification. - Transfers of NR license interests: Considerable variation exists in taxation; interaction with depreciation rules can be complex. Indirect transfers or sales for non-cash consideration may be used to avoid tax. - Exemption of imports for NR operations from VAT and customs duties: Rules may be unclear or open to abuse and require consistent coordination between tax and customs administrations. - Administering departures from standard tax legislation requires significant specialization, including special taxes, contract-based regimes, and NR-related tax provisions (benchmark-based pricing, ring-fencing, cost recovery limits, deduction of abandonment reserves, investment incentives). - Dealing with variation in fiscal terminology and legal frameworks across projects and between petroleum and mining complicates administration. - Administering taxes subject to stability clauses can be unclear and make reform difficult. - A sound and simple legal framework is a key precondition for effective administration. Tax administrations should play a tax policy advisory role and assess administrative implications of laws before presentation to the legislature. - Sufficient time and resources should be allocated for personnel training and preparatory work (changes to IT systems, development of new tax forms). ### Organization and institutional arrangements for NR tax administration - NR tax administration occurs within a wider government policy and regulatory framework covering fiscal policy, NR management, industry policy and administration, and commercial participation. - Typical organizational frameworks (where the finance ministry is wholly responsible for NR fiscal policy) envisage: - Finance Ministry (policy execution / fiscal) - Tax and Customs Administrations - NR Ministry / NR Inspectorate (NR management/operations) - NR or Finance Ministry participation and natural resource company (commercial) - Variations in practice include: - Administration of all NR revenues by the tax administration: less common for petroleum than mining; more common in developed countries apart from those with significant fiscal decentralization. - Fragmentation of NR tax administration among different agencies: common in developing countries, particularly for petroleum. - Administration of all NR revenues by the NR department or NRC: rare, but may apply in petroleum production sharing regimes. - An integrated and functionally-based tax administration is essential; modern tax administrations are legally constituted bodies responsible for collecting all national taxes, based on integration of direct and indirect taxes. - NR tax administration reform requires organizational capacity, clear allocation of responsibilities, interagency coordination, and prioritized implementation of administrative simplifications where possible. *Technical Notes and Manuals 14/02 | 2014* ### Box 2. continued ### _tnm1402 - Box 2. continued ### Organizational models and fragmentation - An integrated, functionally-based administration (taxpayer services, audit, appeals, enforcement collection) is recommended and “equally appropriate for administering NR revenue.” - Typical alternative: fragmented model where, for example, the Ministry of Natural Resources administers royalties and production sharing agreements. - Common reasons for fragmentation: political considerations, concerns about technical ability and integrity of the tax administration (especially in low-income countries). - Outcomes of fragmentation: - Weak administration and loss of taxpayer control. - Increased red tape and extra compliance burden on businesses. - Governments rarely possess the administrative sophistication required for the increased demands of cooperation. - Recommendation: integration within the tax administration is internationally accepted as the better option, though the tax administration should obtain input and assistance from the NR department for specialist knowledge. - Cooperation and information exchange needs: - Clarify and document each agency’s responsibilities (for example, via memoranda of understanding and exchange of information agreements specifying competencies, deadlines, and specifics such as “by whom, to whom, what type of information, and by when?”). - Put in place effective exchange-of-information procedures, ideally automatic and electronic. ### Organization at the revenue administration level - Specialist NR expertise is important and can be developed within a function-based organization by taxpayer segmentation. - Modern practice: an elite large taxpayer office (LTO) generally responsible for closely managing taxpayers that account, collectively, for about 60 percent or more of total revenue; NR companies typically belong in the large taxpayer segment. - Options for NR specialization within LTO: - A separate NR unit within the LTO, or - NR specialist jobs within the LTO’s functional divisions (audit, taxpayer service, risk assessment, legal and policy). - NR specialist roles may also exist at Headquarters (policy, strategy, planning, monitoring) to allow coordinated risk-based administration. - Risks of creating separate NR units outside LTO: - Duplication, increased administrative costs, inconsistent treatment across the tax base. - Creation of a “two-speed tax administration” which jeopardizes long-term institutional capacity if best practices are not shared. - Customs role: - Customs is important because NR sectors have high import (capital goods) and export (oil, minerals) levels. - Trade transactions affect domestic taxes (for example, VAT refunds related to zero rating exports; CIT cross-checks when exports are main reported income). - Recommendation: robust customs control + trade facilitation + systematic exchange of information with domestic tax department. ### Overall compliance strategy for the NR sector - A coherent compliance strategy should: - Identify units involved, responsibilities, and goals. - Manage associated risks for tax compliance. - Include sub-strategies such as cooperation with other government agencies, a risk-management framework, and faster impartial dispute resolution. - Be operationalized with assigned responsibilities, implementation plans, and defined timeframes. - For administrations starting a NR tax unit from scratch (for example, after discovery of NR), recommendation: build on any existent LTO and develop a detailed strategy and action plan addressing: - Appointing head of unit and team members (internal and external selection possible). - Defining offices and facilities. - Designing NR-specific IT systems (for example, prices databases). - Signing memoranda of understanding with partner agencies prior to initiation of operations. - Investing in training and factoring in technical assistance requests. - Communicating the new approach to NR administration to taxpayers. ### Coherent and harmonized procedures (good practice elements) - Main elements: - Harmonized and streamlined legislation in a tax procedure code (TPC) covering registration, filing, payment, arrears enforcement, interest, penalties, audit, and dispute resolution. - Separation of functions where necessary to safeguard integrity. - Efficient routine processing of registration, filing and payment, with filing based on self-assessment. - Taxpayer service, audit and enforcement planned on the basis of risk management and taxpayer segmentation. - Comprehensive and targeted taxpayer service programs to foster voluntary compliance. - Active enforcement of registration, filing, payment, and arrears recovery. - Effective, fair and accessible dispute resolution. - Timely and accurate revenue reporting at the individual and aggregate levels. - Routine vs non-routine functions: - Routine: registration, returns and payments processing, assessment — mechanics of gathering taxes. - Non-routine (technical): taxpayer service, enforcement, physical audit, benchmark pricing, audit of returns, dispute resolution, policy advice — ensure tax is quantified correctly and address noncompliance. - Routine functions should be integrated into generic functional organization; non-routine functions require NR-industry expertise, ideally located in LTO and Headquarters functions. ### Routine functions: returns, payment, penalties, refunds - Return submission: - Consolidated returns may simplify administration though separate returns are common. - Returns should be simple, clear, and support audit risk assessment (including information on international holdings and transactions). - Ideally, NR taxpayers should submit returns only in electronic format. - Consistent annual basis for taxes, where appropriate, would simplify administration. - Payment: - Cash payments should not be accepted in tax branches where a reliable financial sector exists; large taxpayers should pay via banks or electronically. - Integrated administration with common payment rules and payment coding systems improves allocation and reduces refund problems. - Variation exists in timing/frequency of in-year installments; installment approaches vary between provisional-result and estimate-based methods. - Payment in kind (petroleum) presents special administration challenges (storage and marketing competencies); practice deserves scrutiny though many countries continue it. - Consistency in foreign currency accounting/payment is important; for EITI simplification, it is best to require payment of all NR taxes in the same currency. - Penalties: - Penalties for late filing must be charged promptly and automatically; interest should be charged automatically on all late payments, without exception. - Refunds: - Large VAT refunds are common for NR companies due to export zero-rating. - Administrations need adequate procedures (risk-based audits) to deter abuse, and must honor refund payments—delays have huge negative effects on taxpayers’ cash liquidity. - Effective public financial management, including a modern cash management system, is needed to ensure sufficient funds in the Single Treasury Account to pay tax refunds timely. ### Non-routine functions: risk treatment, taxpayer service, audit, dispute resolution, research - Risk treatment: - Non-routine risks (transfer pricing, hedging, thin capitalization) can result in under-declaration of income or over-declaration of costs. - Tax authorities need systematic processes to identify, analyze, prioritize, and treat major compliance risks using internal and external data sources. - Risk profiling should be done at taxpayer level and category level (likelihood of noncompliance and revenue at risk). - Risk-treatment strategies may include marketing/education campaigns, explanatory products (fact sheets), audit components, and legal changes. - Taxpayer services: - Develop comprehensive NR-specific taxpayer service programs, targeting segments (for example, small miners vs large taxpayers). - For large taxpayers, deliver personalized service through a Key Client Manager (KCM) within the LTO/NR unit. - Regular consultation forums with key NR stakeholders are useful. - Payment enforcement: - Follow normal good practice; consider license termination for serious non-payment of NR revenues. - Audit: - Audit of NR tax returns is central and challenging; audit and information access powers must be adequate. - Develop clear strategic, operational, and case audit plans based on risk assessment reflecting industry characteristics and taxpayer segments. - Strengthen risk assessment and audit with NR databases and IT support; risk profiling should use core filters (for example, period since last audit), NR-inherent filters (for example, related party dealings, capital allowance claims, financing costs, mining company margin analysis), and operational filters (for example, sales variances from benchmark prices and stripping ratios). - Contract-based economic models can be useful for audit risk assessment. - Different audit types may be appropriate for different companies; integrate audits across NR revenues where possible. - Where production is valued on benchmark prices, clear procedures must exist for establishing and publishing those prices. - Effective physical audit is important; NR companies should have obligations to measure and record physical production for monitoring. - Dispute resolution: - Equitable, accessible, and timely dispute resolution is essential; many countries’ judicial institutions are weak and may focus on procedural rather than substantive issues. - Set up objection units separate from functional areas that identified/calculated assessments to ensure independent review. - Ideally have specialized tribunals and judges with knowledge of tax legislation and NR issues; identify and train specialized lawyers to defend cases in court. - Consider expert international arbitration in some cases, while building domestic capacity for NR dispute resolution. - Research and analysis: - Contract-based economic models are essential for tax policy development, contract negotiation, revenue forecasting, and expenditure management; initial responsibility should rest with the finance ministry. - Tax administrations need analytical capacity to understand sector performance, contribute to tax policy formulation, and support forecasting systems. ### Capacity concerns: staffing, salaries, recruitment, training, IT, funding - Staffing: - Adequately staff the LTO where most NR revenues are payable; allocation should be based on detailed assessment balancing audit and taxpayer service needs. - Staffing planning should consider: (1) size and complexity of NR sector (for example, only oil, or oil and mineral? size of production and revenues at stake?), (2) number of taxpayers, (3) complexity of tax law and administrative procedures, (4) information technology capacity. - Generally requires a critical mass of highly trained staff rather than large numbers. - Salaries: - Salaries must be adequate to attract/retain skilled staff and discourage corruption; NR specialist salaries should reflect private sector differentials as much as possible. - Better wages and employment terms, combined with performance management and promotion, strengthen capacity over time. - Recruitment and job descriptions: - Recruitment must be transparent, merit-based, and free from political influence; mix internal and external candidates may be useful. - Clear job descriptions clarify required skills and make hiring open and transparent. - Outsourcing should be analyzed from a long-term perspective; when used, private sector involvement should transfer knowledge and skills rather than delegate responsibility entirely. - Training: - Staff need training in general tax administration and specialist NR tax expertise covering (1) industry operations (general and country-specific), (2) industry accounting, (3) tax legislation and special issues, (4) benchmark-based pricing, (5) volume and quality measurement if applicable, (6) multinational tax planning techniques (transfer pricing, financing, treaty shopping). - Train staff in “soft skills” (negotiation, relationship building). - Exercise caution where NR companies facilitate training to avoid conflicts of interest. - Exposure to other countries’ experiences and technical assistance from international organizations (for example, the IMF) are useful. - Information technology: - Adequate hardware and software are required; off-the-shelf systems may be unsuitable for specific NR tax control. - Systems must support exchange of information among government agencies; fragmentation hampers effective IT development. - Budget and autonomy: - Tax administrations need adequate funding and reasonable operational autonomy (design internal structure, set staffing levels and remuneration, hire/fire staff, exercise discretion over capital and current expenditure) subject to proper audit/oversight. - Funding by retention of a proportion of revenues collected is particularly inappropriate for NR revenues due to size and volatility; it is not suitable for stable annual budgeting. ### Transparency and governance - Weak governance is a main explanation for the “resource curse”; transparency is vital for maximizing social and economic benefits. - Corruption risk is elevated in low-capacity administrations facing sudden/large revenue inflows; no simple measures exist, but a robust anti-corruption framework is necessary. - Measures to minimize corruption and address occurrences: - Effective leadership and management to define acceptable behavior and organization culture. - Clear and transparent documented processes to limit discretionary action. - Proper organizational design separating Headquarters functions from operational ones to assign clear responsibility. - Stable, integrated IT systems with logs and passwords to leave audit trails. - Payments through banks and automated systems to avoid cash handling in tax offices. - Robust human resources policy: open recruiting, adequate staffing and wages, systematic performance appraisal, good training, career perspectives. - Strong internal affairs function with independence and adequate powers to investigate and sanction corruption. - Appropriate division of duties and internal audit to test and evaluate control systems; a widely circulated Code of Ethics with disciplinary procedures. - Transparency initiatives: - IMF’s Guide on Resource Revenue Transparency (GRRT) is a benchmark tool for assessing transparency across the NR value chain. - Extractive Industries Transparency Initiative (EITI): global coalition launched in 2003; operates through a standard (last updated in July 2013) for disclosure of taxes and other payments by oil, gas, and mining companies; provides technical assistance to participating countries. *Source: Box 2. continued, Technical Notes and Manuals 14/02 | 2014* ### References ### _tnm1402 - References ### References - Harrison, G. and R. Krelove, 2005, “VAT Refunds: A Review of Country Experience,” IMF WP 05/218, International Monetary Fund. - International Monetary Fund (IMF), 2007, “Guide on Resource Revenue Transparency,” http:// www.imf.org/external/np/pp/2007/eng/051507g.pdf - International Monetary Fund (IMF), 2012, “Fiscal Regimes for Extractive Industries: Design and Implementation,” Washington. www.imf.org/external/np/pp/eng/2012/081512.pdf - International Monetary Fund (IMF) and World Bank, 2014 (forthcoming), Natural Resource Revenue Administration Handbook (International Monetary Fund and World Bank, Washington). - Kidd, M, 2010, “Revenue Administration: Functionally Organized Tax Administration,” Technical Notes and Manuals, Fiscal Affairs Department, International Monetary Fund. http://www.imf.org/external/pubs/ft/tnm/2010/tnm1010.pdf - Sunley, E. and T. Baunsgaard, 2001, “The Tax Treatment of the Mining Sector: An IMF Perspective,” Background paper prepared for World Bank workshop on the taxation of the mining sector, April 4-5, 2001. - World Bank, 2011, Wealth of Nations database. http://data.worldbank.org/data-catalog/ wealth-of-nations. ### Acronyms and Abbreviations - AL Arm’s length - CIT Corporate income tax - EITI Extractive Industries Transparency Initiative - GRRT Guide to Resource Revenue Transparency - IMF International Monetary Fund - JV Joint venture - KCM Key Client Manager - LTO Large Taxpayer Office - NAL Non-arm’s length - NR Natural resources - NRC National resource company - MNR Ministry of Natural Resources - PSA Production sharing agreement - PSC Production sharing contract - RRT Resource rent tax - SA Self-assessment - TP Transfer Pricing - TPC Tax procedure code - VAT Value Added Tax - WHT Withholding tax ### Publication and Contact Information - TNM/14/02 - International Monetary Fund - Fiscal Affairs Department - 700 19th Street NW - Washington, DC 20431 - USA - Tel: 1-202-623-8554 - Fax: 1-202-623-6073 - Title: Revenue Administration: Administering Revenues from Natural Resources—A Short Primer - Prepared by Andrea Lemgruber and Scott Shelton - Fiscal Affairs Department - TECHNICAL NOTES AND MANUALS *Source: _tnm1402 - References* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/tnm/2014/_tnm1402.pdf_