Fiscal Policy in Extractives Sector in Africa

What is fiscal policy: Fiscal policy involves the decisions that a government (Ministry of finance, tax authorities, parliaments) makes regarding collection of revenue through taxation and about spending the revenue. It is often contrasted with monetary policy, which is the use of money supply (by central bank) in the economy to direct economic activity.

MechanismDescriptionNumber of countries MiningPetroleum Signature bonus Up-front payment for acquiring exploration rights. Commonly used as a bid parameter (Notably for petroleum in the US offshore continental shelf) 116 Production Bonus Fixed payment on achieving certain cumulative production or production rate None10 Royalties Specific (amount per unit of volume produced) 21 Ad-valorem (percentage of product value)1731 Ad-valorem progressive with price19 Ad-valorem progressive with production8 Ad-valorem progressive with operating ratio/profit 31 Royalty applied to operating margin (net profits royalty) 20

State, provincial, and/or local CIT Rate of corporate income tax at the state, provincial,or local level in addition to federal level. Common in Canada and the U.S. as a province/state resource charge in addition to federally imposed CIT. 25 Variable income tax CIT where the tax rates increase with the ratio of taxable income to revenue, between an upper and lower bound 32None Resource rent taxes Cash flow with accumulation rate/uplift. Can be assessed before or after CIT. 55 Cash flow with limited uplift on losses (UK).(surcharge tax on cash flow) None2 Allowance for Corporate CapitalNone13 Allowance for Corporate EquityNone14

Other additional income Tax Other profit taxation mechanisms that do not fall under any of the categories above 13 Production sharing Fixed production shareNone5 Cumulative productionNone R-Factor: ratio of cumulative revenues to cumulative costs None13 Rate of return, pre- or post-taxNone3 Production LevelNone13 State participation Free equity: government receives percentage of dividends without payment of any costs 2None Carried equity: government contributions met by investor and recovered from dividends with interest 38 Paid equity: government pays its share of costsNone19 Social investments/ infrastructure Resource companies build infrastructure or make other social investments (hospitals, schools, etc). 16 Number of countries 2567

Government’s objectives for Fiscal Design in the EI in Africa

Signature Bonus Flat Royalty Sliding- scale Royalty Resource Rent TaxCIT/VIT State Participation Maximizing government share of project life XX Securing early revenue XX Ensuring adequate incentives for exploration XX Visible share of commodity price increases X Strategic ownership interest X Maximize resource utilization XX Minimize administrative burden risks XX