1. Petroleum Fiscal Administration in Developing Countries
Charles McPherson “Building Knowledge on Petroleum Resources Management”
Facilitated by
Nairobi, December 16, 2015

2. Outline of Topics Special characteristics of the petroleum sector
Sector characteristics especially relevant to revenue management policies and practice
Fiscal objectives for the petroleum sector
Fiscal objectives of host countries and investors.
Fiscal instruments
Pros and cons of fiscal instruments and fiscal packages

3. Outline of Topics
Relevance and challenges
Routine functions
Non-routine functions
Informational requirements
Tax design and tax administration
Institutional Issues

4. Outline of Topics
Building capacity
Transparency

5. Relevance and Challenges
Oil revenues are “macro-critical” for a growing number of developing countries
Fiscal administration is often a weak link in the chain converting oil wealth into national wealth

6. Relevance and Challenges
The special characteristics of the sector and resulting complex fiscal regimes can be challenging to administer

7. Challenging Sector and Fiscal Regime Features
Special taxes (royalties, production sharing, rent taxes, etc.)
Fiscal regime variation by type of project or contract
Specially negotiated regimes
Government revenues through participation
Integrated projects

8. Challenging Sector and Fiscal Regime Features
Special tax provisions
Valuation
Cost definition
Thin capitalization and transfer pricing
Ring-fencing
Abandonment
License transfers and capital gains

9. Routine Functions
Some administrative functions ought to straightforward:
Registering taxpayers
Processing returns
Assessing tax
Collecting tax
Accounting standards (IAS, GAAP)
Currency of account

10. Problems Encountered in Routine Administration
But are made difficult as a result of:
Multiplicity of taxes
Multiplicity of agencies
Weak filing/payment procedures
Poor accounting systems
Weak or absent IT
Reconciliation challenges

11. Reconciliation Challenges
Off-sets/QFAs
Direct payments to sub-national governments
US dollar accounting vs. local currency
Payment timing in context of depreciating currency and inflation
Cash vs. accrual accounting
Inter-agency cooperation

12. Why Poor Routine Administration Matters
Distracts/confuses management
Results in poor accounting for resource tax
Bad for governance
Bad for reputation of government

13. Simplification of Routine Administration
Implement self-assessment
Minimize number of taxes
Minimize number of agencies
Use established industry concepts/accounting standards
Harmonize rules for different revenues
Consolidated returns/common accounting periods/payment procedures

14. Non-routine Functions
Other functions are by their nature more challenging and involve large amounts of money:
Volume determination
Price determination
Cost determination
Audits
Appeals

15. Volume Determination
Metering
Quality analysis
Adjustments
Monitoring

16. Cost Determination
Cost categories
Cost control
Ring fencing
Finance costs
Transfer prices
Environmental and abandonment costs
Discussed above under Selected Fiscal Topics…

17. Audits
Audit types (physical, cost, tax, “Value for Money”)
Audit choices (full vs. selective etc.)
In-house or out-sourced?
Role of investor audits
National oil company audits
PSC issues

18. Appeals
Disputes are inevitable…
Informal vs. formal resolution
Tax tribunals vs. courts
In-house legal skills vs. out-sourced

19. Informational Requirements
Taxpayer requirements:
Clear, accessible legislation/regulations
Explanatory materials/advice
Tax collector requirements:
Operational information
Contractual agreements and JOAs
Operator and JOA Audits
Prices
Costs

20. Matching Fiscal Regime Design and Administration
Design objectives
Efficiency, broad-based development
Progressivity
Effective rent capture
Administration objectives
Simplicity (minimum number of variables/parameters)
Easily monitored (readily observable/verifiable indicators

21. Matching Fiscal Regime Design and Administration
Challenge: finding a workable balance.
Build capacity rather than accept weak design

22. Complementary Activities: Tax Policy and Modeling
Tax policy capacity is a critical complement to tax administration (and vice-versa)
Tax modeling can be used for:
Longer term forecasting
Improved planning for different scenarios
Cross-check on audit results
Evaluation of agreements

23. Institutional Issues Fragmented administration is common
Centralize administration as much as possible
Obstacles include differing comparative advantages (tax/royalty/production sharing)
Politics
Where centralization not possible
Define roles and improve coordination

24. Disadvantages of Fragmented Administration
More burdens on taxpayers
Duplication of work
Lack of clarity on responsibilities
Lack of accountability
Uncoordinated management/systems/procedures/compliance strategy
Dissipation of capacity building and governance efforts

25. Internal Institutional Organization
Separation of administrative functions
Segment by taxpayer
Resource industry (petroleum) specialization

26. External Legal Services
Possible Institutional Structure
Director NTD
Head NRT
Consultants
Analyst
Analyst
Analyst
Analyst
Monitoring filing and payments
Valuation & tax audits
Dispute resolution
Taxpayer advice & policy
External Tax Audit
External Legal Services

27. Building Capacity Staffing/skills mix Training
Include industry economic/technical expertise
Training
Special legal/contractual arrangements
Industry processes/accounting/vocabulary
Manuals

28. Building Capacity Compensation Resources/facilities/IT Consultancies
Private sector challenge (major issue)
Resources/facilities/IT
Consultancies
Possible twinning with out-sourcing
Funding
Secure budget support

29. Building Capacity
Capacity building enhanced by clear laws, organization and procedures

30. Capacity Building: Tax Administration in Angola
Critical importance
Diagnostic identified weaknesses and made recommendations
High level commitment to reform
Components of reform:
Clear objectives: compliance, audit, policy inputs
Enhanced staffing and resources
Secure funding
Access to first class external support

31. Fiscal Administration and Transparency
Explicit public basis for taxation
Limits on administrative discretion
Easily understandable and accessed laws
Tax manuals/taxpayer advice
Public reporting (revenues, costs, administration)
Ethical code
EITI and IMF Guide on Resource Revenue Transparency

32. Summary and Conclusions
Fiscal administration is a critically important function
Often the weak leak in wealth generation
Faces significant challenges related to fiscal regime complexity
Routine functions have often been made difficult by a proliferation of agencies and lack of support

33. Summary and Conclusions
Poor performance jeopardizes revenue collection, and good governance
Recommended response: self assessment, reduced number of taxes and agencies, harmonized rules
Critical non-routine functions – price, volume and cost determination, audits and appeals - require special skills

34. Summary and Conclusions
Information requirements are central to effective performance
Capacity strengthening is critical and preferable to acceptance of inferior fiscal regime design
Centralized administration is preferable
Transparency across the board is strongly recommended

35. Thank you Questions? Charles McPherson, Lecturer World Bank Consultant