1. Capturing the Wealth from Vietnam’s Energy Resources Patricia Silva, University of Copenhagen Hanoi, 18 November 2009

2. Overview 1. Project background: motivation and research objectives 2. Estimating rents from Vietnam’s energy resources 3. Comparing revenues generated from energy resources with rents 4. Analysis of fiscal instruments for rent capture 5. Conclusion

3. 1. Motivation Over last two decades, Vietnam emerging as important regional producer of oil, gas, and coal

4. 1. Motivation Oil prices and oil revenues increasing overtime Oil revenues an important source of revenues—about a quarter of state budget 24%

5. 1. Research objectives Estimate economic rents from most important energy resources—oil, natural gas, coal Compare revenues generated from energy resources with estimated rent Analyze policy implications of fiscal instruments used to capture energy resource rents

6. 2. Estimating Energy Resource Rents -What is rent? -Estimated rents for oil, gas, and coal

7. 2. What is resource rent? Resource rent—the value of production after accounting for all necessary costs (exploration, development and extraction), including a minimum return to the producer/investor and all other factors of production

8. 2. Estimated Energy Resource Rents

9. 3. Revenues Generated by Energy Resources -Why tax natural resource rents? -History of legislation governing natural resources -Fiscal instruments used in Vietnam -Comparison of estimated rents and revenues for oil, gas, and coal

10. 3. Why tax natural resource rents? Efficiency argument: pure rent tax is non- distorting Equity argument: natural resources are “owned” by people/state and thus profits from its exploitation should accrue for the benefit of society Sustainability argument: taxing natural resource rents potentially provides funds to invest in other forms capital and thus maintain intergenerational equity

11. 3. History of Legislation Governing NR DateLegislationComments 1987Law on Foreign Investment Opened the door to foreign investors. In 1998, 100% foreign ownership disallowed PetroVietnam engaged in all oil exploitation, through joint venture or production sharing contracts (PSC) 1989Ordinance on Mineral Resources Regulates mineral license terms, etc 1993Petroleum Law (revised 2000, 2008) Set natural resource tax rates 1996Mineral Law (revised in 2005) Updated regulations on mineral license terms

12. 3. Fiscal instruments used in NR sector InstrumentOilNatural gasCoal Natural Resource Tax 6-25%0-10%0-6% Export Tax 4% in 2000 8-20% in 2008 50% in 2009? n/aAbolished in 1998, reinstituted in 2006 at 10%? In 2009 increased to 20% then cut again to 10% Corporate Income Tax 50%25-32%???

13. 3. Oil Rents and Revenues

14. 3. Natural Gas Rents and Revenues

15. 3. Coal Rents and Revenues

16. 4. Analysis of fiscal instruments for rent capture

17. 4. Comparative assessment of fiscal instruments Neutrality Investor RiskGovernment Risk EfficiencyStabilityProject risk LossFlexibilityDelay Resource rent tax +2+3+2-2+3 Royalty/ production taxes -3 +2+3 Corporate income tax +100 +2 Production sharing +100+2

18. 4. Comparative assessment of fiscal instruments Neutrality Investor RiskGovernment Risk EfficiencyStabilityProject risk LossFlexibilityDelay Resource rent tax +2+3+2-2+3 Royalty/ production taxes -3 +2+3 Corporate income tax +100 +2 Production sharing +100+2

19. 4. Comparative assessment of fiscal instruments Neutrality Investor RiskGovernment Risk EfficiencyStabilityProject risk LossFlexibilityDelay Resource rent tax +2+3+2-2+3 Royalty/ production taxes -3 +2+3 Corporate income tax +100 +2 Production sharing +100+2

20. 4. Comparative assessment of fiscal instruments Neutrality Investor RiskGovernment Risk EfficiencyStabilityProject risk LossFlexibilityDelay Resource rent tax +2+3+2-2+3 Royalty/ production taxes -3 +2+3 Corporate income tax +100 +2 Production sharing +100+2

21. 4. Comparative assessment of fiscal instruments Implementation DesignAdministrationTax credit? Resource rent tax +3-3-2 Royalty/ production taxes +1-3 Corporate income tax +1+3 Production sharing +2-2-3 Source: A Primer on Mineral Taxation, Thomas Baunsgaard

22. 5. Conclusion Oil accounts for two thirds of energy resource rents Oil revenues amount to just over half of estimated oil rents Rent capture is lower for gas (16-20%) and coal (3-7%) Most favored instrument—royalties/production taxes—also the most innefficient