Value Added Tax in the Extractive Industries

ValueAddedTaxintheExtractiveIndustries ArturSwistakandNateVernonWP/23/221 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate. TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. 2023 OCT ©2023InternationalMonetaryFundWP/23/221 IMFWorkingPaper FiscalAffairsDepartment ValueAddedTaxintheExtractiveIndustriesPreparedbyArturSwistakandNateVernon* AuthorizedfordistributionbyAlexanderKemm October2023 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate.TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. ABSTRACT:LowercapacitycountriesoftenstruggletoadministertheValueAddedTax(VAT)intheextractiveindustries,partlyduetothelargeVATrefundsneedsofthiscapitalandexport-intensivesector.Assumingthatthefirst-bestpolicy(applythestandardVATtotheextractiveindustry)isnotpossibleinthemedium-term,whatshouldcountriesdo?Thispapersystemicallyanalyzessecond-bestVATpolicydesignsconsideringtheimpactoftheVATonthreekeystakeholders:theinvestor,domesticsuppliers,andthetaxadministration.TheanalysisconcludesthatthegenerallypreferredpolicyistoprovideaVATexemptionforimportsandeitherfullytaxorexemptdomesticsupplies,althoughcountrycharacteristics(and,specificallytherelativeweightingofstakeholders)matter.Moreover,governmentsshouldmakeeffortstoshortenrefunddelaysandtransitiontoastandardVAToverthelonger-term. JELClassificationNumbers: H25,Q31,Q32,Q35,Q38 Keywords: valueaddedtax;taxpolicy;extractiveindustries;fiscalregimedesign;mining;hydrocarbons Author’sE-MailAddress: aswistak@imf.org:nvernon@imf.org *TheauthorswouldliketothankThomasBaunsgaardfordetailedcommentsandsuggestions,aswellasthosethatattendedtheseminarstotheFiscalAffairsDepartmentandtheIMF’sNaturalResourceTaxGroup. WORKINGPAPERS ValueAddedTaxintheExtractiveIndustries PreparedbyArturSwistakandNateVernon1 1TheauthorswouldliketothankThomasBaunsgaardfordetailedcommentsandsuggestions,aswellasthosethatattendedtheseminarstotheFiscalAffairsDepartmentandtheIMF’sNaturalResourceTaxGroup.TheanalysisissupportedbydataandinformationobtainedfromanInternationalTaxandInvestmentCenter(ITIC)assistedsurveyofpetroleumandminingcompanies.TheauthorsarethankfultoITIC,especiallyMr.DanWittandJimRobertson,forfacilitatingthesurveyandsubsequentexchangeswithextractivecompanies. Contents 1.Introduction4 2.What’ssospecialaboutextractiveindustries?6 3.ChallengesininputVATrecovery12 DeferredVATRegistration13 IndefiniteCarryofExcessCredits14 DelayedVATRefunds15 4.CommonVATschemesinextractiveindustries17 5.EvaluationofselectVATschemes21 6.PlausibleVATsolutionsforEIs33 7.Conclusions37 Appendix40 AppendixA.Project,financialandfiscalregimeassumptions40 AppendixB.Limitationsofmodellingapproach41 AppendixC.Indicatorsusedtoassesstheimpactoffiscalregimes41 AppendixD.Relationshipbetweencostofzero-ratingandexemption42 AppendixE.relationshipbetweenvalue-added,purchasertype,andfullcreditofinputVAT43 AppendixF.ComparisonofVATschemesbystakeholder43 References45 BOXES Box1:NumericalexampleofpartialdeemingError!Bookmarknotdefined. FIGURES Figure1:ShareofProductionExportedbyRegionandIncomeLevel,20188 Figure2:EvaluationofaStandardVAT23 Figure3:EvaluationofExemptImportsandTaxableDomesticSupply24 Figure4:EvaluationofDomesticExemptionandZero-Rating26 Figure5:WithholdingRatevs.Value-Added(AcrossCountries)28 Figure6:EvaluationofPartialDeeming29 Figure7:EvaluationofTaxOffsetandTaxDeduction/CostRecovery30 Figure8:EvaluationofDeferredRegistration31 Figure9:EvaluationofCombinedPolicyandAdministrativeSolutions32 Figure10:ImpactonDomesticSuppliers33 FigureA.1.:ProjectPre-taxCashFlow41 FigureA.2.:EvaluationofDifferentCapitalIntensities41 TABLES Table1:SelectFeaturesofExtractiveIndustriesandtheirImplicationfortheVAT7 Table2:VATSchemesEvaluated22 Table3:EvaluationofInterestonUnrefundedVAT31 Table4:EvaluationofAnalyzedVATSchemes—impactoninvestors34 Glossary AETR AverageEffectiveTaxRate CIT CorporateIncomeTax EI ExtractiveIndustries EIA UnitedStatesEnergyInformationAgency EITI ExtractiveIndustriesTransparencyInitiative EY Ernst&Young FAD FiscalAffairsDepartment FARI FiscalAnalysisofResourceIndustries GDP GrossDomesticProduct IMF InternationalMonetaryFund IRR InternalRateofReturn ITIC InternationalTaxandInvestmentCenter LCR LocalContentRequirements LNG LiquifiedNaturalGas LPG LiquifiedPetroleumGas METR MarginalEffectiveTaxRate MN Million OECD OrganisationforEconomicCo-operationandDevelopment PWC PricewaterhouseCoopers UN UnitedNations UNCTAD UnitedNationsConferenceonTradeandDevelopment USD UnitedStatesDollars VAT Value-AddedTax VRPO VATReliefPurchaseOrders …. 1.Introduction Discussionsaroundthedesignofnaturalresourcetaxationhavetraditionallyfocusedontaxingeconomicrentsandvariousformsofdirecttaxes(orsimilarinstruments)usedtocaptureextractivecompanies’profits.Yet,extractivecompan