Cash Flow Analysis of Fiscal Regimes for Extractive Industries

CashFlowAnalysisofFiscalRegimesforExtractiveIndustries ThomasBenninger,DanDevlin,EduardoCameroGodinez,NateVernon-Lin WP/24/89 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate. TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. 2024 APR ©2024InternationalMonetaryFundWP/24/89 IMFWorkingPaper FiscalAffairsDepartment CashFlowAnalysisofFiscalRegimesforExtractiveIndustries PreparedbyThomasBenninger,DanDevlin,EduardoCameroGodinez,NateVernon-Lin AuthorizedfordistributionbyAlexanderKlemm April2024 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate.TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. ABSTRACT:Miningandpetroleumprojectssharecharacteristicsdistinguishingthemfromothersectorsoftheeconomy,whichhasledtotheuseofdedicatedfiscalregimesfortheseprojects.TheIMF’sFiscalAffairsDepartmentusesfiscalmodelingtoevaluateextractiveindustryfiscalregimesforitsmembercountries,andtrainscountryofficialsonkeymodelingconcepts.Thispaperoutlinesimportantpreconditionsneededforeffectivefiscalmodeling,keyevaluationmetrics,andemphasizestheimportanceoftransparentmodelingpractices.Itthenexaminesthemodelingofcommonly-usedfiscalinstrumentsandhighligtswheretheireconomicimpactdiffers,andhowfiscalmodelscaninformfiscalregimedesign. RECOMMENDEDCITATION:ThomasBenninger,DanDevlin,EduardoCameroGodinezandNateVernon-Lin(2024).CashFlowAnalysisofFiscalRegimesforExtractiveIndustries.WorkingPaperWP/24/89,InternationalMonetaryFund,Washington,D.C. JELClassificationNumbers: H22,H26,H53,K34,O30,P11,P46 Keywords: Naturalresourcetaxation;extractiveindustries;progressivity;economicrents;fiscalmodeling;investmentanalysis;mining;petroleum. Author’sE-MailAddress: TBenninger@imf.org;DDevlin@imf.org;ECameroGodinez@imf.org;NVernon@imf.org *“TheauthorswouldliketothankThomasBaunsgaard,AlistairWatson,andJean-FrancoisWenfortheirreviewandinsightfulcontributionstothepaper. WORKINGPAPERS CashFlowAnalysisofFiscalRegimesforExtractiveIndustries PreparedbyThomasBenninger,DanDevlin,EduardoCameroGodinez,NateVernon-Lin Contents GLOSSARY4 I.INTRODUCTION5 II.THEGROUNDWORKFORFISCALREGIMEANALYSIS6 A.EnsuringaConduciveInstitutionalEnvironment6 B.ConfiguringFiscalModels6 C.DataRequirements7 III.FISCALREGIMEANALYSISFORPOLICYEVALUATIONANDDESIGN9 A.TaxPolicyObjectives9 B.Royalties13 ThePointofImpositionandtheRoyaltyBase13 StructureofRoyaltyRatesandInteractionwithotherFiscalInstruments15 EconomicAnalysis17 C.CorporateIncomeTax19 DeterminationoftheTaxBase19 EconomicAnalysis22 D.ResourceRentTaxes23 E.ProductionSharingRegimes24 DeterminationoftheProductionSharingBase(ProfitPetroleum)24 StructureofProfitPetroleumSharingRates24 EconomicAnalysis26 F.Stateparticipation27 EconomicAnalysis28 G.CarbonTax30 DeterminationoftheTaxBase30 TaxRate31 EconomicAnalysis32 H.ValueAddedTax34 EconomicAnalysis35 IV.BRINGINGTHEPIECESTOGETHERTOANALYZETHEOVERALLFISCALREGIME36 A.ComparingOverallFiscalRegimes36 B.FinalComments40 Boxes 1:KeyIndicatorsUsedinFARIAnalysis11 2:RoyaltyValuationPoints15 3:TheImpactoftheEnergyTransitiononFiscalRegimeDesign33 Figures 1:RoyaltyValuationPoints15 2:GovernmentRevenuesUnderAlternativeRoyaltyArrangements16 3a:ProgressivityAnalysisUnderDifferentRoyaltyStructures18 3b:Price-basedRoyaltyRatesUnderDifferentRoyaltyStructures18 4:TimingEffectsofdifferentstraight-linedepreciationperiods20 5:CumulativeRevenues/CostsandDeterminationoftheR-Factor25 6:StateParticipation–RevenueProfileofAlternativeForms29 7:StateParticipation–GovernmentShareatDifferentProjectProfitabilityLevels29 8:CarbonTaxImpactforLowandHighEmissionsOilProjects32 9:AETRandInvestorIRRwithVATRefundDelays35 10:ComparisonofIllustrativeFiscalRegimes:GovernmentTakeandRevenueProfilesOverTime37 11:ComparisonofIllustrativeFiscalRegimes:Progressivity,BreakevenPricesandMETRs39 Tables 1:SummaryofStylizedFiscalRegimes36 ANNEX I.PracticalGuidance41 II.DocumentationofModelingAssumptions48 III:FosteringGreaterTransparencyInModeling52 REFERENCES53 Glossary AETRAverageEffectiveTaxRate CDCapacityDevelopment CITCorporateIncomeTax CO2Carbondioxide DCFDiscountedCashFlow EBITDAEarningsbeforeinterest,depreciation,andamortizationEIExtractiveIndustry EMVExpectedMonetaryValue FADFiscalAffairsDepartment FARIFiscalAnalysisofResourceIndustries FASTFlexible,Appropriate,Structured,Transparent FEFreeEquity GHGGreenhouseGas IMFInternationalMonetaryFund IOCInternationalOilCompany IRRInternalRateofReturn JVJointVenture METRMarginalEffectiveTaxRate MOFMinistryofFinance NOCNationalOilCompanies NPVNetPresentValue PCTPlatformforCollaborationonTax POBPay-on-Behalf PSCProductionSharingContracts RORRateofReturn RRTResourceRentTax STBShareofTotalBenefits VATValueAddedTax I.Introduction Miningandpetroleumprojectsshareseveralcharacteristicsthatdistinguishthemfromothersectorsoftheecon