Collecte et dissémination des revenues, Charles McPherson, FMI

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Information about Collecte et dissémination des revenues, Charles McPherson, FMI

Published on July 17, 2008

Author: EPetrilli

Source: slideshare.net

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International Oil and Gas Resource Management Seminar, April 27-30, 2008; held in Libreville, Gabon

Petroleum Tax Administration Regional Petroleum Seminar Libreville April 28 to 30, 2008 Charles McPherson IMF Fiscal Affairs Department

Regional Petroleum Seminar

Libreville

April 28 to 30, 2008

Charles McPherson

IMF Fiscal Affairs Department

Outline of Presentation Relevance Special features of the petroleum sector Tax design and tax administration Routine functions Non-routine functions Non-core activities Organisation

Relevance

Special features of the petroleum sector

Tax design and tax administration

Routine functions

Non-routine functions

Non-core activities

Organisation

Outline of Presentation (cont’d) Building capacity National Oil Companies Transparency Political economy considerations

Building capacity

National Oil Companies

Transparency

Political economy considerations

Relevance of Petroleum Tax Administration Transformation of oil wealth to development depends on: Sector management Tax design Tax administration Revenue management Expenditure management Tax administration is just one factor among several, but it is significant… And a difficult challenge….

Transformation of oil wealth to development depends on:

Sector management

Tax design

Tax administration

Revenue management

Expenditure management

Tax administration is just one factor among several, but it is significant…

And a difficult challenge….

Significance: A Prussian Parable One of the most delightful stories in the entire history of taxation came from Frederick's troubled times. During one of his cabinet meetings Frederick asked his finance minister why his treasury was so low when his subjects were paying so much tax. Where was all the money going? To explain the problem, the finance minister asked for a piece of ice. He handed it to the minister farthest from the king and told him to pass it to the next person, on up to the king. By the time the ice reached Frederick all he received was a wet hand. The lesson the finance minister taught the king ranks in wisdom with the parables of the Bible. Most taxes are consumed by the bureaucracies of the government. It is a wonder Frederick even received a wet hand.

One of the most delightful stories in the entire history of taxation came from Frederick's troubled times. During one of his cabinet meetings Frederick asked his finance minister why his treasury was so low when his subjects were paying so much tax. Where was all the money going? To explain the problem, the finance minister asked for a piece of ice. He handed it to the minister farthest from the king and told him to pass it to the next person, on up to the king. By the time the ice reached Frederick all he received was a wet hand. The lesson the finance minister taught the king ranks in wisdom with the parables of the Bible. Most taxes are consumed by the bureaucracies of the government. It is a wonder Frederick even received a wet hand.

Challenge: Tax Administration under Ivan the Terrible

Special Features of the Petroleum Sector Scale (tax revenues, macro impacts…) Complexity (operational, legal, contractual) Volatility (revenue, regime changes) Integrated value chain (fiscal reference points) International industry (transfer prices, withholding) Asymmetries (expertise)

Scale (tax revenues, macro impacts…)

Complexity (operational, legal, contractual)

Volatility (revenue, regime changes)

Integrated value chain (fiscal reference points)

International industry (transfer prices, withholding)

Asymmetries (expertise)

Tax Design and Tax Administration Sophistication vs. capacity Taxes on production vs. income taxes Production sharing vs. tax/royalty regimes

Sophistication vs. capacity

Taxes on production vs. income taxes

Production sharing vs. tax/royalty regimes

Routine Functions Registering taxpayers Processing returns Assessing tax Collecting tax Accounting standards (IAS, GAAP) Currency of account

Registering taxpayers

Processing returns

Assessing tax

Collecting tax

Accounting standards (IAS, GAAP)

Currency of account

Procedural Steps Provisional Tax Declaration Oil Valuation Payment of Tax Final Declaration & Payment Tax Audit Fixation Commission Revision Commission Before tax year During tax year After tax year Amended Provisional Declarations

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

Taxpayer requirements:

Clear, accessible legislation/regulations

Explanatory materials/advice

Tax collector requirements:

Operational information

Contractual agreements and JOAs

Operator and JOA Audits

Prices

Costs

Problems Encountered in Routine Administration Multiplicity of taxes Multiplicity of agencies Weak filing/payment procedures Poor accounting systems Weak or absent IT

Multiplicity of taxes

Multiplicity of agencies

Weak filing/payment procedures

Poor accounting systems

Weak or absent IT

THE IDEAL APPROACH……. TAXES PAID TAXES RECEIVED TAX PAYER MIN.FIN. & TREASURY A B A=B=C C TAXES DUE TAX PAYER PETROLEUM REVENUE REPORTING

Reconciliation Issues 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 reconciliation

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 reconciliation

Non-routine Functions Volume determination Price determination Cost determination Audits Appeals

Volume determination

Price determination

Cost determination

Audits

Appeals

Volume Determination Metering Quality analysis Adjustments Monitoring

Metering

Quality analysis

Adjustments

Monitoring

Price Determination Market value as a goal…. Arms-length prices Reference prices Integrated operations Transfer prices In kind revenues

Market value as a goal….

Arms-length prices

Reference prices

Integrated operations

Transfer prices

In kind revenues

Cost Determination Cost categories Cost control Ring fencing Finance costs Transfer prices Environmental and abandonment costs

Cost categories

Cost control

Ring fencing

Finance costs

Transfer prices

Environmental and abandonment costs

Ring Fencing Separation of taxable projects for purpose of calculation of tax liability Licence-by-licence or project-by-project Pros: Avoids deferral of revenue Levels playing field for new entrants Avoids administrative complexity where multiple tax regimes Cons: Limits incentive to invest in new activities Additional demands on cost control

Separation of taxable projects for purpose of calculation of tax liability

Licence-by-licence or project-by-project

Pros:

Avoids deferral of revenue

Levels playing field for new entrants

Avoids administrative complexity where multiple tax regimes

Cons:

Limits incentive to invest in new activities

Additional demands on cost control

Finance Costs Project financed oil developments often highly leveraged (heavy use of debt) Interest is typically deductible in determining taxable profits, but Many countries have provisions to protect their tax base vs excessive interest payments A typical rule might limit allowable debt/equity ratio to 3:1 Interest charged should be arms-length

Project financed oil developments often highly leveraged (heavy use of debt)

Interest is typically deductible in determining taxable profits, but

Many countries have provisions to protect their tax base vs excessive interest payments

A typical rule might limit allowable debt/equity ratio to 3:1

Interest charged should be arms-length

Transfer Pricing Investor allocation of revenues and costs across countries to lower taxable income Legislation/regulations should provide for: Adjustments to ensure arms-length pricing Adoption of OECD Guidelines Disclosure of related party transactions Documentation on determination of transfer prices Cooperation with tax authorities in investor home countries can help

Investor allocation of revenues and costs across countries to lower taxable income

Legislation/regulations should provide for:

Adjustments to ensure arms-length pricing

Adoption of OECD Guidelines

Disclosure of related party transactions

Documentation on determination of transfer prices

Cooperation with tax authorities in investor home countries can help

Illustrative Transfer Pricing Mechanisms Mechanisms used to lower revenue: Sales below market to affiliates Price hedging Mechanisms used to increase deductions: Debt finance at above market rates Excessive management, HQ and consultancy fees Provision of goods at above market costs

Mechanisms used to lower revenue:

Sales below market to affiliates

Price hedging

Mechanisms used to increase deductions:

Debt finance at above market rates

Excessive management, HQ and consultancy fees

Provision of goods at above market costs

Environmental and Field Abandonment Costs Legislation or concessions usually contain requirements with regard to environmental protection and field abandonment Funds may be placed in an escrow account for this purpose with tax deductions allowed Alternatively, current expenditures may be deducted currently and deductions may be allowed currently for future expenditures, provided security is put in place to ensure those expenditures

Legislation or concessions usually contain requirements with regard to environmental protection and field abandonment

Funds may be placed in an escrow account for this purpose with tax deductions allowed

Alternatively, current expenditures may be deducted currently and deductions may be allowed currently for future expenditures, provided security is put in place to ensure those expenditures

Audits Audit types (physical, cost, tax) Audit choices (full vs. selective etc.) In-house or out-sourced? Role of investor audits National oil company audits

Audit types (physical, cost, tax)

Audit choices (full vs. selective etc.)

In-house or out-sourced?

Role of investor audits

National oil company audits

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

Disputes are inevitable…

Informal vs. formal resolution

Tax tribunals vs. courts

In-house legal skills vs. out-sourced

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

Tax policy capacity is a critical complement to tax administration

Tax modeling can be used for:

Longer term forecasting

Improved planning for different scenarios

Cross-check on audit results

Evaluation of agreements

Organisation Governance/accountability Separate unit? Where? Centralised vs. decentralised Inter-agency coordination

Governance/accountability

Separate unit? Where?

Centralised vs. decentralised

Inter-agency coordination

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

Building Capacity Staffing/skills mix Training Compensation Resources/facilities/IT Consultancies Funding

Staffing/skills mix

Training

Compensation

Resources/facilities/IT

Consultancies

Funding

National Oil Companies Fiscal treatment Fiscal administration roles Cost control Marketing of government production Quasi-fiscal activities (QFAs)

Fiscal treatment

Fiscal administration roles

Cost control

Marketing of government production

Quasi-fiscal activities (QFAs)

Transparency Explicit legal basis Limits on discretion Easily understandable and accessed laws Tax manuals/taxpayer advice Public reporting Ethical code EITI and IMF Guide on Resource Revenue Transparency

Explicit legal basis

Limits on discretion

Easily understandable and accessed laws

Tax manuals/taxpayer advice

Public reporting

Ethical code

EITI and IMF Guide on Resource Revenue Transparency

Political Economy Long-standing recommendations Powerful entrenched interests Practice vs. policy What is the appropriate response?

Long-standing recommendations

Powerful entrenched interests

Practice vs. policy

What is the appropriate response?

Petroleum Tax Administration Thank you. Questions/comments?

Thank you.

Questions/comments?

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