Meeting 11:00 – 12:30, Wednesday 18 April

Presentations by IMF staff and respondants

• Dhan Ghura, IMF

Big Questions

• How much resource wealth should be saves?
• Should investment be in domestic economy or abroad?
• How to deal with volatility? Ensure not undermine economic stability and efficiency of government spending?
• Role of resource funds?
• Is the permanent income hypothesis useful to answer the above questions?

Considerations:

• Generational distribution, capital market access, poverty, rate of return on investment, capacity of government
• Philip Daniel, Fiscal Affairs Department, IMF
• Paper for the board on taxation of natural resources wealth is coming
• Context: volatility in prices with upward shift, potential for new transformative projects
• Resource wealth are special because of size, tax revenue, high sunk costs, long production

• Questions:

• Are the extractives industry rents taxed appropriately at present? Are the right instruments used?
• Difference between mining and oil?
• Is administration and legal framework correct, including transparency?
• Is there a right level of taxation?
• IMF approach now: terms must be robust, progressive (increasing taxes as profitability increasing); law or public contracts ideal; limit special incentives; minimise aggressive tax planning; take account of risk bearing capacity
• Royalties versus rent taxes
• Ian Gary, Oxfam
• Consider more carefully decision to extract, with broader cost-benefit analysis, need careful “free, prior and informed consent”; Pacing question is really important, especially for new finds
• Tax administration is low-hanging fruit, governance problem in the tax system, audits
• Transparency of contracts is key, but also transparency of audits, payments, etc – IMF can use conditionality to do this
• No one answer on a fair take, but top 5 oil companies have $135 billion in profits in 2011; ADB report says governments not doing enough to tax mining; bad deals are not sustainable – need TA to regional bodies
• Roger Nord, Africa Department, IMF
• African countries clearly want to do better than in the past, but want a “fair” share
• Strong desire for present consumption because of enormous needs
• Constraints from macroeconomic problems of scaled up spending; absorptive capacity
• African countries agree transparency and good governance are important, sign up to EITI
• Like an idea of TA in a regional context, ie work in WAEMU for harmonization

Discussion/Questions

• How do you get citizens at the table even when government is getting a “fair” share? How to get revenue into the citizens’ hands?
• What about environment and social aspects of resource exploitation – what kind of safeguards?
• What about the social impacts of decision to save versus invest?
• What percentage of total is new versus existing contracts?
• How will you work with the World Bank since they are perceived to promote special incentives and low royalties?
• How can taxation mechanisms support more value-added industrial development for processing of natural resources?
• FDI – how can countries use their own currencies for investment?
• Difference in tax breaks between MNCs and SMEs, different taxation based on scale?
• Social impacts – health and livelihoods hurt; in mining areas people’s situation is worse?

Responses

• Philip:

• Caution on the regional context, minimum royalties in the regional environment might exclude projects in some countries – so be careful
• What about the tax rates for normal citizens, direct dividends have been problematic
• Env/social impacts – not the focus of the two papers, that is WB; env/soc costs should be internalised in the projects and give appropriate tax treatment; also need to apportion costs of clean up and community development as well
• I advise against focus on value-added, if already dependent on natural resource, processing makes you more dependent; better to diversify economy than give tax incentives
• Contract arrangements can worsen social impacts because of insecurity if tenure
• On community/environment – the World Bank has been doing a very good job

• Dhan

• Transparency is critical to get citizens involved, we have conditionality on this in programmes
• Governments must consider distribution of taxation burden across sectors, also across income distribution; we discuss these trade-offs with authorities
• Because of assumed growth, makes sense to bring forward development spending
• Governments are concerned about inflationary impact of ramping up investment

• Roger

• Don’t know the breakdown of new and old contracts, very long contracts are there
• No impression that Fund and WB have different advice

• Gary

• Decision to extract is important because of the social impacts