IMF Consultation on Natural Resources Management and Taxation
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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
