Good Administration of Oil and Mining Revenues is Vital

Extractive industries warrant special attention from taxation policymakers

Management of government revenues from extractive industries important to overall budget

Developing countries can strengthen managerial capacity to administer revenues

The new handbook, Administering Fiscal Regimes for Extractive Industries, is a joint IMF and World Bank publication and is one of the first of its kind to focus attention on effectively administering revenues from the extractive industries, which includes petroleum, natural gas, and an array of minerals.

“Getting hold of the potential revenues from the extractive industries in a fair, effective and transparent way is critical to achieving the wider objectives of economic development and macroeconomic stability that we are all looking for,” said Michael Keen, Deputy Director in the IMF’s Fiscal Affairs Department. “Effective revenue administration covering the extractive industries has become an important topic of IMF policy advice and technical assistance, with recent discoveries in many developing countries lending it a new urgency.”

A difficult reality

Administering government revenues from extraction of nonrenewable natural resources, such as oil, gas, coal and other minerals, presents special difficulties. On one hand, how hard can it be to collect taxes from firms that are basically digging holes, taking material out of the ground, and transporting it to the point of export or to a domestic refinery, especially when it can be physically measured, weighed, and controlled? But this is not the whole story. The petroleum and mining sectors have a number of special features that generally result in their being taxed differently from other sectors, creating special challenges for administration:

• nonrenewability;

• a huge variation in scale and profitability (this can reflect differences in industry size, for example, artisanal mining activity vs. that of multinational enterprises, or variations in profitability over time);

• exceptional rent-generating potential;

• high uncertainty and risk; substantial capital investment;

• long development and operating periods; high export and import levels;

• distinctive commercial risk-sharing arrangements;

• frequent transfers of ownership;

• a high level of state control and ownership.

Large resource revenues frequently lead to poor governance. Many of these special features and difficulties are...