Designing Flexible Fiscal Regimes to Protect Revenues

Lower resource revenues are a concern in Andean countries

Sound fiscal regimes can help reduce the impact of revenue losses

Improved regional coordination and collaboration needed

The three-day conference, Determining the Tax Base for Extractive Industries in the Andean Region called for flexible tax regimes that are robust in the face of changing circumstances, while protecting revenues from aggressive tax planning. In that context, participants recognized the importance and relevance of IMF technical assistance in fiscal regime design and evaluation for extractive industries and, in particular, its role in promoting a regional dialogue on these issues.

The conference, which took place September 29–October 1 in Bogotá, Colombia, was hosted by the IMF’s Fiscal Affairs Department and the Ministry of Finance of Colombia, and sponsored by the IMF’s Managing Natural Resource Wealth Topical Trust Fund. The event brought together more than 60 senior government officials from resource-rich countries in the region, international experts, private sector representatives, and IMF staff.

Changing global environment

The discussion took place at a time when the global economic outlook was affected by major economic transitions, including the prospect of rising U.S. interest rates, the slowdown in China, and the rapid drop in commodity prices. Extractive industries have played a strategic role in the region in recent years. On average, the sector represented about 50 percent of total exports in Bolivia, Colombia, Ecuador, and Peru between 2004 and 2013 (see Chart 1). Moreover, revenues have contributed to the increase in the average tax to GDP ratio in these countries from 14.6 percent to 21.2 percent in the same period (see Chart 2).

The persistent decline of commodity prices, which started in 2011 for metals and more recently in the second half of 2014 for oil, has further deteriorated the region’s terms of trade, as reflected in widening current account deficits, exchange rate depreciation, and weakening investment. Weaker commodity prices for the foreseeable future will continue to hurt Andean net commodity exporters—lowering national incomes, reducing investment, and worsening fiscal balances.

Flexible and responsive fiscal regimes

While experts indicated that Andean countries have provided a relevant response during the downturn, participants highlighted the difficulties in doing so with inflexible fiscal regimes. Both Ministers from...