Trends and Trade-Offs in Petroleum Tax Design

Abstract

Topical issues in petroleum tax design are in this chapter discussed by means of a tax model for a net income tax system (Norway) and a representative PSA regime. We analyse the entire life cycle of a typical petroleum project, i.e., the exploration decision is included. Many petroleum tax systems are regressive, and thus not able to cope with high increases or decreases in the oil price. Accordingly, many countries are seeking to include progressive elements in their tax system. We discuss the trade-off between progressivity on the one hand and the optimal sharing of risk and investment between the oil companies and the host government on the other. Optimal risk sharing and optimal allocation of cash flow over the project lifetime between host government and international oil company, often call for the oil company to fund the initial investments. The high front end loading of costs and the high risk on part of the oil company, calls for it to keep a substantial part of the upside if the project is successful. This limits the degree of progressivity that is possible to implement. Thus, optimal tax design is contingent on the relative characteristics of the host government and the oil companies - who is better able to carry downside risk and who is the more impatient in terms of getting revenue. Also, the tax system must be curtailed to the attractivity of the petroleum projects available.