Fiscal Regime Research Articles

Tax Haven and Development Partner: Incoherence in Dutch Government Policies?

This paper focuses on a relatively new issue in the debate on policy coherence for development: the incoherence between tax and aid policies, using a case study of the Netherlands as illustration. Although the Netherlands cannot be considered a ‘pure’ tax haven like the Cayman Islands and the British Virgin Islands, evidence indicates that it does play a key role as ‘conduit’ country in tax planning structures of multinationals that wish to channel funds to ‘pure’ tax havens. This paper shows that as a consequence of the Dutch fiscal regime, other countries, including developing countries, are failing to collect important tax revenues which otherwise could have been used to finance health care, education and other essential public goods and services. It is estimated that developing countries miss about € 640 million in tax revenue – about 15 % of Dutch ODA. This suggests the Dutch tax policy is incoherent with the Dutch policy on development cooperation.

The Netherlands: A Tax Haven?

All the empirical evidence indicates that the Netherlands is a tax haven. This is because it deliberately offers companies who would not otherwise seek to be resident within its territory the means to reduce their tax charges on interest, royalties, dividend and capital gains income from foreign subsidiaries. This SOMO report investigates the extent to which the Netherlands can be regarded as a tax haven, and analyses the factors behind this, such as the unique network of bilateral treaties for the avoidance of double taxation and the special fiscal regimes for group financing operations. It estimates the number of ‘mailbox companies’, mostly established to route financial flows through the Netherlands purely for fiscal reasons, at almost 20,000, and this number has been increasing rapidly in recent years. The Netherlands benefits primarily from attracting financial flows to its territory by increasing the tax yield it enjoys from corporate income and from employment generated in the trust and tax consultancy sector. These benefits do not, however, outweigh the negative consequences for other countries. Hence, Dutch tax policy is inconsistent with its policy on Official Development Assistance (ODA) and its associated high contribution to financing the achievement of the Millennium Development Goals (MDGs). The tax haven features of the Netherlands also facilitate money laundering and attract companies with a dubious reputation. In order to promote a fair and just global economic system in which tax avoidance by multinational corporations is minimised, the report gives recommendations for the Dutch government and all other relevant actors.

Should Neutrality be the Key Factor in a Fiscal Regime? The Case of Angola

Oil companies regularly examine the potential after-tax profits derivable from an investment before investing. A Country’s fiscal regime is therefore central to achieving this goal. Angola like other sub-Saharan African Countries with large proven reserves is concerned with attracting foreign direct investment to its oil sector with a view to capturing maximum resource rent for the benefit of its populace, the investor on the other hand is focused on making profits. To attract and maintain investment, the Host Government (HG) is expected to establish a fiscal regime founded on the principle of neutrality which suggests that taxes that are capable of influencing the investor’s decision in the allocation of resources should not be imposed. The divergent interests between these two groups may not be accommodated adequately by neutral taxes, as a result, fiscal systems are better modeled around the efficiency principle which focuses on assigning investment resources with regard to national objectives. This discourse will focus on assessing Angola’s fiscal regime by critically analyzing its effect on investor’s decision particularly as it relates to oil production and Government revenue and by examining the ways Angola has attempted to balance its interest with the investor’s. The paper concludes by drawing the point that neutrality should be one of the factors for consideration and not necessity the leading objective because other factors like geological potential and the political economy of the country can have significant impact on investment decisions.

How can Mining Law Balance Public and Private Interests in the Face of Regulatory Change? The Fiscal Regime Under the World Bank Strategy for African Mining 1992 and the ECOWAS Mining Directive 2009

The mineral potential of West Africa has been the impetus for foreign direct investment (FDI) in the sub-region. In a bid to strengthen FDI flow, the World Bank, following the collapse of public-controlled enterprises, recommended economic policies, which favoured the foreign investors and consequently led to the influx of FDI.

The taxation of UK oil and gas production: Why the windfalls got away

Starting with evidence that United Kingdom Continental Shelf oil and gas companies have benefitted very disproportionately from the recent period of extraordinarily high oil prices, this paper traces the history of this weakness in the UK’s petroleum fiscal regime. Evidence is provided that the progressive relaxations in the UK’s petroleum fiscal regime in 1983, 1987–1988 and 1993 were: largely unnecessary to stimulate the development of new, smaller, ‘marginal’ fields; misguided in their assumption that such fields were more costly to develop than earlier counterparts or larger contemporary fields; and impotent compared with the effects of oil price movements. The paper concludes with a conceptualisation which illuminates why these failures of policy were not just random: they emerged from the UK’s ‘non-proprietorial’ stance with respect to the country’s oil and gas resources, a stance which assumes responsibility for oil company profitability and vainly tries to counter market forces at the expense of government revenues.

Comparative Study of Indonesian PSC and Malaysian PSC: Challenges and Solution

Malaysia is one of the many countries that adopted Indonesian’s Product Sharing Contract (PSC) since its second formulation. However, both countries had developed their own version of PSCs according to each State’s interest within the last thirty decades. These recent years, Indonesian fiscal regime tends to be less investor-friendly than Malaysia. As a result, Malaysia leads in front Indonesia on attracting foreign investment flooding into its oil and gas sector in the last few decades. The most recent case was happened when only five blocks taken by investors from sixteen blocks that were being auctioned by Indonesian government in 2009. Indonesian government took this issue to restructure the Cost Recovery Regulation on Oil and Gas sector. The new regulation meant to attract foreign investment and recover Indonesia position against the neighboring rival country. This leads to the following questions: (i) why Malaysian PSC could be more investor-friendly than Indonesian PSC; and (ii) how the new regulation on Cost Recovery make Indonesian PSC more competitive against Malaysia PSC? The research will employs comparative legal study in Indonesian and Malaysian legislatives with emphasize on Indonesian new Cost Recovery regulation draft. The ruling is supposedly to be enacted in the end of June 2010. Literature review will strongly support the research as secondary sources along with other relevant sources.

Assessing fiscal sustainability subject to policy changes: a Markov switching cointegration approach

We propose a Markov switching cointegration approach to assess long run fiscal sustainability. This method allows us to simultaneously: (1) test for cointegration in the presence of significant fiscal policy changes; (2) assess the type of fiscal regime that a country experienced at a given period and (3) analyse the timing of the transition between the estimated regime types. Given its flexibility, our approach enable us to uncover a richer and more complex dynamics in the analysis of fiscal sustainability, which standard linear cointegration methods fail to capture.

Scotland: A New Fiscal Settlement

This paper makes five contributions to designing a new fiscal regime for Scotland: 1). It provides the intellectual case for fiscal autonomy in Scotland, and examines explicitly how far autonomy should go. 2). It provides a blueprint for how the tax system could be devolved, and explains why. 3). It details the institutional arrangements necessary to support such a regime and specifies how they might work. Specifically we look at mechanisms to limit public debt, and provide a blue-print for how they might be implemented to ensure credible fiscal policies. 4). Fiscal autonomy trades efficiency and better economic outcomes against spreading adverse spillovers or tax competition to other regions in the UK and a possible lack of discipline. We show how fiscal autonomy can be set up in a way that is consistent with the UK macro-economic framework, and consistent with EU rules on state aid. 5). Under our blueprint, the Scottish budget for 2007-08 would have been in a stronger position than the UK as a whole, being in balance or a mild deficit (0.8% of GDP).

Pitfalls of percentage take metric for assessment of petroleum fiscal regimes

With today's volatile oil prices, contractors and host governments seek ways to maximise wealth and minimise risk in developing oil fields. Fiscal regimes are used by governments and contractors to maximise wealth and minimise risk. Both contractors and host governments use economic metrics to evaluate the economic viability of a fiscal regime. Some of these economic metrics are net present value, internal rate of return and percentage take. The objective of this paper is to show the pitfalls associated with the percentage take metric. A production sharing contract for an oil field with a reserve of 100 million barrels equipped with risk analysis is used to illustrate the pitfalls and to quantify their impact. The main conclusion is that the government and the contractor percentage take do not capture the impact of changing oil prices and the size of the cash flow. Furthermore, the government percentage take misleads contractor investment decisions by causing them not to invest in severe fiscal regimes with higher oil prices, even though the financial rewards would be the same as those achieved with a lenient fiscal regime under lower oil prices.

Evaluation of the Oil Fiscal Regime in Russia and Proposals for Reform

Oil revenue plays a central role in Russia's economic development. Thus, the recent decline in oil production and investment, and the possible contribution of the current fiscal regime to these developments, have prompted a reassessment of the oil tax system in Russia. Some important changes have already been made, while others are underway. This paper uses a simulation model to evaluate Russia's current oil fiscal regime. Based on these simulations, the paper proposes ways to make the fiscal regime more supportive of investment, while ensuring an appropriate share of oil sector profits for the government.

Mining Taxation: An Application to Mali

Mali’s gold sector is an enclave with weak forward and backward linkages with the rest of the economy. Given the predominance of the fiscal transmission channel, it is important that the design of the mineral tax regime gives the state a fair share of the benefits. Using optimal control theory, this paper estimates that the optimal royalty tax in Mali is about 3.5 percent. By reducing the royalty rate from 6 percent to 3 percent, Mali’s mining code broadly ensures that the risk is shared between the state and mining companies, provides sufficient incentives to attract new exploration, and is comparable to the fiscal regimes in other sub-Saharan African countries in its mix of tax instruments and tax structure.

Natural gas—Australia's next energy advantage

Australia’s natural gas resources offer clean, reliable and abundant energy for Australia and the fast-growing economies of Asia. After supplying natural gas to Australia’s largest cities for over 40 years, Santos stands on the cusp of a dramatic transformation to a new role as a major domestic gas supplier and a significant LNG exporter. Santos was first to recognise the opportunity to convert coal seam gas to LNG, and the company’s GLNG project is at the forefront of an exciting new industry. That industry is set to make Queensland the world’s largest exporter of unconventional natural gas. Delivering these projects will require stable fiscal regimes, regulatory certainty and skilled labour. Australian natural gas has a major role to play in generating significant export and domestic revenue; reducing carbon emissions both here and overseas; and maintaining Australia’s comparative advantage in energy.

Evaluation of the Oil Fiscal Regime in Russia and Proposals for Reform

Oil revenue plays a central role in Russia's economic development. Thus, the recent decline in oil production and investment, and the possible contribution of the current fiscal regime to these developments, have prompted a reassessment of the oil tax system in Russia. Some important changes have already been made, while others are underway. This paper uses a simulation model to evaluate Russia's current oil fiscal regime. Based on these simulations, the paper proposes ways to make the fiscal regime more supportive of investment, while ensuring an appropriate share of oil sector profits for the government.

The Global Economic Crisis and the Cohesion of Europe

Three EU-based human geographers argue for the need to contextualize the meaning of the current economic crisis in Europe, pointing to precedents in European history. More specifically, they view Europe (as both a set of practices and ideas) as a product of successive crises that have yielded an unexpectedly resilient structure for the European Union, which retains sufficient flexibility to permit different EU members to adapt their economies to the crisis on their own terms without descending into the disintegrative pull of protectionism. The authors also show how the uneven effects of the economic crisis threaten a renewed east-west divide, and highlight the ongoing relevance of the European Union as a transnational fiscal regime with important implications for EUrope's future. Journal of Economic Literature, Classification Numbers: F130, F150, G010, N130, N140. 1 figure, 1 table, 58 references.

Mining Taxation: An Application to Mali

Mali’s gold sector is an enclave with weak forward and backward linkages with the rest of the economy. Given the predominance of the fiscal transmission channel, it is important that the design of the mineral tax regime gives the state a fair share of the benefits. Using optimal control theory, this paper estimates that the optimal royalty tax in Mali is about 3.5 percent. By reducing the royalty rate from 6 percent to 3 percent, Mali’s mining code broadly ensures that the risk is shared between the state and mining companies, provides sufficient incentives to attract new exploration, and is comparable to the fiscal regimes in other sub-Saharan African countries in its mix of tax instruments and tax structure.

Integrating Reserves Management: Providing Regulatory Compliance and Improving Decision Making

This article, written by Senior Technology Editor Dennis Denney, contains highlights of paper SPE 124168, "Methodology for Integrated Reserves Management: Providing Regulatory Compliance and Im proving Decision Making," by Lev Virine, SPE, Project Decisions, and Doug MacDonald, SPE, Schlumberger Information Solutions, prepared for the 2009 SPE Annual Technical Conference and Exhibition, New Orleans, 4-7 October. The paper has not been peer reviewed. Effective corporate reserves-management systems enable tracking reserves to provide input for reporting to regulators and to serve as a decision-support system. Implementation of such reserves-management systems has challenges. Regulatory bodies, including the US Securities and Exchange Commission (SEC), require proper categorization of reserves on the basis of evaluating whether the volumes can be recovered economically in a timely manner. The reserves-management system should provide technical and economic volumes on the basis of up-to-date prices, capture and analyze uncertainties in the reserves volumes, provide secure data access and data archiving, and implement an approval and audit process. Introduction A method to integrate reserves management was developed that comprises three processes—data management, which ensures fast and secure access to reservoir data; economic and technical volume calculation; and a flexible reporting process. Reservoirs, as well as prospects, are organized within a corporate hierarchy. In accordance with SEC regulations and SPE/World Petroleum Council/American Association of Petroleum Geologists/Society of Petroleum Evaluation Engineers Petroleum Resources Management System (SPE-PRMS) guidelines, the data-management process captures proven, probable, and possible reserves, as well as discovered and undiscovered resources, for different petroleum products and companies with different working interests. Each category of each reservoir is associated with an economic case that contains information about costs, prices, and the fiscal regime. Economic volumes can be calculated on the basis of the results of economic evaluations of the reserves. Uncertainties in reservoir data are captured by use of multiple scenarios for each reservoir and category. A regional-pricing mechanism allows updating prices for all economic cases at a particular level of the corporate hierarchy. All changes to the economic-results data would be recorded and require approval. Challenges. Disclosure of oil and gas reserves is different from disclosure of company financial performance or production. While the financial performance of the company, at least in theory, can be calculated precisely, oil and gas reserves are uncertain by definition. Different proven methods of estimating reserves may yield different results. Moreover, different estimators that use similar methods may determine different numbers. New SEC regulations aim to improve transparency by providing investors with more information about the reserves. In particular, the new regulations permit disclosure of probable and possible reserves. It should be noted that information about probable and possible reserves also includes more uncertainties, compared with proven reserves.

Governance of Oil and Gas Resources in the Australian Federation

The Australian Constitution makes no mention of oil and gas, and for sixty years these resources played no part in the evolution of the Australian federation. However, the discovery in the mid-1960s of valuable deposits of oil and gas in Bass Strait, several kilometers off the coast of the state of Victoria, had a lasting impact on both the Australian economy and the federal system of government. The initial response from governments, federal and state, was revealing. Cooperation was chosen above conflict. By and large, that approach has prevailed. As a consequence, forty years later and despite many changes, both levels of government, federal and state, are actively engaged in the management of oil and gas and share in the revenues derived from these resources. Australian management and fiscal regimes for petroleum resources are therefore complex, if not convoluted. Federal and state governments play two parts in these regimes, as resource proprietors and regulators. For the most part, however, they have eschewed direct participation, electing instead to engage private enterprise to undertake upstream operations pursuant to statutory licensing arrangements administered by those governments. Petroleum revenues, while by no means insignificant, have never been large enough to dominate public policy. Among governments, there has been recognition that revenue sharing is an essential ingredient of the cooperative approach.

Fiscal Regime Shifts in Portugal

We estimate changes in fiscal policy regimes in Portugal with a Markov Switching regression of fiscal policy rules for the period 1978-2007, using a new dataset of fiscal quarterly series. We find evidence of a deficit bias, while repeated reversals of taxes making the budget procyclical. Economic booms have typically been used to relax tax pressure, especially during elections. One-off measures have been preferred over structural ones to contain the deficit during economic crises. The EU fiscal rules prompted temporary consolidation, but did not permanently change the budgeting process.

Long-Run Growth Versus Welfare: The Importance of Transitional Dynamics When Assessing Alternative Fiscal Policies

This paper analyzes the effects of distortionary taxes on growth and welfare in an endogenous growth model with a public capital externality. The model is calibrated to the U.S. economy, and experiments are run under which the tax regime is shifted from the current mix of capital income, labor income, and consumption taxes to a fiscal policy regime with complete reliance on a single source of taxation, including lump-sum tax. We find that tax policy changes that induce higher growth rate do not necessarily result in higher welfare due to different transitory effects. In fact, a shift to capital income tax while delivering highest long-run growth results in lowest welfare. Furthermore, long-run gains take many years - a generation - to start getting realized. Among different sources of taxation, we find that, in the long run, complete reliance on a consumption tax dominates the current tax regime; however, the current tax regime dominates an exclusive labor income tax, which in turn is less welfare-reducing than an exclusive capital income tax. These results are due to the fact that taxes on labor income and capital income distort investment decisions in reproducible capital, i.e., human capital and physical capital, and therefore have cumulative effects that do not result from a tax on consumption. Unlike previous studies, we account for the welfare effects of transition using optimal decision rules all along the transition path.

Lobbying and (de)centralization

This paper presents a positive theory of (de)centralization of policy decisions in an international union -defined as a supranational jurisdiction that may exercise a policy prerogative on behalf of member countries. I build a benchmark model where national lobbies can coordinate (i.e. form a trans-national lobby) at no cost and show that lobbying does not affect the fiscal regime. On the other hand, when interest groups cannot coordinate, decentralization emerges as a political equilibrium with lobbying. Policy centralization hurts national lobbies by increasing competition for influence. At a constitutional stage, interest groups induce politically motivated governments to reject centralization. Three extensions show that this result depends on the level of cross-border externalities; the voting rule at the constitutional stage; and the details of the institutional decision mechanism under centralization.