Exemption in extractive sector agreements creates competitive imbalances

Jan 24, 2018 News

– IMF warns that it breeds reliance on foreign products
In its assessment of Guyana’s oil and gas potential, the International Monetary Fund (IMF) was keen on highlighting the mistakes made, as well as the challenges local authorities encountered with its mining sector. Among the many problems it found, the IMF noted its concern regarding exemptions which are negotiated on a one-on-one basis and then cemented through extractive sector agreements.
The Fund said that these exemptions can lead to competitive imbalances and administrative complexities.
It was noted that when mining businesses obtain tariff and VAT exemptions on imports, they tend to favour foreign over domestic suppliers. The Fund said that this problem is exacerbated when input tax credit refunds on domestic purchases of goods and services are challenging to get processed.
The international body said that revenue administrators, in turn, dedicate significant resources to interpreting individual agreements and then assessing imports to determine whether they qualify for exemptions that may differ from one mining agreement to the next. The Fund also alluded to the fact that the exemptions can lead to a dependence on foreign items.
As Guyana gears to develop various aspects of its oil and gas industry, the IMF cautioned that this sector should not fall prey to the same challenge. The IMF said it is important that these administrative challenges are addressed now for all businesses.
The International Monetary Fund also stated that an effective, fair and transparent petroleum revenue administration is a vital link in the value chain required to transform petroleum revenues into lasting national wealth.
The Fund said, “Petroleum tax policies, however well-designed, will not provide the government with the intended revenues if implemented ineffectively. Even if transparent and well-designed, legislation or contractual arrangements will lose attractiveness to investors if administered unfairly, inconsistently and unpredictably. Investors will also lose confidence in the petroleum tax regime if it is not applied effectively and even-handedly to all taxpayers.”
Moreover, the International Monetary Fund stated that the transparent public financial management of resource revenues will be frustrated if the revenue administration cannot produce timely and accurate reporting.
Finally, the Fund articulated that public confidence in government management of the nation’s petroleum wealth will be undermined if revenues are not seen to be administered efficiently and effectively. It stressed that good revenue administration is important in any count and in particular, in a potentially significant new oil producer like Guyana.

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