Guyana losing big by not imposing windfall tax on oil companies – IMF

Sep 12, 2022 News

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Kaieteur News – Guyana is missing out on large amounts of cash given the surplus of revenue oil operators are enjoying, with the Government refusing to impose a windfall tax on firms.
The surplus that oil companies is making as a result of the supply –demand imbalance stemming for the post –COVID commodity shortage, and subsequent invasion of Russia on Ukraine, have forced United Nations officials to call out the oil companies for not increasing production while adding significant financial pressure on countries in need of energy related goods and other commodities.

The Organisation’s Secretary-General, Antonio Guterres, strongly urged oil producing nations to implement windfall taxes to not only benefit from the surge in income, but to also break the energy sector’s hold on commodity prices in a bid to force them into producing more. With the situation appearing to be a dire one, the International Monetary Fund (IMF) has published a free advisory for countries to look at areas where they can implement additional mechanisms to allow for benefits from the unexpected cash.

Under ‘Tax Policy Advice’ it was first noted that natural resource tax policy design should generally consider efficiency, ease of collection, equity, and revenue-raising ability. It stated therefore that taxes on economic rents (a surplus over and above the market price of a factor of production) are efficient because they do not reduce investment since that tax applies only to revenue above what is required to invest, and can raise substantial revenue in sectors with persistent rents. Taxes on economic rent can also foster a sense of fairness by ensuring that more profitable projects pay more tax. On the hand, ordinary corporate income taxes apply to both rents and the normal return on investment, so that can reduce investment/supply but not as much as taxes on production, for example, royalties, which do not consider a firm’s costs.

It was highlighted however, that “it is best practice to include a fiscal instrument targeting economic rents in the fiscal regime for natural resource upstream extraction.” “This, the Bank said will complement other fiscal instruments that provide relatively more certain and stable revenue for example, royalties and corporate income tax and will, in principle, take effect only when a project realizes economic rents.”

In countries that rely more on rent-targeting fiscal instruments, fiscal revenue may be more volatile, which in turn requires a macro-fiscal framework for revenue management that saves a higher share of windfall revenue gains to promote intergenerational equity from an exhaustible and non-renewable resource.

The Bank related however, that many fossil-fuel-producing countries already have a progressive instrument that captures a portion of the economic rents generated by a commodity price surge. For these countries, especially those with relatively high effective tax rates, it makes little sense to introduce fiscal regime changes in response to a short term price surge. The trickier question, they submitted, is how countries without a rent-targeting mechanism should respond to an event that leads to windfall profits. It said, “Faced with a surge in commodity prices, perhaps expected to be transient rather than permanent, policymakers understandably may consider introducing an exceptional temporary tax measure. But a temporary tax measure can be distortionary and increase investor uncertainty, especially if the tax is not well targeted at rents or if the timing of its introduction or removal is ill-judged.” In addition, to counteract the negative impact on investor uncertainty, there may be pressure to include generous investment incentives in temporary windfall taxes, for example, the UK energy profit levy with an 80 percent investment allowance. Such policies could promote short-term investment in the fossil fuel sector since the tax benefit of investment in extractives is relatively high.

The Bank advised that windfall profits in the case natural resources can be inseparable from the cyclical component of economic rents. It is intuitive that windfall profits arise from an unanticipated event unaffected by the actions or decisions of an investor. An obvious example is a surge in commodity prices benefiting a project after an investment decision has been made. The fact that realized profits turn out to be higher than anticipated at the time of the investment decision comes down partly to luck. In practice, there is no easy way to distinguish between windfall profits arising from commodity price surges and underlying economic rents, the Bank said. “However, a tax system designed to capture a portion of economic rents effectively taxes windfall profits as well.”

Economic rent is defined as the amount a business receives above the expected value. The amount received by the business owner or individual is beyond the market’s economic or socially accepted value or the original offer set. It is unclear the implementation of economic rent in the fiscal regime of the local sector. It should be noted however that while Guyana has been urged to implement windfall taxes, or to benefit from increased revenue through effective tax rates, the country itself has opted to pay taxes for the oil companies, including income and corporate taxes.
Vice President Bharrat Jagdeo said that given the fiscal regime governing the contract the country has with Exxon and partners, Guyana is unable to seek more money from the companies despite the increase in crude prices and the large profits currently being made by oil companies.

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• companies, Guyana, IMF, oil, tax, windfall

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