International tax issues for the resources sector

Abstract

A steady decline in statutory CIT rates has been obvious across most regions, suggesting evidence of tax competition. For example, the average CIT rate in OECD countries has decreased from 36 percent in 1997 to 27.8 percent in 2007, while EU countries have experienced an even more significant decline, with the average rate falling from 35.5 to 24.2 percent during the same period.3 Resource rich countries also appear to have followed this trend. For example, Keen and Mansour (2008) show that in Sub-Saharan Africa, for the period 1980 to 2005, the average CIT rates for resource rich countries declined (from 40 to 35.4 percent) but by slightly less than the average decline for the region (40.4 percent to 33.2 percent). The main motive for tax competition appears to be to attract internationally mobile capital. It could be argued that resource rich countries may be less concerned with tax competition as the natural resources are location specific, so that the mobility of capital argument for tax competition is less relevant. If this is the case, then it would be expected that CIT rates may be higher in resource-rich countries, with a smaller reduction in CIT rates over time. However, it may be that countries compete even in the taxation of natural resources for other reasons, such as: the scarcity in the managerial and technical skills in resource extraction (Osmundsen, 2005); scarcity in available finance for resource projects; or imperfect competition.4 Despite the international trend to reduce CIT rates, corporate tax revenues have not necessarily fallen.5 For many countries, CIT revenues as a share of GDP have broadly remained unchanged. In the OECD, corporate tax revenues as a share of GDP actually increased from 2.8 percent of GDP in 1995 to 3.7 percent of GDP in 2005.6 The trend in developing countries has also been to reduce rates but it appears that corporate tax revenues have fallen, suggesting that tax bases have not been broadened sufficiently to offset the rate reductions.7 Keen and Mansour (2008) suggest that, at least for Sub-Saharan Africa, including for resource rich countries, the trend may be more positive. The outcome for resource rich countries is not unexpected given the commodity price boom in recent years. For CIT revenue as a share of GDP to have remained broadly unchanged in many countries it must be that the reduction in rates has been offset by anexpansion of the tax base. Reasons given for the expansion include: a reduction in tax incentives; improved tax administration; increases in corporate profits as a share of GDP; increased volatility of corporate profits coupled with the asymmetric treatment of losses (tax being due when profits are positive, but no rebate being paid when they are negative);8 and a shift to incorporation as CIT rates are reduced relative to rates of personal taxation. The last argument is less likely the case for resource rich countries, at least in the resources sector, as it would be expected that most participants in the sector would be incorporated due to the size and nature of the operations in the sector. While the sector is likely to have been affected by the winding back of general tax incentives, it will usually continue to be entitled to some sector specific incentives due to the size and importance of the sector, and often its political influence. For example, when Australia reviewed its business tax regime in the late 1990s it reduced the CIT rate and broadened the tax base by removing accelerated depreciation, including for assets used in the resources sector. However, it continued to retain the special immediate write-off of exploration and prospecting expenditure. The reduction in CIT rates, and the potential for loss of revenues, appears to strengthen the case for resource rent taxes in resource rich countries. Resource rent taxes may provide a way of exploiting any lesser intensity of tax competition in the resource sector. In any case, the revenue impact of a reduction in CIT rates may be blunted as, with given royalties or resource rent tax, a reduction of CIT should increase the range of projects that crosses any hurdle rate for investors, potentially yielding more resource taxes to the government. There are a number of benefits from combining a reduction in statutory CIT rates with base-broadening, including lowering the marginal tax rate (although the extent of this will depend on the country’s fiscal situation), improving economic efficiency – due to a more efficient allocation of resources as a consequence of removing distortions created by incentives – and reducing complexity in the tax system. Despite these benefits, there are concerns with tax competition and the potential ‘race to the bottom’ – that is, one country’s cut in the tax rate or reduction in the tax base (by an increase in tax incentives, for instance) makes others worse off (due to a loss of revenue, investment and/or profits) so that other countries respond, resulting in tax rates which are too low and/or tax bases too narrow in terms of the collective interest. This is especially a concern for developing countries, where fiscal mobilization is often a priority (emphasizing the importance of revenue from the resources sector).

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