The advantage of a neutral fiscal regime is its

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The advantage of a neutral fiscal regime is its economic effi- ciency. A neutral tax does not impact resource allocation. With respect to the investing company, a tax is neutral when it leaves the pre-tax ranking of possible investment outcomes equal to the post-tax ranking. With respect to a particular industry, a tax is neutral when it does not divert investments to or from that industry. Stability clauses can be grouped under two categories: “freezing clauses” that maintain the contract and/or fiscal terms unchanged for the duration of the contract or for a cer- tain period of time; and “equilibrium clauses” that allow for an adjustment of the contractual terms over time so that a change in circumstances does not damage or benefit one party to the advantage or detriment of the other. 19 In industries with long time cycles and substantial up front investments, stable and predictable contractual and fiscal terms are an important consideration in ranking investment opportunities, with obvious effects on a country’s future prospects. This is particularly true for the oil and gas industry, in which long project cycles are coupled with great uncer- tainty with regard to resource prices and project output. The stability of the fiscal regime also impacts business confi- dence and affects the level of investment in and pace of development of existing projects. Contract and fiscal stability clauses are used in both conces- sionary and contractual systems. According to a recent study, of 110 countries analyzed, 77 percent offered fiscal stability protection. 20 In a recent survey conducted by Deloitte on behalf of the Aberdeen and Grampian Chamber of Com- merce, contract and fiscal stability was indicated as primary factor in determining business confidence and ranking investment opportunities. 21 What do flexibility, neutrality and stability mean? A “flexible” fiscal regime is one that provides the government with an ade- quate share of economic rent under varying condi- tions of profitability. 16 This type of regime tar- gets the economic rent. 17 A “neutral” fiscal regime neither encourages over investment nor deters investments that would otherwise take place. A “stable” fiscal regime is one that does not change over a certain period of time, or one whose changes are predictable. 14 World Bank Working Paper 16. There are various ways to do this. For example, one could envisage a progressive income tax and a sliding scale royalty in the case of concessionary systems; or a progressive government take linked to petroleum prices or project rate of return in the case of production-sharing arrangements. The further “downstream” a government goes to extract the rent, the less regressive the system. Signature bonuses (which are paid before a discovery is made) and royalties (which are paid whether or not a field yields a positive result) are the most regressive forms of rent extraction.
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