17 a fiscal regime that targets the extra revenue

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17. A fiscal regime that targets the extra revenue that is not required to persuade the investor to con- tinue with the investment and that, if taxed away, will still allow the company to realize an acceptable return on its investment. 18. One of the most important elements of profitability of a project is the oil price level. The variabil- ity and volatility of oil prices provide for the possibility that even projects with normal profits can expe- rience periods where excess profits are generated. Table 3. A Flexible, Neutral, and Stable Fiscal Regime
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From the investing company’s standpoint this means the search for a tax system that provides for: (i) a minimum number of front-end loaded non profit-sensitive taxes; (ii) the ability to repatriate profits to shareholders in their home countries; and (iii) an overall policy environment that is transparent, predictable, stable and based on internationally recognized industry standards and the rule of law so that decisions can be made with reasonable confidence. The use of flexible, neutral and stable fiscal regimes facilitates the reconciliation of these objectives. The characteristics of these regimes are summarized in Table 3. In addition to the above described characteristics, the host government needs to take into consideration its relative position vis-à-vis other countries. In a purely competitive world, countries with favorable geologic potential, high wellhead prices, low development costs, and low political risk will tend to offer tougher fiscal terms than those with less favor- able geology, low wellhead prices, high development cost, and high political risk. The eco- nomic strength and political stability of the country, oil supply balance, regional market demands, global economic conditions, and financial health of the petroleum sector also influence fiscal terms. It is commonly accepted that the level of government take 22 is inversely proportional to the quality and availability of investment opportunities. How- ever, countries with harsh fiscal regimes or the greatest success probability provide no guar- antees in the profitability of the project. Because the fiscal terms are only one of the elements that determine the profitability of a project, a “tough” contract may be highly profitable, while a very “favorable” contract may not be. 23 It is important to note that good fiscal design without complementary institutional structures may still not achieve the desired goals: design needs to be within the administra- tive and audit capacity of the relevant institutions. Therefore, a simpler system may be more viable than a theoretically ideal but complex to manage system. 24 This is particularly impor- tant in countries that are new to the oil industry and/or have significant capacity constraints.
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