The use of lists of exempted material and equipment

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The use of lists of exempted material and equipment often increases the customs authority’s administrative burden. Because equipment and material originally imported for use in one project area may be used in other project areas, the grant of exemptions based on the destination to a particular project area often generates inefficiencies. Effect on Investment Decisions Given the very substantial import needs during the exploration and development phase of a project, the payment of import duties on material and equipment has a direct impact on project economics by reducing the net present value of the project and increasing its risk profile. For this reason, the existence of custom duties exemptions, at least in the early stages of a project, is of great value to investors. 79 However, the administration of a mixed system can prove very difficult and expensive. 80 Russia is among the notable exceptions. Table 13. Value Added Tax How do they work? Value Added Tax is normally levied on a destination basis, i.e. imports are taxed and exports are zero rated. For this reason, oil and gas projects would normally be in a tax credit position 81 . The majority of producing countries exempt or negate the effect of Value Added Tax on projects that export. This is done by providing some sort of credit, refund, exemption, drawbacks or deferrals at least during the initial phases of a project and/or to at least some type of purchases. Advantages and Disadvantages to Host Governments Depending on the choice of system (whether outright exemption or some form of refund, credit, drawback or deferral) the administration of Value Added Tax for oil and gas projects can be quite complex. In particular, if the capacity is not in place to administer a refund- based system, a sector specific exemption or an exemption limited to certain specialized inputs used exclusively in the oil and gas industry may be more efficient. ( continued )
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42 World Bank Working Paper Table 13. Value Added Tax ( Continued ) Effect on Investment Decisions Value Added Tax has approximately the same effect on the investor’s cash flow/return on investment as import duties. For this reasons, fiscal systems that provide exemptions in respect of at least specialized inputs are preferred by investors. 81 This occurs in cases where production (that is zero-rated for VAT purposes) is only marginally sold in the local market. In these cases, the oil company would find itself in a continuous credit position, claiming refunds on VAT paid on purchase of goods and services. Table 14. Surface Taxes How do they work? Surface fees are generally paid annually on the basis of the size of the property under lease. Different fees normally apply for exploration and production acreage. Surface fees are set at a nominal amount. Their aim is to discourage investors from holding on to acreage without exploring it.
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