76 in ror based systems net annual cash flows are

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used to trigger the percentage of the government’s share of profit oil (as, for example, in Qatar). 76 In RoR-based systems net annual cash flows are compounded at the target RoR rate and carried forward until the cumulative amount becomes positive. When the investor has recovered the initial investment plus the target rate, the tax kicks in. Theoretically the target RoR rate should represent the minimum rate to encourage investment. 77 The neutrality of a tax can be assessed by its impact on the 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. 78 This depends on how close the target rate is to the investor’s discount rate. The Brown tax levied on the investor’s cash flow is the most neutral form of taxation, as it provides for subsidies when the project cash flow is negative and captures the excess rent when the cash flow is positive. In practice, this tax has never been applied in its purest form, although some countries do provide subsidies to corporations, and these have an effect similar to the Brown tax. For a discussion of the economic efficiency of resource taxation policy, see Garnaut and Clunies Ross (1975).
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Fiscal Systems for Hydrocarbons 41 Table 12. Import and Export Duties How do they work? Import duties apply to all material and equipment imported in a country. In the past, these were used to provide protection for locally produced goods. Almost all countries have some sort of trade duty system, but in the oil industry import duties have had a limited use as fiscal tools (local content provisions have largely substituted the use of import duties to protect local industries). The majority of countries provide exemptions from import duties on material and equipment destined to oil and gas operations. In some cases, the exemption is granted throughout the duration of the relevant Production Sharing Contract or Concession Agreement; in others, it is limited to the exploration and development phase. 79 Some countries provide a blanket exemption; others limit the exemption to a specific list of materials and equipment. Exemp- tions for temporary import of equipment are the general practice in all producing countries. Because export duties distort the price of export and domestic supplies, they are normally not levied on oil and gas. 80 Advantages and Disadvantages to Host Governments For host governments, import duties provide a source of revenue from the very beginning of project operations. On the other hand, because of the nature of administering such duties, lower level government officers often have to classify the goods. This may create delays in processing the goods and may increase the potential for rent-seeking behavior.
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