See thomas a gresik april 2001 40 world bank working

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See Thomas A. Gresik, April 2001.
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40 World Bank Working Paper Table 11. Resource Rent Tax How do they work? Resource rent taxes tie taxation more directly to the project’s profitability. In its pure form, taxes are deferred until all expenditures have been recovered and the project has yielded a predefined target return. Then a very high marginal tax is applied to all subsequent operating revenue. Basically, the project is granted a tax holiday compared with conventional tax regimes in anticipation of exceptionally high governmental returns over time. There are two main systems: R-Factor based systems, which are linked to the payback of an investment (the ratio of cumulative after tax 74 receipts to cumulative expenditures—capital expenditure and operating costs), 75 and Rate of Return (RoR) based systems, which are linked to the project’s return on investment (hence they take into consideration the time value of money and apply when a target internal rate of return has been achieved 76 ). Some countries have adopted a stepped resource rent tax schedule with incremental brackets to smooth the shift to the higher tax rates. In some countries, the investors’ income tax is paid by the government out of its share of production. Advantages and Disadvantages to Host Governments The main advantage of a resource rent tax is its neutrality 77 (at least in theory 78 ). The dis- advantage is that it only provides income to the government when the target payback or rate of return is reached. This can be avoided by combining the resource rent tax with a royalty and/or a normal corporate income tax. The key issue then becomes that of defining an efficient target rate. This is a complex issue as it depends on the specific characteristics of the project, as well as exogenous conditions. Resource rent taxes are comparatively more difficult to assess and monitor. Therefore, the administrative cost of maintaining this system largely depends on the capacity of the host government. Effect on Investment Decisions Resource rent taxes are relatively neutral to investment decisions. This depends on how close the target rate is to the investor’s discount rate, which in turn reflects the project risk and the investor’s corporate profile. 74 In some countries pre-tax values are used to calculate the R-Factors. Examples can be found in Colombia, Malaysia (R/C index), and India (Investment Multiple post NELP V contracts). 75 The R-Factor is calculated in each accounting period. Once a threshold is crossed, the new tax rate will apply to the next accounting period. The cash flows used in determining the R-Factor do not take into consideration the time value of money (they are undiscounted). In some royalty and tax arrangements, a stepped corporate income tax rate is determined on the basis of a range of R-Factor values (as, for example, in Chad). In some cases the R-Factor is used to determine the royalty rate (as, for example, in Tunisia). In some Production Sharing Contracts, the R-Factor is used to trigger the percentage of the government’s share of profit oil (as, for example, in Qatar).
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  • Winter '14
  • Bijay K Behra
  • host government, fiscal systems, world bank working

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