Fiscal Regimes

4. Pros and cons of fiscal instruments

'Instruments' refer to mechanisms by which government gets a share of the revenues from EI projects. This can occur through partial/direct ownership of the resource in question. On one hand, government could own and operate a mine or oil well. Alternatively, they might 'license' producers whilst taxing them. Middle options of 'state participation' include production-sharing agreements (common in petroleum) and 'equity participation' whereby a government gets a direct share of pre-tax revenues as a joint owner of the project. Generally, the state’s portion of revenues is higher the more it is willing to share in the risk, e.g. by contributing capital to the start-up costs or offering other financial incentives that reduce up-front costs to investors/producers.

In addition to any share the government may negotiate, many fiscal instruments can generate revenue, e.g. royalties and taxes applied on extractives companies. These are described in the following sections. For these fiscal instruments, the rules on how they are administered are often more important than the rates themselves.