Fiscal Regimes

9. Calculating Revenues: Avoiding Pitfalls

Since revenues are a function of the production volumes and prices for the mineral/petroleum taxpayers have an incentive to minimise reported production from EI projects as well as the value of their resources. Reporting low production values directly reduces the amount of royalties they must pay as these are calculated as a percentage of value or proportion of production.

In the case of resource exports the quantity and value can normally be tested at specific exit points, typically the port or land border station. However, this requires advanced testing laboratories to verify producer claims as to the value of the resources being exported. Enforcement of the fiscal regime is complicated with precious metals/stones such as gold and diamonds which are particularly susceptible to smuggling across borders due to their high value-to-weight ratio. Measures to increase revenue thus overlap with measures to reduce crime, including money laundering, a task for which the Customs authorities are best equipped to tackle.

Although cross-border smuggling of petroleum and industrial minerals is harder, producers may try to undervalue their quality in order to reduce the tax they owe. Verifying the quality of crude oil or iron ore is relatively easy whereas ascertaining the quality of diamonds, for example takes rare and expensive expertise and equipment. Where that is not available, resource collection can suffer.

Offtake agreements

Resource exports can be undervalued through perfectly legal mechanisms, particularly related to the prices agreed between resource producers and their customers. Offtake agreements refer to arrangements between the resource project and their customers which fix the sale price for a specified period of time. They are typically negotiated prior to significant development activities to ensure some certainty for the EI project owners, while also allowing buyers to plan their business. The exact details of offtake agreements can have serious repercussions for government income from royalties and other revenue streams.