contribution to the cost of investment due to the slower recognition of expense through depreciation and the lack of an immediate refund for losses. A simplified APT scheme, not using the RRT already mentioned, has been increasingly implemented with success, generating supplementary revenue to the state when the profitability of projects becomes higher than predefined thresholds. The special tax in Norway, the surcharge tax in the United Kingdom, and the variable CIT rate in several African countries are illustrative. If properly designed, and when the applicable tax rules are clearly worded with the necessary guidance note, the administration of an APT or a rent-based tax can be not much more demanding than, say, a royalty or an incomebased tax system. It does require the calculation of a specific profit base that measures rent, profits, or cash flows over time, but these data are normally available. As with any tax, detailed accounting procedures need to be agreed on by the parties to ensure that any loopholes or uncertainties in tax administration are eliminated. For countries with limited capacity in their administrations, this is an important consideration, which may encourage them to shift their attention to less ideal but more practical APT instruments. For example, simpler cash flow taxes (such as the special tax in Norway), or APT or production sharing triggered by the economic R-factor indicator (see the subsection “Government’s Share and Taxes under a
Production-Sharing Contract” for its definition) are increasingly being applied (Duval et al. 2009, 223–52). State participation
State participation in EI sector projects may be motivated by nonfiscal objectives, such as knowledge transfer, as discussed in chapter 5. However, as typically structured, state participation in EI sector projects will have a fiscal motivation or tax dimension as well. The motivation is participation in production and profits, especially in their upside potential. The tax dimension depends on how participation is structured. Several forms of state participation can be found in the EI sectors: (1) full participation interest, (2) carried participation interest, and (3) free equity participation (see box 6.1). With the exception of free equity participation, these forms of participation, full equity participation included, may add little to government revenues relative to the application of an efficient tax regime except when the state interest is high, although they may add considerably to risk by the obligation to contribute to future costs. They usually entail some form of offsetting reduction elsewhere in the fiscal regime, resulting in some equivalence between state participation and tax instruments. (See the discussion of NRCs in chapter 5.) In each case in figure 6.3, government revenues come overwhelmingly from taxation rather than returns to
Box 6.1 Forms of State Participation Governments have embraced state participation in their EI sectors in a variety of forms. 1. Full participation interest. The state or its designated national resource company (NRC) invests pari passu with the private sector from the start of operations, by acquiring either an equity share in an incorporated joint enterprise (common in mining) or a participation interest in an unincorporated joint venture (common in petroleum). 2. Carried participation interest. This may take several forms. The most frequently encountered is the socalled partial carry during the early stages of a project. Under this approach, the private investor “carries” or advances the costs of its NRC
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partner’s interest through specified stages of a project—exploration, appraisal, and possibly even development—after which the NRC spends pari passu with the private investor as under full participation interest. The private investor may or may not be reimbursed for the funds advanced on behalf of the state, with or without interest or a risk premium. Where compensation does occur, it is typically paid out of the state’s interest in the project revenue. 3. Free equity participation. This option is a simple grant of an equity interest in an incorporated joint enterprise to the state without any financial obligation or compensation to the private investor. The state, however, receives a share in the joint enterprise’s dividends pro rata to its equity interest.
