Capital Gains Issues in the Extractive Industries

Reprinted from Tax Notes Int’l, October 3, 2016, p. 91

In this article, the author discusses some of the issues for a country to consider in determining whether, and to what extent, it should tax natural resource-related capital gains. Before making this determination, each country should consider the tax policy it wishes to adopt regarding capital gains for taxpayers across all industries, not just the extractive sector.

"When a taxpayer transfers all or a portion of a capital asset acquired for use in its business (for example, property, a plant, equipment, or license rights), general income taxation rules in many countries treat some or all of the gain as taxable. Countries that impose capital gains taxes also often treat some transfers as nontaxable, the most common being some business reorganization transactions. In designing their tax regimes, countries therefore should determine whether to tax capital gains in the first place and, if so, whether some transactions should be exempt from the tax or whether the tax should be deferred for some period.
Full article

Featured Perspective: "GST in India: From Dream to Reality"

Reprinted from Tax Notes Int’l, September 5, 2016, p. 891

In this article, the author discusses the details of India's long-delayed goods and services tax, which is expected to be implemented on April 1, 2017.

"I
n his 1532 masterpiece The Prince, Machiavelli said, ‘‘It must be considered that there is nothing more difficult to carry out, nor more doubtful of success, nor more dangerous to handle, than to initiate a new order of things.’’ This sentiment aptly captures the pending introduction of the goods and services tax in India in 2017.

After a decade of negotiations between the central government and the states over the structure of the GST first announced in 2006, both houses of Parliament cleared the constitutional amendment bill in the just-concluded monsoon session. (Prior coverage: Tax Notes Int’l , Aug. 8, 2016, p. 466.) India has thus confirmed its decision to adopt a dual GST model, meaning that the central government and the states will collect and administer central GST (CGST) and states GST (SGST), respectively." Full article

Egypt Discovery Transforms Petroleum Outlook in Eastern Mediterranean

By Dr. Carole Nakhle, ITIC Program Advisor


Abstract: "When it comes to oil and gas exploration and production, Egypt is in a different league than its neighbors in the Eastern Mediterranean. Its oil activity spans more than one century and the country enjoys a colorful corporate landscape where large and small international companies and national companies cooperate and continue to make significant discoveries. From a regional perspective, having such a major competitor right at their own doorsteps presents challenges to countries like Lebanon, Cyprus, and Israel. But this does not necessarily signal a race to the bottom. On the contrary, it can lead to opportunities if cooperation is pursued." Full paper

 

Russian Federation, the World Trade Organization, and the Eurasian Customs Union: Tariff and Non-tariff Policy Challenges

World Bank Group Trade and Competitiveness Global Practice Group


Abstract: "This paper assesses issues relating to tariffs and nontariff measures (NTMs) in relation to Russia’s World Trade Organization (WTO) and Eurasian Customs Union (ECU) commitments. The analysis finds that full implementation of Russia’s WTO tariff schedule through 2020, would raise goods imports by about $3.5 billion (1.1 percent) compared to 2012, with estimates of welfare gains to Russian consumers equal to approximately $370 million. Russian exports to members of the ECU, primarily Kazakhstan, would increase by an estimated $194 million, measured against a 2008 baseline. The impact of NTMs in Russia and the ECU, though difficult to quantify, is potentially more important for the market than tariff changes, because of the significant divergence between the historical GOST standards and standards prevailing in most of Russia’s trading partners. Formation of the ECU and its associated bodies in 2010 has tended to perpetuate regional methods of standard setting, and by extension NTM policies, that are closely aligned with older models." Full paper

 

Reforming International Taxation: Is the Process the Real Product?

By Professor Richard Bird, Rotman School of Management, University of Toronto and ITIC Senior Advisor

Abstract: "Reforming international taxation -- how national tax systems interact with each other – is an issue that is always technically complex, often economically significant, and sometimes politically explosive. Some expect major changes in international taxation in the near future but no one yet knows what changes might made or when, how, and how effectively they might be implemented. Instead of speculating about such matters, this paper considers the process by which countries are attempting to reform international taxation problems, essentially through complex technical and political negotiations intended to produce an improved set of “soft” law arrangements, adherence to which will, as in the present system, be essentially voluntary. The current process, although under the aegis of the OECD, is considerably more inclusive than earlier negotiations on international taxation, which were largely between developed countries that were predominantly capital exporters. Greater inclusivity may make negotiations more difficult to conclude successfully but it may also result in a system that will be more widely accepted as fair. Moreover, experience gained through the present prolonged and intensive negotiations on international taxation may perhaps suggest a more fruitful approach to dealing with such other global public goods problems as climate change."  Full paper


Featured Perspective: "How Should VAT Systems Treat Islamic Finance Transactions?"

Reprinted from Tax Notes Int’l, May 16, 2016, p. 687

In this article, the author discusses VAT issues regarding Islamic finance transactions and how some countries have addressed those challenges. 

"Most countries developed their tax systems in an environment of conventional finance. However, while Islamic finance has similar economic objectives to conventional finance, it usually involves transactions that are very different. Accordingly, unless tax systems properly accommodate Islamic finance transactions, prohibitive tax costs can arise.

That applies to direct taxes as well as indirect taxes such as the VAT, which some countries call a goods and services tax. This article illustrates some VAT concerns, using a hypothetical VAT rate of 20 percent for simplicity." Full article


Iraqi Oil Dilemmna: To Freeze or Not to Freeze


By Dr. Carole Nakhle, ITIC Program Advisor



"In recent years, the international community has focused on the North American shale industry and its impact on the Organization of Petroleum Exporting Countries (OPEC), particularly Saudi Arabia. The United States led the growth in global oil supply in 2015, thanks to shale oil’s unexpected resilience in the face of lower prices. OPEC continues to stick to its position that it will not cut production. However, Saudi Arabia announced earlier this year that it was ready to freeze its production if other OPEC members follow suit. At the center of these developments, one country stands out: Iraq." Full article


Assessing the future of North Seal oil and gas

By Dr. Carole Nakhle

The North Sea is a mature oil and gas province. Output from the two main producers – Norway and the United Kingdom – has peaked and the remaining reserves to be exploited are smaller and/or more technically challenging than those developed in the past, thereby shrinking potential returns. As several fields approach the end of their commercial lives, the decommissioning of offshore platforms and the accompanying bills are looming on a scale not seen before anywhere in the world. Full article


Budget 2016 - Good, But Not Bold Enough!

By Sumit Dutt Majumder, ITIC Senior Advisor



"NOW that the dust has settled down and the decibel levels have come down, let us have a dispassionate look at the Budget, 2016. Every Budget makes a statement - at times explicit, and quite often implicit. So, what is the statement that the Budget 2016 has made? Before looking for the answer, TIOL Netizens may recall what I had written in February, 2016 (Indirect Tax - What should one expect from Budget - 2016?).

I had stated, that the General Elections being three years away, the Union Finance Minister would get the unique opportunity to present a bold Budget, purely in accordance with the demands of the economy. The challenge before the Finance Minister was to maintain the fiscal deficit of 3.9 per cent for 2015-16 and 3.5 per cent for 2016-17; and these targets were to be achieved while simultaneously maintaining growth by increase in the public expenditure (investment) in select infrastructure sectors like Roads, Power etc. It was therefore expected that the Government would garner a sizeable amount of additional revenue, find some expenditure savings and minimize the additional demands. As a corollary, therefore, it was expected that the government would minimize and streamline the food and fertilizer subsidies as well." 
Full article


Tax Administration 2025: What is the global outlook for the next decade?

By Terence (Terry) Lutes, Director, Global Revenue Management, IBM and ITIC Board of Director



Tax administrations face continual change. The never-ending stream of budget concerns, large and small policy changes, persistent demands to close the tax gap, rising taxpayer service expectations, and increasingly sophisticated tax avoidance schemes leave no room for boredom in the executive suite. However, the perception is that tax agencies, like most of the government, are generally ineffective at addressing necessary change on a timely basis. Full paper

 


Iran's Oil Comeback: The Awakening of a Giant?

By Dr. Carole Nakhle

Abstract: The lifting of economic and trade sanctions in relation to Iran’s nuclear programme means that the Islamic Republic should be able to export its oil freely to a wide range of customers, just as it did before the imposition of sanctions. Since Iran was not a negligible producer, other producers fear that the timing of its comeback to the market is bad news, as it may lead to lower oil prices for longer, especially if OPEC sticks to its existing strategy. The key questions that the international community is subsequently debating are: will Iran flood the oil market and, more importantly, is it able to do so? As this article argues, the sanctions were only partially responsible for Iran’s energy problems, and their removal will not solve the country’s long standing impediments to production, which, in the absence of sound and robust reforms, will prohibit a rapid expansion in Iranian capacity, as they have done for decades now." Full article


Indirect Tax - What should one expect from Budget - 2016?

By Sumit Dutt Majumder, ITIC Senior Advisor



"THIS year Mr Arun Jaitley, the Union Finance Minister, will get the best opportunity to present a bold budget responding exclusively to the call of the economy. It would be a mid-term budget, the election year 2019 being three years away, therefore, no pressure of pre-election sops. The National Democratic Alliance (NDA) Government can, and I am sure, will use the Budget 2016-17 as a major instrument for steering the economy to the high growth path even as it keeps an alert eye on the fiscal discipline." Full article


Low Oil Prices Today May Not Mean Tighter Supplies Tomorrow

By Dr. Carole Nakhle

"Today’s relatively low price of oil seems to have reconciled the otherwise conflicting interests of the world’s largest producers and consumers. Organizations representing these two groups have warned of negative repercussions, including a price spike that could follow from lower investment. However, the relationship between oil prices, investment and future supply is not so straightforward." Continue reading

 


Fiscal Stabilization in Oil and Gas Contracts: Evidence and Implications

By Mario Mansour and Dr. Carole Nakhle



"The objective of this paper is to analyse how contractual stabilization devices have evolved since the late 1990s, based on a survey of 20 countries and a review of the literature and evidence on stabilization clauses. Although fiscal stability is a commonly cited attribute of a desirable upstream petroleum regime, one of the commonly observed features of existing regimes is the lack of stability. The paper studies the major triggers that push host governments to revise the fiscal terms to which they originally agreed with investors; amongst various economic and political factors, one of the obvious drivers is the oil price. Chasing the price of oil, however, is a burdensome and inefficient strategy, as oil is an internationally traded commodity where short-term price volatility is the norm. The paper’s three broad conclusions include: First, classical stabilization models have not been successful in practice; Second, the more modern clauses are more likely to treat changes in fiscal terms symmetrically, and may be equally beneficial to governments and oil companies; Third, modern stabilization clauses can allow policymakers to consider the overall tax system and its impact on revenue and growth, without worrying about the specific impact on the oil and gas sector, and without penalizing investors in the sector. Fiscal stability clauses in developing countries will remain a key feature of contractual agreements and oil and gas laws for years to come. However, the effectiveness of the more modern clauses in achieving the desired outcome remains as questionable as that of previous stability models, particularly in countries which continue to lack the administrative capability to enforce these mechanisms, and where government policy in general and investment laws and the judiciary in particular lack credibility." Full Paper

 


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