By Sam Mucunguzi
There is big money in oil, gas, and minerals – big not only in absolute terms but also and more importantly, relative to the overall size of many resource-endowed countries.
How all this gets shared between the governments that control access to the resources and those who discover and exploit them – that is, how these resources are taxed and can have a powerful impact on the economic and political fate of resource-rich countries.
Natural resources are a large part of the wealth of many countries and the way in which their potential contribution to government revenues is managed can have a powerful impact – for good or ill – on their prosperity and economic development. The 6 Billion that everyone seems to talk about and what Justice Kavuma has stopped anyone probing on does not reflect the international best practices of managing resource revenues.
Natural resources revenues should be for all nationals both current and future generations because of its nature, and should be equitably shared not this “cake-like sharing”. The challenges to good tax design, however, are formidable, both in the technicalities of dealing with the distinctive features of resource activities and in coping with the interplay between the interests of powerful stakeholders.
Many of the challenges faced in the resource sector are not qualitatively unique but arise in any business activity; it is just that they loom especially large in relation to resources Tax revenue as substantial and a primary benefit to the host Country. Tax revenue may not be the only economic gain from resource projects. Foreign investment is often seen as conveying substantial external benefits to host economies – beyond, that is, the domestic share in the financial returns it yields – in terms, notably, of easing unemployment and developing human capital. The 6 billion would, for example, train 10 engineers and some geologists or even stock Kigumba petroleum institute library.
Reflecting the relative scarcity of the technical and managerial skills needed, the development and exploitation of natural resources are commonly undertaken primarily by foreign-owned firms, albeit often in conjunction with state-owned companies (especially in the oil sector) or in joint ventures with domestically-owned companies. Once more this is not unique to the Ugandan sector but is so pervasive as to make it especially important for resource tax design. It has several implications.
The most obvious is that since more than one jurisdiction will typically seek to tax any resource project, investors and each government concerned must look to the combined impact of all these taxes, not just those in any single country. It’s crank for nationals to join the sharing of profits for a country. This, in turn, has a number of consequences. One is that, the effective rate of taxation on any project depends not only on the tax system in the host country, but also on tax rules in the home country of the investment firm, the countries in which owners of the investing firm reside, and, perhaps, any countries through which income is routed.
Of particular importance is the treatment in home countries asserting the right to tax income that has been earned and taxed abroad. Standard corporate and withholding tax payments will generally be creditable against home country liability in such countries, for instance, but royalties will not; and explicit rent taxes may be credible only if explicit provision for this is made for this in double tax agreements
The international nature of resource companies’ operations also creates particular opportunities for tax avoidance and corresponding challenges for national tax administrations – often an inherently unequal contest, given the expertise and funds available to large multinationals relative to domestic tax administrations even in relatively advanced economies.
In some respects, these challenges are actually easier in the resource sector than in others. In particular, resources themselves often have well-established world prices that can be used to monitor Trans Perspectives on resource tax design for pricing arrangements within multinationals. This is especially so in relation to oil. So there was no magic arbitration that warrants such Cash Bonanza.