Commonwealth faults Govt negotiating tax rates with mining, petroleum companies

A new paper published by the Commonwealth secretariat has faulted governments negotiating tax rates with mining and petroleum companies.

Policies chosen by governments for managing revenues from mining and petroleum resources will help to determine their ability to achieve sustainable development.

The report entitled ‘Key Issues in Natural Resource Taxation and Revenue Management in the Commonwealth’ sees such decisions as an ineffective public policy. The report is a Commonwealth secretariat study of taxation policies around the extractive industries.

“Governments should avoid negotiating tax rates with individual investors, as companies’ superior knowledge about development costs can place governments at a disadvantage during negotiations, it argues.

“In addition, countries should consider establishing a sovereign wealth fund with clear objectives and a mandate that insulates investment decisions from political interference, the paper adds. 

Daniel Wilde, economic adviser at the Commonwealth Secretariat said: “Establishing a sovereign wealth fund is one way of managing natural resource revenues, but such funds should have clear objectives and mandates, and appropriate checks and balances to insulate investment decisions from political interference. There should also be transparent systems for monitoring, managing and reporting the performance of these funds.” 

Nigeria is among eighteen African countries that make up fifty-two member countries of the Commonwealth.

According to Wilde, “Natural resource endowments matter to the wealth and prosperity of nations. Many developing Commonwealth member countries such as Botswana, Nigeria and Papua New Guinea receive more money from mining or petroleum than they do from aid or remittances”.

“Public policies in taxation and revenue management are key to ensuring natural resource wealth results in economic development. Tax policy and systems should ensure that whenever natural resources are extracted, the host state receives a fair share of revenue.

“Revenue management policies are required to ensure that government revenues from natural resources are wisely used to finance sustainable economic development”, Wilde noted.

The economic paper analyses key issues in natural resource taxation and revenue management and recommends policies that can improve countries’ economic performance. The discussion draws on economic theory, empirical evidence and the work of the Commonwealth secretariat.

Petroleum and mining are major sources of government revenue and exports in many developing Commonwealth countries. The paper warns however that, if improperly managed, revenues from these resources can lead to volatile public spending, reduce competiveness and widen inequalities.

The paper argues that governments should consider their administrative capacity and the degree of integration between the mining and petroleum industries and the rest of the economy when designing regimes to tax natural resources.

In broad terms, Commonwealth member countries which have significant natural resource reserves should concentrate on delinking public spending from volatile natural resource revenues. While those countries with more limited reserves should focus on ensuring that the consumption financed by natural resources revenues is sustainable over the long term.

Iheanyi Nwachukwu