Trends and Trade-Offs in Petroleum Tax Design

Abstract

How should tax systems be designed to account for the characteristics of the government, the oil companies and the projects in order to maximise welfare for the country's inhabitants? How should vital government characteristics reflected in parameters such as impatience to obtain tax revenue -the discount rate -and the willingness and ability to carry risk be accounted for in tax design? These basic issues in petroleum tax design are discussed by means of a tax model for a discretionary licensing regime (Norway) and a production sharing agreement regime (Angola).The analysis covers the entire life cycle of a typical petroleum project, i.e., including the exploration decision. We discuss the trade-off between progressivity on the one hand and the incentive for the oil companies and the host government to carry risk and investment on the 1 We would like to express our thanks for rewarding conversations with and comments on the article itself from a number of key specialists in the oil sector and academia, in particular Flemming Helgeland, Michael Keen, Per Kårstad, Morten Lindbäck, and Knut Einar Rosendahl. We are grateful for constructive comments from the editor and the referees. We are also thankful for comments and suggestions at IMF Resource Tax other. Thus, we provide basic elements in a state contingent tax design. The paper also surveys trends in petroleum taxation, and discusses how tax elements vary over the business cycle.