- Introduction to Extractive Industries
- 7 Steps of the EI Value Chain, Explained
- Legal framework
- Resource exploration
- Award of contracts and licenses
- Monitoring of operations
- Collection of revenue
- Key considerations for oil, gas and mining
- Key guidance and further information
- Key audit considerations
- Examples of audit reports
- Revenue management
- Implementing sustainable policies
The ability of a government to efficiently collect taxes, royalties, and other revenues depends on the choice of fiscal regime and fiscal instruments, and in part on the administrative and audit capacity of the relevant institutions.
According to the EI Sourcebook, given the very large amounts of money typically involved in oil, gas, and mining, and the transformative potential they have, it is critical to get the fiscal administration right. A well-designed but poorly drafted or implemented fiscal regime may fall far short of its tax-raising potential. The nonrenewable character of the extractive resources underlines the importance of sound fiscal administration.
Consequently, the Extractive Industries Transparency Initiative requires a comprehensive reconciliation of company payments and government revenues from the extractive industries. Understanding company payments and government revenues can inform public debate about the governance of the extractive industries.
Key considerations for oil, gas, and mining
According to the Extractive Industries Transparency Initiative, governments may collect many different types of revenue from extractive industries:
- Taxes, or the value assessed based on profit from oil, gas or minerals
- Royalties, or the value assessed based on the sale of a volume of oil, gas or minerals
- Host Governments Production Entitlement
- State Owned Company Production Entitlement
- Bonuses, such as signature, discovery and production bonuses
- License fees, rental fees, entry fees and other considerations for license and/or concessions
- Any other significant payments and material benefit to government.
The oil and gas and mining industries are a complex, often heavily regulated sector. Auditors who intend to audit revenues from the extraction of minerals may need access to specialized knowledge and expertise to conduct their audit. Depending on the audit focus, a team may need the help of a tax or data-mining expert, an IT specialist, a lawyer, or an engineer, according to the Canadian Audit and Accountability Foundation.
Figure: Strip mining operation
Key guidance and further information
The following resources provide additional information on the process for collection of revenue.
|EITI: The Extractive Industries Transparency Initiative is a global standard to promote the open and accountable management of oil, gas and mineral resources. EITI’s Revenue Collection (Requirement 4) provides additional information on EITI standards related to the collection of revenue.|
|NRGI: The Natural Resource Governance Institute helps people to realize the benefits of their countries’ endowments of oil, gas, and minerals and has a number of tax policy and revenue collection reports available on its website.|
|IMF: The International Monetary Fund has a manual called the Fiscal Analysis of Resource Industries: (FARI Methodology) that introduces key concepts and methods for IMF’s fiscal analysis of resource industries (FARI) framework. The FARI framework is an analytical tool for economic and financial analysis at the project level.|
|World Bank: The World Bank published a guidance document, “The Extractive Industries Sector, Essentials for Economists, Public Finance Professionals, and Policy makers,” provides an overview of issues core to EI economics and critical fiscal challenges typically associated with large revenue flows from the EI sector, among other topics. Additionally, the World Bank’s “How to Improve Mining and Tax Administration and Collection Frameworks” provides an approach to help government ministries analyze and address challenges in mining taxation.|
|Ernst and Young: Ernst and Young publishes a “Global Oil and Gas Guide,” which summarizes oil and gas tax regimes around the world.|
|CAAF: The Canadian Audit and Accountability Foundation (CAAF) is a not-for-profit organization dedicated to enhancing public sector performance audit, oversight, and accountability. It published the “Practice Guide to Auditing Mining Revenues and Financial Assurances for Site Remediation,” and Practice Guide to Auditing Oil and Gas Revenues and Financial Assurances for Site Remediation, which provide information to help performance auditors plan, conduct, and report the results of EI sector audits.|
Key audit considerations
According to the World Bank, the legal basis for the ownership of hydrocarbon and mineral resources and their exploration, development, and production is established in the constitution in many countries. Normally, a sector law (hydrocarbon and/or mining law), which is formulated at the parliamentary level, sets out the principles of law. Provisions that do not affect principles of law, or that may need periodic adjustments (such as technical requirements, administrative procedures, and administrative fees), are set in regulations
Furthermore, the World Bank states that to ensure completeness of revenue collected it is essential to collect and verify data on the volumes produced, consumed, and exported and on the prices actually realized by the seller. Regular assessments help ensure that the realized prices of minerals and hydrocarbons sold from each project properly reflect market conditions and quality differentials at the time of the transaction.
Once the decision to audit the revenues from the extraction of minerals (and related questions) has been made, guidance from the Canadian Audit and Accountability Foundation recommends that the audit team start conducting research and interviewing officials to acquire (or further develop) a sound knowledge of the business and an understanding of the risks facing the organizations being audited. To develop their plan for auditing revenues, auditors may want to consider the following:
Figure: Collection of Revenue: Key Audit Considerations