Month: August 2010

The ideal method of taxation is one based on resource rent tax which includes also any windfall profit. This progressive tax levied on profits is implemented around the world in two main ways: the R-Factor (The R-Factor is the ratio of cumulative revenue to cumulative expenditure)in which the entrepreneur starts paying a special tax only after having paid his expenses and the ROR rate of return based on his return on investment in the project and is thus implemented when the rate of his return on investment (IRR) has been achieved. However, because this tax is a progressive tax it is linked to the price of the resource that is produced so that the government take increases if the price obtained by the entrepreneur increases also.

The Rate of Return (ROR) method is calculated based on the rate of return on the investment and thus takes into consideration the time value of the money and implements it after the internal rate of return (IRR) has been obtained.

Progressive regimes are based on the premise of taxing a project according to its ability to pay – i.e. an increasing amount should be paid to the state in taxes as its profitability increases. A number of fiscal regimes, therefore, contain fiscal mechanisms (such as production sharing or additional profits taxes) which provide the state with a higher percentage of the economic rent based on a sliding scale, linked to some measure of field performance. Regimes which utilise field profitability as the measure of field performance, such as an “R factor” or IRR, are normally progressive, particularly if the taxable base allows early cost recovery and the rate is levied on cashflow rather than gross revenue.

RRR is similar to PRRT (Petroleum Resource Tax)except for the fact that only exploration expenses for the year prior to the start of the RRR can be deducted and not any expenses incurred prior to this.