Designing Efficient Petroleum Fiscal System for Mozambique

Abstract

Nowadays, tax regime is designed to attract investment and provide the contractor with fair return on investment, at the same time, provide the host government with adequate resources for rent, thereby resulting in win-win situation. This study analyses the existing petroleum fiscal regime in the Republic of Mozambique and proposes a more efficient and flexible regime. The analysis shows that the government take currently remains at around 39% while the contactors’ net present value (NPV) increases as field sizes and oil prices increase. The current system is considered a regressive system which is inefficient in distributing wealth from oil profit. The proposed system uses sliding-scale corporate tax triggered by annual rate of return (RoR) and discards royalty. The study shows that annual RoR demonstrates a good parameter for this system as it is sensitive to boundary conditions such as oil pricing scenarios and field sizes. This makes the government take increases or decreases in relation to contractors’ profits over time given varying field sizes and oil prices. The petroleum fiscal regime proposed is more progressive as the host government and contractors are both subject to profitability fluctuation. This system could encourage more investors to invest in smaller field sizes or when oil prices are low while allow the host government to gain more benefit from bigger field sizes where profitability potential is higher or when oil prices are high.