Petroleum Revenue Management Workshop Luanda, May 18 th – 19 th 2006 Overview of Sector Flow of Funds Survey of some

1. Petroleum Revenue Management Workshop Luanda, May 18th – 19th 2006 Overview of Sector Flow of Funds Survey of some Key Issues at Conceptual and Practical level Peter Macnab

2. PETROLEUM REVENUE REPORTING Introduction - including a brief review of some practical problems in petroleum revenue management based on our experience in Angola and comparison with some countries involved in the EITI process.

3. PETROLEUM REVENUE REPORTING Governance and Transparency 1.Governance is a key requirement for translating resource revenues into sustainable benefits 2.Revenue transparency is an essential building block Where does Angola figure in this?

4. PETROLEUM REVENUE REPORTING FIRST, A REMINDER - Features of good governance • Clear and stable laws and regulations • Rule of law • Transparency in public finances and administration • A high level of capacity and skills in government • Fiscal, monetary and budgetary discipline. • What is Angola’s progress and that of other countries in the foregoing areas?

5. PETROLEUM REVENUE REPORTING Features of good governance (continued) • Clear and stable laws and regulations • (Comment - GOA has updated and simplified the rules governing the Taxation of Oil Activities through the 2004 Act - major step forward – Angolan oil tax regime simpler than UK’s!) • Rule of law …….. • (Comment GOA is protected by strong powers in the 2004 tax law but safeguards also exist for taxpayers. • International oil companies follow the law - based on self assessment and independent audit of tax returns. • The Appeals process is being reviewed.

6. PETROLEUM REVENUE REPORTING • Features of good governance (continued) • Transparency in public finances and administration • Comment - an aim of thenew Tax Administration project is to improve systems and reporting, to reconcile taxes declared as per the inland revenue records with taxes received as per Tax Collection office and taxes received as per Bank records • A High level of capacity and skills in government • Comment -The oil tax dept is arguably the most important Government institution collecting over $7 billion in taxes in 2005 or over 95% of Angola’s tax revenues, A key initial activity of the new Tax Admin. Project has been to hire a team of young but experienced Angolan professionals who are being trained in oil tax administration and who will be expected to liaise with and monitor closely the oil company tax payers

7. PETROLEUM REVENUE REPORTING • Features of good governance (continued) • Fiscal, monetary and budgetary discipline • Comment - Fiscal accountability and transparency are key objectives of the strengthening process for the oil tax department. The aim is for the reforms in this department to be used ultimately as a template for other GOA departments • What is Angola’s progress and that of other countries in the foregoing areas? • Answer • Angola, despite still recovering from the ravages of its civil war, is at the forefront of those developing countries which are introducing reforms. • As a prime example, the current Angolan Government has given a clear commitment, to develop an efficient, fully resourced, well managed and expert tax department to administer oil taxes

8. PETROLEUM REVENUE REPORTING Audit of Nigeria’s petroleum revenue flows Do not forget the accounting problems exacerbated by a lack of skilled human resources common to most developing countries Inadequate training, poor systems, lack of meaningful procedures and reporting all contribute to the problems These problems were admitted by the Nigerian Central Bank Governor after the audit report was issued. He said he thought the differences found were mainly accounting discrepancies which a reconciliation would confirm The auditors confirmed this when they called for an overhaul of the financial reporting system – precisely what we are working on as part of the tax administration strengthening programme in Angola. Let’s look at some typical accounting related problems……..

9. PETROLEUM REVENUE REPORTING THE IDEAL APPROACH……. A=B=C MIN.FIN. & TREASURY TAX PAYER TAX PAYER TAXES RECEIVED TAXES DUE TAXES PAID C B A

10. STATE BANK COMMERCIAL BANKS ARREARS STATE OIL COMPANY TAXPAYER OTHER MINISTRIES TREASURY Regional Governments, PETROLEUM REVENUE REPORTING A=B=C? IN PRACTICE……. MIN. FIN. and TREASURY TAX PAYER TAX PAYER TAXES DUE TAXES PAID TAXES RECEIVED B A C

11. PETROLEUM REVENUE REPORTING • INTERMEDIATE STEPS IN PREVIOUS SLIDE RISK EXPOSURE TO RECONCILIATIONPROBLEMS. NOTE IMPACT OF…… • BARTER ARRANGEMENTS • SET-OFFS • DIRECT PAYMENTS – e,g to REGIONAL GOVERNMENTS • OIL COMPAMIES ACCOUNT IN US DOLLARS WHILE GOVERNMNTS ACCOUNT IN LOCAL CURRENCY • PAYMENT TIMING – IMPACT ON A DEPRECIATING LOCAL CURRENCY AND INFLATION WHEN CONVERTING CURRENCIES • ACCOUNTING FOR ARREARS or ADVANCE PAYMENTS • GOVERNMENTMAY USE CASH BASIS OF ACCOUNTING WHILE TAXPAYERS USE ACCRUALS BASIS • INTER-ENTITY RECONCILIATION PROBLEMS ARISING FROM THE FOREGOING

12. PETROLEUM REVENUE REPORTING Angola’s path to reform 2001 –2003 – Oil Diagnostic performed – initiated and largely funded by the Government of Angola (GOA) Spring 2002 – civil war ends May 2004 - GOA publishes Diagnostic results and adopts the recommendations. Requests its institutions to report back on the human, institutional and legal requirements for the study’s adoption and implementation

13. PETROLEUM REVENUE REPORTING Angola’s path to reform (contd.) 2003- 2004 - More reform initiatives implemented, building upon the commitment of the Government to implement the Oil Diagnostic recommendations. A range of practical advice for institutional strengthening and improving formal public financial managementhas been provided 2004 – The Government embarks on a progamme to resolve certain legislative and fiscal issues 2004 - 2005 - GOA initiates a new project to strengthen its oil tax administration and commissions Aupec to start the work in 2005

14. PETROLEUM REVENUE REPORTING Angola’s path to reform (continued) As per the last slide - after the Government decided to adopt the main recommendations of the Oil Diagnostic, no major delays have occurred in starting the processes of reform. - this is an important feature which has helped the pace of institutional strengthening

15. PETROLEUM REVENUE REPORTING Lessons to be considered for developing countries with administrative problems in revenue flow management Consider the importance of: 1.linkage of audit /diagnostic reports and their recommendations with the 2.timing of implementation of the agreed recommendations to improve the management of petroleum revenue flows

16. PETROLEUM REVENUE REPORTING Lessons to be considered for developing countries with administrative problems in revenue flow management In our experience, a Diagnostic exercise best represents only the first of say, a three phase speedy interlinked project. The first phase or Diagnostic The Diagnostic exercise identifies the gaps between what the oil companies maintain they have paid and the value of those taxes stated as being received by government for the period under review. Critics will naturally seize upon the gap or the “missing millions” This may not be a fair assessment unless the two further phases are given equal priority in terms of importance and timing of their implementation

17. PETROLEUM REVENUE REPORTING The second phase or reconciliation phase • This represents a full reconciliation of the aforementioned gaps with specific reasons to support the reconciliation of the detailed numbers behind the gaps. This phase will probably also include an assessment of the situation including recommendations for change • examples of major reasons for the gaps - see previous slides

18. PETROLEUM REVENUE REPORTING The third phase or Institutional Strengthening The second phase work should lead to a speedily produced Terms of Reference for the third phase. For example - the Inland Revenue of a developing country will likely need to: • strengthen the monitoring, checking, reporting and control of the tax returns of the international oil companies, • Review the current tax legislation for adequacy • Be more forceful in ensuring that tax legislation is being complied with fully 5. Improve internal reporting and forecasting of future tax flows 6. Accelerate the resolution of tax appeals. 7. Consider any tax administration activities to be outsourced e. g independent audit of tax returns, use of specialist law firms to advise on complex tax legislation issues under appeal by taxpayers and ……………..

19. PETROLEUM REVENUE REPORTING The third phase or Institutional Strengthening (continued) - implement a programme of change based on 1 – 7 in the previous slide • above all, hire more experienced staff members • provide them with intensive training in order to maintain the momentum of the strengthening process. Note Advantageous if : • the principles of the three phases were confirmed beforehand • the timing is also confirmed beforehand in order to insert an urgency in the momentum for improving transparency and good governance

20. PETROLEUM REVENUE REPORTING Some administrative comparisons between Nigeria and Angola • The Federal Inland Revenue Service (FIRS) is responsible for checking oil company tax returns. The EITI audit report states that in considering relevant provisions in the tax laws certain items may have an impact on taxes due to the government. • Not clear the extent to which the FIRS may obtain third party professional advice to assist their tax administration • The Angolan Inland Revenue has outsourced to a firm of international auditors the function of auditing the tax returns of the oil companies. • The Angolans also use two firms of lawyers to assist in appeals against taxes assessed by oil companies

21. PETROLEUM REVENUE REPORTING Strengthened tax administration improves service to oil industry clients (our aim at the DRET) International oil companies attract the best accountants, lawyers and commercial managers around, as their compensation packages are superior to what local governments can offer. Governments can reduce the gap by: • improving Human Resource strategies including offering offer more competitive pay scales and career prospects • Hiring the best people that can be afforded • introduce intensive training programmes This will benefit both oil industry and government But……………………………………..

22. PETROLEUM REVENUE REPORTING Strengthened tax administration improves service to oil industry clients (continued) Inherent institutional problem Large scale changes in compensation will be inconsistent with other ministry departments - but countries need the expertise to ensure maximum taxes are received consistent with legislation (Angola $7 billion in 2005 rising possibly to $25 billion by 2012 assuming $45 /bbl) Possible ideas • Consider outsourcing certain tax administration functions to third part experts either permanently or fpr a finite period to buy time to build up internally the institutional strengthening process • Set up an independent revenue management agency

23. PETROLEUM REVENUE REPORTING Conclusion Having had the opportunity to be involved in Angola over the past 5 years on institutional reform projects I have seen at first hand the commitment to the reform process - and in particular the increase in the pace of change under the current Government I suggest that Angola is a good example for other developing countries to consider. Thank you.