The Effects of Taxation of Petroleum Exploitation: A Comparative Study

Abstract

Over the last decade Governments have given increasing attention to the taxation of petroleum production. The large increases in crude oil prices in 1973–74 and later in 1979–80 clearly focussed their attention on the large profits that could be made from this activity. Levels of taxation of this activity have now reached extremely high levels. In several countries oil companies have complained that the burden has become excessive and is impairing oilfield developments. The economic rents emanating from oil extraction are widely regarded as a suitable base for taxation but there is a danger that overzealous Governments will impose burdens which exceed the economic rents and thus cause disincentives and distortions. The dangers of this occurring are increased under most conventional systems of taxation which are not well-designed to extract economic rents to the state. Under conventional systems of taxation when marginal rates reach very high levels the dangers of distortion and anomalies are also increased.