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A Price-Based Royalty Tax?

22 Pages Posted: 17 Feb 2016 Last revised: 26 Nov 2016

Kimberly A. Clausing

Reed College - Department of Economics

Michael C. Durst

Steptoe & Johnson LLP

Date Written: August 15, 2015

Abstract

This paper considers the merits of a price-based royalty, a royalty for which the rate varies with the product price, as a fiscal instrument for taxing extractive industries. In light of the literature on natural resources taxation, the case for a price-based royalty is appealing. A price-based royalty captures some of the desirable attributes of an income or resource rent tax, but in comparison to such taxes, it is easier to administer since revenues are much less sensitive to transfer price manipulation and tax avoidance efforts. In order to explore how a price-based royalty might provide some of the advantages of income- or rent-based taxation, the paper analyzes the relationship between product prices and firm profits, using a data set of the world’s largest extractive firms from the Forbes Global 2000 list during the period 2003-2014. This analysis indicates that for both oil/gas and mining firms, there is a nearly one-to-one relationship between product prices and firm profitability; prices one percent higher tend to be associated with profits about 0.76% higher for oil/gas firms and about 1.38% higher for mining firms. The paper concludes by recommending that tax policy-makers give serious consideration to increasing the use of price-based royalties.

Keywords: international taxation, royalty taxation, natural resource taxation, income shifting, profit shifting

JEL Classification: H25, H87

Suggested Citation

Clausing, Kimberly A. and Durst, Michael C., A Price-Based Royalty Tax? (August 15, 2015). Available at SSRN: https://ssrn.com/abstract=2732797 or http://dx.doi.org/10.2139/ssrn.2732797

Kimberly Clausing (Contact Author)

Reed College - Department of Economics ( email )

3203 SE Woodstock Boulevard
Portland, OR 97202-8199
United States
503-517-7388 (Phone)
503-777-7776 (Fax)

Michael Durst

Steptoe & Johnson LLP ( email )

1330 Connecticut Avenue, N.W.
Washington, DC 20036
United States
202.429.8114 (Phone)
202.429.3902 (Fax)

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