Profits-base Royalties Flashcards
What is the Brown Tax?
The Brown tax is levied as a constant percentage of the annual net cash flow of a resource project with cash payments made to private investors in years of negative cash flow
How is defined net cash flow?
Net cash flow is defined as the difference between total revenue and total costs (which include all exploration and capital expenditure during the year).
How does Brown tax work?
In years where net cash flow is negative, the government pays the investor the Brown tax rate multiplied by the losses. In years where net cash flow is positive, the government receives the same fixed proportion of the profits.
What does the Brown tax is a neutral resource mean?
The Brown tax is a neutral resource tax policy if private investors are risk neutral. That is, with risk neutral private investors, the ranking of resource projects is unchanged and there is no switching between economic and non-economic projects.
What is the Resource Rent Tax (RRT)?
The resource rent tax (RRT) is a profit-based royalty for natural resource projects in developing countries to enable more of the net economic benefits of these projects to accrue to the domestic economy. The RRT is typically regarded as a practical alternative to the Brown tax since the government avoids the need for providing private investors with a cash rebate during years of negative net cash flow
How does RRT work?
Under a RRT, all losses are accumulated at a threshold rate and offset against future profits. The RRT is triggered when the net cash flow, including accumulated costs, becomes positive. That is, the RRT is only paid when a private investor achieves a threshold rate of return on the investment in the resource project.
What are the three cases of RRT?
a) Treatment of failed resource projects
b) Threshold rate and risk premium allowance
c) Tax rate
What are Treatment of failed resource projects?
These are projects whereby expenditure has been incurred by private investors but the project makes a net loss. Importantly, this includes exploration projects that fail to discover a financially exploitable mineral resource deposit.
What are the main options in a RRT when an a full loss is achieved?
1) To allow companies to transfer the loss of failed projects to successful projects within the same company
2) For companies without successful projects against which to offset losses, to permit the sale of losses on failed projects to other companies with RRT obligations.
What is Threshold rate and risk premium allowance?
With risk neutral private investors, the appropriate threshold rate is the risk free interest rate that is typically assumed to be the long-term government bond rate (LTBR)
