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Dear Editor, Profit sharing and royalty payments made by a crude oil extractor or producer to the country of extraction are usually fiscal instruments but they are not typically classified as “taxes” in the narrow sense of the term. Royalties are production-based payments intended to ensure the government gets a minimum compensation for its resources, while profit sharing mechanisms are used in production sharing contracts as another way for the government to capture part of the economic rent from the resource. Royalties and Profit Sharing Defined – Royalties are charges levied on the volume or value of oil extracted, and are considered non-tax revenue. Profit sharing is the division of profits between the government and the operator as stipulated in production sharing contracts, and these payments are also not classified as taxes. Tax vs Non-Tax Revenue – Taxes are compulsory payments by the extractor/producer, such as corporate income tax, resource rent tax, or similar fiscal charges, and are governed by the country’s tax laws. Royalties and profit sharing payments, on the other hand, are contractual payments or obligations established as a condition of accessing and extracting the resource. These payments help the country secure a minimum or negotiated return from its natural resources. Combined Fiscal Regime – Many countries use a combination of taxes, royalties, and profit sharing to maximize government revenue. However, royalties and profit sharing are generally categorized as non-tax instruments, sometimes referred to as “quasi-tax” or “fiscal instruments”. In some regimes, royalties are tax-deductible for income tax purposes, but are not themselves taxes. Production sharing is separate from royalties and is part of direct government participation or entitlement in extracted resources. In summary, profit sharing and royalty payments are not classified as taxes; rather, they are fiscal mechanisms used by governments to capture their share of economic rent from the extraction of oil. Taxes may also be levied in addition to these payments, forming an integrated system for resource revenue. Fernando Balkaran Cross-Border & International Tax Specialist Former full-time Lecturer, UWI -Cave Hill UG Turkeyen Campus
