How to Balance Your Country’s Finances – Adequate Oil & Energy Taxation

September 4th, 2012 Posted in Oil Pricing Formula

How to Balance Your Country’s Finances – Adequate Oil & Energy Taxation

The key to a country’s fiscal health is the collection of all taxes needed for good governance and social services. Without taxation, the lifeblood of a country will dry up, and so goes the well-being of its citizens as social, health, security, infrastructure and other government services are deprived of adequate funding and investments to the future.

The following is a discussion on taxes that must be imposed on all users of petroleum products – ad valorem (percentile) customs duty of 3%, specific taxes on non-essential petroleum products such as gasoline and kerosene, and value added taxes.

In addition, all importation value adding and local value adding activities need to be taxed along the entire supply chain so that all actors in the oil supply chain dutifully report and pay their share of equitable taxation.

Here is how the pump price and taxes are calculated:

DUBAI = given Dubai crude price, $/bbl

MOPS = DUBAI x (factor to refine crude to finished product)

FOB = MOPS + premium due to risks

FRT = Ocean Freight, $/bbl

INS = Ocean Insurance, $/bbl

CIF = Cargo, Insurance & Freight, $/bbl = FOB + FRT + INS

CIF, PhP/L = (CIF, $/bbl) * (FOREX, PhP/$) * (1 bbl / (42 * 3.7854 L))

CD = Customs Duty = CIF * 3.00%

BF= Brokerage Fee, PhP/L

BC = Bank Charges, PhP/L

AC = Arrastre Charge, PhP/L

WC = Wharfage Charge, PhP/L

IPF = Import Processing Fee, PhP/L

CDS = Customs Documentary Stamp, PhP/L

ET = Excise Tax = 4.35 PhP/L of gasoline; 1.63 PhP/L of diesel

LC = Landed Cost, PhP/L = CIF + CD + BF + BC + AC + WC + IPF + CDS + ET

VAT1 (on import) = 12% * Landed Cost (value added)

DPLC = Duty Paid Landed Cost, PhP/L = LC + VAT1 = LC * (1 + %VAT1)

The next step is to calculate the oil company gross margin (refining costs for crude oil refiner, logistics cost for importer, income tax, profit margin):

OCGM = Oil Company Gross Margin (P/L) = DPLC * (1 – % bio) * % GM

OOCC = Other Oil Company Costs (P/L) = (TS + PL + DE) * (1 – % bio) + BF * % bio

TS = Transshipment cost, PhP/L

PL = Pipeline cost, PhP/L

DE = depot cost, PhP/L

BF = Biofuels cost (ETHANOL, CME), PhP/L

HF = Hauler’s Fee, PhP/L (from depot to gasoline station)

DM = Dealer’s Margin, PhP/L (gasoline station margin)

TLC = Total Local Costs, PhP/L = OCGM + OOCC + HF + DM

VAT2 (local costs) = 12% * Total Local Cost (value added)

OPSF = oil price stabilization fund contribution or withdrawal, PhP/L

PP = Pump Price (P/L) = DPLC * (1 – % bio) + TLC + VAT2 + OPSF

= DPLC * (1 – % bio) + TLC * (1 + %VAT2) + OPSF

PP = DPLC * (1 – % bio) + [DPLC * (1 – % bio) * %GM + (TS + PL + DE) * (1 – % bio) + BF * % bio + HF + DM] * (1 + %VAT2) + OPSF

where % bio = 10% for ETHANOL-gasoline blend

= 2% for CME-diesel blend

The pump price is calculated based on an assumed % gross margin (GM) which is the cost and profit margin of the oil company and the driver or economic incentive for the oil company to import, refine, store, market and distribute the oil products.

The country’s regulators need to monitor closely the % oil company gross margin and the level of taxation (ad valorem or % of import value and specific or excise tax in PhP/L and value added taxes in the oil supply chain) needed for the country to balance its fiscal budget and to encourage energy efficiency and investments.

Please share your thoughts on the following:

What is your country doing to balance its budget using oil and energy taxation?

What is the level of oil company gross margin in your country that encourages healthy competition, protects the welfare of the oil consuming public?

What is the level of pump price in your country that encourages oil conservation and ensures security of oil supplies by encouraging investments in the oil industry?


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