Emerging Markets / August 29, 2017

The Energy Industry and State Revenues in South America

Unlike other economic and investment sectors, industries working with mineral commodities in Latin America are subject to complex tax structures. This complexity is for both the government and its state agencies as well as multinational companies operating within its territory. For instance, in the case of Colombia, the government only collected about half of the taxes and royalties that it was entitled to from companies operating in the national energy resources industry between 2005 and 2010. During the same time period, the Colombian government only collected about a third of the taxes and royalties that it was due from companies operating within the national nickel, gold, and carbon mining industry. Even though the governmental mechanisms for tax collection in Colombia have substantially ameliorated since 2011, the issue of unclaimed royalties and duties remains a systemic problem in Latin America.

The Energy Industry and State Revenues in South America

Currently, in Colombia, private and multinational companies operating in the petroleum sector must render government royalties that range from 8% to 25%, while royalties within the mining sector range from 1% to 12%. Simultaneously, private and multinational companies must pay an income tax of approximately 25% (usually the base income for this tax is calculated after the royalties have been subtracted). Out of the several mechanisms by which the Colombian government captures income from production within its domestic oil and energy industry, the royalty is the most important, accounting for more than half of the net income. Similarly, in the case of Colombia, the share of state income derived from the oil and energy industry as a percentage of GDP has gone from less than 2.0% annually between 2000 and 2005 to more than 4.0% in 2013. Meanwhile, as a percentage of overall state income, that which is derived from the oil and energy industry currently represents more than a 10.0% of the total state budget.

Overall, the global increase in energy and mineral commodity prices during the early 2000s increased Latin America’s reliance on its natural resources as a source of state revenue. However, in the medium-term, the public policy of relying mainly on natural resource extraction has proven to be near-sighted, as many national economies have come to a grinding halt in recent years. Those governments that capitalized on the gains from petroleum and gas while continuing to diversify their national economies have been able to sustain growth even during and after the 2008 crisis. Nevertheless, countries such as Venezuela and Trinidad & Tobago became reliant on energy revenues and are still dealing with the economic crisis that ensued from the dive in international market prices.

In order to foster economic prosperity and sustainable development, Latin American governments should encourage socially and environmentally responsible projects within their agricultural sector. This is precisely the vision that Farmfolio’s Founder and CEO, J. Dax Cooke, has when investing in organic agribusiness in a country like Colombia. An industry pioneer, Mr. Cooke is creating, through Farmfolio, a new model for foreign investment and economic diversification in a region with boundless potential.

(Read more about Extractive Industries and Commodities in Latin America)

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