Written by Daniel Hertog.
Namibia’s recent oil discoveries in the Orange Basin (the “project”) are estimated to generate about R443 billion in investment and R53 billion in revenues from taxes and royalties annually for the government. This poses the question as to how Namibia should design its fiscal legal framework to optimally collect and manage revenues expected from this project. In answering this question, it is important to understand the rules and factors that inform the design of the fiscal legal framework in Namibia.
The regulatory design to collect and manage revenues from this project would hinge significantly on where ownership of Namibia’s natural resources lies. This is so because such ownership determines where the economic benefits generated from the project should be distributed.
Article 100 of the Namibian Constitution of 1990 with Amendments through 2010 provides that “[l]and, water and natural resources below and above the surface of the land and in the continental shelf and within the territorial waters and the exclusive economic zone of Namibia shall belong to the State if they are not otherwise lawfully owned”. This presupposes that the manner in which petroleum resources vest in the State is as custodian of petroleum resources, meaning that, as held in Rostock CC and Another v Van Biljon,petroleum resources “belong to the people”, but are “… simply administered by the State on behalf of the Namibian people”. For this reason, the design of Namibia’s fiscal legal framework will need to be such that the collection and management of revenues are geared to benefit the people of Namibia as a whole, both present and future generations.
Furthermore, the design of Namibia’s fiscal legal framework must also be informed by certain unique features of the petroleum industry. This includes, inter alia, the finite nature of petroleum resources, commodity price fluctuation, huge capital outlay requirements and the extensive period between exploration and production.
COLLECTION OF REVENUES
In fulfilling its custodian role and in considering the unique features of the petroleum industry, Namibia’s fiscal legal framework must be designed in a way that it is capable of maximising project revenues for the State. This necessitates the efficient collection of such revenues.
To ensure the efficient collection of project revenues, Namibia could, for example, implement a fixed royalty rate on gross sales instead of the current royalty rate applied on value. Furthermore, Namibia should consider implementing signature bonuses as a tax on the project. The importance of preferring a fixed royalty rate on gross sales and signature bonuses specifically lies in ensuring that government receives an upfront and guaranteed source of revenues from the project. This, in turn, would give effect to the State’s custodian role over petroleum resources and recognize unique features of the petroleum industry, such as the finite nature of petroleum resources and commodity price fluctuation. In particular, a fixed royalty rate should also be preferred as it can guard against commodity price fluctuation. Furthermore, of important consideration is the imposition of a resource rent tax to further guard against commodity price fluctuation as well as to capture windfall profits.
Importantly, Namibia’s fiscal legal framework should include provisions to guard against tax revenue leakage. This necessitates that anti-avoidance rules be implemented and that Namibia joins transparency initiatives, such as the Extractive Industries Transparency Initiatives and Publish What You Pay. To guard against transfer mispricing, Namibia’s fiscal legal framework should make provision for advance pricing agreements and safe harbours or even a petroleum board to set transfer prices annually, that is in addition to the transfer mispricing measures already set out pursuant to ss 95 and 95A of Namibia’s Income Tax Act 24 of 1981. Additionally, Namibia could opt to place more reliance on capital gains tax, turnover taxes or even controlled foreign company rules to curb transfer mispricing or the shifting of profits to low tax jurisdictions.
MANAGEMENT OF REVENUES
Considering the proposed measures to collect revenues, the extent to which Namibia benefits from the project largely depends on the management of its revenues. As such, accountability and transparency must lie at the heart of managing project revenues. This necessitates that Namibia considers following the “Norwegian Model” of management, whereby there is a clear separation of institutional functions. For instance, a separation of institutional functions would necessitate a separation of the consolidated functions Namcor is entrusted to perform pursuant to s 8 of the Petroleum (Exploration and Production) Act 2 of 1991 as amended by Act 24 of 1998.
Importantly, to ensure transparent and accountable management of project revenues, such revenues should flow to a national revenue fund. This necessitates that Namibia promulgate legislation specifically governing where project revenues must be channelled as well as the process for withdrawing and spending such revenues. Moreover, in addition to its Welwitschia Fund, to ensure project revenues benefit future generations, Namibia’s fiscal legal framework should make provision for project revenues to flow to a sovereign wealth fund or heritage fund. In this regard, Namibia should also consider making provisions for project revenues to flow to a fiscal stabilisation fund so as to guard against shortfalls caused by commodity price fluctuation as well as to ensure the stability of sectors affected by exchange rate appreciation arising from the project. Lastly, it is also important for Namibia to ensure that a portion of project revenues flow to an environmental fund. This is especially so given that the project hinders Namibia’s energy transition initiatives and sets it back from going “green”. The purpose of Namibia’s environmental fund could be to allocate project revenues to energy transition initiatives as well as to compensate sectors hardest hit by the environmental effects of the project, such as Namibia’s fishing industry for example.
Namibia’s fiscal legal framework to manage project revenues must be designed against the backdrop of its government’s constitutional obligation and custodian role to benefit all its people. Furthermore, the country’s fiscal legal framework must also be informed by the unique features of the petroleum industry. Additionally, to ensure the efficient collection of project revenues, Namibia should consider implementing taxes aimed at efficient maximisation of revenues and capable of guarding against tax revenue leakage. Lastly, in managing revenues, there should be a separation of institutional functions as well as the implementation of various funds to ensure greater levels of accountability and transparency.
 Namibia’s Constitution of 1990 with Amendments through 2010.
 2011 NAHC 259 para 10.
 P Daniel, M Keen & C McPherson The Taxation of Petroleum and Minerals: Principles, Problems and Practice (2010) 75; B Luhende Towards a Legal Framework for Preventing Tax Revenue Leakage in the Upstream Oil and Gas Industry in Tanzania DPhil thesis UCT (2017) 33; 42-43.
 Tax Policy Discussion Paper for Public Comment What is the Most Appropriate Tax Regime for the Oil and Gas Industry? (2021) 6.
 Luhende Towards a Legal Framework 47.
 Tax revenue leakage is the loss of government revenues through, inter alia, tax evasion, tax avoidance, fiscal corruption and fiscal incentives. See Luhende Towards a Legal Framework 66.
 Income Tax Act 24 of 1981.
 Petroleum (Exploration and Production) Act 2 of 1991 as amended by Act 24 of 1998.