In this paper, the author examined the merits of a price-based royalty, a royalty for which the rate varies with the product price, as a fiscal instrument for taxing extractive industries. The case for a price-based royalty is appealing, In light of the literature on natural resources taxation. A price-based royalty captures some of the desirable attributes of an income or resource rent tax. However, in comparison to such taxes, it is easier to administer since revenue is much less
sensitive to transfer price manipulation and tax avoidance efforts. In order to explore how a price-based royalty might provide some of the advantages of income- or rent-based taxation, the paper analyses the relationship between product prices and firm profits, using a dataset of the world’s largest extractive firms from the Forbes Global 2000 list during the period
2003-2014. This analysis indicates that, for both oil/gas and mining firms, there is a nearly one-to-one relationship between product prices and firm profitability; prices 1 per cent higher
tend to be associated with profits about 0.76 per cent higher for oil/gas firms and about 1.38 per cent higher for mining firms. The paper concludes by recommending that tax policymakers give serious consideration to increasing the use of price-based royalties.
