This paper considers 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. In light of the literature on natural resources taxation, the case for a price-based royalty is appealing. A price-based royalty captures some of the desirable attributes of an income or resource rent tax, but in comparison to such taxes, it is easier to administer since revenues are 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 analyzes the relationship between product prices and firm profits, using a data set 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 one percent higher tend to be associated with profits about 0.76% higher for oil/gas firms and about 1.38% higher for mining firms. The paper concludes by recommending that tax policy-makers give serious consideration to increasing the use of price-based royalties.
