Cash and cash equivalents

Notes to the financial statements for the year ended 31 December 2015 40

11. Income tax expense

As the Fund is exempt from all forms of taxation in Timor-Leste, the Fund has a statutory tax rate of 0. Investment income and capital gains are subject to withholding tax in certain foreign jurisdictions and are the only items subject to taxation. In the current year tax has been withheld from foreign dividend, unit trust income, and interest received according to the applicable laws. Relief from withholding tax is available on application in some of these jurisdictions. The current average applicable withholding tax rate on dividend, unit trust income, and interest is 2.83 2014: 2.80 in such jurisdictions. For those jurisdictions where there is no tax exemption certificate, withholding tax rates were between 20-30. The withholding tax attributable to the Fund in 2015 is 9,367,122 2014: 9,283,669.

12. Financial risk and management objectives and policies

The Petroleum Fund’s activities expose it to a variety of financial risks: market risk including equity price risk, interest rate risk, and currency risk, credit risk and liquidity risk. The Petroleum Fund is also exposed to a range of operational risks that may temporarily or permanently impair the ability of the Fund’s managers to hold or transfer securities. The Petroleum Fund’s overall risk management programme seeks to maximize the returns derived for the level of risk to which the Fund is exposed and seeks to minimize potential adverse effects on the Fund’s performance. The management of these risks is carried out by the IAB and the BCTL. The IAB develops investment mandates and benchmarks that reflect the Board’s understanding of the financial risk tolerance of the Fund’s stakeholders and the capacity of the Fund’s day-to-day management to implement, and which are in accordance with the Board’s published Statement of Investment Beliefs. The mandates and benchmarks are approved by the Minister of Finance prior to implementation. The Central Bank has policies and procedures for managing and monitoring financial and operational risks for its own operations, external managers, global custodian, and the Petroleum Fund’s other key service providers. The financial risks associated with the Petroleum Fund are monitored by the Risk Management Division of the Petroleum Fund Management Department at the BCTL, which prepares daily management reports for senior management and quarterly reports for the Ministry of Finance and IAB. The Petroleum Fund is subject to periodic audit by the Internal Audit Office of the BCTL, which has operational independence from the management of the Petroleum Fund. The Internal Audit Office provides formal monthly reports to the Governor, and half yearly reports to the Governing Board of the BCTL. The Petroleum Fund Law sets limits on the use of derivative financial instruments whereby derivatives may only be used to reduce the risk to the Fund or to efficiently facilitate the desired exposure to an asset, and whereby the risk arising from the use of the derivatives may not be higher than would result from direct exposure to the underlying assets. As such, the objective of using derivative instruments is to reduce financial risks and costs associated with implementing the investment strategy. The Petroleum Fund does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes. The individual investment mandates set by the IAB include rules for the use of derivatives within these legal requirements. Investment strategy The Petroleum Fund’s objective is to meet benchmark returns on its capital within the risk limit provided in mandates and within the limits established in Articles 14 and 15 of the Petroleum Fund Law relating to Investment Policy and Investment Rules. The investment strategy of the Petroleum Fund is determined by the Minister of Finance based on advice and recommendations from the IAB. At the IAB meeting held on 28 June 2012 the decision was made by the Board to expand the public equity exposure by 0.83 a mo nth over a period of two years to 30 June 2014 to achieve 40 equity exposure. The equity exposure as at 31 December 2015 was 40 2014: 40. The Petroleum Fund investment portfolio of assets at fair value through profit or loss including cash and cash equivalents complied with the legislative and contractual requirements throughout the period.