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MINING TAXATION: RECONCILING THE INTERESTS OF GOVERNMENT AND INDUSTRY

Australia

Mining taxation policy and administration has become a critical international issue, particularly for mineral-rich developing and emerging economies, in an increasingly globalised mining industry. As Carlos Vilhena succinctly pointed out at the 2017 International Bar Association Conference ‘The truth is that Governments never believe that they are taxing too much, companies rarely agree that they pay too little and the public in most cases doesn´t believe the benefits from royalty payments are what they should be’. Although many authoritative books have recently been published on the subject of mining taxation, including by the CET in co-operation with the World Bank, they have invariably approached the subject primarily from the point of view of Government and to a lesser degree of the community, rather than of the mining industry.


The objective of this book is to provide some balance in this debate by comparing and contrasting the financial outcomes in terms of revenue gained or foregone by Government or industry under different fiscal regimes and packages in common use. Although the debate is often cast in terms of Governments seeking to levy a “fair share” of the mineral rents, ultimately the level of taxation applied is determined by their having to compete for finite, and largely cyclical, foreign investment capital in exploration and mine development.


In addition, in practice, both Government policy and industry investment decisions are the result of balancing often incompatible objectives. Government will sacrifice economic efficiency and tolerate suboptimal exploitation of its resources for revenue stability and maximisation and to attract foreign investment. By contrast, if a country has high mineral prospectivity, industry will tolerate higher taxes if it perceives the country as having low sovereign risk and its regulatory and fiscal regimes as stable or capable of being stabilised by means of enforceable stability agreements.


The book will include quantitative analysis of the financial impact of different combinations of various taxing instruments (i.e. mineral royalties, corporate income tax, Government’s equity, etc.) applied to a typical and realistic mining project model. Asides from revenue impacts, a range of significant, project-related externalities will also be qualitatively discussed.


Interestingly, while the distribution of mineral rents between Government and industry is generally viewed as a zero-sum game, there are circumstances where win-win situations are possible. Modelling, for instance, may show this to be the case if participative or alternatively free-carried Government equity, with or without legislated local, non-governmental equity participation, commonly used by African jurisdictions, were to be traded off in exchange for a new or increased mineral royalty. As already indicated, to attract foreign capital, jurisdictions often have to offer fiscal incentives, such as tax holidays, and reduce perceptions of sovereign risk by means of stability agreements, in some cases without being fully aware of their potentially negative long-term effects, some of which will also be highlighted by modelling. Finally the book will briefly deal with a range of fiscal administration issues, many of which arise from the rapid globalisation of the mining industry and from inadequate administrative capacity in many developing countries. While both parties would agree on the desirability for administrative simplicity, reality is that mining fiscal regimes have tended to become over time more complex, difficult to audit and costly to comply with. Of particular concern are the tax minimisation issues and compliance costs arising from the escalating number of cross-border transactions between related parties, opening opportunities for tax rate arbitrage by multinational enterprises adopting artificial international corporate structures and manipulation of transfer prices. The book will conclude by highlighting areas where opportunities exist to improve mining taxation collection and administration frameworks, thus promoting and facilitating taxpayers’ compliance and reducing complexity and cost for both Government and industry.