Natural resources Brussels, November 2018 Module 9 Domestic Revenue Mobilisation Training funded by the European Union Trainer: Pierre Vandenberghe Tax administration expert

Outline 1. Characteristics of the mining industry 2. Sharing the mining rent 3. Tax and non-tax instruments

Introduction: The characteristics of the mining industry Resource curse Resource rich countries have a lower growth rate. Taxation: Acountability and transparency Microeconomics Sunk costs, irreversible investment => hold-up issue/ time inconsistency–commitment issue Risks: Technology, economics, politics. Macroeconcomics Worldwide supply and demand Volatility of commodity prices Super-cycles (30 years) : USA end of XIXth century, Europ and Japan (1945-1975), China (2000-) This chapter focuses on the mining industry. Artisanal mining raises particular issues, which are beyond the scope of this lecture. In the upstream Oil sector (production), Production Sharing Arrangements apply and remain largely undisclosed. Sachs, Jeffrey and Warner, Andrew (1995). "Natural Resource Abundance and Economic Growth". NBER Working Paper (5398). Jeffrey Sachs and Andrew Warner established a strong correlation between natural resource abundance and poor economic growth.

Volatility of commodity prices

Supply: an increasing production

Demand: The role of China

2. Sharing the mining rent Through : - Tax instruments : VAT, CIT, or special tax regime (a derogatory tax regime often in the Mining code) - Non-tax instruments (fees, royalties, bonuses, equity…) Result of trade-off between Attracting foreign investors Obtaining a fair share of the mining rent Several mining regimes depending on the production cycle Exploration (no economic activity, no turnover, but potential capital gains) Extraction Two approaches : Concession (the State transfers the ownership of the resource) Contract : The State keeps the ownership of the resource, and a contracor is engaged to extract/produce. Several type of contracts can be considered : production sharing, service (fixed price or risk based), buyback

Some principles of optimal mining revenue raising Transparency Simplicity Stability Progressivity

Transparency Necessary (not sufficient) condition for any optimal tax regime Extractive Industries Transparency Initiative September 2014 : 29 countries are conform, 17 candidate. Particular tax agreements ususally undisclosed May differ significantly from the Mining Code and National Tax Laws. Transparency is a tool to discriminate among MNEs.: All developed countries do not have the same diclosure constraints for their listed companies. Transparency : a tool to protect shareholders in rich countries should also contribute to the protection of tax base in developing countries. http://www.mines.gouv.ml/

Simplicity Advantages Ring fencing principle Improving transparency Reducing compliance costs. Ring fencing principle Limiting a oil or mining company to only one extraction licence => One enterprise per mining site. Applying a strict definition of mining sub-contractors

Stability Irreversible investissements Stability clause The stability of tax regime is necessary for the mining firms. Avoiding the risk of expropriation through tax conditions adjustment. Stability clause Freeze the modality of mining rent sharing. Several forms Freeze the sharing by fixing tax rates for the lifetime of the mine. Mutually accepted renegociation Very long period (20 to 50 years)

Progressivity A mining tax regime is progressive if the mining rent share for the government increases automatically with the profitability of the mining project. Sharing the rent => sharing the risk too

3. Tax instruments : Tax Code Corporate Income Tax Reduced rate or increased rate Exemptions Capital depreciation rules Capital income and capital gain taxation (dividends, interests) DTAs (OECD vs UN model) Indirect transfer of mining profit to tax haven Exploration => Speculation

Other instruments Land tax, registration fees, licences Formalizing property rights Specific royalties Steady revenue, but potential losses and risk only borne by the mining company Ad valorem royalties Unitary rate or progressive rate (based on the commodity price) Based on tunrover, which may be reduced by some costs (transport, marketing) Signature bonuses, production bonuses Resource Rent Tax Tax based on cash flows, which applies when the mining project reaches a given profitability threshold.

Beyond tax instruments Free equity in mining firms The State remains minority. Introduction of preference dividends State-owned Mining Companies The issue of privatization

Main characteristics Investor State share Cost Risk Variable Delay   Investor State share Cost Risk Variable Delay Adm. Cost Resource Rent Tax Low Yes Moderate High CIT Mining royalties Unitary rate No Short Progressive rates Free equity Long

Thanks a lot for your attention! Any question? The lack of available data is a risk, which should be emphasized. .