1. Natural resources Brussels, January 2019
Module 12
Domestic Revenue Mobilisation
Training funded by the European Union
Trainer: Pierre Vandenberghe
Tax administration expert

2. Outline 1 - Introduction
2 - Principles of an optimal taxation of the mining sector
3 – Tax and non tax instruments

3. 1 - 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 ( ), 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.

4. Volatility of commodity prices

5. Supply: an increasing production

6. Demand: The role of China

7. 1 : Goal : sharing the mining rent
Through :
- Tax instruments (tax code : VAT, CIT, or special tax regime = a derogatory tax regime (often in the Mining code)
- Contractual 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 of contractualisation :
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

8. 2 - Some principles of an optimal mining tax regime
=> Transparency
=> Simplicity
=> Stability
=> Progressivity

9. Transparency
Necessary (not sufficient) condition for any optimal tax regime
Extractive Industries Transparency Initiative
Septembrer 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.

10. Simplicity Advantages 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

11. Stability Irreversible investissements
=> 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)

12. 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

13. 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
VAT
Negative impact on VAT revenue (if exported)
Issue of VAT refunds : special VAT treatment

14. 3 - SPECIFIC tax 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.

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

16. 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

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