1. Taxation of mining products and fiscal transition Jean-François Brun Gérard Chambas CERDI Module 3

2. Outline I - The mining sector: the case of Tanzania and Zambia II - Characteristics of the mining sector III - Dependence on oil and mining resources IV - The notion of Ricardian rent V - The objectives of mining taxation VI - The different types of taxes VII - The different types of contracts 2 EU Workshop Brussels 2014

3. Mining Sector: Zambia and Tanzania EU Workshop Brussels 20143

4. Mining Sector: Zambia and Tanzania EU Workshop Brussels 20144

5. Mining Sector: Zambia and Tanzania Sources: Lundstol and Raballand (2012) EU Workshop Brussels 20145

6. II Characteristics of the Sector (1) Sector characteristics: Real estate resources and State property Major financial and technical resources Foreign investors - imported technologies Oriented towards export - enclaves Requires dedicated infrastructure (storage, transportation) Long life - exploration phase, tax base depends on the tax regime - exploitation phases of the tax base less sensitive to the tax regime Sector subject to major uncertainty: Volatility of prices on raw materials markets Evolution of policies linked to climate change EU Workshop Brussels 20146

7. II Characteristics of the Sector (2) Sector source of uncertainty Political Economic, fiscal policy and therefore fiscal performance Information asymmetries between private companies and public authorities Role of transfer prices Competition to attract investors Difficulties to evaluate the rent Possibility of temporary inconsistency in taxation Informal micro sector, limited technology, major use of the work factor EU Workshop Brussels 20147

8. III - Dependence on oil and mining resources (1): exports EU Workshop Brussels 20148

9. III - Dependence on oil and mining resources (2): Relationship between natural capital and education EU Workshop Brussels 20149

10. III - Dependence on oil and mining resources (3) Relationship between education and growth EU Workshop Brussels 201410

11. III - Dependence on oil and mining resources (4) Relationship between natural capital and growth Source: Gylfasson (2008) EU Workshop Brussels 201411

12. III - Dependence on oil and mining resources (5): share of natural capital over tangible capital Source: Gylfasson (2011) EU Workshop Brussels 2014 12

13. II The concept of rents (1) Economic rent: amount of income that can be taxed without affecting the behavior of the economic agents, no distortion. Potentially significant sources of revenue - neutrality Simple concept but complex application Short term / long term rent Pure rent Ricardian rent and Hotelling rent Quasi-rent: Amount of income which, in the long term, provides an incentive for maintaining an effective distribution of resources (ex Brown tax, barely applied) Taxation can reduce mining activity in the future (exploration, new mines, etc.) 13 EU Workshop Brussels 2014

14. IV The concept of Ricardian rent (2) EU Workshop Brussels 201414

15. V - The objectives of mining taxation For the State: To ensure stable resources without discouraging mining activity Neutral taxation To attract foreign direct investment while retaining control of resources To participate in building the state - risk of poor institutional quality trap For the companies: Access to resources and export Creation of profit 16 EU Workshop Brussels 2014

16. V - Different types of taxes (1) Tax not dependent on production or profits Premiums Tax dependent on production Royalties (with local component) Tax dependent on profit Income taxation Investment via national companies 17 EU Workshop Brussels 2014

17. V - Different types of taxes (2) 18 Smoothed revenue Example of revenue Typical cash flow EU Workshop Brussels 2014

18. 19 V R oyalties Based on physical units Based on value Royalties based on profits (rarely used) Charged at project level - appropriation of pure rent – at the mine exit Royalties/hybrid tax EU Workshop Brussels 2014

19. 20 V – Taxing the rent Application of a rate of taxation to the project rent Simple in principle but complex to apply Based on cash flow (Brown’s tax, etc.) Used in oil contracts, planned in mine contracts Efficient as regards economic allocation (neutral) Dangerous regarding the budget EU Workshop Brussels 2014

20. V – indirect Tax on rent: sharing production Production “Net Profit Oil” “Cost Oil” Enterprise share Government share Indirect way of taxation Increasing with rent EU Workshop Brussels 201420

21. VI - Different types of contracts (7) Concessions Share of production Service contracts Source: Wood Mackenzie EU Workshop Brussels 201421

22. Thank you for your attention EU Workshop Brussels 2014