New report examines major challenges in mineral taxation

Tax revenues in mineral-producing countries have been put under increasing pressure in recent weeks as demand for commodities, such as copper and nickel, has collapsed amid the global economic slowdown.

The fall in fiscal revenues can have a crippling effect on public finances, especially in developing countries reliant on extractive industries.

“In May 2008, copper was $9,000 per tonne. Now it is more like $4,000,” says Daniel Dumas, Head of the Economic and Legal Section at the Commonwealth Secretariat.

Grappling with nose-diving profits, companies may seek to renegotiate costly tax payments agreed in previous years when global demand was high. Unresponsive host countries face jobs cuts or even mine closures, says Mr Dumas.

“In times when commodity prices were more-or-less stable, governments could get away with a fiscal regime that wasn’t very flexible,” he explains. “But they were ignoring the need to make their regimes progressive and flexible. The current volatility is a reminder that you can’t do that any more.”

Mr Dumas is co-author of an International Council on Mining & Metals (ICMM) report on minerals taxation regimes launched on 28 April at a reception at Marlborough House, the Commonwealth’s headquarters, based in London.

The ICMM report - ‘Minerals taxation regimes: A review of issues and challenges in their application and design’ - examines the conceptual issues governments face in designing minerals fiscal regimes.

Reviewing past and present thinking on mining taxation, and produced with input from the Commonwealth Secretariat and mining companies, the report argues for increased transparency on the taxation of mineral extraction, building on previous research on the macroeconomic and governance challenges countries face.

It addresses some of the dilemmas governments face by providing a broad overview of available taxation instruments, the collection and distribution of mining taxes at national and sub-national level and arrangements commonly employed to secure investments and promote socio-economic development.

Although arguing there is no one-size-fits-all tax system, Evelyn Dietsche, principal author of the report, explains countries have too often adopted regressive tax regimes that did not take account for the volatile nature of price rises and falls.

"The report discusses more broadly than usual the complex trade-offs that governments in particular face in designing mineral fiscal regimes,” she says. “The recent drop in minerals prices confirms the report's observations."

It is a “laudably even-handed” attempt to tackle the major debates in minerals taxation, according to Matt Genasci, legal analyst at independent watchdog Revenue Watch.

“While the report explicitly does not make recommendations on the ideal tax regime for mining,” Mr Genasci says. “It does suggest a certain degree of convergence on the part of industry and other stakeholders around the core debates in mining taxation.

“One of the more significant debates addressed in the report relates to the proper trade-off between a host country’s need for immediate and stable revenues - as well as fair compensation for the permanent loss of non-renewable resources - and companies’ preference for greater reliance on progressive fiscal tools such as profit-based taxes.”

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