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Taxation of mining products and fiscal transition
Jean-François Brun Gérard Chambas CERDI
Module 3
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
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Mining Sector: Zambia and Tanzania
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Mining Sector: Zambia and Tanzania
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Mining Sector: Zambia and Tanzania
Sources: Lundstol and Raballand (2012)
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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
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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
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III - Dependence on oil and mining resources (1): exports
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III - Dependence on oil and mining resources (2): Relationship between natural capital and education
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III - Dependence on oil and mining resources (3) Relationship between education and growth
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III - Dependence on oil and mining resources (4) Relationship between natural capital and growth
Source: Gylfasson (2008)
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III - Dependence on oil and mining resources (5): share of natural capital over tangible capital
Source: Gylfasson (2011)
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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.)
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IV The concept of Ricardian rent (2)
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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
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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
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V - Different types of taxes (2)
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Smoothed revenue
Example of revenue
Typical cash flow
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V Royalties
• 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
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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
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V – indirect Tax on rent: sharing production
Production
“Net Profit Oil”“Cost Oil”
Enterprise shareGovernment shareIndirect way of taxationIncreasing with rent
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VI - Different types of contracts (7)
ConcessionsShare of production
Service contracts
Source: Wood Mackenzie
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Thank you for your attention
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