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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