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Trends in taxation: coping with transparency, mining royalties and volatility

Trends in taxation: transparency, mining royalties

The dramatic fall in global mining commodity prices, along with high national deficits and a slow climb out of recession in most economies, has elicited a strong reaction from governments.


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Any decision to invest in a new mine must factor in the expected cost of royalties and mining taxes. The rates, type of tax and collection methods can vary significantly between countries and commodities, and are often subject to change. 

Although mining companies acknowledge the need to contribute to the countries where the resources are situated, over-ambitious mining tax regimes can deter foreign investors.

Lessons from Australia’s short-lived Minerals Resource Rent Tax

The Minerals Resource Rent Tax (MRRT) was introduced in 2012 but lasted for only 2 years, netting very little for the Federal Government:

  • MRRT was over-complex and subject to too many different interpretations
  • resource royalties are, by contrast, relatively simple and effective
  • transitional tax relief helps mitigate sovereign risk and prevent the flight of capital
  • federal, state and national policies should be harmonized

Navigating the resource royalty maze

There is often no common pattern to royalties, and the rate may be determined through discussions between the mining company and the government, or based upon what the market will bear. Mining royalties can be indiscriminate, leading to perceptions of unfairness. For example, rates do not always acknowledge other costs that vary significantly between mines, such as distance from ports.

In Western Australia, different rates reflect different levels of value added processing after the ore is mined, with lower rates applied to more processed products.

Choosing the most appropriate mining tax method

Mining tax methods tend to fall into three categories:

  1. royalties
  2. profit-based royalties or resource rent taxes (RRT)
  3. state participation, with the state taking a share of the output from the extraction activity.

Australia has typically applied ‘ad valorem’ mining royalties on the value of extracted resources, providing a stable environment in which miners have contributed to a growing, viable mining industry whose returns help fund public services. Open and transparent consultation between industry and government has resolved most tensions over rate rises.


Global volatility in mining taxation

Recent changes to royalty and tax rates in Western Australia, South Africa, Ghana and Mexico highlight the volatility of mining taxation at a time when the industry is seeking certainty and stability, to underpin decisions to invest in new countries and mining development projects. 

Towards greater certainty 

Mining companies are forging closer relations with tax authorities, using tools such as advanced compliance agreements, ruling requests and tax policy submissions. When investing in new projects, companies use advanced pricing agreements, bilateral investment treaties and fiscal stability agreements.

Towards globally consistent mining taxation

Leading practice can be achieved through:

  • a well-designed tax regime that does not distort investment and production decisions
  • transparency of natural resources revenues by governments
  • effective administration of mining tax rules, to preserve integrity and trust in the system
  • transparency by companies over their total tax burden, to show they are paying their fair share of taxes and earning their social license to operate 
  • early and ongoing consultation between government and industry.

By meeting these goals, stakeholders can together determine a fair price that rewards the community for the value of the extracted resources, and gives a fair return to the mining company.

Future trends in mining tax transparency

Although full exchange of information has not yet arrived, more and more mining companies are getting prepared.

The push to generate tax revenues is driven by growing pressure on public budgets and deficits, and a wider desire to see companies pay their fair share of tax.

Forty-four Organization for Economic Co-operation and Development (OECD) members recently called for automatic exchange of information (AEoI) between tax authorities, to address tax evasion and shift the burden of proof to taxpayers.

Although a number of compulsory and voluntary initiatives have been introduced, there is no single, global tax reporting standard for multinational companies. The US Dodd-Frank Act of 2010, which required any mining company listed on a recognized US stock exchange to disclose payments made to foreign governments, was dismissed.

However, the floodgates are well and truly open, and it is no longer a question of ‘if’ some form of disclosure is required, but of ‘how much’ must be disclosed and to whom. 

Mining ahead of the curve

Mining companies have already experienced the 2003 Extractive Industries Transparency Initiative (EITI), which calls for certain disclosure of payment and revenues for oil, gas and mining compliance. 

Although compliance is voluntary, early adopters include Royal Dutch Shell and Tullow Oil, in anticipation of more onerous and formal laws on country-by country reporting. Even the country of Norway produces an annual EITI report, while also requiring Norwegian companies to state their taxes and other payments. 

Preparing for a more tax transparent world

Country-by-country reporting is a more recent trend, with the OECD striving to prevent profit shifting and ‘double non-taxation.’ Its recommended revised standards for transfer pricing documentation require multinationals to annually report revenue, profits and income taxes for each country in which they do business.

Although the OECD cannot force members to adopt such rules, there are signs that national and transnational authorities, including the UK and the EU, will adopt transparency rules for extractive industries. 

All mining companies will need a comprehensive data extraction, storage and retention strategy, with appropriate systems support. They should consider the risks of disclosure for countries where their tax payments are low, and retain appropriate transfer pricing documentation. 

Payments to foreign persons may be scrutinized by antifraud regulators, especially regarding semi-legal payments to public officials for transport permits and other essential tools of business. 

The move towards transparency is unstoppable, and preparation is the name of the game.

How ready are you for tax transparency?

  • Do you have a strategy for disclosure?
  • Are your IT systems able to generate tax information quickly and clearly?
  • Can you easily access all transfer pricing details?
  • Can you support all your tax submissions with appropriate documentation?

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