“For the revenue authority it’s key to know how to revisit the gaps exploited by the multinationals, to artificially transfer profit where there is little or no economic activity.”
Governments sometimes choose to offer tax incentives to induce mining investment by providing favourable deviations from general tax policies for mining companies. These tax incentives in mining are common in developing countries, but their effectiveness is often disputed. While the incentives may encourage mining sector growth, they can also be overly generous and unnecessarily divert tax revenue away from host governments.
For example, if a mine is given a time-limited tax holiday, a mining company may respond by speeding up the rate of production to maximize its tax-free revenue during the period. This leaves less ore to be extracted after the tax holiday expires, which would further reduce government revenue.
Therefore, it is important that policy-makers understand when tax incentives may be appropriate, what type of incentives are most beneficial, and how companies are likely to respond to incentives.
Our practice note focuses on the taxpayer’s behavioural responses and the unintended consequences that may flow from tax incentives. It includes a step-by-step guide to reviewing tax incentives and specific risks to revenue as well as a checklist to help governments assess behavioural responses and revenue impacts.
Our financial model can be used to estimate the cost of tax incentives in mining, including behavioural responses as set out in our practice note. The model is based on a medium-sized surface gold mine in sub-Saharan Africa. It can be modified in multiple ways to reflect different assumptions and parameters.
Users who intend to adapt the model should first read our supplementary guidance to get a better understanding of the model’s architecture.
Tax Incentives Database
The IGF Mining Tax Incentives Database provides the most granular view yet of tax competition in mining, showcasing how common tax incentives are in the sector. Our research compares the fiscal regimes of 104 mining projects across 21 countries and is the first large-scale, systematic attempt to compile tax incentives used by developing country governments to attract mining investment.
The Insights on Incentives report summarizes the main findings of this empirical research. Key findings include:
- It is more common for countries to grant incentives in primary law than in contracts.
- Tax stabilization and corporate income tax incentives are the most common incentives.
- Royalty-based incentives feature heavily in contracts but not in the primary law.
- On average, taxes are stabilized for 20 years, and tax holidays are nine years long.
- Use of mining tax incentives rose sharply in the late 1990s and during the commodity price crash of 2014–2016.
- Cost-based incentives such as investment allowances and tax credits are uncommon despite being better suited to mining investments than profit-based incentives.
- The Platform for Collaboration on Tax – Options for Low Income Countries’ Effective and Efficient Use of Tax Incentives
- Columbia Center on Sustainable Investment – Rethinking Investment Incentives: Trends and policy options
- Publish What You Pay Canada – Many Ways to Lose a Billion: How governments fail to secure a fair share of natural resource wealth (Tax Breaks and Government Revenue section)
- CIAT – Tax Expenditure Database and Studies