Resource-rich countries must compete to attract mining investment. There is limited capital worldwide, and, as such, investors are weighing opportunities according to the quality and location of the resource and the policy environment. There is a risk, however, that, in competing for investment, countries offer unnecessary or badly designed tax incentives, leading them to forgo vital revenues in exchange for often illusive benefits.
A tax holiday is one such incentive that is likely to have a limited impact on investment decisions and is extremely costly for governments. Yet, in a review of mining tax incentives in 21 countries, the IGF finds that more than half offer a complete exemption from corporate income tax for nine years on average. Tax holidays are particularly common in African countries, which are also more likely to grant incentives in mining contracts than the primary law, raising concerns about the potential for corruption.
Tax incentives may also elicit behavioural responses by industry that increase the cost to governments. Continuing with the example of tax holidays, investors may speed up the rate of production in order to push all of their income into the tax-free period. The result is that the amount of tax relief is well above that originally envisaged by the government. In this webinar, we quantify this and other risks to revenue.