Mining Tax Policy Responses to COVID-19
Governments are responding to the spread COVID-19 with drastic measures to combat the pandemic’s health and economic impacts.
In the mining industry, the virus has harmed workers, disrupted supply chains, and halted operations in many nations. The crisis presents commodity-specific risks to supply and/or demand, which is reflected in ongoing price volatility throughout the sector.
Mining companies, under pressure to balance worker safety with business imperatives, may seek supportive tax measures and there is a risk that countries may adopt unnecessary or poorly designed tax policies that cut vital government revenues while providing minimal benefits.
To help policy makers navigate complex tax measures during the crisis, the Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development (IGF) partnered with the African Tax Administration Forum (ATAF) to publish a guidance brief for policy makers considering tax relief for the mining sector.
On April 16, IGF and ATAF hosted an English webinar on the topic. (French and Spanish webinars were held in May.) The panel included Anthony Munanda from ATAF, Alexandra Readhead and Thomas Lassourd from IGF, and government officials from Colombia (Claudia Escobar Oliver, Advisor, Ministry of Mines and Energy), Ghana (Martin Ayisi, Deputy Chief Executive, Minerals Commission), and Zambia (Joseph Nonde, Director of Tax Policy, Ministry of Finance).
More than 200 participants joined the webinar and many shared their concerns, experiences, and questions. Not all questions could be answered during the event, so IGF and ATAF have published some brief answers and links to further reading material below.
1. Impacts on the Mining Sector
If uranium prices rise, why do diamond prices tumble?
One of our main messages is that each commodity is faring differently depending on the resilience of supply, demand, and any specific factors. Uranium prices are going up because of important supply disruptions, while demand is inelastic. Diamond prices are going down because processing has all but stopped, leaving mines with rough diamonds that they cannot cut and put on the market—and most of the demand for diamonds is very elastic.
Have you observed different impacts on different government revenue streams?
It is still early to be able to analyze data on government tax and royalty receipts from mining. Countries that publish this information, often through EITI, do so only on an annual basis. But based on how different fiscal tools are designed, and on previous experiences, price drops have a stronger impact on profit-based taxes (such as income taxes, rent taxes, or state equity dividends) and a smaller impact on output-based taxes (such as most mineral royalties, turnover, or local development taxes). Other taxes (including VAT, customs duties, and withholding taxes) would be affected only to the extent that a price decrease leads to cost-cutting measures or reduced economic activity.
2. Conditions for Mining Tax Relief
Should mining companies with cases of human rights violations, environmental destruction, and corporate tax abuse be barred from tax relief?
Mining companies convicted of human or environmental crimes, or tax abuse should be excluded from tax relief in general. The challenge will be having sufficient proof of wrongdoing to deny tax relief. Some governments are considering barring companies registered in tax havens, based on the risk that they are engaging in tax-avoidance practices.
Should mining companies be required to guarantee the health of their workers in order to continue to operate during quarantine? Should any health expenses incurred be eligible for deduction against income tax, like a social responsibility expense?
First and foremost, mining companies should protect the health of their workers. Regarding any costs incurred in protecting the health of workers, affected mining communities and host countries should be eligible for immediate deduction or tax credit. Governments could also consider “Work for Taxes” schemes that allow companies to pay their corporate income tax (CIT) in advance through the execution of public works projects such as hospitals.
Do you think governments will, or should, take into account the mine’s carbon footprint when they are pre-screening eligibility for support?
Governments should consider the mine’s carbon footprint to grant tax relief, as they should more generally reward front runners on sustainable development in their economic stimulus packages. Governments could use their response to COVID-19 as an opportunity to assess the corporate energy performance and carbon reductions strategy of each company requesting tax relief. Assessing the level of company compliance might be challenging given time constraints, in which case governments could refer to rankings by the CDP.
Even though the gold price has increased, many miners are currently struggling to bring their product to market due to the widespread cancellations of international flights. What are your thoughts on this?
Commodity prices are just one factor to determine whether tax relief is required. If a mine is unable to export its product due to circumstances reasonably beyond its control and this causes its cash flows to go negative, it should be considered for tax relief. Governments could also help consolidate orders for bulk shipment, as well as negotiate favourable terms and conditions with the airline(s).
What would you suggest in a case where a company has not been able to achieve a cash flow-positive position in the past years but has shown a path to profitability, but can make a strong case that the mine would have to enter care and maintenance unless government were to relieve it of its short-term payment obligations?
The answer to this question depends on a deeper appreciation of the causes of negative cash flows. The taxpayer would need to disclose full information to be verified by auditors. If the verification indicates that the losses are caused by operating challenges that are reasonably expected to improve in the near future, then the government may consider providing short-term tax relief. If the verification indicates that the causes of the losses and negative cash flows are related to party transactions and other tax-avoidance schemes, short-term relief should not be granted. Companies entering into these arrangements have sufficient cash flows at the group level to keep their related parties (group members) afloat.
Governments in Africa haven’t been benefiting optimally from mining—offering more tax relief could exacerbate poverty on more challenges for Africa.
Many African countries have indeed reported that there are limited benefits from mining activities on the continent, although some governments have tried to reform the sector. Thus, countries should carefully evaluate the role of the sector in their economy when designing options for supporting businesses and workers during this crisis. It would generally not be appropriate to provide relief targeting corporate taxes; rather, the benefit should target the workers in the mining companies. The tax relief would be in the form of reduction or suspension of payroll taxes or during the crisis period.
3. Mining Tax Relief Options
Should it be made easier to use losses by extending loss carry-forward/back periods or relaxing any ring-fence rules applicable to mining losses?
The extractive sector typically already enjoys long loss carry-forward periods. Extending the carry forward of losses would not provide any immediate relief to mining companies in terms of tax savings and further defer future tax payments.
Where some projects of the mining company are in profit position and others in tax losses, relaxing ring-fencing rules may allow the mining company to utilize losses in other projects to minimize the taxes payable in the profitable project(s). There should be guardrails to ensure that there is no abuse to this approach by only allowing losses that have been fully audited and any necessary adjustments are made on the same prior to their utilization.
Do you view it as necessary to extend any fiscal or other support to sectors supporting mining, for instance, the transport and logistics sector?
Businesses that support the mining industry, such as transport and logistics companies, may be negatively affected by mine closures, in which case they may be entitled to tax relief. The same considerations should apply (e.g., negative cash flows precipitated by the impacts of COVID-19, potential layoffs, inability to meet tax obligations), as well as conditions for state support.
How can mines on care and maintenance benefit from the adjustments in the tax regime?
During a care and maintenance phase, production is stopped but the site is maintained to ensure it is in a safe and stable condition. A company in this position could still benefit from the deferral of payroll taxes for workers required to maintain the mine site; quicker refunds of outstanding VAT payments (where government cash flows allow); and deferral of tax payments for previous financial periods.
Could you discuss more about environmental taxes?
Governments should refrain from suspending environmental taxes during this period (e.g., taxes on fuel for energy and transport use, and pollution taxes). By putting a price on pollution, tax systems encourage companies to reduce carbon emissions to the lowest possible level. Short-term tax relief should not compromise longer-term environmental goals.
We have experienced requests to prepay taxes from time to time as governments face shortfalls. We have not engaged in such practices due to the risks of even greater shortfalls later on (and accumulation of shortfalls). How do you address that?
Exceptional times call for exceptional measures. Mining companies should do whatever they can to help host country governments mitigate the economic and health impacts of COVID-19. Companies trading in precious metals are currently generating . They are in a unique position to be able to prepay taxes and royalties, providing much-needed revenues for governments. While lump sum payments are not the norm, there is precedent for more frequent tax payments (e.g., monthly as opposed to annual CIT payments).
4. Tax Relief for Artisanal and Small-Scale Mining (ASM)
For countries with substantial ASM sectors, could you highlight any specific advice or risks?
Formal ASM could benefit from tax relief like other mining companies and subject to certain conditions. Governments might want to pay special attention to formal ASM sectors to avoid formal miners returning to informality as a consequence of COVID-19. The challenge will come up for countries with substantial informal ASM sectors, as they often do not pay formal taxes. Other measures could be taken for this subsector during COVID-19, although many challenges are involved around implementation given its informal nature. See, ICTD.
While the price of gold has increased tremendously during the COVID-19 period, it has been reported that some people are buying gold too cheaply from the ASM in countries like Burkina Faso. What could be done to halt this abuse?
This is a huge problem created mainly by low local prices producing an arbitrage opportunity for buyers who can buy cheaply in one market and sell at an elevated price elsewhere. Government might implement control measures for the gold trading/marketing, giving more transparency to mineral trading activities. Governments might request that the list of agents marketing minerals (buyers and sellers of minerals) should be published. See the Registro Unico de Comercializadores de Minerales (RUCOM) in Colombia as an example.
5. Audit Issues
What are the short- and long-term policy recommendations regarding the audit of mining multinational enterprises (MNEs)?
- Develop and implement a risk-assessment framework. Audit resources may be particularly constrained during the COVID19 pandemic, making it especially important to focus limited resources on high-risk taxpayers. This would reduce the number and frequency of audits. Additionally, only the dedicated team of officers would be required to address the identified risks. This helps reduce the number of auditors conducting audits during this time.
- Ensure there is a robust domestic law that covers issues of transfer pricing and tax-avoidance schemes. The law could include simplified methods for determining the value of commodities sold to related parties. See ATAF’s suggested approach to transfer pricing legislation. The Inter-American Center of Tax Administrations (CIAT’s) Transfer Pricing Cocktail is also useful in this regard.
- Ensure that tax treaty provisions are updated and provide sufficient taxing rights to source jurisdictions. Strengthen treaty provisions relating to technical fees, royalty and services permanent establishments. A comprehensive definition of a fixed place of business (i.e., permanent establishment) is important for mining e.g., exploration, exploitation, and extraction, among other issues. IGF guidance on tax treaties and the mining sector is forthcoming.
- Establish a dedicated transfer pricing team. Through technical support to such officers, this team would be able to develop expertise in auditing the MNEs: such skills can be used across different sectors, including the mining sector.
- Ensure that auditors have access to complete information about the transactions of the local company and the related parties (in cases of MNEs). This should include disclosure by the local mining company of information about the production and pricing of transactions. Governments may consider automating access to production information.
Have any countries taken measures related to mergers and acquisitions for companies in the mining sector?
It is important for governments to keep track of mergers and acquisitions in the mining sector, as some of these transactions could lead to taxable capital gains on mining assets within their jurisdiction. Many governments tax capital gains on both direct and indirect transfers of immovable property, including hydrocarbon and mining rights. There are different ways for governments to establish such taxes, described in this latest draft of the platform for collaboration on tax’s toolkit (also in a video presentation). Governments should design these provisions carefully and ensure that bilateral tax treaties and mining conventions do not create any loopholes.
6. Future-Proofing Mining Fiscal Regimes
Considering the uncertainty of both commodity prices, should there be automatic triggers for some of the incentives here?
Automatic triggers are an interesting suggestion, although they would need to be designed within each country based on local conditions and factors. In our note, we suggest a number of screening factors that could be turned into automatic triggers for some short-term relief measures.
Would a more sustainable option be progressive royalties?
Progressive royalties do provide some adjustments to mineral prices that can help make a fiscal regime more resilient. For instance, many countries in West Africa have adopted progressive royalties on gold over the last few years, which is proving useful at this time of increasing gold prices. But the impact of progressive royalties on companies’ bottom lines in times of low prices depends on how they are calibrated. In the face of a very large and sudden economic shock, such as the current global pandemic, companies might find only limited relief in the automatic downward adjustment of the progressive royalty rate based on lower mineral (e.g., copper) prices. Our advice at this time would be to design targeted, short-term measures to help those companies in financial distress to weather the crisis.
Do you have any advice for countries that are considering tax increases on the sector at this time?
People always have a bias toward the present moment. Thus, during an economic recession, there is a risk that tax revisions get based too much on pessimistic future forecasts. Government should take time and consideration before designing any tax increase. In the next two years, ATAF and IGF will develop additional guidance and new ideas on how to improve mining taxation regimes for governments considering fiscal regime changes.
Regarding the specific case of companies faring particularly well in 2020 (such as several gold companies) governments could design other mechanisms to help fund national measures to fight the pandemic and weather the global economic recession, including advance payments of CIT, a special COVID 19 contribution, or temporary royalty increase.