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Tax Incentives

The Challenge

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 Response

The IGF has produced the following suite of materials on mining tax incentives, often in partnership with the OECD.

  • Tax Incentives in Mining: Minimising Risks to Revenue 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.
  • The IGF 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.
  • 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.
  • Insights on Incentives: Tax Competition in Mining summarizes the main findings of this empirical research.

The International Institute for Sustainable Development (IISD), the IGF’s host since 2005, has published a Q&A for policy-makers reconsidering tax incentives as an investment promotion tool, as part of IISD’s taxation program.