{"id":3235,"date":"2019-10-30T15:10:57","date_gmt":"2019-10-30T15:10:57","guid":{"rendered":"https:\/\/www.igfmining.org\/stage_new\/as-mining-enters-the-renewables-era-taxation-challenges-persist\/"},"modified":"2023-06-21T18:00:15","modified_gmt":"2023-06-21T18:00:15","slug":"as-mining-enters-the-renewables-era-taxation-challenges-persist","status":"publish","type":"post","link":"https:\/\/www.igfmining.org\/stage\/as-mining-enters-the-renewables-era-taxation-challenges-persist\/","title":{"rendered":"As Mining Enters the Renewables Era, Taxation Challenges Persist"},"content":{"rendered":"

At the\u00a0annual general meetings of the Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development\u00a0<\/a>(IGF) earlier this month, the main theme was the role of mining in a world where climate concerns are front and center. But as the world changes in multiple respects, from the increased use of renewables to the digitalization of work, taxing the activities of mining companies has only become more challenging.<\/p>\n

Mining is a critical element in policy strategies aiming to reduce greenhouse gas emissions. The sector contributes an estimated\u00a01.25 to 11 percent of global emissions<\/a>\u00a0(depending on definitions used). Efforts by companies and the governments of major mining jurisdictions to\u00a0increase the share of renewable energy used in the mining sector<\/a>\u00a0are therefore welcome. Better\u00a0measurement<\/a>\u00a0of environmental and social impact would also help, as would\u00a0improved guidance on the subject from the IGF<\/a>. Meanwhile,\u00a0the latest renewable energy technologies<\/a>, especially in solar, wind and batteries, require increasing amounts of minerals such as cobalt, lithium and graphite (which had fewer uses in the past) and new supplies of more established commodities such as bauxite and copper.<\/p>\n

These trends are gathering pace as the digitalization of the economy has affected tax collection and spurred a global debate on the taxation of multinational companies, with recent proposals from\u00a0the OECD\/G20 Inclusive Framework<\/a>\u00a0going much further than the initial scope of the OECD\u2019s 2013 base erosion and profit shifting\u00a0action plan<\/a>. But these proposals are led by the world\u2019s major powers, and they will likely just move consumer-based multinational companies\u2019 taxable profits from low-tax jurisdictions to large markets, mostly in the G20.<\/p>\n

In the meantime, developing countries face enduring challenges in taxing mining companies.\u00a0Most countries\u2019 fiscal regimes for mining<\/a>\u00a0include a mix of production-based taxes, typically royalties or export taxes, and profit-based taxes. To create the figure below, we pulled data on payments to governments from\u00a0resourceprojects.org<\/a>, disclosed by mining companies listed in the European Union or Canada over the last three years, showing what proportion of these payments were royalties, taxes (mostly corporate income taxes), or other types of payments. Although the data do not represent all revenue from mining in these jurisdictions, they do show a wide range of tax collection realities. For some countries on the left side of the figure, royalties represent more than half of all payments declared by mining companies, reflecting governments\u2019 difficulties in collecting income tax, which are typically easier for corporate taxpayers to avoid. Both tax and royalties depend on a\u00a0proper assessment of production<\/a>\u00a0quantity, quality and value, but income taxes can also be minimized through the\u00a0mispricing of costs<\/a>.<\/p>\n

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When governments struggle to collect profit-based taxes, they might be tempted to rely more heavily on royalties or other production-based taxes, as recent examples in the\u00a0DRC<\/a>,\u00a0Indonesia<\/a>\u00a0and\u00a0Zambia<\/a>\u00a0illustrate. But fixed ad valorem royalties lack flexibility: they do not adjust well to the profile of mining investments, nor to booms and busts. They may cause\u00a0interruptions in mining activity<\/a>, or require\u00a0frequent regulatory changes<\/a>.<\/p>\n

However, the mining sector is rich in alternative tax instruments that provide some middle ground between the reliability and simplicity of royalties, and the flexibility of income taxes. Their rates are progressive, and their bases are somewhat less susceptible to erosion through cost inflation, transfer mispricing and thin capitalization. We classify them in three categories, from the simpler to the more flexible, as illustrated in the figure below:<\/p>\n