KUALA LUMPUR, Malaysia, Sep 13 (IPS) – The commodity boom at the beginning of this century was mainly driven by mineral prices. Yet mining’s contribution to developing countries’ revenues has been modest, largely due to massive tax evasion and avoidance.
Fewer mining royalties
Decades of well-controlled mineral extraction prove that resource extraction by responsible and effective states can accumulate more ‘resource returns’ to improve sustainable development and social well-being.
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A well-regulated, progressive income tax could significantly increase the fiscal contribution of such extractive industries to public welfare and national development.
But mining royalty rates fell significantly in the late 20th century, by as much as 30 percent. If resource-rich developing countries are to make progress, mineral revenues must be increased.
Those responsible have justified reducing returns to host governments and economies. The World Bank’s Extractive Industries Transparency Initiative would like to reduce mining-related corruption and attract more foreign direct investment in mining.
From the late 20th century, Tanzania quickly became the third largest gold producer in Africa – behind South Africa and Ghana, once known as the Gold Coast.
But with negligible royalties and tax revenues, Tanzania – a least developed country – subsidizes government-provided infrastructure built to attract mainly foreign investors into its gold mines.
Ten policy proposals
The Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development (IGF) and the African Tax Administration Forum (ATAF) have proposed how developing countries can benefit more from their mineral resources.
Their book – The future of resource taxation: 10 policy ideas to mobilize mining revenues – considers the policy options available to governments, and offers lessons from how different governments have successfully implemented the proposed approaches.
Minimum profit share for the government
Many governments receive revenue from mineral resources through royalties and corporate taxes. Some are pushing for minimum government revenue even if prices fall below the thresholds. The book assesses whether such ‘profit sharing’ – in Tanzania, the Philippines and Ecuador – improved on the status quo ante.
Production sharing contracts
Many governments obtain oil and gas revenues through production sharing contracts. Some have wondered whether such arrangements would work well for other minerals. One chapter discusses issues arising from the execution of such contracts.
Participation in state shares
State participation in the share capital allows governments to receive dividends and other benefits from their investments. The book provides practical guidance in this regard.
Commercial state-owned enterprises
Nationalist desires for ownership of mineral resources may involve fully state-owned mining companies to maximize economic benefits to the nation. One chapter recommends how such businesses should be created, expanded, and reformed to be successful.
Variable royalties
Variable royalty rates are easier to enforce than profit- or cash-flow-based taxes. The book provides pragmatic guidance on assessing variable royalties in 15 countries.
Sales to related parties
Resource-rich Latin American countries have used commodity prices from a relevant exchange – such as the London Metals Exchange – to reduce tax avoidance in mineral transactions. Such reference prices are less vulnerable to tax evasion by related parties on mineral sales.
Carbon pricing and border adjustment mechanisms
The Carbon Border Adjustment Mechanism (CBAM) taxes imports from outside the European Union (EU) due to presumed greenhouse gas emissions at rates equal to what EU-made products are charged by the Emissions Trading Scheme. The report looks at the likely impact of CBAM on mineral-exporting developing countries, and whether they should emulate it.
Community revenue from a development sales tax
Some mining tax instruments meet specific requirements of resource-rich countries. One chapter discusses a “development sales tax” that requires private mining companies to invest in shared public infrastructure. Alternatively, the national tax authority could collect a development sales tax so that a government-run mining development fund could do the same.
Competitive bidding for mining rights
Under the right conditions, competitive bidding can efficiently award mineral resource extraction permits to private companies. The report describes how countries can increase revenue from allocating mining permits through competitive bidding.
Better monitoring of the quarries
In most resource-rich countries, regulatory oversight and mining revenue mobilization tends to focus on precious minerals, ignoring industrial mineral extraction. Remote monitoring can help tax authorities better assess the volumes and sales of extracted commodities.
Implementation is important
When mining companies use their power, money and influence to obtain mining rights, land, water and other resources, they invariably provoke resistance, often locally. But better international, national and local regulation can reduce such negative impacts and associated conflicts.
Some of the proposals in this book involve incremental changes, while others are more radical. But each must be carefully considered by the government to determine its suitability. Of course, the chance of success also depends on various circumstances.
Governments need human and financial resources to implement the proposed reforms. They must avoid inefficient and ineffective tax incentives, as well as enforcement powers that undermine government policy and law.
Effective implementation often requires support for resource-rich developing countries – from international organizations, bilateral and other development partners – to improve rent collection from mineral resources.
Overall, mining returns have fallen short of expectations – largely due to inappropriate laws, poor investment deals, overly generous tax breaks, tax evasion and avoidance. Some countries also lack the necessary expertise, information and resources to implement mining taxes effectively and free from corruption.
Increased competition for mineral resources exacerbates rivalry. As demand grows, new alliances and rivalries emerge, even as conditions change.
With such uncertainties in a rapidly changing international environment, developing countries can better advance their national interests by working together and remaining non-aligned, rather than competing with other mineral producing countries.
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© Inter Press Service (2023) — All rights reservedOriginal source: Inter Press Service