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Part C: Fiscal Terms | 36. Fiscal Terms

The fiscal terms, or fiscal regime, refer to the set of instruments or tools that determine how the revenues from mining projects are shared between the state and companies and may include royalties, bonuses, state equity participation, resource rent taxes, surface area fees, income taxes, withholding taxes and other types of duties or fees.

Often, fiscal tools specific to the mining sector, such as royalties, bonuses, state equity participation and surface area fees are included in the mining law. These payments may be collected by the mining ministry or state-owned mining company or other entity which holds equity in a mining project on behalf of the state.

On the other hand, income taxes, withholding taxes, and provisions to address tax loopholes, which may be standard across all sectors, are often included in the tax laws and administered and collected by the tax authority. Tax laws may also include provisions specific to the mining sector, such as depreciation rules, loss carry-forward rules, and the separate taxing of individual projects, known as ring fencing.

It may be advantageous to keep all tax provisions within the tax law, while non-tax provisions that do not fall under the purview of the tax authority may be included in the mining law. The mining law may make reference to the tax law and explicitly provide that, in addition to the non-tax provisions included in the mining law, companies must pay income taxes, customs duties and other fees in accordance with generally applicable tax laws. This may help avoid incoherence and inconsistencies between the tax law and the mining law and avoid confusion over which parts of the tax laws are applicable to mining companies.

It may also be advantageous to set the fiscal regime in legislation and regulations, with limited allowance for variation from project to project, rather than setting the fiscal regime entirely in contracts with bespoke arrangements for each project. Given that contracts may not always be disclosed, setting the regime in law provides certainty and transparency for investors and other stakeholders alike, including the authorities who must administer the regime. Setting the fiscal regime in law also limits the scope for negotiation, where governments may be at a disadvantage vis-à-vis companies who may have a better understanding of the mineral resource, and can help limit the possibility of corruption. A fairly standard fiscal regime across mining projects is also easier to administer than multiple fiscal regimes with wide variation across them.

In choosing the mix of fiscal tools to be used in the sector, a government should consider:

  • Timing- tools such as bonuses and royalties are paid early in the life cycle of a mining project, either at signing of a mining contract (in the case of a signature bonus) or once production begins (in the case of royalties or bonuses related to the attainment of certain production milestones), while profit-based taxes are only paid once the project makes a profit, which may take several years;
  • Progressivity-progressive fiscal regimes give the government a larger share of the profit when profits increase, neutral regimes give the state the same share regardless of changes in profitability and regressive tools give the government a lesser share as profits increase. Neutral and regressive regimes can ensure a steady flow of income to the state but are less attractive to investors as they require payment even if costs exceed revenues and may be politically unpopular at times of soaring prices if the country loses out on capturing the resulting super profits;
  • Risk- tools that are based on profits, such as income taxes, or tools such as state equity participation that may require the state to contribute to costs of the project while receiving a share of dividends only if there are dividends to be paid carry more risk for the state in the event that the project is not profitable.