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Part C: Fiscal Terms - 36. Fiscal Terms - 36.3 Taxes | 36.3(a). Income

Corporate Income Tax, or Profit tax, is a percentage of a business’s profits due to the tax regulating entity, where profits are generally calculated as gross revenues minus allowable deductions for expenses and minus any unrecovered losses from previous periods that may be carried forward. Generally, the corporate income tax rate is standard across all sectors to avoid distortion in investment decisions (however, the possibility of including exemptions to encourage investment as part of a strategy to develop the mining sector is discussed further under the sections on exemptions (section 25.4) and tax holidays (section 25.5)). As discussed in the overview on fiscal terms it may be advantageous to keep all tax provisions within the tax law, to avoid inconsistencies and incoherence in the legal framework. 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.

A government might also consider including a “ring fencing” provision in the tax law. This is the separation of mining projects (by, for example, requiring separate mining companies to be established for each project) for the purposes of calculating income tax instead of the consolidation of income and losses across projects for calculating taxes. Without such a requirement, profits in a producing project can be offset by losses from a project in the exploration or development phase thereby delaying or reducing taxes paid to the government. The legislation would also need to define “project” for the purposes of ring fencing; for example the area defined in the license.

However, note that the ability to apply losses from projects in the exploration or development phase against the taxable income of a profitable project can make investing in new projects less risky for an investor. For this reason, some countries may choose not to use ring fencing in order to encourage investment in new mines. That said, it should also be noted that the companies that might be incentivized to invest in new mines by a “no ring fencing” policy would be those companies already operating mines within the country. A country may seek to attract investment from various companies and avoid heavy reliance on a small number of companies for developing the mining sector. Ring-fencing also does pose some administrative challenges, particularly on allocation of shared costs across several projects held by the same investor. The pros and cons of a ring-fencing policy should therefore be carefully considered.

Though not specific to mining, it is also important for governments to address tax loopholes and combat abusive tax planning and tax avoidance, which can negatively impact revenues to governments. These issues are dealt with further under the sections in the Guiding Template on royalties, deductions and transfer pricing. Governments might further consider the necessity of including a strong general anti-avoidance rule in the tax law, which enables revenue authorities, subject to judicial review, to deny companies the benefit of arrangements that have been entered into for impermissible tax avoidance purposes. Governments, however, should be aware that such provisions can create uncertainty for companies, given their inherent generality. Extensive guidance to companies on the application of the rule, including examples of taxpayer behaviour of interest to the authorities, could help limit uncertainty. South Africa’s general anti-avoidance provisions in sections 80A to 80L of its Income Tax Act may serve as a starting point for government consideration.

As a general matter, it is also very important to carefully consider tax treaty policy and its impact on tax revenues. Tax treaties may create exemptions or reductions in tax rates and can have the effect of reducing revenues to a host country without an equivalent offsetting benefit. Governments may consider limiting such treaties to provision for information exchange and dispute resolution. In any event, governments should consider :

  • explicitly limiting benefits from such treaties to inhibit treaty shopping, through, for example, restricting benefits to particular taxpayers, disallowing the benefits of the treaty if the principal purpose of the transaction is to obtain a tax benefit, or disallowing the benefit if the beneficial owner of the company is not a resident of the treaty partner
  • ensuring that the right of taxation is preserved over income generated in the country, including through withholding tax and capital gains tax

The African Tax Administration Forum’s model double taxation agreement may provide guidance on good practice for tax treaty design.

36.3(a). Example 1:

Article [_]

In addition to taxes, royalties and duties provided in the Tax [Code][Act][Law], the holder of a mining right or authorisation is subject, for its activities in [Country], to the payment of duties and royalties provided in [relevant articles] of this mining code. Except as otherwise provided, the procedure to be applied for the collection and control of these duties and royalties is that of common law. In particular, the principles and concepts set out in the [Tax Code] or in the [Customs Code] automatically apply for the purposes of this [Code][Act][Law].

Annotation

Drawn from Guinea’s mining code (2011), this provision follows the model of including all tax obligations in the general tax laws, while explicitly stating in the mining law that, in addition to royalties and other non-tax payments required under the mining law, tax obligations under the general tax laws will apply to mining companies.

However, in other articles, Guinea’s mining code does break the general rule of a standard tax rate for all sectors by granting a preferential rate of corporate income tax and withholding tax for mining companies.

36.3(a). Example 2:

Article [_]

(1) The chargeable income for any year of assessment of a holder of a large-scale mining licence shall be calculated separately for each large-scale mining licence under which licence such holder shall maintain separate balance sheets, statements and books of accounts for each large-scale mining licence under which mining operations are carried on.

(2) A holder of a mining right, other than a large-scale mining licence may elect, by informing the [Tax Regulating Authority] in writing, to have the provisions of the subsection (1) apply to him in respect of his mining right.

(3) A holder of a mining right to whom this Act applies may, on application for the relevant mining licence, elect to maintain his accounts and be assessed for taxation and other Government impositions in United States Dollars and such holder shall, for the duration of the licence, account in, and make all payments to the Government in that currency.

Annotation

Drawn from Sierra Leone’s mining law (2009), this provision provides an example of the principle of ring-fencing assets that prohibits the profits of one license being offset by the losses of another license held by the same company in order to reduce that company’s taxable income.