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Part C: Fiscal Terms - 36. Fiscal Terms | 36.6 Fiscal Stability

Fiscal stability refers to the fixing of all or some of the fiscal terms that were in place when the mining agreement was signed between the investor and government or the date that the license was granted, for the duration of the mining project or for a set number of years.

Investors make calculations as to the likely profitability of a mining project and, therefore, whether or not to invest, based in part on the fiscal terms being offered for a project. A mining project can require significant investment of up to billions of dollars and can last several decades. An investor has a strong interest in ensuring that fiscal terms will not be later changed to reduce the investor’s share of the revenues from a mining project after investment decisions have already been made and billions of dollars expended.

A government seeking to attract foreign investors, especially one with weak institutions or with a history of political instability, might seek to reassure investors that the rules will not be suddenly changed.

One means to reassure investors is by the use of stabilization clauses, in mining agreements or in law, which broadly provide that certain changes to the law will not apply to agreements signed before the change in the law.

Stabilization clauses may be very broad and provide that no changes in the law will apply. Such clauses are increasingly out of favour as they prevent the application of advances in health and safety, environmental or labour laws to a mining project which may last several decades. For example, significant advances on global practice in mine safety, which may be incorporated into law or regulation in a country, would not apply in the event of a broad stabilization law. More favoured are stabilization provisions that fix specific key fiscal terms (not all terms) for a specific period of time (not indefinitely).

“Economic equilibrium” terms are also more widely used today. Such terms do not provide that changes in the law will not apply. Instead, they provide that changes in law that change the economic equilibrium between the parties will require negotiations between the state and the investor to restore that balance or will require the state to compensate the investor to restore the investor to the same economic position the investor would have been in had the change to the fiscal regime not occurred.

The law may also require that contracts include a provision requiring the parties to periodically (for example, every certain number of years) re-examine the financial terms and conditions to ensure economic equilibrium. “Economic equilibrium” should be defined but should generally make reference to fundamental changes in conditions and assumptions existing at the time the parties entered into the agreement. Some countries have provided for stability only if the investor agrees to higher base rates at the outset.

It should be noted that use of stabilization clauses can pose serious challenges to tax regulating entities. Their use multiplies the number of fiscal regimes that a government must keep track of. An agreement entered into in 2005 may have a separate fiscal regime from one entered into in 2010 if the law changed. If the law changes again, by 2015 the government would have three separate fiscal regimes to administer.

Ultimately, stabilization is an incentive to an investor. It would be best for a country to avoid stabilization clauses, if it could still attract the required investment. To the extent used, a stabilization term in the law should generally seek to define and limit the scope of stabilization provisions that may be used in contracts and should ensure that such terms do not broadly freeze the law (extend to health, safety, labour, environmental, local content and other terms) but are tailored specifically to stability of fiscal terms. Further, since fiscal stability is meant to honour the assumptions upon which the deal was based, fiscal stability provisions should not allow investors to automatically benefit from generally applicable reductions in fiscal obligations while exempting them from generally applicable increases. Finally, a stability provision should allow for the use of stabilization clauses in contracts, but should not set in law that certain terms will be stabilized for all agreements entered into under the current law. In this way, stabilization clauses would only be used if and as necessary.

A time frame of 10-15 years is generally sufficient to allow investors to recoup initial capital investment.

36.6. Example 1:

Article [_]

(1) When entering into an agreement with a Chapter 6 contractor, or a Chapter 7 producer, the [State] is permitted to accept a clause stabilizing the following aspects of taxation to the terms under Code provisions for a period not to exceed 15 years from the effective date of the agreement:

(a) The income tax rate;

(b) The rate of royalty;

(c) The special rule for extended net operating loss carry forward;

(d) The special rule for depreciation and other cost recovery;

(e) The rate for withholding of tax on payments;

(f) The exemption provided in [relevant sections];

Annotation

Drawn from Liberia’s revenue code (2010), this provision allows for the use of stabilization clauses but does not itself provide for automatic stability of the fiscal regime for all contracts entered into under that law. The provision also limits the scope of such clauses both as to time and to fiscal terms that it may cover.

36.6. Example 2:

Article [_]

(1) The stabilization of the fiscal and customs regime is guaranteed to holders of an exploitation licence who have signed a Mining Agreement.

(2) The maximum duration of a period of stabilization of the fiscal and customs regime is 15 years. This period of stabilization runs from the date on which the exploitation licence is granted.

(3) During this period of stabilization, the rates of levies, duties and taxes will neither be increased nor reduced. These rates will remain as they were on the date the exploitation licence was granted. In addition, no new tax or levy of any kind whatsoever is applicable to the holder of the exploitation licence during this period.

(4) Specifically referred to, on a limited basis, in the stabilization clause are the rates:

(a) of the Commercial and Industrial Profit and Corporate Tax;

(b) of the Contributions to Local Development, set out in [relevant article] of this [Code][Act][Law];

(c) of the flat rate entry fee defined in this [Code][Act][Law].

(5) Also specifically referred to, on a limited basis, by the stabilization clause, are the base rates, subject to the provisions relating to the changes in indices:

(a) of tax on the extraction of Mineral Substances other than the Precious Metals indicated in [relevant article] of this [Code][Act][Law];

(b) of tax on industrial or semi-industrial production of Precious Metals set out in [relevant article] of this [Code][Act][Law];

(c) of export tax on mineral substances other than on the precious substances set out in [relevant article] of this [Code][Act][Law]

(d) of export tax on Precious Stones and Gemstones set out in [relevant article] of this [Code][Act][Law].

(6) Specifically expressly excluded from stabilization are the rates for fixed fees, annual royalties and surface royalties indicated in [relevant articles] of this [Code][Act][Law] as well as excise duties and environmental taxes.

(7) With the exception of the tax on extraction or production and export tax, stabilization does not cover the bases for contributions, fees and taxes.

(8) However, any change in tax base during the period of stabilization, which does not apply to all taxpayers subject to the same contribution, fee or tax, but which will affect holders of exploitation licences exclusively, will be deemed discriminatory and will not be binding on them.

Annotation

Drawn from Guinea’s mining code (2011), this provision is specific as to the scope of stabilization in terms of time and which fiscal terms are included in and excluded from the scope.

It is important to note that the law provides that increases in the rates of specific fiscal terms will not apply. At the same time, it also specifically prevents investors from benefiting from reductions in the rates of such terms. This could in theory protect the state from pressure from investors to benefit from reductions while at the same time being protected from increases. It is also in keeping with the general reasoning for stabilization, which is, in essence, to keep to the terms agreed to between the parties. This means that while fairness may dictate that the investor should not be made worse off by changes to the fiscal regime, the investor also should not be made better off by changes.

The disadvantage of this provision is that it provides for automatic stability rather than simply permitting use of stabilization clauses within prescribed limits. At the same time, an automatic stability provision does provide for a transparent and standardized use of stabilization across all agreements.