A comprehensive review of mining tax incentives in 21 countries found that more than half offer a complete exemption from corporate income tax for nine years on average which poses significant economic threat to those countries.
The new research from the Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development (IGF) provides the most granular view of tax competition in mining yet, showcasing how common tax incentives are in mining.
This is of particular concern in African countries, which are more likely to grant incentives in mining contracts than the primary law, raising concerns about the potential for corruption.
“Resource-rich countries compete to attract mining investment but run the risk of offering unnecessary or poorly designed tax incentives,” says Alexandra Readhead, technical advisor on tax and extractive industries, IGF.
“The use of tax incentives may lead countries to forgo vital mining revenues in exchange for unknown benefits - revenues which are needed to fund public services and infrastructure.”
It is particularly concerning that more than half of the countries surveyed offer a corporate income tax holiday either in the law, or in one or more mining contract. Statutory tax holidays are provided for in Ecuador, Madagascar, Niger, and the Philippines. Tax holidays in mining are problematic for two reasons:
- Inefficiency and ineffectiveness: Tax holidays are ineffective because mining is location-specific, meaning it is difficult for investors to move where they are offered better fiscal terms, and they are inefficient because profitable projects benefits more from tax holidays than marginal ones.
- Risk of abuse: Investors can speed up the rate of production to push all their income into the tax-free period and shifting profits offshore, leaving less income for the country to tax after the holiday has ended.
“In certain cases, tax holidays last longer than the average life-of-mine, meaning governments may never collect income tax,” explains Readhead. “Tax holidays in mining are extremely costly for governments and can negatively impact communities surrounding mining projects.”
The IGF Mining Tax Incentives Database, a collection of files comparing the fiscal regimes of 104 mining projects across 21 countries, is the first large-scale, systematic attempt to compile tax incentives used by developing country governments to attract mining investment.