HomeTop StoriesMining and Taxes

Mining and Taxes

A Citibank mining survey put South Africa as the world’s richest mining country in terms of its reserves, which according to it are worth US$2.5 trillion. Surveys of this nature can be somewhat arbitrary, since they depend on existing commodity prices for one thing. And while South Africa underperforms relative to its reserves, mostly accounted for by platinum group metals in this survey, such claims of wealth are probably unwelcome in any case.

It creates the false impression that mining is a free ride. Australia, which is ranked third in this survey, dramatically reduced its competitiveness against other jurisdictions with its plans to levy a 40% tax on profits. The claim is that this money will be used to provide all sorts of nice social services, but if they think they have not just damaged the mining industry in that country, what they are smoking there is not tobacco.

So too the case in Tanzania, where the Tanzanian chamber of minerals and energy says the country’s new mining bill threatens to significantly reduce the mining industry’s competitiveness. Tanzania’s government has responded by accusing the chamber of immaturity and saying that what is contained in its new mining bill is not that different from other countries. But arguments aside as to whether the Tanzanian government erred on the side of generosity in its initial legislation to attract mining to that country, investing in its mining sector has just become less attractive.

From a country’s revenue generation viewpoint, there is an optimum line at which taxation rates gets the state its maximum return before the taxation levels hinder the industry and discourage investment to the point where the mining tax base shrinks sufficiently that the returns diminish. That is probably a moving target and impossible to quantify accurately at any given time.

Some countries get it obviously and completely wrong, like Angola. That country undoubtedly has rich mineral potential beyond diamonds, but has created an environment where few will invest. A lot of dubious regimes are banking on Chinese desperation for commodities, and no doubt many of the governments raising taxes are emboldened by that global development.

Of course the nasty trick is that many countries, like Tanzania, put forward very favourable taxation agreements when they are desperate to attract investors. Once investors have come, and built the expensive infrastructure, including dams, roads, schools, hospitals, and power generation plants in the case of remote undeveloped areas, the game changes. That is why stabilisation agreements are important, and if in place, all that is done is that future investment is deterred.

The downside is that if governments, through their actions, encourage each other to increase the burden on the global mining industry and demand for commodities remains inelastic, prices will inevitably have to factor this in. It means consumers everywhere will pay, and governments, certainly those in most developing countries, are not typically the most efficient employers of capital. It suggests wealth destruction and higher commodity prices will drive inflation. There is no free ride.

It is not as if the world’s richest mining jurisdiction, South Africa, according to that Citibank survey has also not just increased taxes. It has, in the form of the newly introduced Royalties Act, which raised little outcry recently because it has been pending for so long. Yet, to pretend that some of the country’s reserves have not just been sterilised is naive.

But it is also important to remember too that there was a time when the tax incentive on building new deep level shafts in South Africa’s gold mining was so attractive that companies did it just for the tax benefit. Those incentives are still there to a degree but nowadays the industry needs them simply to survive.

South Africa is the world’s highest cost gold producer, and it very much needs the foreign income its gold mines bring in. In fact, last year, even as the gold industry produced only 205 tonnes and fell from first to fourth place in the world rankings, it earned some US$6.35 billion for the country in foreign exchange, second only behind platinum which earned South Africa US$7.3 billion last year. The gold sector also employed 159,000 workers who earned some US$2.3 billion in wages. It spent US$1.4 billion on capital expenditure and well over another US$1 billion on the procurement of other goods and services within the country’s economy.

Taking all this into account, while the first thing mining project developers look at is the quality of the orebody, how intelligently tax incentives and disincentives are used will determine the success of a country’s mining industry. Those jurisdictions that forget that do so at their peril.