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Global changes in mining laws, agreements and tax systems
Pergamon
PII: S0301-4207(98)00011-7
Resources Policy. Vol. 24, No. 2, pp. 79–86. 1998 1998 Elsevier Science Ltd. All rights reserved Printed in Great Britain 0301-4207/98 $19.00 ⫹ 0.00
Global changes in mining laws, agreements and tax systems James M. Otto Institute for Global Resources Policy and Management, Colorado School of Mines, Golden, CO 80401-1887, USA
During the 1990s there has been a shift in exploration investment by multinational mining companies into regions that were previously closed or considered too risky. Many nations have introduced changes to their mineral policies, mining laws, and fiscal systems, and the author traces some of the major regulatory trends in developing, developed and transition economies. The author discusses trends in mining laws and provides data on current fiscal systems in 25 tax jurisdictions. The author concludes that the effect of recent changes has been to reduce barriers to entry and lower risk, thus encouraging increased investment in an ever-increasing number of countries. 1998 Elsevier Science Ltd. All rights reserved Keywords: Mining law, taxation, policy
Introduction
Global investment in mineral exploration
In the 1990s, exploration and mining companies have unprecedented access to a larger portion of the earth’s surface than ever before. Direct and indirect barriers to foreign investment in the mineral sector have been reduced or eliminated in many countries. The ‘open door’ mineral sector policies adopted by most nations have posed both challenges and opportunities for companies faced with a complex and extensive array of choices that require a balancing of risks and rewards. While attractive geology remains the driving force behind exploration investment, government policies, laws and fiscal systems play an important supplemental role in exploration decision-making and a pivotal role in mine investment decisions.1 This paper examines recent trends in exploration and mining investment, identifies some of the changes taking place in mining laws and agreements, and presents information on mining-taxation trends.
There is no reliable source of data that reports the aggregate sum of money spent globally on exploration and mining. This is, in part, due to the diverse nature of the mining industry which produces a wide array of minerals ranging from locally mined and consumed sand and gravel to billion dollar vertically integrated copper and aluminum complexes. No single organization collects investment data for all mineral commodities and even within a single commodity group, such as the intensively studied gold industry, coverage is incomplete. Nevertheless, it is possible to identify some global trends. Two important investment trends occurred in the 1990s and these will be described from an exploration perspective. First, the amount of money invested in exploration has increased dramatically. Secondly, the patterns of where this money was spent has shifted toward Australia and developing countries with high geological potential. To illustrate these two points, Figure 1 has been derived from a figure published by the Canadian government (IWGMI, 1997). The figure, although drawn from the Canadian study, reflects proprietary data collected by the Metal Economics Group (MEG) based on its worldwide survey of exploration expenditures by major mining companies.2 In comparing the amounts spent in each region, it
1
In 1992, the author conducted a survey of 39 multinational mining companies for the United Nations to determine the priority ranking of 60 possible exploration and mining investment decision-making criteria. The most important exploration investment decision criteria was ‘geological potential for target mineral.’ Of the top 10 criteria for exploration investment the other nine all related to government policy, law or taxes. For mining investment, nine out of the top 10 criteria also related to government policy, law or taxation (see Otto, 1992, 1994).
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Global changes in mining laws, agreements and tax systems: James M. Otto
Figure 1 Exploration budget of major companies by region. Source: IWGMI (1997), based on Metal Economics Group data
is evident that there has been a marked increase in the total amount budgeted for exploration between 1992 and 1996. While the aggregate exploration budget of the world’s larger mining companies increased, historical patterns of investment also changed. During the 1970s and 1980s, the United States, Canada and Australia attracted the majority of exploration investment. In the 1990s, overall exploration expenditures in the United States did not decrease but remained relatively flat, while exploration in Canada increased only modestly compared to other regions. Exploration budgets for Australia more than doubled during the 5 year period and most of this was generated internally by Australian companies.3 The most dramatic increases occurred in mineral-rich developing countries. Latin America (mainly Chile, Mexico, Argentina and Brazil) enjoyed over a fourfold increase, while selected African, Asian and Pacific nations also saw a high level of increased exploration activity. There are several explanations for why the global aggregate exploration budget increased during the early 1990s. During this period the consumption of most mineral commodities increased and prices generally remained relatively stable or rose. Many companies also enjoyed lowered costs of production 2
The aggregate totals include the budgets of companies expecting to spend more than US$3 million annually on exploration for base and precious metals (excludes uranium and industrial minerals). Note: the US$3 million cut-off results in exploration by many ‘juniors’ not being included. The cut-off may be particularly relevant for Africa and South American countries where there is a high level of activity by juniors. Although the aggregate amounts underestimate the actual total expenditure in each region, they are useful in identifying the aggregate exploration budget allocations of larger companies. 3 While the total amounts spent on exploration in Australia have moved steadily upward during the early 1990s, the percentage of the exploration budgets of Australia’s 13 largest exploration companies spent on grass-roots exploration outside of Australia has increased. For a discussion of the magnitude of this shift and its causes see Reid (1994).
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resulting from technological and other advances. Profits rose and companies expanded their exploration budgets hoping to locate additional reserves to meet actual and projected market demand. Private investor interest in mining was also high due to perceptions that large returns could be made from investment in emerging exploration companies. Actual and purported world class discoveries such as Voisey’s Bay (Canada) and Busang (Indonesia) captured the imagination of small investors. Stock markets in Canada, and to a lesser extent in the United States, Australia and London, provided access to new sources of exploration finance. These and other factors all contributed to the early 1990s exploration boom. The relative shift in exploration budgeting favoring geologically prospective developing nations can also be at least partially explained. Up to the 1990s, some large mining companies perceived investment in most developing nations as too risky or too costly. Political, regulatory, and fiscal systems were not conducive to attracting foreign mining investment. In the late 1980s, and continuing up to today, many developing nations introduced new foreign investment policies, mining laws, foreign exchange laws and fiscal systems specifically with the intent of increasing foreign participation in the mining sector. At the same time as many developing countries were opening their doors to foreign investment, companies in Europe, Canada, Australia and the United States were experiencing weakened security of tenure at home as environmental permitting became more difficult or lengthy4 and land access became increasingly diffi4 In Canada and the United States, environmental permitting can take up to 5 years and more. In many European countries, local community involvement is part of the approval process and has become more difficult as communities have shifted their emphasis away from support for employment generated by ‘dirty’ industries. Examples of major identified deposits that companies have not been able to develop because of ‘environmental’ or land use reasons can be identified in Australia (Coronation Hill), Canada (Windy Craggy), and the United States (New World).
Global changes in mining laws, agreements and tax systems: James M. Otto 5
cult. A perception also emerged that exploration had matured in Europe and the United States and that green-fields exploration efforts in newly opened regions had a higher chance of yielding economically attractive deposits. Mineral markets are notoriously cyclical. It is safe to assume that at some point there will be a slowdown in both exploration and mine investment. Many factors point to this happening, at least for some commodities, before the turn of the century (eg, a lack of small investor confidence in investing in junior exploration companies as an outgrowth of the Indonesian BreX scandal, the Asian economic crisis, the sale of gold stocks by central banks and its resultant effect on the gold price, the possible overbuilding of copper and aluminum capacity, etc.). When the downturn comes it will be interesting to see if current trends in regional expenditure undergo significant shifts.
Mining laws and agreements Government attitude shifts toward their mineral sectors over the past decade have resulted in numerous changes to mining policies, laws and approaches to agreements. According to this author’s count, based on primary and secondary data sources, since 1985, over 95 countries have either adopted new mineral sector laws, made a major revision to existing laws, or are currently working on draft legislation. While the mining industry has always been ‘international,’ the past decade has seen an unprecedented level of policy and regulatory changes that affect the ability of companies to operate abroad. These changes are occurring in virtually every region, from Africa to Asia, from South America to North America. Developed, lesser developed and transition countries are all reexamining their resource sectors in the context of a more global, inter-linked economy. Transition countries Pronounced and yet unfinished changes are taking place in the so-called ‘transition’ countries that are moving from central-planning to a more free market orientation. There are wide variations in policy approaches, but an evolutionary process has been suggested that more-or-less describes what has, or is, occurring in many of the larger transitional economies.6 During a first phase, a policy emerges which opens the minerals sector to private enterprises, including foreign companies. An embryonic joint venture law or foreign investment law is introduced but contains features that fail to recognize that the private 5
In Australia and Canada, native title and rights have emerged as serious issues in some regions and in certain classifications of land. In Europe, Australia, Canada and the United States, lands which are now closed to mining activities have expanded. 6 Dorian and Humphreys (1994) have proposed a three step evolutionary process. This author suggests the fourth stage.
enterprise, not the state, should be responsible for key investment and project operations decisions. The mineral resources made available to the private sector, including foreign entities, are restricted and some minerals, such as ‘strategic’ and precious metals, may be placed completely off limits. Specified known deposits and existing mines may be offered to the private sector, but these tend to be marginal or subeconomic. Mines may carry substantial social maintenance burdens as well as unlimited environmental liability. Geological information will be closely guarded or available only at a high cost. During this phase there may be internal disputes as to which agency and level of government has primary and ultimate authority to grant a private party exploration and mining rights. Some foreign companies will express an interest during this phase, but large investments will be rare or absent. In most instances, suspicious policy-makers will have a distorted sense of the actual worth of their resource base, assuming that it is a prize that will be highly valued and sought after by foreign interests. During the second phase, policy-makers come to realize that their resource base is not an essential part of every foreign mining company’s dream portfolio and that to attract foreign investors, policy and regulatory changes will be required. A better understanding of profit motivation (in contrast to production motivation) develops and a fundamental attitude shift begins that recognizes that the success of the mineral sector will require infusions of capital and technology that are most easily provided by the private sector. Steps will be taken to begin to accommodate private and foreign investor needs and objectives. A new mining code may be introduced or changes made to existing laws, regulations and administrative procedures. Some foreign companies will begin to make investments. In situations where the entire body of law is under transition, the investor may seek and obtain a special agreement regulating the operation. As experience is gained with private enterprise in other economic sectors, the mineral industry will begin a third transitional stage. It will be split into three components: economic operations will be transferred in one way or another to the private sector, marginal operations with large social obligations will be maintained by the state, and sub-economic projects will be closed or mothballed. Further changes will be made to the regulatory system that loosens state control over individual operations and a mining code may emerge that begins to reflect ‘international’ norms. Foreign investors will be actively sought out and viewed increasingly as participants in economic development instead of as mere exploiters. Deposit oriented exploration functions of geological survey organizations will diminish or be eliminated. In the final stage of transition, a fully market-oriented industry emerges in which the state has withdrawn from any operator role. The new role of the state is that of regulator, not operator. A new or 81
Global changes in mining laws, agreements and tax systems: James M. Otto
amended mining law emerges clearly defining the functions and powers of specific government officers and clearly delineating the rights and obligations of private sector parties granted exploration and mining authorizations. In addition to its regulatory role, the state acts as a promoter of further private sector development of the sector by providing public services such as Geological Survey drawn maps, open-file reporting systems and so forth. This evolutionary process is well advanced in some transition countries (Hungary, eastern Germany, Mozambique), but in others (Russia and China) the process has been slow and may take several generations. Regulatory systems are complex and exploration and mining activities are usually subject to a wide variety of laws besides the mining law. Laws regulating foreign exchange, business formation, land, labor, water, environment and so forth may all be in a state of change and each will pose its own unique risks, or assurances, to foreign mining investors. Less developed countries Historically, less developed countries (LDCs) have been faced with a dilemma, as noted by Chowdbury (1988): The dilemma of the host State$was that, while on one hand ‘the atmosphere in which foreign investment is now being judged’ has to be viewed in the historical circumstances of decolonization, memories of exploitation and the persistence of unequal bargaining power, on the other hand, the resources of developing countries could only be exploited through the most complex technological operations and would require international markets for their products which could not be obtained without the cooperation of the capital exporting countries and their TNCs [transnational corporations].
Faced with this dilemma, many LDCs turned inward and developed policies that excluded foreign investment in their natural resources sectors or made such investment subject to terms that were not acceptable to most potential foreign investors. The result was that the state or the national private sector took control of the mineral sector. While some nations saw mining substantially expand under state ownership (such as in China), in many others the mineral sector stagnated, declined or never developed. Attitudes in LDCs toward foreign investment have changed appreciably over the last decade. In the words of Moran (1992): The 1970s [and 1960s, au.] was a time of broad-based attacks against multinational corporations in the Third World, with the sharpest hostility reserved for investors in the natural resource sector. Something of a turnaround occurred during the 1980s, stimulated by the debt crisis and a perceived need for the capital and management that foreign companies offer the development process. Nations with a long tradition of
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suspicion toward international companies—from Argentina to India, Mozambique to Yemen, the Andean Pact to the sub-Saharan periphery—began to incorporate foreign firms into their five year plans.
This turnaround, which began in the mid-1980s, has continued and intensified in the 1990s.7 Shifts in government attitudes toward mining have been reflected in mining policies, laws and agreements. In many LDCs, the key impediment to mineral sector foreign investment was a restriction, or ban, on the foreign equity share allowed in a mining project. In some nations the fear of ownership control over resources was so strong that restrictions were written into the national constitution (Brazil, Philippines), while in others it was incorporated in the mining or foreign investment law, implemented as a de facto policy, or agreed to in a regional pact (for example, Decision 24 of the Andean Pact). Many mining companies will not invest in a country where there is a requirement that the government or a local party hold a majority equity share.8 In the 1990s, majority local equity requirements have been eliminated in most countries and many now allow up to 100% foreign ownership in a mineral project.9 Major mining operations with foreign participation can be regulated under the general mining act, under an ad hoc agreement or by a combination of the two. It can be argued that there is a trend for countries to move away from special mining agreements to the broader application of the general mining law as their legal and mineral sectors mature,1011 but it can also be argued that there is a trend for LDCs to introduce more ad hoc ‘mining development agreements.’12 Evidence supports both contentions. In reality, governments are using systems or combinations of systems based on their unique situations. Regardless of whether a country uses ad hoc or model agreements13 for large projects, almost all countries have a general mining code. Older codes focused primarily on permitting, reporting, inspection 7 For a description of this transformation process see Otto (1994) and Waelde (1986). 8 In a 1992 United Nation survey of 39 transnational mining companies (Otto, 1992), 20 companies indicated they would not invest in any country where there was a mandatory majority equity participation requirement, and the remaining 19 indicated they considered such a requirement to be a major disincentive. Fourteen companies indicated that majority participation by private sector nationals was unacceptable and 17 indicated it was a major disincentive. 9 Exceptions exist. In Papua New Guinea, the government may opt to take a minority paid equity share. In Ghana and some West Africa region countries, governments may require a minority free equity share. 10 Such as in Western Australia with the phasing out of new special mining project acts. 11 Negotiation is time consuming and costly for government. If high levels of activity occur, governments may look to simpler methods than negotiated agreements, such as the use of standardized application procedures under the mining code or model agreements. 12 See Thomas Waelde (1986). 13 Examples of countries with model mining agreements include Indonesia, the Philippines and Vietnam.
Global changes in mining laws, agreements and tax systems: James M. Otto
and safety issues. Today’s codes still retain permitting as a core function, but have introduced more efficient approaches. For example, many older codes required on-the-ground physical claim staking as part of the application process for exploration tracts. Newer codes have tended to shift to map-based block or geographical coordinate application methods. Reporting requirements have been strengthened requiring a greater level of detail and improvements have been made in making these reports readily accessible to the public once confidentiality periods have expired.14 The degree to which mining codes still address safety varies widely. In LDCs where substantial levels of industrialization have occurred, mine safety and inspection may no longer be regulated under the mining code, but instead under another law dealing more generally with industrial safety. There has been a growing recognition of the need to provide mechanisms for better land access to explorers, and to provide compensation to landholders for any resulting damages. Reclamation is now a standard topic in most mining codes. Environmental awareness in LDCs has increased, but this is not always reflected in the newer mining codes. Often, a separate environmental act regulates environmental matters, but where this is not the case, environmental provisions in mining acts have been expanded. Small scale mining occurs in many nations and was often considered illegal. There has been a trend to legitimize small scale mining by providing a regulatory structure either in the mining code or in a special act (for example, the Philippines has introduced a stand-alone small scale mining act). Exploration tenure periods have expanded, but so have protective measures to ensure that land is not tied up without effective exploration taking place. Protective measures include annual percentage relinquishment requirements, minimum annual expenditure requirements,15 periodic reviews and so forth. While the above trends have been reflected in many new mining codes, they are by no means uniform. Structures of government, administrative capabilities, historical experience and the political situation vary widely from country to country and all will affect the approach any one country takes in drafting a mining law.
Taxation Mining companies are not in the business to produce minerals, rather they mine to produce profits. Government imposed taxes and other imposts directly reduce the amount of profits, and mining companies pay
close attention to fiscal systems when making investment decisions. In a 1992 United Nations survey by Otto (1992), 39 multinational mining companies were asked to rank 60 mining investment criteria. Four out of the 15 top-ranked criteria related to taxation (Table 1). Of main concern to companies was the overall level of profitability. Also of keen concern was the ability of a company to predetermine its tax liability prior to making the mining investment decision. This latter point has been recognized by many governments who now provide, right from the exploration stage, a known, published fiscal system. Today, in most countries, taxes and other imposts are defined in the general tax laws and mining code. In other nations some or all tax terms are stated in a government/company agreement negotiated prior to the commencement of exploration. It is rare to see a nation imposing or negotiating new ad hoc taxation measures on an operation between the exploration and mining phases. The 1992 United Nations survey also indicated that companies are concerned about the stability of the fiscal regime (stability was ranked 10th out of the 60 investment criteria). Not all nations provide for tax system stabilization. In nations where impositions are imposed through the general tax laws, stabilization is rarely provided. However, in nations where large mining projects are regulated under a negotiated agreement, it is common to see one or more types of tax rates stabilized for a stated time period. In a 1997 study by the Colorado School of Mines (Otto et al., 1997) the tax systems of 25 nations were examined and about one third of the systems provided some form of tax system stabilization. In a few instances, tax rate stabilization is provided for by law (such as in Argentina: 30 years for some taxes; Chile: 10 years for income tax under an electable special regime; Uzbekistan: 10 years for all taxes), while in others the stabilization takes the legal form an agreement (Indonesia: life of the agreement; Philippines: negotiable under a financial and technical assistance agreement; Peru: 10–15 years depending on the size of investment). Another factor important to many mining companies is the government’s approach to ‘ring-fencing.’ Ring-fencing refers to whether individual operations of a single company are taxed independently, ie, ring fenced, or whether the accounts from individual operations may be aggregated for tax purposes, ie, not ring Table 1
Ranking of taxation criteria out of 60 investment criteria
Rank
Decision criteria
3 5 10 13
Measure of profitability Ability to predetermine tax liability Stability of fiscal regime Method and level of tax levies
14
However, many Latin American countries still have no or minimal reporting requirements. 15 Some nations have adopted an escalating minimum expenditure requirement. Under such a scheme, the holder of the exploration right may retain area but must expend more on each unit area each year. The amount required per unit area increases rapidly encouraging early relinquishment of lower priority areas.
Source: Derived from Otto (1992).
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Global changes in mining laws, agreements and tax systems: James M. Otto
fenced. For example, in a country without ring-fencing, a company could offset exploration costs incurred throughout its various operations in the country against income from a mine. The Colorado School of Mines study indicated that many countries do not impose ring-fencing restrictions on books of account. The exceptions mainly occur in nations where different tax regimes apply to different operations under negotiated agreements (such as large projects in Papua New Guinea and Indonesian operations regulated under contracts of work). Table 2 indicates the status of ring-fencing and tax stabilization in 25 countries. Globally, there has been a pronounced trend to reduce the number of special tax incentives available to the mining industry. In the past it has been argued that the mining industry should receive special tax treatment because of its capital intensive and inherently risky nature. While some governments still provide certain special tax allowances and credits to the mining sector, there has been a move by many governments to provide a more uniform approach to taxation across all economic sectors. Where tax credits are provided to the mining sector, they often are to improve local infrastructure or to further a particular objective of government not directly related to an individual mine (Canada: qualified scientific research; Chile: available for certain donations to cultural, educational and art related institutions; Papua New Table 2
Tax aspects in 25 mineral producing jurisdictions (large scale operations)
Arizona, USA Argentina Bolivia Brazil China Chile Ethiopia Ghana Greenland India Indonesia Ivory Coast Kazakstan Mexico Namibia Nevada, USA Ontario, Canada Papua New Guinea Peru Philippines South Africa Sweden Tanzania Uzbekistan Western Australia
Some form of tax Ring-fencing system stabilization is available to some projects
Some form of tax Loss carryholiday is forward allowed available to some projects
Loss carry-back allowed
Some form of tax credits are available to some projects
No Yes No Yes No Yes No No No No Yes Yes Yes No No No No No Yes Yes No No No Yes No
No No No Yes No Yes No No No Yes No No Yes No No No No No Yes Yes No No No Yes No
Yes No No No No Yes No No Yes No No No No No No Yes Yes No No No No No No No No
No No Yes No No Yes No No No No No No Yes No No No Yes Yes No No No No No Yes No
No No No No No No No No No No Yes No Yes No No No No Yes No Yes Yes No Yes Yes No
Source: Derived from data contained in Otto et al. (1997).
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Guinea: construction of approved infrastructure). Various forms of accelerated depreciation remain fairly common. While tax rates vary widely, the mix of tax method types that governments impose is fairly uniform. Although unique taxes do exist in some countries (such as in China and central Asian republics), most impose a fairly standard set that includes: a form of tax based on income or profit; a low level unit or value based royalty; withholding taxes on remitted profits, interest, dividends and contractor payments; rental or land use fees; property taxes; and taxes related to employment. Import and export duties are also common, but now play a much smaller role as governments position their mineral sectors to compete in the global marketplace. The impact of withholding taxes on foreign investors has been reduced in many nations through preferential rates set out in bilateral investment treaties. Value added taxes on services and capital expenditures are becoming more common, but most nations that impose a value added tax provide some mechanism so that mine product exports are not affected. Companies prefer to have taxes imposed that are in some way based on profits, and most governments have systems that are mainly profit based. As was mentioned above, companies are primarily interested in the after-tax profits that can be derived from a project. It is difficult to compare the relative levels of mine taxation in one country to another by
Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Global changes in mining laws, agreements and tax systems: James M. Otto
comparing rates of individual types of taxes. One way to compare the overall tax burden in one country versus another is to create a mine model that captures all cash inflows and outflows and then apply the tax systems of different countries to that model. Various measures of profits (such as Internal Rate of Return and Net Present Value) can be calculated, as can measures of the net tax load. One commonly employed measure of the net tax load is the Effective Tax Rate (EFT), which is defined as the net present value of all amounts paid to government, ie, the sum of all tax types, divided by the net present value of project before-tax cash flow. Table 3 indicates the IRR and EFT in 25 tax jurisdictions for hypothetical gold and copper mines. In calculating the EFT rate, discount rates of 12% and 0% have been used to show the effect of the time value of money on the measure (at a discount rate of 0% the calculation takes into account cash flows unadjusted for the time value of money). The table indicates that, based either on the profit measure (IRR) or the tax measure (EFT), the net effect of various tax systems can vary widely. It is probably safe to assume that countries at either extreme are the most prone to future changes in their tax regimes (for example, in 1997, both Argentina and Chile were debating raising mineral sector taxes). Given the lack of complete and accurate investment data, it is not possible to quantify the effect that a Table 3
high EFT has on investment decision-making by multinational companies. However, those countries with low EFTs, such as Argentina, Chile, Philippines, Brazil and Indonesia, have seen higher levels of mineral sector investment than high EFT countries, such as Uzbekistan, China and India.
Conclusion The trend toward globalization and open economies has been reflected in the national mineral sector policies of many nations. In the 1990s, exploration and mining companies have unprecedented access to a larger portion of the earth’s surface than ever before. Mining policies, regulatory systems and taxation systems have gone through a period of modernization in many nations, and conditions for investment have been shaped by a world marketplace where countries must compete for private sector investment. This paper has examined recent trends in exploration and mining investment, identified some of the changes taking place in regulatory systems, and contains information on mining taxation trends. Given such a broad range of topics, no one topic has been dealt with in detail, and the reader is encouraged to make use of the sources cited in the footnotes for additional information.
Internal rate of return and effective tax rate at two discount rates in 25 tax jurisdictions Hypothetical gold mine
Hypothetical copper mine
Effective tax rate IRR(%) Argentina Chile Philippines Brazil Indonesia South Africa Sweden Greenland Mexico Namibia Bolivia Ethiopia Ghana Papua New Guinea Arizona, USA Peru Ontario, Canada West. Australia Nevada, USA Kazakstan Tanzania India China Uzbekistan
19 19 17 16 16 16 16 15 15 15 14 14 14 14 na 13 12 12 10 10 10 8 −3 − 10
@ 12%(%)
@ 0%(%)
47 51 69 71 75 77 73 79 82 81 88 86 88 89 na 92 102 98 123 115 114 125 211 228
28 34 47 40 46 51 42 53 48 52 50 53 57 52 na 52 67 61 54 62 64 76 112 129
Effective tax rate IRR(%) 16 16 12 13 15 14 14 14 13 12 13 15 15 13 12 11 11 12 na 10 10 9 5 5
@ 12%(%) 59 49 99 93 72 81 78 81 83 97 84 66 93 92 103 106 108 102 na 131 127 136 196 180
@ 0%(%) 35 30 55 41 40 48 38 50 43 54 41 37 54 47 53 47 62 58 na 60 59 68 78 83
Source: Derived from data reported in Otto et al. (1997).
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Global changes in mining laws, agreements and tax systems: James M. Otto
References Chowdbury, S (1988) Permanent sovereignty over natural resources: substratum of the Seoul Declaration. In International Law and Development, ed. P de Klaart et al. Martinus Nijhoff, Dordrecht. Dorian, J and Humphreys, H (1994) Economic impacts of mining. Natural Resources Forum 18, 22–24. Otto, J (1992) A global survey of mineral company investment preferences. In Mineral Investment Conditions in Selected Countries of the Asia-Pacific Region. United Nations ST/ESCAP/1197, United Nations, New York, pp 6-34 and pp 330–342. Otto, J (1994) The changing regulatory framework for mining ventures. Journal of Energy and Natural Resources Law 14, 251–261.
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Otto, J et al. (1997) Global Mining Taxation Comparative Study. Institute for Global Resources Policy and Management, Colorado School of Mines, Golden. Moran, T (1992) Mining companies, economic nationalism, and third world development in the 1990s. In Mineral Wealth and Economic Development, ed. J Tilton. Resources for the Future, Washington DC. IWGMI (1997) Overview of Trends in Canadian Mineral Exploration. Natural Resources, Canada. Reid, G (1994) Encouragement Provided for Resource Investment and Impediments Created by Selected Foreign Jurisdictions. AMPLA Yearbook, AMPLA, Melbourne, pp 269–305. Waelde, T (1986) Third world mineral investment policies in the late 1980s: from restriction back to business. In Proceedings UN Conference on Mineral Development Planning, Buenos Aires, 19–28 May, United Nations DTCO, New York, 1986.
PII: S0301-4207(98)00011-7
Resources Policy. Vol. 24, No. 2, pp. 79–86. 1998 1998 Elsevier Science Ltd. All rights reserved Printed in Great Britain 0301-4207/98 $19.00 ⫹ 0.00
Global changes in mining laws, agreements and tax systems James M. Otto Institute for Global Resources Policy and Management, Colorado School of Mines, Golden, CO 80401-1887, USA
During the 1990s there has been a shift in exploration investment by multinational mining companies into regions that were previously closed or considered too risky. Many nations have introduced changes to their mineral policies, mining laws, and fiscal systems, and the author traces some of the major regulatory trends in developing, developed and transition economies. The author discusses trends in mining laws and provides data on current fiscal systems in 25 tax jurisdictions. The author concludes that the effect of recent changes has been to reduce barriers to entry and lower risk, thus encouraging increased investment in an ever-increasing number of countries. 1998 Elsevier Science Ltd. All rights reserved Keywords: Mining law, taxation, policy
Introduction
Global investment in mineral exploration
In the 1990s, exploration and mining companies have unprecedented access to a larger portion of the earth’s surface than ever before. Direct and indirect barriers to foreign investment in the mineral sector have been reduced or eliminated in many countries. The ‘open door’ mineral sector policies adopted by most nations have posed both challenges and opportunities for companies faced with a complex and extensive array of choices that require a balancing of risks and rewards. While attractive geology remains the driving force behind exploration investment, government policies, laws and fiscal systems play an important supplemental role in exploration decision-making and a pivotal role in mine investment decisions.1 This paper examines recent trends in exploration and mining investment, identifies some of the changes taking place in mining laws and agreements, and presents information on mining-taxation trends.
There is no reliable source of data that reports the aggregate sum of money spent globally on exploration and mining. This is, in part, due to the diverse nature of the mining industry which produces a wide array of minerals ranging from locally mined and consumed sand and gravel to billion dollar vertically integrated copper and aluminum complexes. No single organization collects investment data for all mineral commodities and even within a single commodity group, such as the intensively studied gold industry, coverage is incomplete. Nevertheless, it is possible to identify some global trends. Two important investment trends occurred in the 1990s and these will be described from an exploration perspective. First, the amount of money invested in exploration has increased dramatically. Secondly, the patterns of where this money was spent has shifted toward Australia and developing countries with high geological potential. To illustrate these two points, Figure 1 has been derived from a figure published by the Canadian government (IWGMI, 1997). The figure, although drawn from the Canadian study, reflects proprietary data collected by the Metal Economics Group (MEG) based on its worldwide survey of exploration expenditures by major mining companies.2 In comparing the amounts spent in each region, it
1
In 1992, the author conducted a survey of 39 multinational mining companies for the United Nations to determine the priority ranking of 60 possible exploration and mining investment decision-making criteria. The most important exploration investment decision criteria was ‘geological potential for target mineral.’ Of the top 10 criteria for exploration investment the other nine all related to government policy, law or taxes. For mining investment, nine out of the top 10 criteria also related to government policy, law or taxation (see Otto, 1992, 1994).
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Global changes in mining laws, agreements and tax systems: James M. Otto
Figure 1 Exploration budget of major companies by region. Source: IWGMI (1997), based on Metal Economics Group data
is evident that there has been a marked increase in the total amount budgeted for exploration between 1992 and 1996. While the aggregate exploration budget of the world’s larger mining companies increased, historical patterns of investment also changed. During the 1970s and 1980s, the United States, Canada and Australia attracted the majority of exploration investment. In the 1990s, overall exploration expenditures in the United States did not decrease but remained relatively flat, while exploration in Canada increased only modestly compared to other regions. Exploration budgets for Australia more than doubled during the 5 year period and most of this was generated internally by Australian companies.3 The most dramatic increases occurred in mineral-rich developing countries. Latin America (mainly Chile, Mexico, Argentina and Brazil) enjoyed over a fourfold increase, while selected African, Asian and Pacific nations also saw a high level of increased exploration activity. There are several explanations for why the global aggregate exploration budget increased during the early 1990s. During this period the consumption of most mineral commodities increased and prices generally remained relatively stable or rose. Many companies also enjoyed lowered costs of production 2
The aggregate totals include the budgets of companies expecting to spend more than US$3 million annually on exploration for base and precious metals (excludes uranium and industrial minerals). Note: the US$3 million cut-off results in exploration by many ‘juniors’ not being included. The cut-off may be particularly relevant for Africa and South American countries where there is a high level of activity by juniors. Although the aggregate amounts underestimate the actual total expenditure in each region, they are useful in identifying the aggregate exploration budget allocations of larger companies. 3 While the total amounts spent on exploration in Australia have moved steadily upward during the early 1990s, the percentage of the exploration budgets of Australia’s 13 largest exploration companies spent on grass-roots exploration outside of Australia has increased. For a discussion of the magnitude of this shift and its causes see Reid (1994).
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resulting from technological and other advances. Profits rose and companies expanded their exploration budgets hoping to locate additional reserves to meet actual and projected market demand. Private investor interest in mining was also high due to perceptions that large returns could be made from investment in emerging exploration companies. Actual and purported world class discoveries such as Voisey’s Bay (Canada) and Busang (Indonesia) captured the imagination of small investors. Stock markets in Canada, and to a lesser extent in the United States, Australia and London, provided access to new sources of exploration finance. These and other factors all contributed to the early 1990s exploration boom. The relative shift in exploration budgeting favoring geologically prospective developing nations can also be at least partially explained. Up to the 1990s, some large mining companies perceived investment in most developing nations as too risky or too costly. Political, regulatory, and fiscal systems were not conducive to attracting foreign mining investment. In the late 1980s, and continuing up to today, many developing nations introduced new foreign investment policies, mining laws, foreign exchange laws and fiscal systems specifically with the intent of increasing foreign participation in the mining sector. At the same time as many developing countries were opening their doors to foreign investment, companies in Europe, Canada, Australia and the United States were experiencing weakened security of tenure at home as environmental permitting became more difficult or lengthy4 and land access became increasingly diffi4 In Canada and the United States, environmental permitting can take up to 5 years and more. In many European countries, local community involvement is part of the approval process and has become more difficult as communities have shifted their emphasis away from support for employment generated by ‘dirty’ industries. Examples of major identified deposits that companies have not been able to develop because of ‘environmental’ or land use reasons can be identified in Australia (Coronation Hill), Canada (Windy Craggy), and the United States (New World).
Global changes in mining laws, agreements and tax systems: James M. Otto 5
cult. A perception also emerged that exploration had matured in Europe and the United States and that green-fields exploration efforts in newly opened regions had a higher chance of yielding economically attractive deposits. Mineral markets are notoriously cyclical. It is safe to assume that at some point there will be a slowdown in both exploration and mine investment. Many factors point to this happening, at least for some commodities, before the turn of the century (eg, a lack of small investor confidence in investing in junior exploration companies as an outgrowth of the Indonesian BreX scandal, the Asian economic crisis, the sale of gold stocks by central banks and its resultant effect on the gold price, the possible overbuilding of copper and aluminum capacity, etc.). When the downturn comes it will be interesting to see if current trends in regional expenditure undergo significant shifts.
Mining laws and agreements Government attitude shifts toward their mineral sectors over the past decade have resulted in numerous changes to mining policies, laws and approaches to agreements. According to this author’s count, based on primary and secondary data sources, since 1985, over 95 countries have either adopted new mineral sector laws, made a major revision to existing laws, or are currently working on draft legislation. While the mining industry has always been ‘international,’ the past decade has seen an unprecedented level of policy and regulatory changes that affect the ability of companies to operate abroad. These changes are occurring in virtually every region, from Africa to Asia, from South America to North America. Developed, lesser developed and transition countries are all reexamining their resource sectors in the context of a more global, inter-linked economy. Transition countries Pronounced and yet unfinished changes are taking place in the so-called ‘transition’ countries that are moving from central-planning to a more free market orientation. There are wide variations in policy approaches, but an evolutionary process has been suggested that more-or-less describes what has, or is, occurring in many of the larger transitional economies.6 During a first phase, a policy emerges which opens the minerals sector to private enterprises, including foreign companies. An embryonic joint venture law or foreign investment law is introduced but contains features that fail to recognize that the private 5
In Australia and Canada, native title and rights have emerged as serious issues in some regions and in certain classifications of land. In Europe, Australia, Canada and the United States, lands which are now closed to mining activities have expanded. 6 Dorian and Humphreys (1994) have proposed a three step evolutionary process. This author suggests the fourth stage.
enterprise, not the state, should be responsible for key investment and project operations decisions. The mineral resources made available to the private sector, including foreign entities, are restricted and some minerals, such as ‘strategic’ and precious metals, may be placed completely off limits. Specified known deposits and existing mines may be offered to the private sector, but these tend to be marginal or subeconomic. Mines may carry substantial social maintenance burdens as well as unlimited environmental liability. Geological information will be closely guarded or available only at a high cost. During this phase there may be internal disputes as to which agency and level of government has primary and ultimate authority to grant a private party exploration and mining rights. Some foreign companies will express an interest during this phase, but large investments will be rare or absent. In most instances, suspicious policy-makers will have a distorted sense of the actual worth of their resource base, assuming that it is a prize that will be highly valued and sought after by foreign interests. During the second phase, policy-makers come to realize that their resource base is not an essential part of every foreign mining company’s dream portfolio and that to attract foreign investors, policy and regulatory changes will be required. A better understanding of profit motivation (in contrast to production motivation) develops and a fundamental attitude shift begins that recognizes that the success of the mineral sector will require infusions of capital and technology that are most easily provided by the private sector. Steps will be taken to begin to accommodate private and foreign investor needs and objectives. A new mining code may be introduced or changes made to existing laws, regulations and administrative procedures. Some foreign companies will begin to make investments. In situations where the entire body of law is under transition, the investor may seek and obtain a special agreement regulating the operation. As experience is gained with private enterprise in other economic sectors, the mineral industry will begin a third transitional stage. It will be split into three components: economic operations will be transferred in one way or another to the private sector, marginal operations with large social obligations will be maintained by the state, and sub-economic projects will be closed or mothballed. Further changes will be made to the regulatory system that loosens state control over individual operations and a mining code may emerge that begins to reflect ‘international’ norms. Foreign investors will be actively sought out and viewed increasingly as participants in economic development instead of as mere exploiters. Deposit oriented exploration functions of geological survey organizations will diminish or be eliminated. In the final stage of transition, a fully market-oriented industry emerges in which the state has withdrawn from any operator role. The new role of the state is that of regulator, not operator. A new or 81
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amended mining law emerges clearly defining the functions and powers of specific government officers and clearly delineating the rights and obligations of private sector parties granted exploration and mining authorizations. In addition to its regulatory role, the state acts as a promoter of further private sector development of the sector by providing public services such as Geological Survey drawn maps, open-file reporting systems and so forth. This evolutionary process is well advanced in some transition countries (Hungary, eastern Germany, Mozambique), but in others (Russia and China) the process has been slow and may take several generations. Regulatory systems are complex and exploration and mining activities are usually subject to a wide variety of laws besides the mining law. Laws regulating foreign exchange, business formation, land, labor, water, environment and so forth may all be in a state of change and each will pose its own unique risks, or assurances, to foreign mining investors. Less developed countries Historically, less developed countries (LDCs) have been faced with a dilemma, as noted by Chowdbury (1988): The dilemma of the host State$was that, while on one hand ‘the atmosphere in which foreign investment is now being judged’ has to be viewed in the historical circumstances of decolonization, memories of exploitation and the persistence of unequal bargaining power, on the other hand, the resources of developing countries could only be exploited through the most complex technological operations and would require international markets for their products which could not be obtained without the cooperation of the capital exporting countries and their TNCs [transnational corporations].
Faced with this dilemma, many LDCs turned inward and developed policies that excluded foreign investment in their natural resources sectors or made such investment subject to terms that were not acceptable to most potential foreign investors. The result was that the state or the national private sector took control of the mineral sector. While some nations saw mining substantially expand under state ownership (such as in China), in many others the mineral sector stagnated, declined or never developed. Attitudes in LDCs toward foreign investment have changed appreciably over the last decade. In the words of Moran (1992): The 1970s [and 1960s, au.] was a time of broad-based attacks against multinational corporations in the Third World, with the sharpest hostility reserved for investors in the natural resource sector. Something of a turnaround occurred during the 1980s, stimulated by the debt crisis and a perceived need for the capital and management that foreign companies offer the development process. Nations with a long tradition of
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suspicion toward international companies—from Argentina to India, Mozambique to Yemen, the Andean Pact to the sub-Saharan periphery—began to incorporate foreign firms into their five year plans.
This turnaround, which began in the mid-1980s, has continued and intensified in the 1990s.7 Shifts in government attitudes toward mining have been reflected in mining policies, laws and agreements. In many LDCs, the key impediment to mineral sector foreign investment was a restriction, or ban, on the foreign equity share allowed in a mining project. In some nations the fear of ownership control over resources was so strong that restrictions were written into the national constitution (Brazil, Philippines), while in others it was incorporated in the mining or foreign investment law, implemented as a de facto policy, or agreed to in a regional pact (for example, Decision 24 of the Andean Pact). Many mining companies will not invest in a country where there is a requirement that the government or a local party hold a majority equity share.8 In the 1990s, majority local equity requirements have been eliminated in most countries and many now allow up to 100% foreign ownership in a mineral project.9 Major mining operations with foreign participation can be regulated under the general mining act, under an ad hoc agreement or by a combination of the two. It can be argued that there is a trend for countries to move away from special mining agreements to the broader application of the general mining law as their legal and mineral sectors mature,1011 but it can also be argued that there is a trend for LDCs to introduce more ad hoc ‘mining development agreements.’12 Evidence supports both contentions. In reality, governments are using systems or combinations of systems based on their unique situations. Regardless of whether a country uses ad hoc or model agreements13 for large projects, almost all countries have a general mining code. Older codes focused primarily on permitting, reporting, inspection 7 For a description of this transformation process see Otto (1994) and Waelde (1986). 8 In a 1992 United Nation survey of 39 transnational mining companies (Otto, 1992), 20 companies indicated they would not invest in any country where there was a mandatory majority equity participation requirement, and the remaining 19 indicated they considered such a requirement to be a major disincentive. Fourteen companies indicated that majority participation by private sector nationals was unacceptable and 17 indicated it was a major disincentive. 9 Exceptions exist. In Papua New Guinea, the government may opt to take a minority paid equity share. In Ghana and some West Africa region countries, governments may require a minority free equity share. 10 Such as in Western Australia with the phasing out of new special mining project acts. 11 Negotiation is time consuming and costly for government. If high levels of activity occur, governments may look to simpler methods than negotiated agreements, such as the use of standardized application procedures under the mining code or model agreements. 12 See Thomas Waelde (1986). 13 Examples of countries with model mining agreements include Indonesia, the Philippines and Vietnam.
Global changes in mining laws, agreements and tax systems: James M. Otto
and safety issues. Today’s codes still retain permitting as a core function, but have introduced more efficient approaches. For example, many older codes required on-the-ground physical claim staking as part of the application process for exploration tracts. Newer codes have tended to shift to map-based block or geographical coordinate application methods. Reporting requirements have been strengthened requiring a greater level of detail and improvements have been made in making these reports readily accessible to the public once confidentiality periods have expired.14 The degree to which mining codes still address safety varies widely. In LDCs where substantial levels of industrialization have occurred, mine safety and inspection may no longer be regulated under the mining code, but instead under another law dealing more generally with industrial safety. There has been a growing recognition of the need to provide mechanisms for better land access to explorers, and to provide compensation to landholders for any resulting damages. Reclamation is now a standard topic in most mining codes. Environmental awareness in LDCs has increased, but this is not always reflected in the newer mining codes. Often, a separate environmental act regulates environmental matters, but where this is not the case, environmental provisions in mining acts have been expanded. Small scale mining occurs in many nations and was often considered illegal. There has been a trend to legitimize small scale mining by providing a regulatory structure either in the mining code or in a special act (for example, the Philippines has introduced a stand-alone small scale mining act). Exploration tenure periods have expanded, but so have protective measures to ensure that land is not tied up without effective exploration taking place. Protective measures include annual percentage relinquishment requirements, minimum annual expenditure requirements,15 periodic reviews and so forth. While the above trends have been reflected in many new mining codes, they are by no means uniform. Structures of government, administrative capabilities, historical experience and the political situation vary widely from country to country and all will affect the approach any one country takes in drafting a mining law.
Taxation Mining companies are not in the business to produce minerals, rather they mine to produce profits. Government imposed taxes and other imposts directly reduce the amount of profits, and mining companies pay
close attention to fiscal systems when making investment decisions. In a 1992 United Nations survey by Otto (1992), 39 multinational mining companies were asked to rank 60 mining investment criteria. Four out of the 15 top-ranked criteria related to taxation (Table 1). Of main concern to companies was the overall level of profitability. Also of keen concern was the ability of a company to predetermine its tax liability prior to making the mining investment decision. This latter point has been recognized by many governments who now provide, right from the exploration stage, a known, published fiscal system. Today, in most countries, taxes and other imposts are defined in the general tax laws and mining code. In other nations some or all tax terms are stated in a government/company agreement negotiated prior to the commencement of exploration. It is rare to see a nation imposing or negotiating new ad hoc taxation measures on an operation between the exploration and mining phases. The 1992 United Nations survey also indicated that companies are concerned about the stability of the fiscal regime (stability was ranked 10th out of the 60 investment criteria). Not all nations provide for tax system stabilization. In nations where impositions are imposed through the general tax laws, stabilization is rarely provided. However, in nations where large mining projects are regulated under a negotiated agreement, it is common to see one or more types of tax rates stabilized for a stated time period. In a 1997 study by the Colorado School of Mines (Otto et al., 1997) the tax systems of 25 nations were examined and about one third of the systems provided some form of tax system stabilization. In a few instances, tax rate stabilization is provided for by law (such as in Argentina: 30 years for some taxes; Chile: 10 years for income tax under an electable special regime; Uzbekistan: 10 years for all taxes), while in others the stabilization takes the legal form an agreement (Indonesia: life of the agreement; Philippines: negotiable under a financial and technical assistance agreement; Peru: 10–15 years depending on the size of investment). Another factor important to many mining companies is the government’s approach to ‘ring-fencing.’ Ring-fencing refers to whether individual operations of a single company are taxed independently, ie, ring fenced, or whether the accounts from individual operations may be aggregated for tax purposes, ie, not ring Table 1
Ranking of taxation criteria out of 60 investment criteria
Rank
Decision criteria
3 5 10 13
Measure of profitability Ability to predetermine tax liability Stability of fiscal regime Method and level of tax levies
14
However, many Latin American countries still have no or minimal reporting requirements. 15 Some nations have adopted an escalating minimum expenditure requirement. Under such a scheme, the holder of the exploration right may retain area but must expend more on each unit area each year. The amount required per unit area increases rapidly encouraging early relinquishment of lower priority areas.
Source: Derived from Otto (1992).
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Global changes in mining laws, agreements and tax systems: James M. Otto
fenced. For example, in a country without ring-fencing, a company could offset exploration costs incurred throughout its various operations in the country against income from a mine. The Colorado School of Mines study indicated that many countries do not impose ring-fencing restrictions on books of account. The exceptions mainly occur in nations where different tax regimes apply to different operations under negotiated agreements (such as large projects in Papua New Guinea and Indonesian operations regulated under contracts of work). Table 2 indicates the status of ring-fencing and tax stabilization in 25 countries. Globally, there has been a pronounced trend to reduce the number of special tax incentives available to the mining industry. In the past it has been argued that the mining industry should receive special tax treatment because of its capital intensive and inherently risky nature. While some governments still provide certain special tax allowances and credits to the mining sector, there has been a move by many governments to provide a more uniform approach to taxation across all economic sectors. Where tax credits are provided to the mining sector, they often are to improve local infrastructure or to further a particular objective of government not directly related to an individual mine (Canada: qualified scientific research; Chile: available for certain donations to cultural, educational and art related institutions; Papua New Table 2
Tax aspects in 25 mineral producing jurisdictions (large scale operations)
Arizona, USA Argentina Bolivia Brazil China Chile Ethiopia Ghana Greenland India Indonesia Ivory Coast Kazakstan Mexico Namibia Nevada, USA Ontario, Canada Papua New Guinea Peru Philippines South Africa Sweden Tanzania Uzbekistan Western Australia
Some form of tax Ring-fencing system stabilization is available to some projects
Some form of tax Loss carryholiday is forward allowed available to some projects
Loss carry-back allowed
Some form of tax credits are available to some projects
No Yes No Yes No Yes No No No No Yes Yes Yes No No No No No Yes Yes No No No Yes No
No No No Yes No Yes No No No Yes No No Yes No No No No No Yes Yes No No No Yes No
Yes No No No No Yes No No Yes No No No No No No Yes Yes No No No No No No No No
No No Yes No No Yes No No No No No No Yes No No No Yes Yes No No No No No Yes No
No No No No No No No No No No Yes No Yes No No No No Yes No Yes Yes No Yes Yes No
Source: Derived from data contained in Otto et al. (1997).
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Guinea: construction of approved infrastructure). Various forms of accelerated depreciation remain fairly common. While tax rates vary widely, the mix of tax method types that governments impose is fairly uniform. Although unique taxes do exist in some countries (such as in China and central Asian republics), most impose a fairly standard set that includes: a form of tax based on income or profit; a low level unit or value based royalty; withholding taxes on remitted profits, interest, dividends and contractor payments; rental or land use fees; property taxes; and taxes related to employment. Import and export duties are also common, but now play a much smaller role as governments position their mineral sectors to compete in the global marketplace. The impact of withholding taxes on foreign investors has been reduced in many nations through preferential rates set out in bilateral investment treaties. Value added taxes on services and capital expenditures are becoming more common, but most nations that impose a value added tax provide some mechanism so that mine product exports are not affected. Companies prefer to have taxes imposed that are in some way based on profits, and most governments have systems that are mainly profit based. As was mentioned above, companies are primarily interested in the after-tax profits that can be derived from a project. It is difficult to compare the relative levels of mine taxation in one country to another by
Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Global changes in mining laws, agreements and tax systems: James M. Otto
comparing rates of individual types of taxes. One way to compare the overall tax burden in one country versus another is to create a mine model that captures all cash inflows and outflows and then apply the tax systems of different countries to that model. Various measures of profits (such as Internal Rate of Return and Net Present Value) can be calculated, as can measures of the net tax load. One commonly employed measure of the net tax load is the Effective Tax Rate (EFT), which is defined as the net present value of all amounts paid to government, ie, the sum of all tax types, divided by the net present value of project before-tax cash flow. Table 3 indicates the IRR and EFT in 25 tax jurisdictions for hypothetical gold and copper mines. In calculating the EFT rate, discount rates of 12% and 0% have been used to show the effect of the time value of money on the measure (at a discount rate of 0% the calculation takes into account cash flows unadjusted for the time value of money). The table indicates that, based either on the profit measure (IRR) or the tax measure (EFT), the net effect of various tax systems can vary widely. It is probably safe to assume that countries at either extreme are the most prone to future changes in their tax regimes (for example, in 1997, both Argentina and Chile were debating raising mineral sector taxes). Given the lack of complete and accurate investment data, it is not possible to quantify the effect that a Table 3
high EFT has on investment decision-making by multinational companies. However, those countries with low EFTs, such as Argentina, Chile, Philippines, Brazil and Indonesia, have seen higher levels of mineral sector investment than high EFT countries, such as Uzbekistan, China and India.
Conclusion The trend toward globalization and open economies has been reflected in the national mineral sector policies of many nations. In the 1990s, exploration and mining companies have unprecedented access to a larger portion of the earth’s surface than ever before. Mining policies, regulatory systems and taxation systems have gone through a period of modernization in many nations, and conditions for investment have been shaped by a world marketplace where countries must compete for private sector investment. This paper has examined recent trends in exploration and mining investment, identified some of the changes taking place in regulatory systems, and contains information on mining taxation trends. Given such a broad range of topics, no one topic has been dealt with in detail, and the reader is encouraged to make use of the sources cited in the footnotes for additional information.
Internal rate of return and effective tax rate at two discount rates in 25 tax jurisdictions Hypothetical gold mine
Hypothetical copper mine
Effective tax rate IRR(%) Argentina Chile Philippines Brazil Indonesia South Africa Sweden Greenland Mexico Namibia Bolivia Ethiopia Ghana Papua New Guinea Arizona, USA Peru Ontario, Canada West. Australia Nevada, USA Kazakstan Tanzania India China Uzbekistan
19 19 17 16 16 16 16 15 15 15 14 14 14 14 na 13 12 12 10 10 10 8 −3 − 10
@ 12%(%)
@ 0%(%)
47 51 69 71 75 77 73 79 82 81 88 86 88 89 na 92 102 98 123 115 114 125 211 228
28 34 47 40 46 51 42 53 48 52 50 53 57 52 na 52 67 61 54 62 64 76 112 129
Effective tax rate IRR(%) 16 16 12 13 15 14 14 14 13 12 13 15 15 13 12 11 11 12 na 10 10 9 5 5
@ 12%(%) 59 49 99 93 72 81 78 81 83 97 84 66 93 92 103 106 108 102 na 131 127 136 196 180
@ 0%(%) 35 30 55 41 40 48 38 50 43 54 41 37 54 47 53 47 62 58 na 60 59 68 78 83
Source: Derived from data reported in Otto et al. (1997).
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Global changes in mining laws, agreements and tax systems: James M. Otto
References Chowdbury, S (1988) Permanent sovereignty over natural resources: substratum of the Seoul Declaration. In International Law and Development, ed. P de Klaart et al. Martinus Nijhoff, Dordrecht. Dorian, J and Humphreys, H (1994) Economic impacts of mining. Natural Resources Forum 18, 22–24. Otto, J (1992) A global survey of mineral company investment preferences. In Mineral Investment Conditions in Selected Countries of the Asia-Pacific Region. United Nations ST/ESCAP/1197, United Nations, New York, pp 6-34 and pp 330–342. Otto, J (1994) The changing regulatory framework for mining ventures. Journal of Energy and Natural Resources Law 14, 251–261.
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Otto, J et al. (1997) Global Mining Taxation Comparative Study. Institute for Global Resources Policy and Management, Colorado School of Mines, Golden. Moran, T (1992) Mining companies, economic nationalism, and third world development in the 1990s. In Mineral Wealth and Economic Development, ed. J Tilton. Resources for the Future, Washington DC. IWGMI (1997) Overview of Trends in Canadian Mineral Exploration. Natural Resources, Canada. Reid, G (1994) Encouragement Provided for Resource Investment and Impediments Created by Selected Foreign Jurisdictions. AMPLA Yearbook, AMPLA, Melbourne, pp 269–305. Waelde, T (1986) Third world mineral investment policies in the late 1980s: from restriction back to business. In Proceedings UN Conference on Mineral Development Planning, Buenos Aires, 19–28 May, United Nations DTCO, New York, 1986.