The primary commodity price boom early this century has often been attributed to a commodity ‘super-cycle’, i.e., a price upsurge greater than what might be expected in ‘normal’ booms. This was largely due to some minerals as most agricultural commodity price increases were more modest.
This minerals boom improved many developing country growth records, not least in Africa. With growing pressures to act urgently in response to accelerating global warming, mitigation efforts have been stepped up, promising energy transitions to reduce greenhouse gas emissions.
These require major shifts from fossil fuel combustion to renewable energy and complementary (e.g., transport) technologies. This energy transition requires more of specific minerals like lithium, copper and cobalt. This increased demand for minerals offers resource-rich economies more opportunities for greater domestic resource mobilization for development.
The Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development (IGF) and the African Tax Administration Forum (ATAF) report, The Future of Resource Taxation: 10 policy ideas to mobilize mining revenues, reviews major problems faced by African and other governments trying to greatly increase revenue from mining.
Great expectations, little taxation
Colonial and neo-colonial mining arrangements have rarely delivered the revenue needed by post-colonial governments. Weak governance, overly generous tax incentives, poor fiscal policies, bad contracts, as well as tax avoidance and evasion have all eroded mineral revenues for developing countries.
Resource-rich countries have been rethinking how to benefit more from mining in the face of the Covid-19 pandemic, worsening developing country debt crises, and increasingly uncertain government revenues and expenditures.
Mining royalties and taxation have remained largely unchanged for decades, while corporate income tax is hard to collect, vulnerable to profit shifting and often minimized with the aid of tax professionals and corrupt officials.
Improving taxation
Taxing transnational corporations has long posed major challenges. Poor laws and enforcement as well as limited funding and staff mean most developing countries are poorly equipped to apply complex international tax norms, such as the ‘arm’s-length principle’ and ‘double taxation treaties’.
Developing nations are especially vulnerable to tax base erosion and profit shifting (BEPS). International Monetary Fund staff estimate African countries have lost annual mining revenue up to $730 million annually due to BEPS.
Many developing countries identified ‘transfer pricing’ as the greatest challenge to taxing mining. The problem has been made worse by mining tax regimes and investment agreements favouring investors, especially from abroad.
Such agreements often contain fiscal incentives making mining revenue collection difficult. Worse, many governments believe generous tax incentives are necessary to attract mining investment. But these typically undermine effective tax administration, causing significant revenue losses.
Also, policy conditionalities typically ‘lock in’ poorly designed fiscal conditions and mining contracts, often required or recommended by the IMF or World Bank. These tend to benefit investors, potentially resulting in costly disputes for host governments.
Generating substantial government revenue from artisanal and small-scale mining (ASM) is difficult. As ASM induces more local spending, rather than extraction or export taxes, indirect taxes and wealth taxes are probably better for such incomes.
Governments of resource-rich developing countries require finance and reliable personnel for successful implementation, to ensure accountability and curb corruption. Sufficient financial and technical assistance can greatly improve mining revenue collection, ensuring companies pay all royalties and taxes due.
Effective implementation needs to be well supported by international agreements and organizations, development partners, and civil society. Tax incentives undermining government policy objectives and legal systems should be avoided.
Taxing better not easy
More access to information and expertise can greatly improve mining tax administration. Information, particularly from other jurisdictions, is critical for tax administrations to better collect taxes due. Sadly, progress has been painfully slow in many developing countries.
Instruments designed to improve information exchange include bilateral investment and tax treaties, tax information exchange agreements, the Organization for Economic Co-operation and Development (OECD) Convention on Mutual Administrative Assistance in Tax Matters, and the ATAF Multilateral Agreement on Assistance in Tax Matters.
Mining revenue collection needs to be able to verify the quantity and quality of mineral reserves and extracts. Key challenges include enhancing tax audit capacity and getting up-to-date knowledge of mining, including implications of changes in mining techniques.
Better inter-agency cooperation is often necessary for better regulation and to avoid an incoherent, fragmented approach. Many mining revenue BEPS problems are due to capacity constraints, e.g., whether governments can effectively verify the costs of goods and services and mineral prices.
Many transactions also require tax auditors to have detailed knowledge of the mining value chain. Many aspects of mining operations allow inflating actual costs to evade taxes. Valuing intangibles, such as intellectual property, is also difficult. Many countries also lack regulations to tax the sale of offshore indirect mining assets, often losing much revenue as a consequence.
Too little too late?
Mineral-rich developing countries hope for more ‘resource rents’ from mining to significantly enhance government revenue. They hope mining taxation will collect much more revenue, subject to other policy goals. However, in most cases, mining has failed to deliver the expected revenues.
Inappropriate laws and investment agreements, overly generous tax incentives, as well as tax evasion and avoidance have contributed to this failure. Some authorities lack the expertise, information and means to more effectively tax mining. Corruption and poor revenue management also remain challenges.
Thankfully, mining revenue collection has improved, albeit modestly. Many countries are improving their mining tax regulations and strengthening their tax audit capacity.
Better international cooperation can address many problems, including information asymmetries. All countries implementing the Extractives Industries Transparency Initiative (EITI) are now required to disclose mining, oil, and gas contracts. This can significantly improve transparency.
Although welcome, such improvements are still far from enough to meet the considerable domestic revenue mobilization needs of developing countries soon enough to adequately accelerate sustainable development after dismal progress for almost a decade.
Jomo Kwame Sundaram is a prominent Malaysian economist. He is senior adviser at the Khazanah Research Institute, visiting fellow at the Initiative for Policy Dialogue, Columbia University, and adjunct professor at the International Islamic University.
