Avoiding Mining Tax Relief Pitfalls During a Crisis

Establishing effective tax policy for the mining sector can be a challenge in the best of times, especially for resource-rich developing countries which may lack sector-specific experience and technical capacity. Under the pressure of a crisis, it is critical for countries to steer clear of inefficient tax relief measures which may be unnecessarily costly.

Mining companies have been squeezed by COVID-19-related shutdown orders and supply chain disruptions, but not all operators are affected the same way. For instance, an open-pit gold mine may face minimal disruption and enjoy prices that rise along with global uncertainty.

Tax relief recipients should face rigorous screening and demonstrate that they would need to lay off workers or shutter operations without government support. Policy makers need to pay close attention to details such as a project’s cash flow, relevant commodity prices, debt obligations and operability during the crisis.

Moreover, governments would be wise to set clear conditions for support and only relieve companies which, for example, commit to retain workers and refrain from paying executive bonuses and investor dividends.

In the right circumstances, the following tax measures may provide prudent relief to mining companies:

• payroll tax referrals;
• value-added tax relief;
• import duty relief;
• deductions or credits for health-related expenditure.

As a last resort, policy makers may consider royalty payment deferrals or waivers, only if an operation will be cash-flow positive in the foreseeable future. Governments should view any waived amounts as capital injections and receive equity in the mine in return.

Ineffective and inefficient tax policies such as income tax holidays and withholding tax relief are best to be totally avoided.

Government relief should be conditioned on companies renouncing artificial tax avoidance arrangements as well as adopting modern, transparent, and fair transfer pricing practices. Governments should also take the opportunity to strengthen their fiscal regime by, for instance, introducing an excess profit tax.

Tax base erosion and profit shifting (BEPS) risk in the mining sector has been highlighted as a major concern by the 76 member nations of the Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development (IGF), which includes many resource-rich developing countries.[1]

 

 

[1] As part of IGF’s COVID-19 Response Series, a partnership was established with the African Tax Administration Forum (ATAF) to publish a guidance brief and organize associated webinars to help mining policy makers navigate complex tax relief measures during the crisis.