Unusual but effective: how some tax incentives are used to promote mining

Mining is an industry that demands considerable time and investment into each project, especially new operations, which can discourage companies from developing projects. Offering generous tax breaks can be an effective way for governments to encourage mining in their countries, but this incentive needs to be balanced with the potential benefits. The country needs to be able to earn its share of the company’s income. Here, we list four unique mining tax systems around the world.

Six years on from the global commodities crash many junior and exploratory mining companies are still struggling to secure project investment. In fact, as noted in Fieldfisher’s recent Alternative Finance 2.0 report, many lower-tier miners missed out completely on the 2017 mining boom, despite a surge in demand for metals and minerals like copper, zinc, nickel, cobalt and lithium.

Yet the story was very different for the top 40 miners. In the same year, these companies recorded a 30% surge in their combined market caps to $926bn, delivering an 11% return on equity for the year, according to PwC figures.

The continued weak confidence in junior and exploration mining firms is in part due to the increased competition from a raft of new investment opportunities, such as technology and cryptocurrencies, life sciences, and even the cannabis industry in North America, notes Fieldfisher.

As such, while seven or eight years ago the vast majority of mining deals used to be capital markets transactions, today alternative financing deals are increasingly the best option for cash-strapped miners. In fact, around half of the billion dollars of mining deals Fieldfisher conducted last year came from alternative sources.

More than half of the country’s coal mines are managed by pro-Russian separatist militia.

Credit: DmyTo/Shutterstock.

Canada: exploration tax encourages growth in British Columbia

In January, British Columbia (BC) made permanent two tax credits for miners that had previously existed only as temporary laws. The mining flow-through share tax credit and the BC mining exploration tax credit had both been renewed on an annual basis prior to the changes and both have the potential to make significant contributions to the state’s mining sector, being valued at 20% and between 20% and 30% of mining expenses respectively.

"The exploration tax credit is particularly important for the state, which has received considerable investment into new mines in recent years."

The exploration tax credit is particularly important for the state, which has received considerable investment into new mines in recent years. In 2007, the state received almost a third of a national fund for new mining projects, which totalled C$500m. Local authorities will hope that the tax credit will encourage the exploration and extraction of new mineral reserves, at a time where Canada on the whole is struggling to grow its mining industry. From 2014 to 2018, the estimated value of new mining projects that are expected to be built between 2018 and 2028 fell from C$160bn to just C$72bn, a decline of 55%.

More than half of the country’s coal mines are managed by pro-Russian separatist militia. Credit: DmyTo/Shutterstock.

US: Trump’s CCS dependant tax credits

In 2018, President Donald Trump signed into legislation tax credit 45Q, an arrangement which makes mining companies eligible for substantial tax credits, provided they invest in carbon capture use and storage (CCUS) technology. CCUS involves trapping CO₂ and other harmful emissions underground instead of releasing them into the atmosphere, and provides a potential part of the solution to climate change. Around 40 million tonnes of CO₂ are currently stored in CCUS facilities, and the International Energy Agency predicts that around 6 billion tonnes will need to be stored by 2050.

The 45Q credit rewards companies who construct new carbon-producing facilities, such as mine sites, with $35 per tonne of CO₂ captured if the gas is used in a productive way or $50 per tonne if the gas is stored in CCUS facilities. With the US responsible for producing 5.2 million kilotons of CO₂ in 2014 according to the World Bank, mining companies could save considerable sums through the scheme.

More than half of the country’s coal mines are managed by pro-Russian separatist militia.Credit: DmyTo/Shutterstock.

Zambia: exceedingly favourable or simply undertaxed?

Mining accounts for over 70% of Zambia’s income from international trade, and while the country’s low tax rates have encouraged mining there is growing concern that the industry has actually been undertaxed, with the mining tax rate peaking at just 6% of income in 2018. The national government has proposed a number of changes to the tax code, including increasing mining taxes by 1.5%, a further 10% tax on copper projects if the price of copper reaches $7,500 a tonne and removing mineral royalties from corporate income tax.

"Mining accounts for over 70% of Zambia’s income from international trade, and while the country’s low tax rates have encouraged mining there is growing concern that the industry has actually been undertaxed.”

However, the proposed changes have prompted a backlash from the mining sector, with the country’s Chamber of Mines claiming that 27,900 jobs would be threatened and more than half of the country’s copper producers would make losses should the tax rate be raised. Last December, Zambian miner First Quantum Minerals announced that 2,500 workers would be made redundant ahead of the impacts of the tax, despite the company reporting improved performances in both production and sales in 2018 compared to 2017.

More than half of the country’s coal mines are managed by pro-Russian separatist militia. Credit: DmyTo/Shutterstock.

Sierra Leone: tax breaks or tax haven?

The Government of Sierra Leone offered generous tax breaks to foreign mining companies following the end of the country’s civil war in 2002, but these breaks have enabled mining companies to hoard vast sums of wealth, ultimately damaging the country’s economy. Four of the five largest miners in the country are owned through intermediaries in tax havens such as Bermuda and the British Virgin Islands, and only one – Sierra Rutile – pays any income tax.

A 2014 report found that mining companies only contributed $6.2m in taxes in 2010, compared to exports worth $78.4m in the diamond sector alone and to total tax revenue of $237.9m. The report also estimated that the government would lose out on revenues of up to $131m from 2014-16, with much of the lost money being earned by the mining sector. This figure is equivalent to almost 3.5% of the country’s total 2018 GDP of $3.77bn, according to the World Bank.

The report predicts that the country will lose up to $240m every year from tax incentives under the current scheme, and the country’s tax system remains a cautionary tale for other countries that aim to promote mining projects through generous tax cuts.