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Tax Competition
for resource
extraction
Bourgain, Zanaj
(2018)
Our contribution
Context
The Model
The model (a)
The model ...
Tax Competition
for resource
extraction
Bourgain, Zanaj
(2018)
Our contribution
Context
The Model
The model (a)
The model ...
Tax Competition
for resource
extraction
Bourgain, Zanaj
(2018)
Our contribution
Context
The Model
The model (a)
The model ...
Tax Competition
for resource
extraction
Bourgain, Zanaj
(2018)
Our contribution
Context
The Model
The model (a)
The model ...
Tax Competition
for resource
extraction
Bourgain, Zanaj
(2018)
Our contribution
Context
The Model
The model (a)
The model ...
Tax Competition
for resource
extraction
Bourgain, Zanaj
(2018)
Our contribution
Context
The Model
The model (a)
The model ...
Tax Competition
for resource
extraction
Bourgain, Zanaj
(2018)
Our contribution
Context
The Model
The model (a)
The model ...
Tax Competition
for resource
extraction
Bourgain, Zanaj
(2018)
Our contribution
Context
The Model
The model (a)
The model ...
Tax Competition
for resource
extraction
Bourgain, Zanaj
(2018)
Our contribution
Context
The Model
The model (a)
The model ...
Tax Competition
for resource
extraction
Bourgain, Zanaj
(2018)
Our contribution
Context
The Model
The model (a)
The model ...
Tax Competition
for resource
extraction
Bourgain, Zanaj
(2018)
Our contribution
Context
The Model
The model (a)
The model ...
Tax Competition
for resource
extraction
Bourgain, Zanaj
(2018)
Our contribution
Context
The Model
The model (a)
The model ...
Tax Competition
for resource
extraction
Bourgain, Zanaj
(2018)
Our contribution
Context
The Model
The model (a)
The model ...
Tax Competition
for resource
extraction
Bourgain, Zanaj
(2018)
Our contribution
Context
The Model
The model (a)
The model ...
Tax Competition
for resource
extraction
Bourgain, Zanaj
(2018)
Our contribution
Context
The Model
The model (a)
The model ...
Tax Competition
for resource
extraction
Bourgain, Zanaj
(2018)
Our contribution
Context
The Model
The model (a)
The model ...
Tax Competition
for resource
extraction
Bourgain, Zanaj
(2018)
Our contribution
Context
The Model
The model (a)
The model ...
Tax Competition
for resource
extraction
Bourgain, Zanaj
(2018)
Our contribution
Context
The Model
The model (a)
The model ...
Tax Competition
for resource
extraction
Bourgain, Zanaj
(2018)
Our contribution
Context
The Model
The model (a)
The model ...
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[Workshop en économie de développement:"Pertinence des politiques publiques de développement dans les pays d'Afrique subsaharienne" ]

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Arnaud Bourgain

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[Workshop en économie de développement:"Pertinence des politiques publiques de développement dans les pays d'Afrique subsaharienne" ]

  1. 1. Tax Competition for resource extraction Bourgain, Zanaj (2018) Our contribution Context The Model The model (a) The model (b) Concluding Remarks Extractive resource taxation in developing countries: An international tax competition approach Arnaud Bourgain, Skerdilajda Zanaj (CREA, University of Luxembourg) Workshop en économie du développement Université de Dschang - Cameroun, 29 et 30 Janvier 2018 Pertinence des politiques publiques de développement dans les pays d’Afrique subsaharienne
  2. 2. Tax Competition for resource extraction Bourgain, Zanaj (2018) Our contribution Context The Model The model (a) The model (b) Concluding Remarks Our contribution We contribute to research on tax design for extractive resources, in low income countries, in a context of international competition We build an international tax competition model where governments compete in rent taxes to attract foreign extractive …rms Di¤erences with a standard model of international tax competition: The mining …rm cannot move the production site Asymmetric information: Tax authorities in developing countries have severe informational disadvantage vis-à-vis mining companies cost structures
  3. 3. Tax Competition for resource extraction Bourgain, Zanaj (2018) Our contribution Context The Model The model (a) The model (b) Concluding Remarks Context Low tax mobilization in Subsaharan countries, even in rich resource countries. Strong presence of multinational …rms in extractive sectors Mining codes reforms Trial and error in tax setting Di¢ culties to identify empirically the existence of international tax competition in extractive sectors in developing countries (Mansour and Swistak, 2016)
  4. 4. Tax Competition for resource extraction Bourgain, Zanaj (2018) Our contribution Context The Model The model (a) The model (b) Concluding Remarks Tax competition for resource extraction: stylized facts (I) Reforms of mining codes have been generalized in Subsaharan Africa in the 1990’s: new codes are designed to attract foreign investment through various incentives to foreign mining companies (Campbell, 2010 ; Besada and Martin, 2013 ; Moussa et al. 2015). The framework for an international tax competition is in place. Specialized consulting …rms play their role in comparing di¤erent sites and policies across the world of mining. Fraser Institute 2015: A perception Index of attractiveness is constructed on the basis of 15 policy factors ! Taxation regime features prominently. A new database (Laporte B. et al, 2016) covers the 14 main African gold producing countries on the period 1980-2015. The CIT rates (ordinary or special for mining) were strongly decreasing in all countries on all the three decades, but especially since the end of 90’s. Secondly, during the period of soaring gold price (2005 -2013), a lot of governments increased their royalties’rate, in general from 3% to 4% or 5% of the output value.
  5. 5. Tax Competition for resource extraction Bourgain, Zanaj (2018) Our contribution Context The Model The model (a) The model (b) Concluding Remarks Tax competition for resource extraction: stylized facts (II) In the specialized press or consultants regularly report: In March 2016, the government of Ghana has agreed to lower the corporate tax to 32.5% from 35 percent and royalty rate for South Africa’s Gold Fields, which was reviewing a $100 million expansion of gold mining operation in the country. In 2014, the Ivorian Parliament approved a new mining code in the aim to attract more international investors in the gold extraction. These new …scal measures are greatly appreciated by the mining company Randgold, based in Caïman, but also very present in other African countries. In 2015, Zambia experienced two mining tax regimes, namely: 0% CIT to 30 June 2015 and 8% royalty for underground mining and 20% for open cast mining. From 1 July 2015, this regime was reversed as follows: 30% CIT was reinstated and 6% royalty for underground mining and 9% for open cast mining.
  6. 6. Tax Competition for resource extraction Bourgain, Zanaj (2018) Our contribution Context The Model The model (a) The model (b) Concluding Remarks Two main tax instruments for the mining sector Royalties: ad-valorem tax levied directly on the extraction of the resource distorsive but easy to implement for tax authority Pro…t tax (rent tax) Very easy to reduce the taxable income by cost manipulation under strong asymmetries of information (Collier 2010) Our starting point: Boadway and Keen (2010 and 2015): Models of a combination between pro…t taxes and royalties in a context of asymmetric information between mining company and government (one country analysis)
  7. 7. Tax Competition for resource extraction Bourgain, Zanaj (2018) Our contribution Context The Model The model (a) The model (b) Concluding Remarks The model: main assumptions Assume a two-country model A resource …rm decides which country to locate Each government imposes an ad valorem royalty at the rate θi, i = a, b on revenues and a pro…t tax on reported rents/pro…ts at the rate τi, i = a, b. Tax authority in each country relies on self-reporting by the …rm to establish its tax liabilities The …rm can overstate its production costs and investment with a coe¢ cient β
  8. 8. Tax Competition for resource extraction Bourgain, Zanaj (2018) Our contribution Context The Model The model (a) The model (b) Concluding Remarks The model: assumptions The resource …rm is a monopoly with the right to exploit a mine. The price of the extracted good is …xed at the global market. Costs: Initial investment K in the …rst period to generate a quantity of the resource q(K) with certainty in the second period and the extractive costs are given by C(q(K)). Over-reporting production costs using a coe¢ cient (a) βi 1, i = a, b. (b) βiτi 1, i = a, b.
  9. 9. Tax Competition for resource extraction Bourgain, Zanaj (2018) Our contribution Context The Model The model (a) The model (b) Concluding Remarks The model (a) Pro…t maximization determines the optimal level of declared investment for the …rm: maxKi ΠD i (K, θi, τi) = (1 τi) Kiβi + (1 θi)q(Ki) βiC(q(Ki)) 1+r To obtain a closed solution for the level of investment we may assume q = αK and C(q) = 1 2α2 q2 , α > 1 The optimal KD i (θi, τi) reported investment is KD i (θi, τi) = α βi rβi αθi βi
  10. 10. Tax Competition for resource extraction Bourgain, Zanaj (2018) Our contribution Context The Model The model (a) The model (b) Concluding Remarks The model: government The government maximizes tax revenues Max τi,θi TR(τi, θi) = θiαKD (τi, θi) | {z } revenues from royalties + + 1 1 + r τi (1 θi) αKD (τi, θi) βi 1 2α2 α2 K D2 (τi, θi) | {z } revenues from profit taxes The optimal policy mix is: τ = τmax i θi (βi) = α 1 τmax i βi (τi + 1) (r + 1) α τmax i + 2 1 τmax i Using optimal taxes, we …nd optimal tax revenues, real and reported pro…ts for the …rm.
  11. 11. Tax Competition for resource extraction Bourgain, Zanaj (2018) Our contribution Context The Model The model (a) The model (b) Concluding Remarks Royalties and the level of cost over-reporting We …nd that royalties depend negatively on the coe¢ cient of cost over-reporting: The higher the β, the lower the royalty. Intuition: A high level of β implies a low level of declared capital invested as well as low level of declared pro…t. The government …xes the optimal royalty only observing the declared pro…t and capital and not the real ones. Then, the optimal choice of θ decreases with β. Hence, two di¤erence countries, depending on the level of β may …x very di¤erent levels of royalties with very di¤erent implications for tax revenues.
  12. 12. Tax Competition for resource extraction Bourgain, Zanaj (2018) Our contribution Context The Model The model (a) The model (b) Concluding Remarks Tax competition and location of the …rm The …rm will be indi¤erent between locating in country a or in country b if ΠR a (τa) = ΠR b (τb). We can verify that pro…ts are monotonically decreasing with pro…t taxes This implies that attracting the …rm induces countries to engage in a …erce tax competition that will reduce tax rates to the minimum possible value.
  13. 13. Tax Competition for resource extraction Bourgain, Zanaj (2018) Our contribution Context The Model The model (a) The model (b) Concluding Remarks Results (I) Proposition Assume that the coe¢ cient of cost over-reporting is independent from rent taxes. Then, the …rm locates where the rent tax is the lowest. Corollary A country with lower rent tax but higher royalty and low β, attracts the foreign extractive …rm. The lower β the higher the royalty and the higher tax revenues. A country with lower rent tax, lower royalty, and high β may also attract the extractive …rm.
  14. 14. Tax Competition for resource extraction Bourgain, Zanaj (2018) Our contribution Context The Model The model (a) The model (b) Concluding Remarks Results (II) Proposition Developing extracting countries with severe problems of over-reporting that face international tax competition experience strong tax revenues loses. The …rm is in a winner takes it all position. It locates in the country where the rent tax is the smallest, the βi is the highest, paying the lowest royalty. Finally notice that when countries …x the same royalty, then the attracting country …xes a smaller pro…t tax. It follows that the attracting country has necessarily a higher coe¢ cient of mis-reporting.
  15. 15. Tax Competition for resource extraction Bourgain, Zanaj (2018) Our contribution Context The Model The model (a) The model (b) Concluding Remarks The model (b) Pro…t maximization determines the optimal level of investment for the …rm: maxKi ΠD i (K, θi, τi) = (1 τi) Kiβiτi + (1 θi)q(K) βiτiC(q(Ki)) 1+r The optimal choice KD reported to the government: KD (θi, τi) = α αθi βiτi rβiτi βiτi
  16. 16. Tax Competition for resource extraction Bourgain, Zanaj (2018) Our contribution Context The Model The model (a) The model (b) Concluding Remarks The model: government The government maximizes tax revenues Max θi,τi RD i (θi, τi) = θiq(K ) + τi( K βiτi + (1 θi)q(K ) βiτiC(q(K )) 1+r ) The optimal policy mix is: τ = τmin i and θD i (τi)ˆθi = 1 + r τmin i α βiτmin i rβiτmin i α(2r τmin i +2)
  17. 17. Tax Competition for resource extraction Bourgain, Zanaj (2018) Our contribution Context The Model The model (a) The model (b) Concluding Remarks Comparison Proposition Compared with the scenario βi 1, the level of optimal reported capital, the real pro…t of the …rm, as well as the level of royalties are all higher when the coe¢ cient of over-reporting depends on pro…t taxes. Optimal pro…t taxes are much lower.
  18. 18. Tax Competition for resource extraction Bourgain, Zanaj (2018) Our contribution Context The Model The model (a) The model (b) Concluding Remarks Tax competition and location of the …rm Proposition Assume that the coe¢ cient of cost over-reporting is positively dependent from rent taxes. The extractive …rm locates where the pro…t tax is the lowest putting further pressure on rent taxes. The country with the lowest βi, will impose a higher royalty collecting higher tax revenues. As in the previous scenario, a country may …x a lower royalty but not be able to attract the …rm.
  19. 19. Tax Competition for resource extraction Bourgain, Zanaj (2018) Our contribution Context The Model The model (a) The model (b) Concluding Remarks Concluding Remarks We present a model of tax design with two instruments with the possibility of cost over-reporting. A setting very adapted to extractive industries in developing countries Policy mix in absence of tax competition under two di¤erent schemes of cost over-reporting. Tax competition is very detrimental for the developing countries, in both scenarios, pushing strong downward pressure to pro…t taxes. Royalties decreases as a consequence of tax competition, too. Pro…t taxes do not depend directly on the level β, but royalties do. Royalties become smaller, the higher the asymmetry of information. To conclude, royalties may be distortive, but in presence of strong asymmetry of information about extractive costs and in presence of tax competition, they remain the only mean to collect tax revenues in these industries!

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