Nov 2016 World Bank Presentation on Mineral Fiscal Regimes

A.1 INTRODUCTION AND
BUILDING BLOCKS OF MINERAL FISCAL REGIMES
Recent developments
Slides 1-12
John Strongman
Extractive Industries Expert
1World Bank Mineral Fiscal Regimes Presentation11/15/2016

Introduction/Overview
• This presentation is made primarily from the perspective of advising governments on the
design of a mineral fiscal regime
• The focus is solely on mining i.e. non-fuel minerals and coal – not hydrocarbons.
• It aims at giving an understanding,
• first, of the key characteristic of different mineral fiscal instruments
• second, at how they interact together in terms of overall government revenues (tax
take) from the mineral sector in both a qualitative and quantitative manner and
• Third, how a government can use a modelling approach to position its mineral fiscal
regime so that is has a tax take be in the lower part, the mid range or the higher part
of the tax take for other mining countries
• It also touches on some related issues such as state equity in mining projects
• It concludes with some mineral fiscal administration issues relating to protecting against
taxpayers seeking to minimize taxes in a host country by shifting taxable profits to
another jurisdiction, since no matter now well designed a mineral regime is, it will not
achieve expected results if it cannot be administered effectively

Recent Development - Lessons from 2003-2012
Commodity price boom
(Nov 2016 Copper Price -$5500/tonne)

Recent Development - Lessons from 2003-2011
Commodity price boom
Tax collections did not keep pace with profit growth
Why?
Inadequate Mineral Fiscal Regime design
• Countries had signed confidential contracts with overly “generous terms”
• Countries lacked “progressive fiscal instruments”
• Inadequate Tax Administration Capacity – especially auditing
• Countries lacked sufficient capacity to counteract profit shifting/tax
minimization behaviors especially those linked to “related party” transactions
• Product transfer pricing audit capacity
• Construction costs, operating costs audit capacity

Mineral/Economic Rent
Minerals can have a scarcity value that results
in Financial terms – in “excess profits”
in Economic terms – in “mineral/economic rent”
i.e. profits/returns over and above the minimum required for an investment to be
made
Many minerals are sold at a world-wide market price – thus a high grade deposit can
generate an economic rent (excess profit) as compared with a low grade or average project
Economic rent can also be generated during commodity price booms when many projects
can become extremely profitable while the price boom lasts
Appropriate fiscal instruments are needed to enable governments to obtain a fair share of
the economic rent/excess profit
These are generally referred to as “Progressive Fiscal Instruments”

Progressive Fiscal instruments
• Progressive Fiscal instruments
• that take effect when a certain level of profitability is reached
• e.g. Resource Rent Tax; Excess Profits Tax
• that have a base rate which increases when a certain “trigger” level of
profitability is reached
• e.g. Variable Income Tax; Sliding-scale Royalty
Profit-based sliding-scale royalties introduced
• South Africa 2008;
• Chile 2010;
• Peru 2011;
• Australia MRRT 2012

Starting Point – the August 15, 2012 IMF paper
"Fiscal Regimes for Extractive Industries: Design and Implementation”
IMF Paper Page 9
Revenue objectives are important for mineral fiscal regime design but
involve complex trade-offs
Fiscal regimes vary greatly from country to country with a wide range of
instruments being used
Fiscal regimes require tailoring to each country

Mineral Fiscal Regime Design – some key points
IMF Paper Comment
Mineral regimes need to be county-specific
Complex trade offs will need to be addressed (page 6)
A Mineral Fiscal Policy can be used as
the decision-making framework to
address the complex trade offs
The central fiscal issue is ensuring a “reasonable”
government share in extractive industries’ rents so that
private investors have an adequate incentive to explore,
develop, and produce; (page 9)
The target tax take can be positioned
in relation to other countries
The Rate of CIT and Link to Additional Rent Taxation
Section makes the point that it is the aggregate tax
impact (tax take) that is of greatest importance to
companies rather than the tax take from individual fiscal
instruments (page 44)
The total tax take depends on all the
fiscal instruments and how they
interact – for example if the royalty is
deductible for income taxes it reduces
CIT payments

The Mineral Fiscal Regime - Main Instruments
The Mineral Fiscal Regime generally consists of
Income and other taxes including dividend and other withholding taxes
Customs duties
Mineral royalties and fees
Most jurisdictions use the term “non-taxes” to cover duties, royalties and fees
The term “fiscal instruments” in this presentation is used to cover both tax and
non-tax fiscal instruments.

The Mineral Fiscal Regime -
Institutional Responsibility and Authority
The Ministry of Finance - tax policy and legislation including applicable rates
The Revenue Service - tax assessment, collection and audits
The Customs Service - customs duties
The Mining Ministry - mineral royalties and fees

What are the Most Important Fiscal Instruments in the
Mineral Fiscal Regime in terms of Revenue Collection?
From fiscal modeling for over thirty mining countries
The three most important fiscal instruments are profits taxes, mineral royalties and
dividend withholding taxes. The following table shows (a) average rate for each
instrument; (b) estimated share of fiscal revenues provided by each instrument.
(Note - Customs duties and minin-related fees generally account for less that 5% of
government revenues over the life of a project).
Fiscal Instrument
Survey of Thirty Mining Countries
Prevailing
Rates
Average
Rate
Range of
Share of
Fiscal
Revenues
Average
Share
Fiscal
Revenues
Corporate Income Taxes 18-38%, 30% 40%-80% 60%
Mineral Royalties (gold/copper) 1-10% 4.2% 15-40% 30%
Dividend Withholding Taxes (DWT) 0%--20% 10% 0-20% 10%

Key Development
Previous Approach
• Corporate Income Tax (CIT)
• Dividend Withholding Tax (DWT)
• Royalty
New Approach
• Royalty
plus
• Additional Profits Tax
12
IMF Paper Comment
A regime of (a) a royalty; (b) a corporate
income tax; and (c) an instrument
targeted for rent collection can be
suitable (page 6 and page 48)
For example the Resource Rent Tax .
Also Excess Profit Taxes and Sliding-
scale royalties
World Bank Mineral Fiscal Regimes Presentation11/15/2016

A.2 INTRODUCTION AND
BUILDING BLOCKS OF MINERAL FISCAL REGIMES
Economy-wide, and Mineral Sector-specific
Fiscal Instruments
Slides 13-24

Mineral Fiscal Regime - Fiscal Instruments
The four types of fiscal instruments in the mineral fiscal regime (taxes; duties;
royalties; and fees) may be considered in terms of fiscal instruments that apply:
All sectors of
the economy
Only to
foreign parties
Only to the
minerals sector.
Taxes X X X
Duties X
Royalties X
Mineral-
related Fees
X

Fiscal Instruments that apply to all sectors
Taxes
• Corporate Income Taxes (CIT)
• Value Added Taxes (VAT) or Sales Taxes
• Employment Withholding Taxes
• any Municipal Taxes such as Property Taxes
• any Environmental Taxes
Duties
• Import Duties
• Export Duties

Taxes and Duties
Application of VAT and Customs Duties to Export industries
Mining operations that export their production, like other exporters, should be
subject to zero rating for VAT and to reduced or zero customs duties and VAT on
imports of capital expenditures and certain operating supplies on the basis that
• zero rating for VAT for export industries will reduce the need to pay VAT refunds
to exporters
• zero rating for VAT on imports for export industries will reduce the burden of
indirect taxes on imports for which domestic supplies are not readily available or
likely to be readily available
• zero rating for customs duties will reduce the burden of customs duties on
imports for which domestic supplies are not readily available or likely to be
readily available

Tax Depreciation
Many countries use the following three depreciation categories for tax
purposes
• exploration,
• tangible assets (e.g. plant and equipment), and
• other development costs (e.g. earth moving, shaft sinking) including
intangible assets (e.g. value of a license or management fees)
• Accelerated depreciation can allow investors to recover their capital more
quickly – but reduces government revenues in the early years of project life
• In the year that an asset comes into service, countries must also consider
whether to
• allow depreciation for the whole year even if the asset has only been in
service for one or two months or
• to only allow depreciation for the number of months that an asset has
been in service

Fiscal Instruments that Apply only to Foreign Parties
include
Dividend Withholding Tax - Investors
Interest Withholding Tax – Lenders
Contractors Withholding Tax – Contractors

Fiscal Instruments that apply only to the Mining Sector
include
Mineral Sector-related Fees
• License Fees; Land access or use fees;
• Municipal level mining-related fees
Mineral Royalties
• Unit Royalties; Fixed Rate Ad Valorem Royalties;
• Profits-based sliding scale royalties; Price-based sliding-scale royalties
“Progressive” Taxes
• Excess Profits Taxes;
• Rate of Return type taxes

Payments associated with receipt of a mineral right and use of land – fees etc.
Compensation for the removal of a non-renewable resource, generally owned
by the state
Mineral royalties
• Unit mineral royalties
• Ad valorem mineral royalties in the order of 2-3% of sales values
Capture of some of the mineral rent for the government
Ad valorem mineral royalties in the order or 4% or above of sales value
Sliding-scale mineral royalties
Excess Profits Taxes; Rate of Return type taxes
Underlying Rationale for Fiscal Instruments that apply
only to the Mining sector

 Unit Mineral Royalty
• A fixed fee per unit e.g. ounce, pound or ton of material produced or sold.
• Generally applied to low value minerals (such as construction materials)
produced for the domestic market with relatively stable prices.
• Payments to government depend only on volume produced or sold and thus tend
to be fairly stable
• Provides a base payment to government to compensate for the exploitation of a
non-renewable resource

 Fixed Rate Ad Valorem Royalty
• A fixed percentage of the market value of minerals produced or sold.
• Generally applied to higher-value minerals (such as metals) produced for the export
with world market prices that can go through large price cycles.
• Payments to government depend on market price as well as quantity/quality and
thus payments have higher upside potential than for the unit royalty.
• A 2-3% ? royalty may be considered to compensate for the exploitation of a non-
renewable resource
• A higher royalty 4%+ may be considered to have a mineral rent component

 Sliding-scale (Variable) Rate Ad Valorem Royalty
Sliding-scale (Variable) Rate Ad Valorem Royalty
• Payments to government depend on a variable (not fixed) ad valorem royalty rate
• Base rate (if 2-3%) may be considered to compensate for the exploitation of a non-
renewable resource
Profit-Based
• Royalty rate linked to profit of each taxpayer
Price-Based – Mineral Specific
• Sector wide royalty rate linked to the market price of a given mineral
Price-Based – Project Specific
• Project-specific royalty rate set on a project by project basis

 Excess Profits Tax and Rate of Return-type Tax
Step up Excess Profits Tax:
• The Corporate Income Tax is stepped up to a higher rate above a certain profit
point
Variable Excess Profits Tax
• The Corporate Income Tax varies above a base level depending on a measure of
profitability
Rate of Return-type Tax
• Additional tax payments occur when the a pre-defined rate of return is exceeded
over time

B.1 INNOVATIONS IN DESIGNING
MINERAL FISCAL REGIMES
Government Objectives/What Investors Seek
Slides 25-36

Possible but Potentially Conflicting Government Objectives
Early, stable and predictable revenues
Higher and progressive revenues i.e. revenues increase with profitability/obtaining a
higher share of Mineral Rent
International competiveness/Investment promotion
Administrative simplicity/Minimizing potential “loopholes”
The selection of instruments and rates determines how these trade offs are made
How Profits Taxes and Unit Based or Ad Valorem Mineral Royalties meet different
objectives
Profits Taxes tend to come later in project life, are inherently unstable and difficult to
predict, have considerable upside potential but are more complex to administer
Unit Based or Ad Valorem Mineral Royalties provide early, more stable and more
predictable revenue than profits taxes but have less upside potential, are regressive
and simpler to administer

Regressive Nature of Unit and Fixed Rate Ad Valorem Royalties
Compared with a Corporate Income Tax
$4 Unit
Royalty
4% Ad
Valorem
Royalty
30%
profits tax
$4 Unit
Royalty
4% Ad
Valorem
Royalty
30%
profits
tax
Quantity 50 50 50 50 50 50
Price 2 2 2 4 4 4
Revenues 100 100 100 200 200 200
Production Costs (60) (60) (60) (60) (60) (60)
Profit Before
Royalty and Tax
40 40 40 140 140 140
Royalty 4 4 0 4 8 0
Profits Tax 0 0 12 0 0 42
Govt Revenues as
% Profit
4/36
=9%
4/36
=9%
12/40
=30%
3/137
=2.3%
6/134
=4.5%
42/140
=30%

 Taxes - Corporate Income Tax
Main Advantages and Disadvantages
Main Advantages
Revenues increase with profitability
Gives greater revenues than ad valorem royalty during periods of high prices
Obtains more of the mineral rent during periods of higher prices and profits
Main Disadvantages
Revenues start later in project life and are less stable and less predictable
than for a fixed rate royalty
More complicated to administer and predict because revenues depend on
capital expenditures (for depreciation) , production costs, interest costs and
sales values – all of which must be assessed and verified
More vulnerable to manipulation (can be minimized by transfer pricing,
parent company charges, thin capitalization, excessive depreciation)

 Unit Value and Ad Valorem Fixed Rate Royalty
Main Advantages and Disadvantages
Main advantages
Easy to measure
 Unit Value Royalty requires quantity and quality;
 Ad Valorem Fixed Royalty requires price, quantity and quality
Revenues start early and tend to be stable predictable
Main disadvantages
Regressive – limited upside potential
Unit Value Royalty does not respond to changes mineral price or project
profitability
Ad Valorem Fixed Royalty does not respond to changes in project profitability
• Disincentive for investment

F
Productionaverageunitcosts/price P
Potential projects in ascending order of costs
Fixed Rate Ad Valorem Royalty and Investment
Not
viable
Viable
Long term expected price
Project C
D
E
Project A
Project B
R
Project D
E
Profit After
Tax

F
Productionaverageunitcosts/price
P
Fixed Rate Ad Valorem Royalty and Investment
Royalties do not decline as costs increase and profits fall
Projects D and E as well as Project F not viable for investment
Project C
D
E
Project A
Project B
R
Fixed Rate
Royalty
Fixed Rate
Royalty
Fixed Rate
Royalty
Fixed Rate
Royalty
Fixed Rate
Royalty
Fixed Rate
Royalty
Profit including
required ROI
Not viable
for
Investment
Viable
for
Investment

 Profit-Based Sliding-scale (Variable) Rate Royalty
IMF Paper
Where royalties form a major part of the fiscal regime, refinements
will likely be needed to make them responsive to cost and
profitability. Otherwise the ad valorem fixed royalty adds materially
to investor risk (para. 30)
32
 Main Advantage
 the royalty rate responds directly to the ability of the project to pay i.e.
 a relatively high royalty rate for a high profitability project
 a relatively low royalty rate for a low profitability project
 Main Disadvantages
 much more complicated to administer – depends on taxpayer profitability.
 Payments are much less stable than for the unit or fixed rate ad valorem royalties.

 Excess Profits Tax and Rate of Return Type Tax
Main Advantages
Both vary with profitability
Rate of Return Type Tax takes account of time value of money and has
minimal impact on investment decision
Main Disadvantage
Both are complicated to administer in terms of establishing and/or verifying
taxpayer profitability
Rate of Return Type Tax requires measuring cash-based expenditures and
revenues each year from a defined (generally exploration-related) starting
point and then either discounted or increased to take account of minimum
return allowed to investor
Rate of Return Type Tax only generates revenues once a pre-determined rate
of return has been achieved – which may only be in later stage of project life
or not at all

Profits based
royalty or
additional tax
F
Productioncosts/price
P
Profits-based Taxes and Investment
Both profit after tax and taxes paid decline as
production costs increase
Not
viable
Viable
Profit after
tax
Project C
unit cost
D
E
Project A
unit Costs
Project B
unit costs

What do Investors Seek in a Mineral Fiscal Regime?
The mineral sector requires large development expenditures including exploration and
prefeasibility costs. Moreover, the initial exploration and construction phases are highly
risky and offer no profits. A Modern Fiscal Regime can help attract good quality
companies who are financially sound, technically competent and reliable and who will
• invest in potentially profitable (not loss-making) projects
• not burden the government with excessive infrastructure costs
• have the financial resources to withstand periods of low prices
• follow the fiscal rules and not attempt to minimize taxes by profit-shifting or
cheating
Considering these features, investors in the mining sector seek:
• A fair sharing of taxable income – depends on total tax take .
• Early recovery of initial capital – which is influenced by:
• the rate of depreciation for capital expenditures – high depreciation rates in the
early years of operation will help bring forward capital recovery and
• the use of fixed rate royalties which will slow initial capital recovery

What do Investors Seek in a Mineral Fiscal Regime? (ii)
• Investors look for minimum payments to government during loss-making periods,
through the introduction of legal provisions that allows for fixed rate payments
(e.g. royalties) to be deferred during loss-making periods.
• Investors look for a longer loss carryover period (typically 8-10 years). Since
mining projects can require large development expenditure including prior
exploration and prefeasibility costs.
• Many large-scale investors look for fiscal regime stability, due to the long time
horizons of mining projects, which can be provided by governments being willing
to consider entering into a fiscal stability agreement between the investor and
the government.
• Investors look for Double Taxation Agreements (DTAs) which can reduce
aggregate tax payments in different jurisdictions. In particular DTAs can be used
to reduce/minimize dividend withholding tax payments by foreign owners

B.2 INNOVATIONS IN DESIGNING
The Key Decisions in Designing
a Mineral Fiscal Regime
Slides 37-48

The Mineral Fiscal Regime and other Factors that influence
a Country’s Attractiveness for Mining Investment
• Geological Prospectivity
• Country Stability and Security
• Mineral Licensing system – security of tenure etc.
• Government mining equity policy
• Government institutional capacity
• Government track record regarding mining investment
• Infrastructure availability
• Mineral Fiscal regime

Key Taxation Design Decisions for the Government
1) The international competiveness of the mineral fiscal regime i.e. where to position
the tax take compared with other countries and the balance between raising more
revenues and attracting new investment.
2) Whether to have/what type of progressive fiscal instrument to have that increases
the tax rate on excess profits/captures more of the mineral rent but makes the
sector less attractive to investors.
3) The balance between linking government revenues (a) to ad valorem royalties
which provide more reliable and predictable revenues for the budget but which are
regressive; or (b) to profitability which will likely provide revenues that are higher,
more progressive but much less reliable and predictable
4) Whether to have fiscal instruments that are simple to administer or more complex
to administer
5) Making Fiscal Provisions for Mine Closure and Reclamation
6) Government Equity Policy – government equity in private mining operations
7) Investment Incentives to attract new investment including the balance between
seeking early government revenues which support the budget or instead to allow
investors early recovery of their initial capital with revenues coming later.

What is the Average Effective Tax Rate (AETR)
• The Average Effective Tax Rate (AETR) is the government’s share of pre-tax net cash flow
• This is calculated as the total payments to government over time (generally referred to as
total “tax” payments) divided by the net cash flow before tax.
• Government Revenues 45
• Pre Tax Net Cash Flow 100
• AETR =45/100 = 45%
• The AETR can be calculated for the tax regimes of different countries for comparison
purposes using a stylized (or actual) mining project
• The AETR It is generally calculated over the life of a project using discounted net values –
there will likely be considerable variation from year to year if the AETR is calculated on an
annual basis for each year

(1)Positioning the Tax Take - International Competiveness
AETR for Fifteen Countries (discounted, NPV basis)
41
IMF Paper
With regard to the Average
Effective Tax Rate (AETR)
discounted AETRs in the range of
40-60% are reasonably achievable
(para. 49)
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
AETR (tax take) for Fifteen Mining Countries
The international competiveness of the
mineral fiscal regime i.e. where to
position the tax take compared with
other countries and the balance
between raising more revenues and
attracting new investment

(2) Introducing a Progressive Fiscal Instrument
.
Whether to have/what type of progressive fiscal instrument to have that
increases the tax rate on excess profits/captures more of the mineral rent but
makes the sector less attractive to investors.
42
Progressive Fiscal Instrument Comment
Rate of Return Tax Investment neutral; later revenues; complex
Excess Income Tax/Additional
Profits Tax
Requires Tax law change; later revenues;
effectiveness depends on profit tax (CIT) reliability
Profit-based sliding scale Royalty Sector instrument; a minimum base can be set;
earlier revenues; depends on CIT reliability
Price-based sliding scale Royalty Sector instrument; a minimum base can be set;
earlier revenues; needs frequent adjustment

(3 and 4) The Balance between administratively simpler Fixed
Rate Ad Valorem Royalties and more complex Profitability-
based Fiscal Instruments
The balance between linking government revenues
 to fixed rate ad valorem royalties which are administratively simpler and which
provide more reliable and predictable revenues for the budget but which are
regressive; or
 to more complex profitability-based fiscal instruments which will likely provide
revenues that are higher and more progressive but are much less reliable and
predictable
Factors influencing this decision will include
Extent of near term budget funding needs
Strength of tax administration capacity to audit profitability based instruments
Overall attractiveness to mining investors

(5) Mine Closure Costs
Some mine closure costs occur when production has ceased when
there may be no or very small revenues (sales of inventories and
assets). Costs consist of
• Reclamation and decommissioning costs
• Post closure costs including maintenance of impoundments/acid
water management
Provision can be made for such costs through
• Placing funds in an Escrow account (with possible tax deduction)
• Allowing tax deductions for future expenditures
Both require adequate assurances such as a bank guarantee that
the expenditures will be made

(6) Government Equity Participation in Mining Projects
Some governments have a policy of having the right to obtain a minority share of
the equity in a new mining venture.
The equity share is generally in the range of 5-10% but Mongolia has taken as much
as 34%. For African countries (mostly around 10%) see ADB Paper No 147 Gold
Mining in Africa: Maximizing Economic Returns for Countries, March 2012
The main benefits are that the Government obtains
• a share in the profits of the project (noting that money is only received when
dividends are paid) and another mechanism to obtain mineral rent
• a “seat at the table” in the Boardroom
• access to internal company information including company plans and
projections
• an asset (i.e. the shares) that may possibly be sold later in project life and may
generate substantial funds if the company is very profitable

(6) cont - Options for Obtaining Equity
• Governments may consider taking paid-up equity on full cost basis which gives them
equal standing with other investors. Paid in equity requires capital but avoids
exploration risks
• Carried equity means that the private shareholder(s) must fund the government’s
equity share initially. It is subsequently paid for through dividends
• Free equity is equivalent to a dividend withholding tax and is resented by investors –
but a modest equity holding of say 10% can be compensated for by exempting foreign
shareholders from any prevailing (10%?) dividend withholding tax.
A Shareholder Agreement can be used to clarify the rights and obligations related to the
equity participation, including, a seat on the board, access to internal company
projections and plans, anti-dilution of the government’s interest and contingent
liabilities; shareholder funding of any cash shortfalls that occur
But equity comes with shareholder risks - Income is not immediate and it may be a
number of years before dividends are paid and dividends can be very uncertain and
volatile and Government may need to help

(6) cont - Main Implications of Government Equity for
the Investor
Equity participation is a disincentive for investment
• Investors see it as reducing their profits.
• If it is “free” the investor must fund the government’s share of investment.
• If it is carried the investor must raise all of the the initial capital
• Smaller companies may not explore if they have to mobilize capital for the
government's shareholding.
• If the percentage is very high or if the government is viewed as unreliable
or unstable, many investors may simply stay away from the country
• Even if equity is paid for at full cost, government has not had to bear the
exploration risks.
Also Equity creates a potential conflict of interest since government becomes
both regulator and owner.

Investment incentives can include – in response to investor concerns:
• Low ad valorem royalty rates (less than 3%)
• Accelerated Depreciation for tax purposes compared with other sectors. Earlier
capital recovery helps protect against risk that the rules will change and results in
faster recycling of capital that can be used for other new projects
• a longer Loss Carryover period (than other sectors) - typically 8-10 years.
• Use of Double Taxation Agreements to reduce withholding taxes
• fiscal regime stability through fiscal stability agreements.
• To protect from possible abuse, any such agreement should be
• time-bound (say 5-10 years from the start of production) and
• should only cover the rates of specific fiscal instruments such as profits tax,
withholding taxes to non-residents, mineral royalties and customs duties.
• There should be no overall “blanket” fiscal stability agreements.
6 Mineral Fiscal Regime - Investment Incentives

C.1 MODELING THE MINERAL FISCAL REGIME –
QUANTIFYING THE TAX TAKE FROM
THE DIFFERENT FISCAL INSTRUMENTS
An example of a basic Mineral Fiscal Model
- structure and inputs
Slides 49-66

High-level Summary Mine Financial Model
Purpose
• The main purpose of this model is to provide an indicative estimate of
the (discounted) Net Present Value (NPV) Average Effective Tax Rate
(AETR) for the mineral fiscal regimes of fifteen countries.
• It also provides indicative estimates of
• The After Tax Internal Rate of Return for an Investor
• The time for recovery of the initial capital expenditure by the
Investor
• The relative size of government revenues for the three main fiscal
instruments (CIT, DWT, and royalties).

Characteristics
• The model is described as a “high-level summary model” for two reasons.
• First, it considers instruments that have the most significant financial impact.
Thus, customs duties, VAT and various smaller fees and any municipal-level
taxes are not included. However, their impact can be examined through
sensitivity analyses
• Second, some of the assumptions are representative but not entirely
precise. For example all capital expenditures are depreciated on a straight
line basis over a certain number of years (ranging from 1 year to 10 years)
based on the tax depreciation rules for a country. Thus, depreciation is very
much simpler than the actual tax legislation in most countries.

Usefulness
The high level summary approach is used,
• First, to enable to enable high level summary AETR cross-country
comparisons to be made in a manageable manner.
• Second, to understand the relative impact of the most important
fiscal instruments on the AETR; and
• Third, to examine the extent to which different mineral fiscal
regimes are progressive or regressive
• Fourth, to undertake sensitivity analyses regarding different
price and cost assumptions on the AETR

Using the Results – Important Considerations
A cautionary note is needed on two fronts:
First, a number of countries have signed Double Taxation Agreements which
result in foreign investors domiciled in the other DTA country being exempt from
dividend withholding taxes.
oFor example, DTAs signed with the Netherlands have this feature.
oTherefore, the column with the combined CIT and Dividend Withholding
Taxes must be treated with some caution.
oIn addition governments must protect against Double Taxation Agreements
with other countries being abused by companies (treaty shopping)
Second, where an equity share is taken by the government on a free or carried
basis, the income (i.e. dividends received) should also be included. Such income
may help offset reductions in government revenues if dividend withholding taxes
are reduced or eliminated by a Double Taxation Agreement.

Overview of Model Structure
Overview of Model Sheets
• Inputs – Assumptions for the mine (investment; quantity, costs, sales
price)
• Inputs – Assumptions for the Fiscal Regime
• Inputs – Assumption for Dividend Distribution and Borrowing
• Model structure overview – Income Statement
• Model structure overview – Cash flow Statement
• Results – Government Revenues
• Results – Cash Flow; IRR; AETR

Overview Of Model Sheets
• The model consists of
• Sheet 1 Input sheet
• Sheets 2-16 one sheet showing results for each of the fifteen countries
• Sheet 17 – one sheet showing results for the “average country regime”
• Sheet 18 – Results for NPV10 AETR
• Sheet 18 – Results for IRRAT
• Sheet 20 – Results for Initial Capital Recovery

Key Assumptions – The Mine
• Saleable Metal Content of Production
• Capital Expenditures consisting of exploration and development
costs, replacement capital expenditures
• Construction period
• Mine Life
• Production costs and processing costs
• Mine closure costs
The model structure also includes, if data is available,
• Customs duties on capital expenditures and operating costs
• Borrowing (if any) including debt %, interest rate and length

Setting the mine production, cost and price
assumptions
• The IMF practice is to develop a model that fits the characteristics of a particular
country
• For the purpose of the presentation, a more generic copper/gold model is used to
illustrate how a model works.
• Generally the impact of different tax instruments can be understood by setting
investments costs, production costs and revenues that result in a before tax
internal rate of return in the range of 20-30% for the base case.
• For this model the base case before tax internal rate of return is 25%.

Key Assumptions – the Mine
(all costs/prices in 2016 terms)
• Copper Production
• Copper Price
• Gold Production
• Gold Price
• Preproduction Cost
• Capital Expenditures
• Sustaining Capital Costs
• Production Costs (all allocated to copper)
• 60,000 tons/year
• USD6,000 per ton
• 65,000 oz./year
• USD1,200 per oz.
• USD42 million
• USD1,000 million
• USD20 million/year
• USD2,000 per ton including
USD640 per ton processing costs

Fiscal Regime Assumptions
are set on a country by country basis
Data Needed for Countries to be included in the model
• Copper Royalty (applied to total revenues)
• Gold Royalty (applied to total revenues)
• Tax Depreciation (1 – 10 years straight line)
Following can be added if data is available
• Import Duty – construction cost
• Import Duty – operating cost
• Interest Withholding Tax (IWT) if debt is used

Dividend Distribution and Borrowing Assumptions
Dividends
• 70% Earnings After Tax are paid out as Dividends
(70% can be changed)
Borrowing can be included
• Loan size (according to Debt/Equity ratio)
• Interest Rate
• Repayment Term

Overview of model structure
– Income Statement
Key rows
Revenues
• Operating costs,
• Royalties,
• Depreciation (with unused depreciation carry forward provisions)
• Earnings Before Tax (EBT)
• Earnings After Tax (EAT)
• Dividends
• Retained Earnings

Overview of model structure
– Income Statement cont
Customs duties can also be included if data is available
Sensitivity analyses to see the impact of debt on tax and royalty
payments can be made

Overview of model structure – Net Cash Flow Before Tax
(NCF BT) and NCF After Tax (NCF AT)
• Net Cash Flow Before Tax (NCF BT) over mine life
• Cash Receipts over mine life
• Capital expenditures over mine life (excluding tax/royalties/duties etc.)
• Cash Operating costs over mine life (excluding tax/royalties/duties etc.)
• Net Cash Flow Before Tax (BT) over mine life
• Net Cash Flow After Tax (NCF AT) over mine life
• Net Cash Flow Before Tax (BT) over mine life
• Total Tax Take over mine life (including tax/royalties/duties if included etc.)
• Net Cash Flow After Tax (AT) over mine life

Results – Government Revenues
calculated from the Income Statement
• Total Tax Take
• NPV Total Tax Take
initially consisting of:
• Corporate Withholding Tax (CIT)
• Royalties
Following can also be calculated if data are available
• Import Duties
• Interest Withholding Tax (IWT) if debt is used

Results – NCF BT; NCF AT; IRR BT; IRR AT; AETR
In addition to Total Tax Take the following are calculated
• Net Cash Flow Before Tax
• NPV Net Cash Flow Before Tax
• Net Cash Flow After Tax
• NPV Net Cash Flow After Tax
• IRR Before Tax
• IRR After Tax
• Average Effective Tax Rate (AETR)
• Discounted AETR

Results – AETR and Total Tax Take
• AETR calculations for each of the fifteen countries using the fiscal regime data
(i.e. CIT, DWT, royalty and depreciation) information for each
• The absolute size of payments are not very meaningful because they are only
relevant to the mine being modelled.
• But they can be used to examine the relative size of payments from each
instrument.
• Sensitivity runs can also be made with different prices or costs to see the impact
of different fiscal regimes for very profitable projects and for marginally profitable
projects

C.2 COMPARING COUNTRY-SPECIFIC
Using the Model to calculate
the Average Effective Tax Rate (AETR)
and Pre-Tax/Post Tax Rates of Return
for Fifteen Different Mining Countries
Slides 67-82

Summary Mineral Fiscal Regimes for Fifteen Mining
Countries
• Summary data includes the following fiscal instruments for
Fifteen Mining Countries
• Corporate Income Tax - CIT
• Dividend Withholding Tax - DWT
• Ad valorem fixed Royalty
• A summary tax depreciation rule
• Data collected for Fifteen Mining Countries

Summary Mineral Fiscal Regimes for fifteen mining
countries
• Data collected for 15 Countries
• Sources include
• Corporate income taxes, mining royalties and other mining
taxes A summary of rates and rules in selected countries
PWC June 2012
• IMF various Country Reports 2010 -2013
• Gold Mining in Africa : Maximizing Economic Returns for
Countries African Development Bank March 2013

Summary Regimes for fifteen mining countries
% CIT DWT
Combined
CIT/DWT
Copper/
Base
Metals
Royalty
Gold
Royalty
Depn
years
S/L
Botswana Min 25 7.5 30.6 3 5 1
Brazil 34 0 34.0 2 1 3
Burkina Faso 25 12.5 34.4 4 3 5
D R Congo 30 10 37.0 2 2.5 5
Papua New
Guinea 30 10 37.0 2 2 3
Tanzania 30 10 37.0 4 4 8
Liberia 30 5 38.3 3 3 4
Indonesia 25 20 40.0 4 3.75 4

Summary Regimes for fifteen mining countries
% CIT DWT
Combined
CIT/DWT
Copper/
Base Metals
Royalty
Gold
Royalty
Depn
years
S/L
Mongolia 25 20 40.0 5 5 10
Mozambique 25 20 40.0 5.5 10 10
Ghana 35 8 40.2 5 5 1
Namibia 37.5 10 41.5 5 3 3
Guinea 33 15 43.1 3 5 5
Sierra Leone 37.5 10 43.8 3 4 4
Congo 30 20 44.0 3 5 5
SIMPLE AVERAGE 30.1 11.9 39.1 3.6 4.1 5

Model Results – Base Price
AETR for Fifteen Countries (discounted, NPV basis)
72
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
AETR (tax take) for Fifteen Mining Countries

Some Sensitivities – Duties, Depreciation
Base price representative regime
• The next slide plots the three sets of AETR calculations – demonstrating that the
regimes are regressive i.e. as prices and profits rise, the AETR declines.
• The slide after presents the data for the highest, lowest and average AETR and
associated fiscal regimes.
Reminder
• All AETR references refer to discounted AETR (at 10%)
• All references to values are in NPV real terms not nominal terms

Comparing AETRs – Low, Base and High Price
Data in the NPV10 AETR chart
Results of calculations made for a “Low Case” with prices at 80% of the Base Case
and a High Case with prices at 120% of the Bas Case
74
Low Price Base Price High Price
Highest AETR 76% 57% 52%
Average AETR 62% 50% 46%
Lowest AETR 52% 40% 37%

Regressive Taxes – AETR declines as IRRAT Increases
The country-specific tax regimes can be examined under different profitability
assumptions to measure whether they are progressive or regressive
Average AETR 62% 50% 46%
IRR AT 14% 19% 24%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
NPV AETR declines as IRRAT increases
AETR IRR AT

Relative Size of CIT, DWT and Royalties
for “Average Country Regime”
NPV $M
discounted
@ 10%
“Average
Country
Regime”
$M
%
CIT 439 68%
DWT 86 13%
Royalties 125 19%
Total 650 100%
76
“Average
Country
Regime”
CIT 30%
DWT 12%
Copper Royalty 3.6%
Gold Royalty 4.1%

Relative Size of CIT, DWT and Royalties
Implications
• CIT revenues are much larger than royalties – so tax administration capacity is
crucial to ensure taxes are correctly assessed and collected.
• Based on the 70% dividend payout rule, dividend withholding taxes are about
two thirds of royalties – thus DTAs which exempt dividend withholding taxes may
be quite costly in reducing the Total Tax Take for profitable mines that pay
dividends.

A Base Price Sensitivity – 5% Customs Duties on 50%
capital expenditures and operating costs;
Adding 5% duty on 50% of capital expenditures and operating costs;
Duties (which are tax deductible) increase total revenues by about 6% (in real
terms) over mine life - a rather modest effect.
Revenue No Customs Duties
Real USD
With
Real USD
Customs Duties
Nominal USD
CIT 439 432 1360
DWT 86 85 267
Royalty 125 125 323
Customs Duties - Construction 0 26 26
Customs Duties - Operations 0 22 60
Total 650 690 2036

Some Base Price Sensitivities – Duties, Depreciation
• The next slide considers the possible impacts of companies to reduce profits and
taxes through transfer pricing by
• Reducing price and sales revenues by 10%
• Increasing capital expenditures by 10%
• Increasing operating costs by 10%
• The three above combined

Some Base Price Sensitivities – Price Capex Opex
Average Price -10% Capex
+10%
Opex
+10%
All
Three
CIT 439 341 413 411 288
DWT 86 67 81 81 56
Royalties 125 113 125 125 113
Total 650 520 619 617 457
AETR 49.6% 53.6% 51.8% 50.7% 59.9%

Some Sensitivities – Duties, Depreciation
Base Price Average Regime
The impacts are substantial.
The largest impact is transfer pricing of products – government revenues
decline by 20%.
Increasing construction costs and operating costs by 10% reduces revenues
by about 5% each.
Combined together the three changes reduce government revenues by 30%
(all in real (NPV) terms)
This underlines the importance of having the capabilities necessary to prevent
transfer pricing abuses.

How Does the Average Effective Tax Regime (AETR)
compare to other countries that are potentially
competing for investment?
• A more aggressive fiscal regime with high tax and royalty rates will result in higher
state revenues in the near term (about 5-20 years)
• Whereas a less aggressive fiscal regime that encourages investment will likely
lead to greater investment and higher state revenues in the longer term (about
20 years and beyond).
• The competiveness of the fiscal regime can be benchmarked against other mining
countries to see where the AETR fits compared within the range of AETRs for
other countries.

D. PROTECTING AGAINST
TAX MINIMIZATION BEHAVIORS
Slides 83-92
IMPORTANT NOTE:
Key Resources:
• Fiscal Regimes for Extractive Industries: Design and Implementation,
IMF Fiscal Affairs Dept, August 2012
• How to Improve Mining Tax Administration and
Collection Frameworks: A Sourcebook, Pietro Guj, Boubacar Bocoum,
James Limerick, Murray Meaton, and Bryan Maybee World Bank 2013
• Administering Fiscal Regimes for Extractive Industries: A Handbook
Jack Calder, IMF July 2014

How Companies can reduce tax liabilities in the host country -
Transfer Pricing between “Related Parties”
Companies can use transactions between “related parties” to shift profits from a
host country to another jurisdiction where taxes rates are lower. Related party
transactions are typically between a parent company in another jurisdiction and
the subsidiary mining company in the host county. But the transactions could
also be with other subsidiaries of the parent company or even a third party
company with which the parent company has “cut a deal”.
Transfer pricing can take place regarding
 Product sales between related parties
 Borrowing and lending between related parties
 The sale or purchase of goods and services between related parties
 Management fees between related parties
 Charges for intangibles such as the value of a license or intellectual property
between related parties .

OECD Guidelines/Legal Requirements
• The OECD Guidelines on Transfer Pricing can help guide the preparation
of modern regulations and legislation.
• Companies should be required by law to provide information annually
regarding both expected and actual related-party transactions above a
certain level – say USD1 million.
• Transfer pricing abuses can be minimized by requiring in the law that
companies demonstrate that prices (or interest rates/lending terms) are
in line with arms length market prices or similar arms length
transactions. If not the law should give the Revenue Authority the right
to set such prices for tax assessment purposes
• Where arms length market prices are not readily available an Advanced
Pricing Agreement (APA) can be used.
A combination of modern legislation
and strong audit/enforcement capabilities is essential

How Companies can reduce tax liabilities in the host
country - Hedging
• Hedging is used by companies to set prices for future transactions, generally as a
risk reduction measure.
• Hedging can then generate profits or losses compared with actual prices on the
date the transaction takes effect.
• There is a risk that hedging between related parties may be used to reduce
profits and move them to a related party in another jurisdiction.
• Some hedging arrangements can become very complex arrangements involving
different foreign parties
• Some governments require companies to prepare their income tax statements
with market prices (hedging is excluded)

country – Goods and Services
Mining, Processing, Transportation, Marketing and Other Costs Transfer
pricing can also take place in terms of the purchase or sale of goods and
services between related parties. For example, a parent company can
supply goods such as explosives or services such as marketing services at
above arms length market prices. In this case profit is transferred because
• the mining company’s costs are increased and profits reduced
• the parent company’s revenues and profits are both increased
The mining company can also sell goods or provide services to the parent
company at below arms length market costs.
As with product pricing, if the company cannot demonstrate that
transactions are priced at market prices, the law should give the Revenue
Authority the right to set prices such for transactions for tax assessment
purposes.

country - Fees and Management Services
Fees: Parent companies can also charge overhead fees, management fees or even
intellectual property fees – all of which will increase the costs and reduce the profits
and profit taxes paid by the mining company.
Management Services Parent companies can provide goods and services such as
management or exploration services during the exploration or development stage of a
mining operation at highly inflated prices which
• increases profits for the parent company and
• increases the value of the assets to be depreciated by the mining company which
results in lower profits and lower taxes in the host country.
As with earlier examples, if market prices cannot be demonstrated, then the law
should give the Revenue Authority the right to set prices such for transactions for
tax assessment purposes

country - Finance charges/Thin Capitalization
Parent companies can increase financing costs for subsidiaries by
• charging an above market interest rate on loans
• financing the subsidiary with as much as 100% debt
• taking only interest payments and leaving all of the debt in place for many years.
• The later two actions above result in “thin capitalization” and would not be possible
with a third party lender
• Correspondingly, the mining company could make loans to the parent company at
below market rates.
• The law can restrict the level of borrowing that is eligible for tax action purpose –
setting a limit of say 60/40 debt-equity ratio.
• As with earlier examples, if market terms cannot be demonstrated, then the law
should give the Revenue Authority the right to set terms for tax assessment purposes

Some Other Useful Points -Separating Expenses from
Capital Expenditures; Ring Fencing; Construction Audits
Point from IMF PaperFiscal Regimes for Extractive Industries:
Design and Implementation
Comment
The Capital Allowances and Definition of Capital
Expenditures Section makes important points about
depreciation and the use of International Financial
Reporting Standards (IFRS) for separating expenses
from capital expenditures when making income tax
returns (page 44)
Where rules are not precise companies
will tend to deduct expenditures as an
operating cost rather than to capitalize
expenditure as an asset to be
depreciated. Mine related exploration
might be an example
Neglect in auditing exploration and development
expenses (that occur before production starts) can
reduce the tax base significantly as a project starts
to generate income” (page 67)
For large projects, cost audits by the
Tax Authority are essential during the
construction stage

Legislation and Contracts; Transfer of an
Interest; Double Taxation Agreements
Issue Comment
The Losses Carried Forward by EI companies
section discusses ring fencing (page 44)
Ring fencing can be used to prevent losses or
expenses from other operations/projects being
deducted from a profitable mine
A fiscal regime based on general legislation has
advantages relative to contract by contract
negotiations (para. 68)
This ensures transparency and avoids the risk of
very experienced company negotiators out
negotiating a government negotiating team
Taxation on the transfer of an interest in
mining rights needs special attention (para. 74)
Approaches are becoming available
Poorly designed tax treaties (Double Taxation
Agreements – DTAs) can reduce the tax basis
of EI projects (para. 75)
Tax treaties may need renegotiation to reduce
potential revenue losses. Legislation can
protect against “treaty shopping” by investors
to reduce/minimize taxes.

Thank you

Nov 2016 World Bank Presentation on Mineral Fiscal Regimes

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