Arnaud Bourgain

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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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!