Mining tax incentive could help lift industry out of doldrums
Government is investigating introduction of tax measures in key sectors, but an OECD report shows incentives do not attract mining investment into developing countries
In his medium-term budget policy statement in October, finance minister Tito Mboweni laid out plans to revive the mining industry, where output fell 1.7% in the first eight months of 2018, in contrast to a rise of 4.5% over the matching period in 2017. His plans included a focus on reforms and policy certainty.
While no major tax changes were announced, trade and industry minister Rob Davies said in November that the government was investigating the introduction of tax incentives in key industries to kick-start the economy. He mentioned mining as one sector the government planned to target.
Would a mining tax incentive help improve the sector’s contribution to the economy, and assist in dragging it out of recession? A 2018 report titled "Tax incentives in mining: minimising risks to revenue", published by the International Institute for Sustainable Development and the Organisation for Economic Co-operation and Development (OECD), suggests there is no clear and definitive answer.
Authored by Alexandra Readhead, the document highlights that for many developing countries mining receipts are often a major source of revenue. “The central task for policymakers, therefore, is to design fiscal regimes for the mining industry that raise sufficient revenue, while providing adequate inducement to invest,” Readhead writes. Where countries are considering mining tax incentives, these need to be part of a balanced plan that takes into account other important factors, such as policy certainty and co-operation between various governing bodies.
Readhead’s goal is to enable governments of resource-rich countries to identify and cost the potential responses by mining investors to tax incentives. She defines mining tax incentives as any special tax provisions granted to mining investors that provide favourable deviation from the general tax treatment that applies to all corporate entities.
Mining tax incentives can relate to reduced taxes on income or on production, or to tariffs levied on imports and exports. The mining industry does have accelerated tax allowances on capital goods, and there is a special formula for calculating the rate of tax mining companies should pay, which is often lower than the standard corporate tax rate of 28%.
Transfer pricing involves the study of prices charged, or profits earned, by members of large multinational companies for goods and services provided by an entity in one country to a related entity in another country. If a country introduces a mining tax incentive it needs to ensure there is clarity for all parties involved.
For example, we’ve seen instances in Africa where a local ministry, for example a ministry of trade or mineral rights, grants an incentive to a mining house, but because the finance ministry has not been involved they view the matter as an instance of base erosion and profit shifting (BEPS).
BEPS is the term that is used to refer to the practice of exploiting gaps in tax regulations to artificially shift profits, often to low-tax or zero-tax jurisdictions.
The OECD report on mining tax incentives suggests that harmful tax practices should be tackled by reviewing incentives. Accordingly, several countries are likely to review their incentive programmes in the next while.
SA is no exception, and the department of planning, monitoring and evaluation has undertaken a review of all current incentives on offer by the government to the private sector. The review took two years to complete and its output will be called an “evaluation of government business incentives”. Therefore, mining multinationals should be aware that the SA mining incentives’ landscape may change.
Readhead notes that there is little evidence that tax incentives are effective at attracting mining investment into developing countries, particularly if the investment climate is weak and the inflow of foreign direct investment (FDI) in question would have been unlikely without taxation benefits (as is currently the case in SA).
In short: tax incentives alone will not attract investment. “Effectiveness also depends on the type of foreign investment that is being made. The mining sector involves location-specific resources that cannot be moved, making investment less mobile and less responsive to incentives,” she writes.
We agree that tax is just one factor in any investor’s decision-making process. Given the current economic climate, SA’s labour issues, political instability and limited infrastructure, not to mention the land expropriation issue, taxation is unlikely to be the deciding factor in FDI decisions. We echo Readhead’s suggestions for good governance when designing and managing tax incentives. This includes having clear, measurable policy objectives for any incentives regime, plus detailed monitoring.
Government departments also need to work together to make each and every incentive package effective (for example, with co-operation between the finance ministry and the department of mineral resources). Meanwhile, clear criteria on eligibility for tax incentives need to be available to all potential mining investors.
Finally, we await the final recommendations from the department of planning, monitoring & evaluation on its evaluation of incentives in SA. We expect it to recommend that the government needs to regularly undertake a cost-benefit analysis to assess and report on revenue generation and any loss directly attributable to mining support, to other tax incentives and to grant incentive programmes.
• Newman is a founding partner of Cova Advisory and Hewson a director at Graphene Economics.