How Taxes, Royalties, and Fiscal Regime Stability Affect Mining Investment

Abstract

Mineral tax systems vary from country to country depending on the level of geological prospects, foreign private investment, and developmental needs of the country. The high-risk/high-capital characteristic of mining activities coupled with long lead time and high degree of market uncertainty call for special tax treatment of the sector if an appreciable level of foreign private investment is expected to be made. In addition, potential investors have several countries from which to choose when committing capital to exploration and mining activities, hence the realization that favorable geology in the absence of an attractive fiscal regime cannot sustain substantial investment in the mineral sector. In this research an analysis is made of the tax climate and the tax burden on mining operations in the Republic of Niger and the Republic of Indonesia to determine how the two regimes conform to the standards of fiscal regime design. The findings from the analysis of the various tax incentives available to foreign investors and their effect on the level of investment in these countries lead to the conclusion that, although it is probably true that an unattractive mining tax regime can drive away investment, it is equally true that an attractive mining tax regime will not necessarily attract and sustain investment.

TOPICS: Credit risk management, project finance, legal and regulatory issues for structured finance