Fiscal regime for the mining sector requires equitable benefit sharing and should not weed out good investments. Effective Tax rate should be more favourable to the party that has spent more on exploration and development cost. An idle mineral deposit is of no use to a country if not exploited. Good decision making looks at long term gains and wider social economic benefits the country accrues from mining.


It is universally accepted that natural resources are a nation’s inheritance and belong to its people.  Mining companies come into the country to exploit these resources with full understanding that there will be benefit sharing between government and the company.  This benefit sharing is guided by the fiscal regime of the host nation.  Governments try to use fiscal regime tools to maximise their revenue while mining companies look for loop holes to maximise revenue for its shareholders.  An effective fiscal regime maximises government revenue while maintaining a good return on investment for resource companies.

The paper tries to enlighten policy makers and “watch dogs” on how the fiscal regime of natural resources projects can be designed to realise a fair share of the profits for government and resource companies.


Governments collect the following from resource companies:

  1. Annual ground rent per hectare – Other countries allow payments to local administrative authorities. In Malawi, annual ground rents are paid as follows:

Table 1: Licence fees currently applicable to Malawi.

Year 1Year 2Year 3Year 4Year 5 and beyond
Reconnaissance Licence1,00010,000NANANA
Exploration Licence10,00010,00015,00020,00025,000*
Retention Licence10,00015,00020,00025,00030,000
*Fees shall increase by 5000 per square Kilometre Kwacha annually after 5th year
  • Small scale licence ground rent fee = 20,000 regardless of area
  • Medium Scale and Large Scale Mining Licence = 50,000 per square Kilometre
  • Fees shall increase by 5000 per square Kilometre Kwacha annually after 5th year
  • Small scale licence ground rent fee = 20,000 regardless of area
  • Medium Scale and Large Scale Mining Licence = 50,000 per square Kilometre

2. Royalties – These are a percentage of the value of minerals produced without taking into account production costs.  Royalties vary normally between 5 and 10 %.

3. Corporate Income Tax – This is a percentage of net profit (after deducting operation costs). Corporate Tax may range from 30 to 35%.

4. Withholding Tax – This is a percentage of payments made to third parties. This can be in form of payment for services and dividends. In Malawi it is 20%

5. State equity participation – This offers a share of profits to government as long as no operational risks are attached. The Mines and Minerals Act stipulates that government can have a free equity participation of 10%.

Table 1 summarises all the tax that government benefits from the minerals sector. The author recommends government to take advantage of production based taxes and be flexible on profit based taxes.

Table 2: Fiscal regime applicable in the minerals sector

Stamp Duty
Corporate Income Tax
RoyaltiesProfit Tax on Dividends
Sales and Excise TaxRoyalty  Based on profit/ Income  measures
Payroll TaxWithholding Tax on remitted dividends
Export TaxResource Rent Tax
Import Duty
Value Added Tax
Land Rents/Withholding Tax
Withholding Tax on Loan
Interests and Services
Property Tax

Production sharing – This is mainly practiced in oil and gas projects. Companies collect an agreed share of produced oil to offset exploration and development costs. The rest is shared between government and the resource company. The initial oil produced is subject to a royalty charge. Figure 1 shows a standard agreement bet

6. ween a resource company and government.

The design of a fiscal regime depends on how government wants to balance between attracting Foreign Direct Investment and maximising Effective Tax Rate (or its fair share of proceeds). Average Effective Tax rate for oil and gas varies between 50% and 80% while that of solid minerals varies from 40% to 70% depending on whoever has spent much on exploration and development costs. Good decision making looks at long term gains and wider social economic benefits the country accrues from mining.


Raw deals emerge when government designs regressive tools that offer lesser shares of the proceeds as profits increase. Some investment incentives are self-defeating in areas where companies take advantages of governments’ investment incentives. For example, Double Taxation Agreements encourage Transfer Pricing and Treaty Shopping. Lack of project ring fencing erodes government revenue collection as taxes are assessed together as one project in two projects with one that is highly profitable and the other loss making.  Thin capitalisation reduces project revenue thereby prolonging non-payment of profit based taxes due to high and long loan servicing. Taxes that are affected in this situation include Corporate Tax and Resource Rent.

Policy makers need to monitor effectiveness of their fiscal regime. Fiscal regimes should maximise government revenue within shortest time possible.

Most governments rush to take state equity without proper mechanisms for monitoring their investment and putting up mechanisms for effective participation in the operations of the resource company.  Lack of participation in working with the resource company leads to unethical activities such as transfer pricing on managing of procurement of goods and services

Raw deals emanate from tax avoidance and tax evasion. Tax avoidance is the ability to reduce one’s tax burden while complying with tax law. Tax evasion corresponds with not reporting all of one’s income. Treaty shopping leads to tax avoidance and this is not illegal. Tax evasion is illegal as it is tantamount to cheating.  Any business ventures need to be properly monitored in terms of how they manage procurement of goods and services. Government needs to have a highly trained and sophisticated unit to maximise revenue from business entities.


Malunga G. W. P. 2013. Fiscal Regime and Management of Revenue from Mining. Geomine Services

Natural Resource Governance Institute. 2015. Fiscal Regime Design: What Revenues the Government Will be Entitled to Collect.

PricewaterhouseCoopers. 2012.  Corporate Income Taxes Mining Royalties and Other Mining Taxes: A summary of rates and rules in selected countries (2012),


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